THE JOSIP JURAJ STROSSMAYER UNIVERSITY OF OSIJEK

FACULTY OF ECONOMICS IN OSIJEK - CROATIA
HOCHSCHULE PFORZHEIM UNIVERSITY
_____________________________________________________________

INTERDISCIPLINARY MANAGEMENT RESEARCH X
INTERDISZIPLINÄRE MANAGEMENTFORSCHUNG X

Opatija, 2014
Published by:
Josip Juraj Strossmayer University of Osijek, Faculty of Economics in Osijek, Croatia,
Postgraduate Studies “Management”
Hochschule Pforzheim University

For the Publisher:
Ulrich Jautz, Ph.D., Dean, Germany
Vladimir Cini, Ph.D., Dean, Croatia

Editors:
Urban Bacher, Ph.D., Pforzheim University, Business School, Germany
Dražen Barković, Ph.D., Faculty of Economics in Osijek, Croatia
Karl – Heinz Dernoscheg, Ph.D., International Business School Styria, Austria
Maja Lamza - Maronić, Ph.D., Faculty of Economics in Osijek, Croatia
Branko Matić, Ph.D., Faculty of Economics in Osijek, Croatia
Norbert Pap, Ph.D., University of Pecs, Hungary
Bodo Runzheimer, Ph.D., Pforzheim University, Business School, Germany

Review Committee:
Ivana Barković Bojanić, Ph.D., Faculty of Law in Osijek, Croatia
Ivan Ferenčak, Ph.D., Faculty of Economics in Osijek, Croatia
Nino Grau, Ph.D. University of Applied Sciences, Fachhochschule Giesen-Friedberg, Germany
Mladen Jurišić, Ph.D., Faculty of Agriculture in Osijek, Croatia
Slavo Kukić, Ph.D., University of Mostar, Faculty of Economics in Mostar, Bosnia and Hercegovina
Hartmut Loffler, Ph.D., Pforzheim University, Business School, Germany
Brano Markić, Ph.D., University of Mostar, Faculty of Economics in Mostar,
Bosnia and Hercegovina
Renata Perić, Ph.D., Faculty of Law in Osijek, Croatia
Bela Orosdy, Ph.D., University of Pécs, Faculty of Business and Economics, Hungary
Ivan Pavlović, Ph.D., University of Mostar, Faculty of Economics in Mostar,
Bosnia and Hercegovina
Slavica Singer, Ph.D., Faculty of Economics in Osijek, Croatia
Jusuf Šehanović, Ph.D., Juraj Dobrila University of Pula, Croatia
Dirk Wentzel, Ph.D., Hochschule Pforzheim University, Germany

Technical editors:
Jerko Glavaš, Ph.D., Faculty of Economics in Osijek, Croatia
Hrvoje Serdarušić, Ph.D., Faculty of Economics in Osijek, Croatia

Language Editing and Proofreading:
Ljerka Radoš, Faculty of Economics in Osijek, Croatia

CIP record is available in the electronic catalogue of the City and University Library of Osijek
under the number 131102055.

ISSN 1847-0408
ISBN 978-953-253-126-8
Indexed in: EBSCOhost, RePEc, EconPapers, Socionet
Program committee:
Mate Babić, Ph.D., University of Zagreb, Faculty of Economics in Zagreb, Croatia
Heinrich Badura, Ph.D., President, The European Academy for Life Research, Integration and
Civil Society, Austria
Firouz Gahvari, Ph.D., University of Illinois at Urbana-Campaign, Department of Economics,
USA
Gunther Gottlieb, Ph.D., University of Augsburg, Germany
Rupert Huth, Ph.D., Pforzheim University, Business School, Germany
Zoran Jašić, Ph.D., Ambassador of the Republic of Croatia to the Republic of Austria
Zlatko Kramarić, Ph.D., Ambassador of the Republic of Croatia to the Republic of Kosovo
Ulrich Jautz, Ph.D., Pforzheim University, Business School, Germany
Željko Turkalj, Ph.D., Faculty of Economics in Osijek, Croatia
Mladen Vedriš, Ph.D., University of Zagreb, Faculty of Law, Croatia
CONTENTS

VORWORT ......................................................................................................................... 11
FOREWORD ...................................................................................................................... 12

Management
Sofija Adžić
MEASURING PERFORMANCE OF MANAGEMENT IN AGRIBUSINESS
- PROBLEMS, CONTROVERSIES AND SOLUTIONS .................................................... 15
Martina Briš Alić, Alen Alić
COMPETITIVE ADVANTAGES OF THE CROATIAN WOOD INDUSTRY ................ 26
Dražena Gašpar
INFORMATION TECHNOLOGY AND KPIs
DEVELOPMENT AT UNIVERSITIES ............................................................................... 38
Đuro Horvat, Marinko Kovačić, Ljiljana Kristijan Ivanek
PROCESS MANAGEMENT MODELS AND FUSION
ORGANIZATION CULTURE ..............................................................................................48
Linda Juraković, Ivan Herak, Romina Sinosich
ANALYSIS AND PERSPECTIVES OF TOURISM /
AGROTOURISM DEVELOPMENT IN ISTRIA ................................................................ 60
Krešimir Jurina, Igor Vrečko, Zlatko Barilović
WEB TECHNOLOGIES DEVELOPMENT SUPPORTING
CONTEMPORARY PROJECT MANAGEMENT NEEDS ............................................... 69
Zlatica Kavić, Mario Šercer
FRANCHISE RELATIONSHIP: FRANCHISEES’ SATISFACTION ................................. 77
Sandra Mrvica Mađarac, Igor Kukić, Matej Galić
USE OF ELECTRONIC RETAIL IN THE REPUBLIC OF CROATIA ............................. 85
Sanja Kršić, Ivan Maloča, Dušan Ljuština
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM ....................... 93
José G. Vargas-Hernández
RESEARCH METHODOLOGY STRATEGIES IN
STRATEGIC MANAGEMENT ......................................................................................... 106
Dražen Barković, Ivana Barković Bojanić
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING
THE ANALYTICAL HIERARCHY PROCESS METHOD ............................................... 148
Thomas Cleff, Klaus Rennings
ARE THERE ANY FIRST AND SECOND MOVER
ADVANTAGES FOR ECO-PIONEERS? LEAD MARKET
STRATEGIES FOR ENVIRONMENTAL INNOVATION ............................................ 164
Stefan Dilger
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL
CONSUMPTION IN FRG DURING A SELECTED PERIOD OF TIME ................... 190
Nedzad Fajic
RISK AS SOURCE OF RELUCTANCE TO SAAS ADOPTION IN EUROPE ............. 226
Gerdesics Viktória, Mladen Pancić, Orosdy Béla
THE ROLE OF TOURISM IN PERCEPTION OF THE
CROATIAN COUNTRY BRAND IN HUNGARY AND CROATIA ............................ 236
Ivanka Hadži-Petruševa Meloska, Anica Hadži-Petruševa Jankijevič
PROJECT MANAGEMENT OF LYME DISEASE THROUGH
MONITORING OF SEROPREVALENCE OF ANTI-BORRELIA
ANTIBODIES IN MACEDONIAN PATIENTS.............................................................. 245
Barbara Marušnik, Luka Stanić
CROATIA AND NEW PROFESSIONS .............................................................................255
Igor Mavrin, Jerko Glavaš
THE NIGHT OF THE MUSEUMS EVENT AND DEVELOPING
NEW MUSEUM AUDIENCE – FACTS AND MISAPPREHENSIONS
ON A CULTURAL EVENT ..............................................................................................265
Markus Moritz, Sonja Keppler
CUSTOMER EQUITY IN A NETWORK DRIVEN
CONTEXT - CONTRIBUTIONS FOR EVALUATING CUSTOMER EQUITY ..........275
Robert Obraz, Zlatko Rešetar, Nikolina Pavičić
REDUCING DELIVERY TIMES OF PRODUCTS
USING DMAIC METHODOLOGY ..................................................................................285
Goran Pajnić, Davor Bošnjaković, Ivan Kelić
THE POTENTIAL OF MOBILE APPLICATIONSIN
ORGANIZATION AND PROMOTION ...........................................................................296
Mirko Pešić, Teufik Čočić
ORGANIZATIONAL ASPECTS OF MODERN
MANAGEMENT IN 21st CENTURY ................................................................................304
Andreja Rudančić-Lugarić
INTEGRATED QUALITY MANAGEMENT OF A TOURIST
DESTINATION – THE KEY FACTOR IN ACHIEVING A
COMPETITIVE ADVANTAGE.........................................................................................312
Đurđa Soleša Grijak, Dragan Soleša
HUMANISTIC APPROACH TO MANAGEMENT ..........................................................332
Nenad Stanišić, Jelena Stanišić
CONSUMERS PERCEPTION OF CRM AND E-COMMERCE ...................................342
Slobodan Stojanović
CASH CONVERSION CYCLE AS A COMPANY LIQUIDITY MEASURE ....................358
Vunjak Nenad, Davidović Milivoje
COST EFFICIENCY OF AGROINDUSTRIAL COMPANIES IN
VOJVODINA: DEA APPROACH .......................................................................................369
General Economics
Gabrijela Žalac, Mario Banožić
FINANCING DEVELOPMENT PROJECTS IN NEW EU
FINANCIAL PERSPECTIVE 2014-2020 ............................................................................379

Microeconomics, Macroeconomics and Monetary Economics
Besim Aliti, Marko Markić, Boris Štulina
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE
ANALYSIS FROM 2008 UNTIL 2013 AS AN MACROECONOMICAL
CRISIS INDICATOR ..........................................................................................................391
Éva Ladányi, István Kobolka
THE HAWALA SYSTEM....................................................................................................413
Mladen Vedriš
THE CRISIS, NEW EU POLICIES, AND THE REPUBLIC OF CROATIA ....................421

International Economics
Luka Burilović, Tolušić Zrinka, Dražen Holmik
IMPACT OF GLOBALIZATION PROCESSES FROM THE
SURROUNDINGSON THE SUGAR INDUSTRY IN
THE REPUBLIC OF CROATIA .........................................................................................459
Sanda Renko, Alica Grilec Kaurić, Mario Lešina
DEALING WITH CRISIS: USING SUBCONTRACTING
FOR THE DEVELOPMENT OF THE CROATIAN LEATHER
MANUFACTURING AND PROCESSING INDUSTRY.................................................463
Slobodan Vujić, Saša Vujić, Aida Abduzaimovic
INNOVATTIVE SALES OF “E@SY LEASING“
PRODUCT IN THE B&H LEASING MARKET .............................................................475

Financial Economics
Andreas Will
SHORT TERM SOLUTIONS FOR THE FINANCIAL CRISIS .....................................491
Markus Häfele, Celine Frei
PRACTICAL APPLICATION EXAMPLES FOR SPECIAL CASES IN
THE SCOPE OF CONSOLIDATION ACCORDING TO IFRS ....................................501
Urban Bacher, Eva Amann
WHY BANKS NEED A SLOGAN .....................................................................................513
Domagoj Karačić, Ivana Bestvina Bukvić
RESEARCH OF INVESTMENT RISK USING BETA COEFFICIENT ...........................521
Ivan Lukić, Branka Martić, Davor Vlaović
ROLE AND RESPONSIBILITIES OF LOCAL MANAGEMENT FOR
GOVERNING AND DISPOSAL OF FUNDS FOR FINANCING OF
DECENTRALIZED FUNCTIONS .................................................................................. 531
Andreja Katolik
IMPACT OF FISCALIZATION AT THE HEIGHT OF
CALCULATED VALUE ADDED TAX .............................................................................. 545
Branko Matić, Hrvoje Serdarušić, Maja Vretenar Cobović
ECONOMIC CIRCUMSTANCES AND PERSONAL
FINANCE MANAGEMENT ........................................................................................... 557
Izabela Pruchnicka-Grabias
THE INFLUENCE OF CONFIDENCE LEVEL, CORRELATION AND
VOLATILITY ON VALUE AT RISK. SIX CASE STUDIES .............................................. 565
Bodo Runzheimer
FAIR VALUE MEASUREMENT - THE NEW IFRS 13 - CONCEPTUAL
SUITABILITY AS A DATA BASIS FOR CONTROLLING AND IMPACT ON
PERFORMANCE MEASUREMENT ............................................................................... 582
Nikolina Smajla
MEASURING FINANCIAL SOUNDNESS OF INSURANCE
COMPANIES BY USING CARAMELS MODEL – CASE OF CROATIA........................ 600
Milan Stanić, Melita Cita, Berislav Bolfek
ADVANTAGES AND DISADVANTAGES OF PRE-BANKRUPTCY SETTLEMENT ... 610

Public Economics
Boris Crnković, Željko Požega, Goran Sučić
STATE OWNERSHIP AND CORPORATE GOVERNANCE OF
ENTERPRISES IN CROATIA .............................................................................................623
Branimir Marković, Domagoj Pavić
THE EFFECTS OF THE ECONOMIC CRISIS ON BEVERAGE
SALES IN CATERING FACILITIES...................................................................................633
Ana Udovičić, Katarina Marošević, Katarina Arnold Bratić
SOCIAL ENTREPRENEURSHIP IN CROATIA .............................................................644

Health, Education and Welfare
Grozdanka Gojkov, Aleksandar Stojanović, Aleksandra Gojkov-Rajić
META-COMPONENTS OF INTELLECTUAL AUTONOMY AS
HIGHER EDUCATION TEACHING QUALITY INDICATORS ....................................657
Nevenka Kovač
QUALITY MANAGEMENT IN HEALTH CARE - CONTRIBUTING TO
PATIENT SAFETY AND EFFICIENCY OF BUSINESS OPERATION .........................670
Nedeljko Kovačić
GLOBALIZATION AND THE IMPACT OF GLOBALIZATION
ON THE HEALTH INDUSTRY ........................................................................................684
Maja Lamza-Maronić, Ivana Ivančić, Mira Majstorović
THE ROLE OF VOCATIONAL EDUCATION AND TRAINING IN
THE YOUTH EMPLOYABILITY.......................................................................................696
Katarína Letovancová, Mária Dávideková
IMPACT OF SCHIZOPHRENIA ON THE LIFE QUALITY..........................................712
Mirela Mabić
QUALITY IN HIGHER EDUCATION – WHICH DIMENSIONS CAN BE
IDENTIFIED FROM THE RESPONSES OF STUDENTS OF ECONOMICS ............721
Ivan Miškulin, Ivan Ambroš
PRODUCTIVITY LOSSES FROM ROAD TRAFFIC DEATHS IN CROATIA .............732
Sunčica Oberman-Peterka, Nada Bosanac, Darko Matotek
ANALYSIS OF EFFICACY OF STUDYING OF THE FIRST
GENERATION OF STUDENTS WITH NATIONAL MATRICULATION ....................742
Klara Šćuka, Isabella Belić, Miroslav Jarić
ROLE OF MANAGEMENT IN ORGANIZATION OF PRIMARY HEALTH
CARE IN UNITS OF REGIONAL GOVERNMENT ........................................................752
Dirk Wiedenhöfer, Sonja Keppler
FREE HOSPITAL CHOICE IN SWITZERLAND – PATIENTS’ DECISION
CRITERIA AND SOURCES OF INFORMATION .........................................................763
Martina Žáková, Thorsten Eidenmüller
NATIONAL DIVERSITY AT UNIVERSITIES IN SLOVAKIA .......................................774
Zsuzsa M. Császár, Gábor Csüllög, Norbert Pap
INTERNATIONALISATION OF THE UNIVERSITY OF PÉCS, HUNGARY .............787

Law and Economics
Pavao Gagro
ECONOMIC ANALYSIS OF LAW: CRIMINAL OFFENSES
AGAINST PROPERTY (LARCENY AND AGGRAVATED LARCENY)..........................811
Renata Perić, Emina Jerković
PRINCIPLE OF FAIRNESS IN REGARD TO PERSONAL INCOME TAX ..................821
Vjekoslav Puljko, Mirela Župan, Josipa Živić
INFRINGEMENT OF PRIVACY VIA INTERNET ...........................................................829

Industrial Orgnization
Dalibor Pudić, Ivana Čandrlić-Dankoš
DISTRICT HEATING IN THE SERVICE OF DEVELOPMENT OF ENERGY
EFFICIENCY, COMPETITIVENESS AND SECURITY OF SUPPLY ..............................841

Bussiness Administration and Business Economics
Antun Biloš, Davorin Turkalj, Ivan Ružić
THE POWER OF SOCIAL NETWORK APPS:
PHOTO-CONTEST BASED APPLICATION STUDY ................................................... 855
Sanja Ćorić, Danijel Bara
BUSINESS PROCESS MANAGEMENT IN INSURANCE CASE OF JADRANSKO
INSURANCE COMPANY ................................................................................................. 866
Economic Development, Technological Change and Growth
Drago Pupavac
ECONOMETRIC MODEL FOR FORECASTING TRAFFIC
ON CROATIAN MOTORWAYS ...................................................................................... 891

Urban, Rural and Regional Economics
Dejan Tubić, Josip Britvić, Božidar Jaković
CLUSTER AS THE DEVELOPMENT TOOL OF RURAL TOURISM IN
CONTINENTAL CROATIA ..............................................................................................903
Iva Buljubašić, Marta Borić, Bojan Bodražić
CULTURE AND TOURISM AS MAJOR CATALYST IN CREATING
COMPETITIVE AND MULTICULTURAL CITY IDENTITY .........................................913
Lukas Pavelek, Thorsten Eidenmueller
THE CURRENT STATUS, PROSPECTS AND CHARACTERISTICS OF
POPULATION AGEING IN SLOVAK REPUBLIC .........................................................923
Bernadett Gálosi Kovács, Norbert Pap, Zsuzsa M. Császár,
Péter Reményi, Krisztina Kőműves, Andor Végh, Aliz Horvát
HUMAN RESOURCE DEVELOPMENT AS A POSSIBILITY FOR
DEVELOPING THE MOST UNDERDEVELOPED MICRO-REGIONS OF
HUNGARY .........................................................................................................................931
Sanja Knežević, Anita Kulaš, Lena Duspara
THE IMPACT OF MIGRATION ON CROATIAN CULTURAL DIVERSITY ...............943

Miscellaneous Categories
Darko Etinger, Jusuf Šehanović, Antonio Ribić
MEASURING THE SUCCESS OF E-LIBRARY IMPLEMENTATION:
STUDENTS PERCEPTIONS AND USE .........................................................................957
Monika Mačkinová, Jana Keketiová, Marta Vavrčáková
THE IDENTITY OF GYPSY CHILDREN IN FAMILY FOSTER HOMES .....................970
Ulrich Föhl, Felicitas Meßmer
THE INFLUENCE OF DESIGN CRITERIA FOR THE BRAND PERSONALITY.........981
Ivan Miloloža, Helena Miloloža, Emil Kuhtić
CHALLENGES OF CROATIAN EXPORT ........................................................................981
Vorwort

Es ist uns ein Vergnügen, das Konferenzband „Interdisziplinäre Managementforschung
X / Interdisciplinary Management Research X“ vorstellen zu können. Ein Buch aus
dieser Reihe ist zum ersten Mal 2005 erschienen, als Resultat der Zusammenarbeit
zwischen der Wirtschaftsfakultät in Osijek, Kroatien und der Hochschule Pforzheim,
Deutschland, und insbesondere durch das Magisterstudium des Management. Die
Zusammenarbeit der zwei genannten Partnerinstitutionen ist unter anderem durch
jährliche wissenschaftliche Symposien gekennzeichnet, auf welchen interessante Themen
aus verschiedenen Bereichen der Wirtschaft und des Managements vorgestellt und folglich
in einem Band veröffentlicht werden. Jedes Jahr ziehen die wissenschaftlichen Symposien
Akadamiker anderer kroatischer, sowie ausländischer Universitäten, einschließlich
Australien, Deutschland, Ungarn, Polen, Rumänien, Slovenien, Montenegro, Bosnien
und Herzegovina, Serbien, Indien, Irland, Czechien, Israel, Italien, Sudafrica, Belgien,
Schweiz, USA, Slowakei, Dänemark, Mazedonien, Mexico und Großbritannien an, die
ihren wissenschaftlichen und profesionellen Beitrag zur Diskussion über zeitgenössische
Fragen aus dem Bereich des Managements leisten. Die Aktualität der behandelten
Fragen, der internationale Charakter im Hinblick auf Themen und Autoren, die höchsten
Standards der Forschungsmethodologie sowie die Kontinuität dieser Konferenzreihe
wurden auch von der internationalen akademischen Gemeinde erkannt, weswegen
sie auch in internationalen Datenbanken, wie Thomson ISI, RePEc, EconPapers und
Socionet, zu finden ist.

Die neueste Ausgabe von „Interdisziplinäre Managementforschung X / Interdisciplinary
Management Research X“ umfasst 75 Arbeiten geschrieben von 165 Autoren. Der
Erfolg früherer Ausgaben ging über die Grenzen der Länder hinaus, deren Autoren
schon traditionell Teil der Reihe waren und zog neue Autoren aus Mexico und Zypern
an. Jedes der Autoren leistete einen bedeutenden Beitrag zu diesem fachübergreifenden
Managementforum.

Als Herausgeber dieses Bandes hoffen wir, dass diese Reihe auch weiterhin Akademiker
und Profesionelle dazu bewegen wird, in Forschung und Beruf die höchsten Standards
zu beanspruchen, und dass es weiterhin als Ansporn zu weiteren Formen von
Zusammenarbeit unter Teilnehmern dieses Projektes dienen wird.

Prof. Dr. Dražen Barković
Prof. Dr. Bodo Runzheimer
Foreword

It is our pleasure to introduce the book “Interdisziplinäre Managementforschung X /
Interdisciplinary Management Research X” to you. The first volume appeared in 2005
as a result of co-operation between the Faculty of Economics in Osijek (Croatia) and
Pforzheim University (Germany), particularly through the postgraduate programme
“Management”. The co-operation between these partnering institutions has been
nurtured, amongst else, through annual scientific colloquiums at which interesting
topics in various fields of economics and management have been presented and later
published in the proceedings. Over the years, the scientific colloquiums have drawn
the attention of academic scholars from other Croatian universities, as well as from
other countries including Australia, Germany, Hungary, Poland, Romania, Slovenia,
Montenegro, Bosnia and Herzegovina, Serbia, India, Ireland, Czech Republic, Israel,
Italy, South Africa, Belgium, Switzerland, USA, Slovakia, Denmark, Macedonia, Mexico
and the United Kingdom each making a contribution in academic and professional
discussion about contemporary management issues. Actuality and importance of the
issues discussed, the international character of the book in terms of authors and topics,
the highest standards of research methodology and continuity in publishing have been
recognized by the international academic community, resulting in the book now being
indexed in world-known data bases such as Thomson ISI, RePEc, EconPapers, and
Socionet.

The latest edition, i.e. “Interdisziplinäre Managementforschung X / Interdisciplinary
Management Research IX” encompasses 75 papers written by 165 authors. The success of
former editions has echoed beyond the traditionally participative countries and authors
and now includes new authors from Mexico and Cyprus, each providing a valuable
contribution to this interdisciplinary management forum.

As editors we hope that this book will continue to encourage academic scholars and
professionals to pursue excellence in their work and research, and to provide an incentive
for developing various forms of co-operation among all involved in this project.

Prof. Dr. Dražen Barković
Prof. Dr. Bodo Runzheimer
MANAGEMENT
MEASURING PERFORMANCE OF MANAGEMENT IN AGRIBUSINESS  PROBLEMS ... 15

MEASURING PERFORMANCE OF MANAGEMENT IN
AGRIBUSINESS - PROBLEMS, CONTROVERSIES AND
SOLUTIONS
Sofija Adžić. Ph.D.1
1
University of Novi Sad, Faculty of Economics, Subotica, Republic of Serbia, sofija.adzic@gmail.com

Abstract
The paper is focused to the problem of external performances measurement of
management in agribusiness. The measurement is discussed in terms of the needs
of public and commercial development institutions, researchers and other devel-
opment actors. The main goal is to design a coherent set of indicators for external
analysis of the problems and processes of business development, as well as monitor-
ing of the reforms and the allocation of development resources in accordance with
the criteria of an open market economy (in particular, the analysis of the effective-
ness of public support for I&R activities, subsidies and subsidized loans to finance
the production of food for export in terms of broader socio-economic objectives).
The methodology is derived based on the analysis of problems and controversies
that accompany the structural adjustment of agricultural industry in Eastern Croa-
tia and AP Vojvodina in the period from year 2015 till 2030/2035.
The presented matter, in addition to an introduction and a conclusion, divided
into four parts. The first part is focused to researching the structure of manage-
ment performances indicators in the context of the needs of more effective exter-
nal regulation of agribusiness. The focus of the second part is on the selection of
principles for concretization of contents of indicators for performances measure-
ment of management in agribusiness. The base is a holistic approach to solving this
problem. The third part shows the author’s view of the problems and challenges of
their implementation and consequently, establishment of rules that should guide
the public and commercial development institutions in the awarding of subsidies,
loans and providing the technical support. In the fourth section is given a critical
evaluation of conditions of their operationalization.
16 Sofija Adžić

JEL Classification: O13, D78, E65
Keywords: agricultural business, macro management, performances measure-
ment system for external regulations, holistic approach

1. Introduction
The paper is focused to the problem of external performances measurement of
management in agribusiness. This problem can be approached in various ways. The
proposal is based on an analysis of the problems that faced the public support for
the privatization of the development of agricultural industries in Eastern Croatia
and AP Vojvodina in the period from year 2015 till 2030/35. Although they are
in two states, a common feature is that they belong to typical Central European
NUTS 2 agricultural regions with large p/c natural and man-made resources for
food production and similar problems to overcome the (post)socialist transition
depressions. The main goal is to design a coherent set of indicators for external
analysis of the problems and processes of business development, as well as moni-
toring the reforms and the allocation of development resources (in particular, the
analysis of public support for I&R activities, subsidies and loans for production
financing in terms of broader socio-economic objectives in the reproduction chain:
higher and more efficient food production with greater share of added value>higher
export - > increased employment - > increased standard of living).

2. The structure of indicators for performances measurement of management
in agribusiness in the context of needs to increase the efficiency of external
regulation
The problem of determining the set of indicators to measure the performances
of management in agribusiness is based on a methodological approach in which
two aspects are separated.
The first is based on the SWOT analysis: Why the factors, such as: (1) A clearly
defined mission, vision and goals in the entrepreneurial decision-making; (2) The
possibility to establish a continuity in the improvement of corporate governance
by development of management processes and functions of capital; (3) Organiza-
tion in function to constitute three-ply management process in the activities of
planning, organizing, leading and control; (4) Econometric support in planning
defined targeted states; (5) The risk analysis in financial flows for the given liquidity
management; (6) Increased degree of freedom in identifying impacts and pressures
MEASURING PERFORMANCE OF MANAGEMENT IN AGRIBUSINESS  PROBLEMS ... 17

of non-economic and economic factors and resources; (7) Application of modern
(market-oriented) technique for the preparation and evaluation of investments in
processes that enable the growth and faster capital turnover; (8) Operational and
investment decision-making in the management processes and stages based on the
multidisciplinary action; (9) Pinpointing the responsibility for deciding on the
material, financial and human resources through consultations, cooperation and
co-decision, did not result in more efficient farm management, or companies or busi-
ness ventures, according to the minimalist criteria - providing the cash-flow, which
provides the regular service of all obligations with maintenance of the minimum
(target) profit rate (Adžić et al.; 2014, 173-176)?
The second aspect relates to the objective of this study – the performances mea-
surement of management in agribusiness is considered, first of all, in terms of the
needs of public and commercial development institutions, researchers and other
actors of development. The initial commitment is providing a balance between
market reforms and incentives and public interest. In this context, it is necessary to
say something about the key elements of scientifically valid transformation of the
role of public factors in the formation of a general framework for the development
and their implications for the determination of indicators for the performances
measurement of management in agribusiness (the exposed matter is processed ac-
cording to Hyden and Court; 2002).
Both the Republic of Croatia and the Republic of Serbia are over two decades in
the process of constituting the conditions for the transfer of rights and responsibili-
ties for the allocation of development resources from the state to the market. Tech-
nically, this approach marks: (1) liberalization of market, (2) increasing the degree
of freedom of movement of capital, and (3) development of economic and legal
institutions in function of encouraging and maintaining the (1) and (2). However,
in terms of their development problems, it is more visible that the discretionary
role of the state in the allocation of development resources can be reduced, only
if as a substitutions establish a clear, precise and transparent principles based on
certain aspects of reforms and management actions in which in the foreground are
the rights, not needs (Table 1).
18 Sofija Adžić

Table 1. The implications of concept of rights implementation on the public
regulation of management behavior in agribusiness
Behavior of managers in agribusiness when in Behavior of managers in agribusiness when in
the structure of public regulation dominates the structure of public regulation dominates
the concept: the needs the concept: the rights
The needs are met. The right is exercised.
The needs do not implicate any obligations. The acquisition of rights implicates corresponding
duties and obligations.
The needs are not universal. The rights are universal.
The needs can be met in a variety of ways, The needs can be achieved under the condition of
provided that some desired set of results simultaneous respect for the processes and results.
is achieved (for example, a minimum
amount or resources to each user).
The needs can be ranked in order of priority (for example, The right is indivisible and must be achieved
privileged farms, companies and businesses ...). completely and at the same time.
The needs can be achieved in various ways: gifts, In normal conditions, gifts, donations, subventions,
donations, subventions, by assistance, awarding the assistance, awarding the discretionary power to the
discretionary power to full or partial write-off of various write-offs are incompatible with the rights-
outstanding debts from suppliers and the like. based approach (this means that all economic entities
and citizens must regularly service their obligations,
the only exception are the individuals unable to work
- which belongs to the domain of social policy in the
narrow sense).
The exposed indicates that the application of the concept of rights in the public
regulation of management behavior in agribusiness is based on the completion of
the institutions and norms that will enable everyone to take responsibility to meet
their needs and their development in the future. On technical side, it can be seen
- that the development does not go from the top to the state to the farm, or com-
panies and their management, but inverse, development is a process that goes from
the individual in terms of people and their families (primarily as consumers of food
and employment opportunities) and economic entities and their associations to the
state (the so-called holistic approach).

3. Principles for selecting the methodology for performances measurement of
management in agribusiness
Initially should be noted that, there is no agreement on the concept of successful
managerial control, and consequently about the determination of the appropriate
MEASURING PERFORMANCE OF MANAGEMENT IN AGRIBUSINESS  PROBLEMS ... 19

set of indicators for its measurement. In seeking solutions, the key is a clear distinc-
tion between the system of public governance and ways of its implementation at
micro-level (corporate and entrepreneurial management). The scientifically valid
approach is based on determining the adequate combination of measuring the re-
alization of goals in the domain of: increasing the economic performances (farms,
companies and businesses within an open market economy), protection and im-
provement of environment issues and social prosperity, on the one hand, and meet-
ing the expectations of the owner and all other interest groups in and outside the
farm or enterprise, on the other hand. The key of implementation is the holistic
view of the business of farm or enterprise (Box 1).
Frame 1. The holistic approach in determining good public and corporate gov-
ernance in the agricultural business
The holistic approach has two characteristics. The first is that defining the key
(may be called also ultimate) development goals should be placed at the execu-
tive level. Second, the individual goals are harmonized starting from the different
observation perspectives. In fact, the initiatives for the integration of strategies are
correlated. The integration of development strategies can be seen in the example
of sugar production. The continuity in production requires a removal of sugar
beet production from the plot to the plot, because it can not be sown at the same
plot every year ( the scientific recommendations is every five years, meaning, for
the continuous production of an average sugar refinery is necessary at least 50.000
hectares of high class arable land). Defining the crop rotation on a larger num-
ber of grounds connect the export providing industrial strategy and agricultural
strategy for providing food raw materials respecting the sustainable development
criteria. The implementation of the holistic approach to this problem relies on a
network of public, corporate and enterprise policies and strategies composed of
four nodes, representing different views of this problem. The first node is macro
management. Its ultimate goals are: (1) reduce unemployment by increasing pro-
ductive employment, (2) increase export and a newly created p/c value, (3) in-
crease of fiscal revenues. The second node is a micro economic management. The
ultimate goals are: (4) increase the accumulation and income, (5) improving the
investment capacities, (6) reduce the conflicts due to the market power dispropor-
tion between the primary agricultural producers and processors. The third node
includes institutions and regulation. The structure in this case is formed by the
commercial and the public part. The top of the commercial part of the institutional
20 Sofija Adžić

system and regulation is formed by: (a) an aggregation of banks, whose ulti-
mate goals are: (6) short-dated investments, (7) high interest rates, and (8) low
risks. The public part is composed of: (b) control of monopoly, (c) settlement of
disputes, (d) set of local, regional, national and European norms and standards.
The ultimate goal is: (9) respect of consumer and environmental standards. The
fourth node establishes a system of values. The ultimate objectives are: (10) fighting
the corruption and (11) respecting the economic freedoms.

Measuring the economic performances of management in agribusiness should
be carried out directly from the regular service of all obligations of their farms or
companies and mass and structure of profit compared with the analogous indicators
in closer and further international environment. Since the techniques are known,
the focus is on the selection of principles for measuring the realization of other
goals. Three groups of indirect indicators for the determination of the content of
successful managerial control in agribusiness are proposed (Arndt & Oman, 2006):
The first includes the inputs or entries. The term includes: legislation, certain
specific rights, accepted national and international obligations and the like. The
indicators for measuring are the facts derived from the analysis of relevant laws,
contracts and agreements, accepted obligations. They are the basis (de jure concept)
for determining the content of term successful managerial control in agribusiness,
but do not show: “What is the real situation?” or “What is going on: at the level of
farm or company?”
The second includes the processes or procedures that lead to the implementation
of enacted laws and rights, acceptance of contracts and obligations, and the like.
These indicators determine where is the farm or the company on the path of the
enacted laws and accepted contracts, agreements and obligations to their imple-
mentation. Although this is a de facto concept to determine the term successful
managerial control, there is no information on the achievement of concrete results,
implementation of specific rights, and the like.
The third includes the outputs, outcomes, results or actual performances.
The measure is: “How many farms or companies, but also how many people and
their families (as food consumers and job seekers) enjoys the results of enacted laws,
agreements, contracts and the like, and at what price?”
The presented point out six general principles that should be used in the con-
struction of the indicators (Vujović, 2007, 222):
MEASURING PERFORMANCE OF MANAGEMENT IN AGRIBUSINESS  PROBLEMS ... 21

First, the principle of participation, that is appreciation of authentic interests in
a triangle: government (in terms of public interest holder) - farm or company - in-
ternal and external stake-holders;
Second, the principle of equality, more exactly its application in the formation
of the rules that fully respects the rights and interests of all participants in the chain
of reproduction;
Third, the principle of equivalence, that is in the application of rules to everyone,
regardless of income, economic, political and social status;
Fourth, the principle of responsibility, more exactly that all elected actors must
be responsible for their actions and consider the justified demands of the govern-
ment and also of the internal and external stake-holders;
Fifth, the principle of transparency, more exactly that the decision-making pro-
cess must be efficient, clear, transparent and open to review by the government and
the internal and external stake-holders;
Sixth, the principle of efficiency, that is, definitiveness of rules of game, which
enables quick and timely decision-making;
The presented approach is based on a broader understanding of agribusiness
out of the political and financial framework. At the same time shows which way
and how should the agribusiness actors go into the initiation of the process of con-
stituting a good business environment for the regular market operation. A good
entrepreneur and manager must very carefully and systematically submit the sug-
gestions, comments, criticisms and statements of support to the surrounding, so
his work on management will be sufficiently supported and as little as possible
hindered aside. Thereby it must be done in such a way that will make the coworkers
cooperative rather than uninterested or competitors.

4. The structure of indicators for measuring the quality of agribusiness and
the preliminary results of their implementation
The proposed structure of indicators for measuring the quality of agribusiness
is derived from the mixture consisting of: (1) obligations to implement and ap-
ply the appropriate technical, business, social and environmental standards as a
preconditions for the globalization of business activities, (2) elements of the cor-
porate social responsibility concept, as well as (3) positive destiny of entrepreneurs,
managers and owners to the problem of improving the quality of their business. In
22 Sofija Adžić

this framework, the classification of indicators for measuring the performances of
agricultural business is carried out in four groups (Lončar, 2007, 366-370):
The first group includes the obligation of every business entity to establish and
apply the appropriate technical, business, social and environmental standards. A
special role in improving the management performances have the common stan-
dards, such as: (1) Quality Management System (ISO 9000), (2) Environmental
Management System (ISO 14000), (3) Social Accountability System (SA 8000),
(4) Health and Safety Management System (OHSA 18000) and the like. Each cov-
ers a narrower or broader set of business activities that ultimately result in a forced
or voluntary respect of national, European and international regulations and obli-
gation toward all relevant interest groups in the internal and external environment.
The second group of agribusiness performances indicators results from the needs
that the agribusiness actors should be more transparent and accurate in reporting to
the public about their results and achievements. In this sphere a variety of standard
instruments circulate, such as: (1) Sustainability and Social Corporate Responsibil-
ity (CSR), (2) Reporting - Global Reporting Initiative (GRI), (3) Corporate Sus-
tainability Reporting Toolkit, (4) CSR Assessment Tool and the like.
The third group refers to the principles and instructions on the application of
positive business standards.
The fourth group is related to the efforts of owners, entrepreneurs and man-
agers to introduce and apply the first three groups of indicators for measuring
the performances of agribusiness. This refers to measures for: (1) integration of
requirements and goals of the first three groups of indicators for measuring the
performances of agribusiness into organizational structure of farm or company and
typical processes, (2) motivating the employees to create innovative solutions for
more efficient implementation of the above-mentioned indicators, (3) intensifica-
tion of the cooperation with internal (unions, professional teams, ...) and external
groups (agricultural administration, spas, consumer associations, ...), as well as (4)
more accurate reporting on achievements and problems. The key instruments for
the implementation are: (1) awards, (2) education and training, (3) partnerships
and (4) promotion and communication.
MEASURING PERFORMANCE OF MANAGEMENT IN AGRIBUSINESS  PROBLEMS ... 23

5. Discussion
In the analysis of operationalization possibilities the proposed conceptions of
measuring the performances of agribusiness should take into consideration the
fact that science, in the dominant understanding of its essence, can not develop
methods and mechanisms for successful determination of all mentioned elements.
At this point should be noted that for a large part of the (minimal) European
standards for measuring the effectiveness of business and the quality of business
environment there is no adequate production-technological and socio-economic
solutions, but they should be sought on the fly.
Both the Republic of Croatia and the Republic of Serbia, sooner or latter, will
have to turn to the macro, meso and micro-economic reforms and policies that will
pave the way towards regional and local endogenous, auto-propulsive and sustain-
able development in conditions of high uncertainty and risk. In the preparation
and implementation of the development strategy of regional agricultural indus-
tries are present a various interpretations of reality, which are also variable in time.
Therefore, the fundamental existential questions of formulation and implementa-
tion of reforms and policies to the constitution of the institutional and financial
framework for the endogenous, auto-propulsive and sustainable development of
regional agricultural industries are - the result of the interaction between: (1) indi-
vidual and collective entrepreneurship, ownership and management initiatives, (2)
sciences, (3) non-governmental sector and civil society, (4) internal and external
actors of commercial reproduction, while on the other hand are (5) left to the poli-
ticians voluntarism. For successful solving this problem, in the selection of actors
of the business, innovation and political system should be given a more impor-
tance to the possession and use of: (1) specific knowledge and skills, (2) ability for
credible understanding of the problem and managing the complex and uncertain
circumstances and (3) specific abilities to create solutions and persistence in their
implementation. This approach faces two problems.
The first arises from the fact that the main task of the proposed concept is-
how to with the simultaneous action of public regulation, entrepreneurship and
corporate governance create the conditions for growth of competitiveness of food
production for export on the basis of generation and valorization of scientific
knowledge. For its improvement are required the investments in new products,
new organization, new equipment, new knowledge and skills, but above all, those
who will be able to, on the basis of micro-innovations organize the labor and capital
24 Sofija Adžić

in order to make the production profitable in tough and unequal game on target
segments of the European and global food markets. So, requires a large number of
agricultural entrepreneurs, managers and technical teams with a very diverse and
specific knowledge and skills.
The second is related to the current ranges of national and regional innovation
systems in initiating and implementing the restructuring strategy of (regional) ag-
ricultural industries. At first appearance, the current situation (number and struc-
ture of the organization for education and research, the number and structure of
teachers, scientists and researchers, available space, experimental farms and to some
degree the equipment) is in many dimensions respectable. However, the institu-
tional arrangements supporting these systems are far away from their ability to pro-
vide their modernizing role, despite the plenty of, more politically-declarative than
properly constructed institutional reforms, educational, scientific, technological,
agricultural, and industrial and trade policies. In this context, the listed innovative
systems, in the strict (scientific) sense of this term does not exist, because where
there is no innovation (in terms of bringing (economic) benefits to the innovator,
and new values to the user), there is no innovation system, and thus one of the
major factors of starting the process of food production industrialization by the
exogenously determined European and global standards.

6. Conclusion
The main finding of this study is that indicators for external performances
measurement of agribusiness must be derived from the mixture composed of: (1)
obligations to in their business implement and apply the appropriate national,
European and global technical, business, social and environmental standards, (2)
key elements of the corporate social responsibility concept, but above all, (3) posi-
tive definitiveness of entrepreneurs, managers and owners toward the problem of
improving the business performances in the conditions of hyper-competition on
the domestic, European and global food market. The entrepreneurs, owners and
managers in agricultural businesses have to accept the high standards of conduct
in the field of relationship to the external and internal environment. Their reputa-
tion should not depend only on business success accounting indicators, as the basis
to satisfy the owners and financiers, but also on the ability to make a consistent
relationship of mutually beneficial interactions with employees, customers, (local,
sub-regional, regional and national) community and environment.
MEASURING PERFORMANCE OF MANAGEMENT IN AGRIBUSINESS  PROBLEMS ... 25

References
1. Adžić, S. et al. (2014). Performanse i razvojne mogućnosti agrarne industrije u AP
Vojvodini: Prilog regionalnoj strategiji unapređenja agrarnog biznisa, Univerzitet
u Novom Sadu, Ekonomski fakultet, Subotica, Poljoprivredni fakultet, Novi Sad,
ISBN 978-86-499-0190-2, Novi Sad.
2. Hyden, G. and Court, J. (2002). Governance and Development. World Governance
Survey Discussion Paper 1, Union Nations University, Tokyo.
3. Kaufmann, D., Kraay, A. and Mastruzzi, M. (2006). Governance Matters V: Aggregate
and Individual Governance Indicators for 1996-2004. World Bank Policy Research
Department Working Paper.
4. Lončar, D. (2007). Korporativna socijalna odgovornost: koncept, rejting, instrumenti
i značaj, Zbornik radova: Miločerski ekonomski forum 2007: Korporativno i javno
upravljanje u funkciji razvoja konkurentnosti, Dabić, S. (ur), str. 358 – 376, ISBN
978-86-84651-112-1,Savez ekonomista Srbije i Savez ekonomista Crne Gore,
Beograd.
5. Vujović, D. (2007). Pojava kompozitnih indikatora upravljanja: potreba ili globalna
moda bez povoda, Zbornik radova: Miločerski ekonomski forum 2007: Korporativno
i javno upravljanje u funkciji razvoja konkurentnosti, Dabić, S. (ur), str. 209 – 232,
ISBN 978-86-84651-112-1,Savez ekonomista Srbije i Savez ekonomista Crne Gore,
Beograd.
26 Martina Briš Alić • Alen Alić

COMPETITIVE ADVANTAGES OF
THE CROATIAN WOOD INDUSTRY
Martina Briš Alić, Ph.D.1, Alen Alić, B.Sc.2
1
Josip Juraj Strossmayer University of Osijek, Faculty of Economics, Republic of Croatia, mbris@efos.hr
2
Aurea Grupa Inc., Republic of Croatia, uprava@aurea-grupa.hr

Abstract
This research will look into competitive advantages of the Croatian wood indus-
try. The paper provides an explanation of potential sources of competitive advan-
tages as well as positive and negative aspects of the selected generic strategies, fol-
lowed by examples of companies using these strategies. The subject of the research
encompasses characteristics, the area and the impact of competitive advantages on
the company’s market position and business success.
The aim of the paper is to define the term competitive advantage and to bring it
into correlation with the wood industry.
The methods used in the research include description, compilation and classifi-
cation, and use of comparative and genetic method to interpret the phenomenon
in its origin, i.e. in this case, a competitive advantage in its source, namely in costs
or differentiation.
JEL Classification: F12
Keywords: competitiveness, competitive advantages, productivity, Croatian
wood industry

1. On competitive advantages in general
When organisms belong to different species, they can both survive, as they fight
over resources in different ways. However, when they belong to the same species,
one of them disappears. In other words, the species that take up the same ecological
niche cannot coexist in a stable equilibrium (Popov, 2010:10).
COMPETITIVE ADVANTAGES OF THE CROATIAN WOOD INDUSTRY 27

Accordingly, the natural law that the stronger ones will survive can be perceived.
For this reason in the field of economy and business operations there is competi-
tion between companies fighting to achieve competitive advantages by means of
which they would avoid competitors’ threats and succeed in achieving their set
goals, expressed in profit, market share or something else.
Competitiveness can also be defined as productivity by which a company uti-
lizes its human resources, capital and natural resources. Higher productivity leads
to higher competitive advantage.
Staying competitive and being always aware of consumer needs requires coop-
eration among different business functions. Operational function is not isolated.
Actually, none of the business functions can survive isolated from others. Work can
be done optimally only if interdependence of various business functions is accepted
and exploited in an optimal way (Barković, 2011:27).
Competitive advantage is punctum saliens of the strategic activity of a company,
and presence or absence of a competitive advantage is what makes a difference
between successful and unsuccessful companies. It is achieved by having or build-
ing a specific quality that is required and accepted by buyers and which makes a
company different from their competitors (Tipurić, 1999:3).
A company achieves a competitive advantage in the situation when it offers a
product or service that is considered superior by buyers and does so at a lower cost
than its competitors, making it possible to sell a product at a lower or equal price,
whereby the company generates higher profit. Simply said, competitive advantage
is a characteristic of a product that makes it different from the competitor’s prod-
uct. According to Porter, competitive advantage arises in the first place from the
value that the company offers to its buyers, and which exceeds the very costs of
achieving that same value (Pekanov Starčević, 2012:12).
There are two key sources of competitive advantages – lower costs and differ-
entiation. Competitive advantage is achieved and maintained by either supplying
identical value to buyers at a lower cost than competition in the industry (cost
advantage) or by supplying higher value to buyers at an average cost in the industry
(differentiation advantage).

1.1. Cost leadership
Although competitive advantage is established and maintained through all busi-
ness activities and their operativity, a company may achieve a competitive advan-
28 Martina Briš Alić • Alen Alić

tage by orienting itself primarily towards low costs, which implies focus on rela-
tively standardized products and services.
Through this strategic orientation, based on the experience curve, efficient use
of resources and economies of scale, and with strict cost control, a company seeks
to reduce the price of its products (costs), thus achieving competitive advantage.
Based on low production costs, a cost leader is able to impose low sale prices that are
lower than competitors’ prices. A cost leader chooses the lowest level of production
differentiation, as differentiation makes production more expensive and it can lead
to the situation where the strategic business unit directly jeopardizes the founda-
tion upon which its strategy is built. Furthermore, a cost leader ignores the differ-
ences among market segments and directs the positioning of its products towards
an average buyer. The reason for such an attitude of the leader is that adjusting the
product to the different market segments is costly, i.e. it increases production costs.
Besanko, Dranove and Shanley also state the following favourable conditions
for building a competitive advantage based on low costs:
• When the industry is characterized by economies of scale and economies of
experience, but none of the companies in the market has begun to exploit
them seriously
• When the possibilities for improving the perceived benefit of an industrial
product are limited by the nature of the product itself
• When buyers are relatively price sensitive and they are not willing to pay a
premium price for additional improvements of quality, design or image of
the product
• When an industrial product has features of a product whose objective quality
attributes buyers are able to estimate at the time of buying (for example, of-
fice furniture or computers). In such cases possibilities of differentiation can
be found in improving the visible product features, which multiplies the risks
of imitating differentiation and directs strategic attention to cost advantages
(Tipurić, 1999:15).
It should be mentioned that cost advantage arises from more efficient perfor-
mance of activities in the value chain compared to industrial competitors. In addi-
tion, “low cost culture” should be implemented in the core of the company’s activi-
ties, thus successfully monitoring and managing costs, which is not an easy task at
all. Exactly for this reason, a company may not succeed in achieving competitive
COMPETITIVE ADVANTAGES OF THE CROATIAN WOOD INDUSTRY 29

advantage through orientation on low costs. The logic behind this strategy is to be
the leader in the industry, and not one of several followers. Rivalry of several com-
petitors over the position of the industry leader is extremely dangerous, because, as
long as one of the companies does not become a leader and eliminates others from
the market, consequences for the company may be catastrophic. However, high risk
is also followed by a high yield, so that focusing on costs may achieve a significant
competitive advantage.
Wall-Mart and Southwest Airlines have won strong market positions by using
low-cost advantage over their competitors and by consistently having lower prices
than their competitors (Thompson & Strickland & Gamble, 2008:7). Other suc-
cessful global cost leaders include Texas Instruments in consumer electronics, Hyun-
dai in the automobile industry, Black & Decker in the power tools industry, etc.
In the wood industry, the Swedish company IKEA is known worldwide for its
low prices, as their business strategy is based on low prices only.

1.2. Differentiation
By means of differentiation in the process of market exchange, a company is
trying to achieve the desired level of differentiation between its product and similar
products of its competitors. The content of differentiation relies on the knowledge
about consumer needs, wants and preferences. Efforts and investments in this area
belong to the category of improving placement of the products that are already
present in the market. When it comes to new product development, the producer is
trying in advance to embed certain elements in the product through design, which
will help the product to stand out among similar competitors’ products.
In the Croatian wood industry, there is an example of Kvadra Design, a com-
pany that differentiated itself from other companies in the industry through its
innovation and finalisation of their own designer products. With emphasis on the
Croatian design furniture, they were the first to start with the above business con-
cept and have chosen a business strategy that in the long run produces only top
results. The concept and model they apply in their production can be compared to
Italy, a country that is known for production of design furniture.
By applying this generic strategy, barriers to entrance of other companies are
established by building customer loyalty, which discourages potential new players.
Buyers also feel connected to products or services with unique attributes, which
30 Martina Briš Alić • Alen Alić

reduces the threat of a substitute, and brand loyalty provides safety to the company
against rival threats.
Brand is a name, term, sign or a symbol, i.e. a system of fundamental, visual,
verbal and written characteristics, aimed at identification and differentiation of one
supplier’s product from those of others (Medić & Pancić, 2009:88).
The term brand refers to a specific product that will be accepted by consumers,
that will remain familiar to them based on differentiated features and promises
they have to ascertain. Consumers also have to be convinced of its superiority or
appropriateness for their lifestyle, status, purchasing power. In this way, brands are
transformed into beliefs, ideas, and the world that consumers can identify with
(Pavlek, 2008:121).
Brand is the basic reason why buyers are willing to pay more (although they
could buy an identical or similar product for less). Brand is the strongest weapon
in the fight against competition and a company’s most valuable asset (Medić &
Pancić, 2009:95).
Consequently, differentiation makes it possible for a company to:
• Set the price with additional profit
• Sell larger quantity of the product at a given price
• Acquire equally valuable benefits (higher customer loyalty during cyclic or
seasonal falls) (Jović, 2010:51).
The process of differentiation of the existing products in the market is actually
neutralisation of causes and differences that cause the product to fall behind oth-
ers in the market. By applying adequate measures, for example, product “meta-
morphosis” in the production and technological sense, the company is trying to
improve the product, under condition that it is profitable (considering the costs).
Sometimes it is not about eliminating physical flaws, but about the need for chang-
es in the marketing mix. The problem lies within the fact that buyers often cannot
know the value a product has for them. Sometimes they overestimate a product,
and in other cases, they underestimate it. Buyers often do not know what is ben-
eficial for them. Therefore, the strategy should be based on use and signal values. A
buyer ought to recognise the product as unique; thus, the forms of differentiation
that are difficult to imitate have the best chances for success. Some of the examples
of such successful differentiation are overall value of McDonalds, prestigious Rolex
watches, Federal Express delivery, Daimler Chrysler engineering, etc.
COMPETITIVE ADVANTAGES OF THE CROATIAN WOOD INDUSTRY 31

Examples of companies successful at applying differentiation in the Croatian
wood industry include Spin Valis d.d., with high quality solid wood furniture sets
and eco-friendly furniture – chest of drawers, show cases, tables and chairs. Spačva
is known for its high quality floors and doors, whereas Kvadra Design is known for
its original furniture designed by Croatian designers.
In addition to the two extremes of competitive advantages, there is also another
generic strategy – focus strategy, which is based on the choice of targeted market
segment. Focused cost leadership includes cost control in a narrow field. Similar
to focused cost leadership, focused differentiation also offers a unique product in a
narrow field. Cost leadership strategy and differentiation strategy are trying to find
competitive advantages in a wide range of industrial segments, whereas focus strate-
gies are focused on cost advantages (Cost Focus) or differentiation (Differentiation
Focus) within a narrow segment (Pekanov Starčević, 2012:27).

2. Analysis of the wood industry in Croatia
Forests1 cover about 47% of the Croatian land area, and total area of forests and
forest land amounts to 2 688 687 ha.
Wood processing and furniture production in the Republic of Croatia has devel-
oped based on high quality raw material. Development of these industries is based
on utilisation of this raw material, long-term tradition of wood processing and
good human resources (Pirc et. al., 2010:230). Wood processing industry accounts
for a significant segment of the Croatian economy.
As shown in Table 1, the total number of people in Croatia employed in the
activity C16 – wood processing and wood products in 2012 amounted to 11 072,
whereas the total number of people employed in the activity C31 – furniture pro-
duction was 8 887 in the same year. Therefore, the total number of people em-
ployed in these activities in the Republic of Croatia in 2012 amounted to 19 959.

1
Find more details on forests in Croatia at: http://portal.hrsume.hr/ (February 5, 2014)
32 Martina Briš Alić • Alen Alić

Table 1. THE NUMBER OF EMPLOYEES IN LEGAL ENTITIES ACCORDING TO THE
2007 NATIONAL CLASSIFICATION OF ACTIVITIES (annual average)
Shares Indices
ACTIVITY 2009 2010 2011 2012
2012 12/11
Agriculture, forestry and
A 25,766 24,710 24,891 25,391 2.2 102
fishing
02 - forestry and wood cutting 8,659 8,224 8,495 8,478 0.7 100
C Processing industry 232,751 219,976 214,302 207,298 18.0 97
Wood processing and
16 11,501 11,050 10,839 11,072 1.0 102
wood products
31 Furniture production 9,637 9,676 9,357 8,887 0.8 95
Total wood processing
21,138 20,726 20,196 19,959 1.7 99
and furniture production
  TOTAL CROATIA 1,211,085 1,168,179 1,159,657 1,153,497 100.0 99
Source: State Bureau of Statistics, Communication 9.2.6.

Wood processing industry in Croatia is among rare industries that have recorded
exports higher than imports. Exports in this industry in 2012 accounted for 7% of
the total exports of the Republic of Croatia, and it amounted to USD 902 million.
The value of exported wood and wood products was USD 578 million, whereas the
value of exported furniture amounted to USD 324 million. The value of imported
products in the same year was USD 498 million (Table 2).

Table 2. FOREIGN TRADE OF WOOD PRODUCTS AND FURNITURE
EXPORT IMPORT BALANCE Export -import ratio
mil. USD mil. USD mil. USD (%)
2008 977 905 72 108
2009 755 655 100 115
2010 814 535 279 152
Index 2011/2010 118 110 135
2011 964 587 377 164
Wood and wood products 612 239 373 256
Furniture 352 349 4 101
COMPETITIVE ADVANTAGES OF THE CROATIAN WOOD INDUSTRY 33

2012 902 498 405 181
Wood and wood products 578 194 384 298
Furniture 324 304 20 107
Index 2012/ 2011 94 85 107
Wood and wood products 95 81 103
Furniture 92 87 573
Source: State Bureau of Statistics

The greatest problem is that the structure of export products is very unfavour-
able. It is dominated by export of raw materials and semi-finished goods that gener-
ate the lowest added value. As the most important segment of forest-based indus-
try that should represent the highest added value, furniture industry is in a very
difficult position. Although global recession has significantly reduced demand for
furniture, the problems for this industry actually started 20 years ago. At the begin-
ning of the 1990s, within only a couple of years, Croatian furniture industry was
almost halved and brought to the verge of catastrophe, partially due to the war, and
later due to the largely unsuccessful privatization and economic policy that failed
to provide adequate incentives. As annual yield has increased, companies now have
wood raw material, but they lack processing capacities to increase the added value
(Vlahinić-Dizdarević & Uršić, 2010:66).
Due to the situation in the industry outlined above, imported products domi-
nate the furniture market.
To change the structure in the wood processing industry, the Ministry of Ag-
riculture has developed the Operative Programme for the Development of Wood
Processing and Furniture Production with the goal to increase the value of wood
raw material multiple times through products of high finalization level, quality,
design and recognisability.
The long-term goal is to achieve wood processing and furniture production as
economically successful, profitable activities with well-balanced, competitive and
sustainable development, following the global development trends.
This goal is based on the prerequisite of increased economic efficiency, and in-
creased level of competitiveness will be the key point for continuous economic
achievements.
34 Martina Briš Alić • Alen Alić

The long-term goal will be achieved through realization of short-term goals:
• Change in the existing structure, with higher proportion of final production;
• Increased share of final products on the market;
• Increased competitiveness of final products on the market;
• Increased employment and maintaining the population in rural areas;
• Encouraging the development of, and protecting the national wood process-
ing and furniture production, without compromising its openness.2

Thus, the entire economy as well as wood industry in the Republic of Croatia
needs to face strong and large competition, in both the home and foreign markets,
and look for solutions for its survival and future development in such competitive
conditions.
One of the strengths of the forest-based industries is superb yet available raw
material. Products made of Slavonian oak and other types of wood have been tradi-
tionally exported to the European and world markets. Croatia has a long tradition
and experience in production of wood products. One of the strengths is also the
forestry policy with elements of sustainable development. According to Hrvatske
šume (a public enterprise for forest and woodland management in the Republic of
Croatia)3, the wood mass in the Republic of Croatia amounts to 398 million m3,
with annual yield growth of 10.5 million m3, thus ensuring the future of sustain-
able management, as annual consumption of wood mass is lower than the yield.
However, the above stated facts are only comparative advantages that should be
developed into competitive ones and become opportunities for the development
of this sector. One of the possibilities refers to encouraging the development of
clusters, which would make it possible for Croatian companies to specialize in a
particular phase of furniture production and improve production flexibility. This
type of business organisation has already proved itself very successful, for example
in Austria (Vlahinić-Dizdarević & Uršić, 2010:71).
Based on the above, several clusters were founded in Croatia and they are ori-
ented towards problems of companies in the wood industry, trying to facilitate

2
Operative Programme for the Development of Wood Processing and Furniture Production 2011-
2014. Available at http://www.mps.hr/default.aspx?id=8474 (January 19, 2014)
3
http://portal.hrsume.hr/index.php/hr/ume/opcenito/sumeuhrv (February 5, 2014)
COMPETITIVE ADVANTAGES OF THE CROATIAN WOOD INDUSTRY 35

placement of goods through joint presentations at trade fairs and on the market.
Producers organised in a cluster can also obtain raw material under more favour-
able terms and many other benefits.
When it comes to branding of the Croatian wood industry, the cluster Drvo je
brand (‘Wood is a brand’) stands out. Through its goals and activities, it promotes
and educates companies about the need of the Croatian wood industry to aspire
to the highest possible level of product finalisation. One of the most important
tasks of the cluster Drvo je brand is to achieve a higher level of competitiveness of
the Croatian wood products on the world market through its activities based on
innovation, design and final products, with inevitable activities of marketing and
promotion to create a higher additional value.
Change in the production structure to the benefit of final products opens op-
portunities for greater employment, but also for greater export. Opportunities also
exist in tourism – involving of domestic furniture producers in supplying hotels
and tourist facilities with furniture would result in sales growth and indirect pro-
motion of the Croatian furniture (Vlahinić-Dizdarević & Uršić, 2010:71).
Unfortunately, there are more weaknesses than strengths. These refer to dominant-
ly standardized mass production, which prevents comparative advantages of Croatia
from being utilised. Mass production results in products of lower added value that
have difficulties in finding the market due to increasing international competition
within the observed market segment, where the product price is the most important
factor of competitiveness. In the field of mass production, greatest competitiveness
is achieved by countries with low labour costs with which Croatia cannot compete.
Therefore, Croatian production should specialize in production of high quality furni-
ture that is produced in small series (Vlahinić-Dizdarević & Uršić, 2010:71).
Poor product structure should also be emphasized, with dominance of primary
products, which usually generate the lowest profit, compared to final products.
Low productivity and low level as well as outdated technology are also some of the
weaknesses of the forest-based industry. Significant weaknesses in furniture produc-
tion include inadequate and unattractive design as well as a lack of brands.
Threats refer to poor utilization of wood raw material in the way that good raw
material is turned into an uncompetitive final product. In terms of price competi-
tion, countries presenting threats include countries of Asia and Eastern Europe,
which have lower labour costs.
36 Martina Briš Alić • Alen Alić

2.1. Measures to stimulate competitiveness
The unacceptable existing programme and unsatisfying competitiveness require
restructuring and diversification of the existing production toward products of
higher added value and adjusting to the market conditions of the EU. This requires
increased investment activity, embedding competitiveness factors in production
and business, and sustainable production that increases the share of the analyzed
activities in GDP structure.4
In order to increase competitiveness, in 2010 the Ministry of Regional Develop-
ment, Forestry and Water Management presented the “Operative Programme for
the Development of Wood Processing and Furniture Production 2011 – 2013”.
This programme aimed to increase competitiveness in two ways5:
a) Through education and improvement of human resources
Raising the human capital value, acquiring knowledge, skills, attitudes and val-
ues that an individual needs to realise his or her working role, all of these are
key factors of repositioning the economy in terms of competitiveness. Education
should be perceived as an investment that enables integration of business plans and
employees’ skills in order to achieve goals in the field of economic growth, products
and services. Education and improvement increases competitiveness by ensuring
the necessary quality of human resources.
b) Through application of new technologies and technological processes
Today’s production conditions imply wide application of automated technol-
ogy in designing, engineering, and production process. Successful integration of
this technology in the business process and keeping up with global trends requires
systematic investment in technological development. Introduction of new tech-
nologies has numerous effects on business, such as increased production volumes,
reduction of production costs, improvement of product quality and business pro-
cesses, improved production flexibility and shorter delivery periods.

3. Conclusion
Recognising competitive advantages and disadvantages is the most important
goal of any company. There are two key sources of competitive advantages – low
4
Amendments to the Operative Programme for the Development of Wood Processing and Furniture
Production 2011 – 2014, available at http://www.mps.hr/default.aspx?id=8474 (January 19, 2014)
5
Ibidem
COMPETITIVE ADVANTAGES OF THE CROATIAN WOOD INDUSTRY 37

costs and differentiation. Competitive advantage is achieved and maintained either
by supplying identical value to buyers at a lower cost than the competition in the
industry i.e. low cost advantage, or by supplying a higher value to buyers at an aver-
age cost in the industry, i.e. differentiation.
In 2012 in the Republic of Croatia there were 19 959 people employed in the
wood processing industry. The crisis has had devastating effects on all segments in
Croatia, including the wood industry. One of the most important strengths of the
forest-based industries is high quality, easily available raw material. Another im-
portant strength is the experience in wood industry. Unfortunately, there are more
weaknesses than strengths. These refer to predominantly standardized production
in large series, which prevents Croatia’s comparative advantages from being utilised.

References
1. Barković, D. (2011) UVOD U OPERACIJSKI MANAGEMENT. Faculty of
Economic in Osijek, Osijek.
2. Jović, S. (2010) Upravljanje lancem vrijednosti u malim poduzećima. Osijek.
3. Medić, M., Pancić. M. (2009) Osnove marketinga – praktikum. Ekonomski fakultet
u Osijeku, Osijek.
4. Ministry of Agriculture, available at www.mps.hr (January 19, 2014)
5. Pavlek, Z. (2008) Branding. M.E.P. Consult, Zagreb.
6. Pekanov Starčević, D. (2012) Metode upravljanja troškovima u funkciji konkurentnosti
poduzeća. Osijek.
7. Pirc, A., Motik, D., Moro, M., Posavec, S., Kopljar, A. (2010) ANALIZA
POKAZATELJA STANJA NA TRŽIŠTU DRVNIH PROIZVODA REPUBLIKE
HRVATSKE. Drvna industrija, Nr. 4/10, Vol. 61, Zagreb, pp. 229-238
8. Popov, L. (2010) Strateški marketing kao preduvjet konkurentske prednosti i
poduzetničkog rasta. Osijek.
9. Portal Hrvatske šume, available at http://portal.hrsume.hr/index.php/hr/ume/
opcenito/sumeuhrv (February 5, 2014)
10. Thompson, A.A., Strickland, A.J., Gamble, J.E. (2008) Strateški menadžment, U
potrazi za konkurentskom prednošću, Teorija i slučajevi iz prakse. 14th Edition,
Croatian edition, Mate, Zagreb.
11. Tipurić. D. (1999) Konkurentska sposobnost poduzeća. Sinergija, Zagreb.
12. Vlahinić-Dizdarević, N., Uršic, V. (2010) Drvno-prerađivački kompleks u Republici
Hrvatskoj : SWOT matrica i projekcije rasta. Poslovna izvrsnost, Zagreb, pp. 63-83
38 Dražena Gašpar

INFORMATION TECHNOLOGY AND KPIS
DEVELOPMENT AT UNIVERSITIES
Dražena Gašpar, Ph.D.1
1
Faculty of Economics, University of Mostar, Bosnia and Herzegovina, drazena.gaspar@sve-mo.ba

Abstract
The paper presents importance of development and implementation of appro-
priate key performance indicators (KPIs) at universities in order to make precondi-
tions for better strategic management of these institutions. Strategic management
of the modern universities is based on vision, mission, defined strategy and strategic
goals. But after defining the main strategic goals, the universities need indicators to
enable monitoring of their implementation. Therefore, universities have enormous
obligation to collect, access and analyze data on their key performance indicators.
Today, that is almost impossible without quality IT support. Through Tempus
project SHEQA public universities in B&H developed and implemented USKPI
(University System of KPI) software that provides a simple and fast method of data
collection, calculation and presentation of key performance indicators necessary for
the efficient management of the University. Continuous monitoring and analysis
of KPI creates a basis not only for strategic planning and management of higher
education institutions, but also for accreditation, evaluation, tactical planning, en-
rolment procedures and so on.
JEL Classification: I21, I23
Keywords: Key performance indicators, KPI software, strategic management

Introduction
Knowledge is recognized as the new currency of the innovation economy and
long-term economic success is tied inextricably to human and knowledge capital
(HEA; 2013, 14). The emergence of the knowledge economy challenged the
“ivory tower” status hitherto enjoyed by universities and academics, ushering
in a new era for the higher education sector. Last fourteen years the European
INFORMATION TECHNOLOGY AND KPIS DEVELOPMENT AT UNIVERSITIES 39

Commission has continuously emphasized the role of universities in contributing
to the knowledge society and economy (EC; 2005a, Eurydice; 2008), stressing
that “Europe must strengthen the three poles of its knowledge triangle: educa-
tion, research and innovation. Universities are essential in all three” (EC;2005b).
Appropriate governance structures and processes are frequently regarded as a pre-
condition to achieve these goals. The changing role of the state – higher education
(HE) institutions relation has been visible in the form of enhancing institutional
autonomy and stressing quality assurance and accountability. The strong correla-
tion between institutional autonomy and high-performance was well-established
in the literature on higher education (Aghion et.al; 2010, Salmi; 2011). Yet while
there is consensus about the need for both autonomy and accountability, there is a
divergence of opinion as to what constitutes the optimal balance between them. An
overly mechanistic approach to performance evaluation can stifle innovation while
an overly detached approach deprives stakeholders of reassurance about the quality
of teaching, learning and research in the higher education sector (HEA; 2013, 16).
The monitoring of institutional performance has been on many university
boards’ agendas during the last decade. Many universities accepted that key per-
formance indicators (KPIs) could be a useful tool for assisting with institutional
performance monitoring. KPIs are sets of measures on aspects that are most critical
to current and future success of an organization (Parmenter; 2010, 3), where com-
petitive advantages may be built over competitors. KPIs can provide a set of com-
petitive advantages in analysis where the results can be comparable to those in other
organizations. Although the use of KPIs has become a hot topic at universities, little
guidance or arguments on concrete selection of KPIs have been developed. Some
of commonly used criteria in selection of KPIs are importance of specific KPI for
institution, its relationship with strategic planning, measurability (quantification)
and so on. Very often, the selection process is the result of managerial subjective
judgments and may be driven by external stakeholders in universities.
In year 2006 the Committee of University Chairs (CUC) developed Report
on the Monitoring of Institutional Performance and the Use of Key Performance
Indicators (CUC; 2006) where proposed 10 high-level KPIs later refined in Report
from 2008 (CUC; 2008, 14) here presented in Table 1. These KPIs were used in
the measurement of institutional performance from a perspective of governors
in higher education, covering both financial and non-financial aspects. Report
from 2006 (CUC; 2006) included a number of self-assessment questions in each
40 Dražena Gašpar

of the ten performance areas covered by the high-level KPIs, and also a number of
supporting (lower level) KPIs in each of the ten areas.

Table 1. High-level KPIs
Super KPIs
Institutional Sustainability Academic Profiles and Market Position
Supporting KPIs
Student Experience Student Diversity
Leadership & Governance Staff & Human Resources
Financial Health Estates
Regional Engagement Commercialisation
Research Excellence Research Income
Source: (CUC; 2008, 14)

Combination of these three types of monitoring tools (high-level KPIs, self-
assessment questions and supporting KPIs) creates a logical monitoring framework,
and a menu of illustrative monitoring tools which institutions can use and adapt
as they wish (CUC; 2006, 1). In the Report from 2008 (CUC; 2008,14) they
presented that universities included in that initiative mostly accepted and imple-
mented proposed 10 KPIs while they are still experimenting with two super KPIs.
These trends identified in the European Higher Education Area clearly indicate
the need for a thought-out, organised and high-quality approach to higher educa-
tion governance in Bosnia and Herzegovina. These circumstances call for a strategic
approach to the harmonization of the higher education governance system within
Bosnia and Herzegovina and with the European Higher Education Area.

1. Use of KPI in strategic management of public universities in B&H
Since Bosnia and Herzegovina is a country with complex structure, this com-
plexity also reflects on state governance in higher education. Namely, in Bosnia and
Herzegovina there is no ministry for education at the state level, because education
is responsibility of the entity Republic of Srpska, cantons in Federation of Bosnia
and Herzegovina and District Brčko. Result of such constitutional organization
is existence of 14 different ministries and bodies which are competent for educa-
tion, and of course higher education. Consequence of such complex constitutional
INFORMATION TECHNOLOGY AND KPIS DEVELOPMENT AT UNIVERSITIES 41

structure is that there are substantial differences, not just in approaches related to
financing of public universities, but also in quantity of assignment of public money
to them. In Bosnia and Herzegovina there is no consensus about the basic indica-
tors for public sector funding and costs, not to mention other sources. Two public
universities are even not in the budget of their ministries and they are financed
through grants.
It is clear that both different ways of institutional organization and approaches
to financing directly influence on the way of governance and management of pub-
lic universities in Bosnia and Herzegovina. The degree of strategic management
development at the institutional level is different from university to university.
As far as national level is concerned, Agency for Development of Higher Educa-
tion and Quality Assurance (HEA) developed Criteria for accreditation and stand-
ards (OGB&H; 2010) where the first criterion is related to strategic management
and performance monitoring of higher institutions. This criterion puts in focus
necessity for strategic management, planning and performance monitoring at HE
institutions in B&H. But, neither Criteria for accreditation and standards clearly
defined Key Performance Indicators (KPI) at the national level nor required its us-
age at institutional level.
However, it is necessary to stress out that in the last decade development and
modernization of institutional governance systems were significantly supported by
the international projects in which all public universities in Bosnia and Herzegovi-
na have participated. Public universities in Bosnia and Herzegovina have observed
trends in European higher education and therefore have understood that is neces-
sary to adopt some managerial approach if they want to be a significant key player
in the further development of the society. That was the main reason why Uni-
versity of Mostar proposed idea for Tempus project called “Strategic management
of Higher Education Institutions based on Integrated Quality Assurance System”
– SHEQA. The main objectives of this project are analysing the existing KPIs for
performance measurement in Europe, defining and implementing KPIs for perfor-
mance measurement in B&H and contributing to strengthening and developing
the strategic management at HEIs on the basis of KPI, which are used in the Eu-
ropean Area of Higher Education (Rezić et al, 2013). Tempus SHEQA lasted three
years, from 2010 till 2013. University of Mostar used experience and knowledge
gained in that project to improve development of its KPIs and to integrate them
with strategic planning.
42 Dražena Gašpar

2. Development of KPIs at the University of Mostar
University of Mostar has long tradition of using KPIs, but they are used mostly
as a base for specific decisions (enrolment policy, new study programs, decreasing of
drop out, etc.) and reporting to amenable ministries and other external stakeholder.
There is no, at least no purposely, direct relations between KPIs and university
strategic goals. In the process of developing new university strategy and preparing
for accreditation, top management of the University of Mostar has recognized the
necessity to use KPIs for better performance monitoring of institution and that, in
that case, KPIs should be directly related to strategic goals. That was reason why
Team for strategy development decided that new strategy should be followed by
strategic plan based on KPIs.
Development of new strategy was preceded by comprehensive analyses of in-
ternal and external stakeholders’ opinions related to the future of University. The
analyses were based on a survey conducted among actual and former rectors, vice-
rectors, deans, vice-deans and among professors, assistants and students representa-
tives. Also, the research was conducted on a convenience sample of external stake-
holder like amenable ministries, companies and employment offices.
Survey consisted of questions about advantages/disadvantages of University,
about what should be changed, about possible improvements and new ideas related
to future development. The result of that survey was SWOT analysis of the Uni-
versity which was the basis for definition of new mission, vision and main strategic
goals of the institution.
Strategic plan based on KPIs was constituent part of a new strategy. Way of
measurement, data sources, way of data collection, responsibility and deadline
were defined for each KPIs. Strategy, together with strategic plan was first passed
through extensive internal analysis at faculty councils. Also, it passed through pub-
lic discussion. All suggestions and recommendations were collected and analyzed
first by Team for development of strategy and then by the Senate. Finally the Senate
adopted new University strategy and strategic plan for period 2011-2016.
As it was already said, University of Mostar, as creator of Tempus SHEQA,
during development of new strategy and definitions of KPIs used experience and
knowledge from this project. For example, Team for development of strategy ad-
opted template for KPIs definition developed in USKPI (University System of
KPIs) software purchased through Tempus SHEQA (see Figure 2.)
INFORMATION TECHNOLOGY AND KPIS DEVELOPMENT AT UNIVERSITIES 43

3. IT support for KPI
Continuous monitoring and analysis of KPIs is almost impossible without qual-
itative IT support. During Tempus SHEQA workshops basic demands and initial
model for development of IT support for monitoring KPI were defined.
Selected and at each B&H public university installed USKPI (University Sys-
tem of KPIs) software provides a simple and fast method of data collection, cal-
culation and presentation of key performance indicators necessary for the efficient
management of the University.
USKPI is a web-oriented i.e. database web centric application developed by
using Oracle Application Express tools and it uses Oracle Database 11g Express
Edition (XE) as a database.
Basic elements of USKPI software (Figure 1) are as follows (Rezić et al; 2013):
• User interface for maintaining set of master data and definition of indicators
• User interface for automatic and manual import of data about key perfor-
mance indicators
• Reporting on indicator values
• Administration of security settings.

Figure 1: Basic elements of USKPI software – Main menu

Source: (Rezić et al; 2013)
44 Dražena Gašpar

The most important part of the master data is definitions of indicators. This part
of the master data must be maintained carefully in order to correctly apply each
individual indicator definition data (Figure 2).
USKPI software uses traffic lights for better visual presentation of KPI value
(Figure 3).

Figure 2: Definition of indicators in USKPI software

Source: (Rezić et al; 2013)
INFORMATION TECHNOLOGY AND KPIS DEVELOPMENT AT UNIVERSITIES 45

Figure 3: Visual presentation of KPIs in USKPI software

Source: (Rezić et al; 2013)
It is obvious from Figure 3 that Index of financial resources – total budget is
rising (green light) while index related to student fees is in stagnation (yellow light)
and index related to donations declines (red light). USKPI software enables graphi-
cal data presentation (Figure 4).

Figure 4: Graphical data presentation in USKPI software


Source: (Rezić et al; 2013)
46 Dražena Gašpar

Tempus SHEQA project enabled University of Mostar and other B&H public
universities to purchase and implement USKPI software. The final result is signifi-
cant advancement in development and implementation of strategic management
and performance monitoring at those institutions.

6. Conclusion
Continuous monitoring and analysis of KPI supported by USKPI software cre-
ates a basis not only for strategic planning of higher education institutions, but also
for planning of higher education done by authorized institutions, both cantonal
and state ones. USKPI software implementation could be crucial advantage for
B&H public universities in efficient strategic management and monitoring of real-
ization of their strategic goals.
The methodology to be used in the implementation of systems of management
indicators in the university should have the direct participation of the manager’s
team. Management structure of universities and key persons responsible for the
quality assurance collects accesses and analyze data on key performance indicators
of universities. This process begins by defining the vision, mission, goals and strat-
egy of the university. After defining the basic strategic goals, the university needs
indicators to enable monitoring of their implementation. Key indicators should be
complete and accurate. Each indicator must be measurable, and its way of measur-
ing is to be clearly defined. It is essential that the definitions of these indicators do
not change and are monitored from year to year.

References
1. Aghion,P., Dewatripont,M., Hoxby,C., Mas-Colell,A. & Sapir,A. (2010). The
Governance and Performance of Universities: Evidence from Europe and the
U.S., Economic Policy 25/61, p. 7–59., available at: http://dev3.cepr.org/meets/
wkcn/9/976/papers/aghion_etal.pdf (accessed 20.01.2014.)
2. CUC (2008). CUC Report on the implementation of Key Performance Indicators:
case study experience, Committee of University Chairs, June 2008. Available at:
http://www2.bcu.ac.uk/docs/cuc/pubs/CUC_Report.pdf (accessed 08.11.2013.)
3. CUC (2006). CUC Report on the Monitoring of Institutional Performance and the
Use of Key Performance Indicators, Committee of University Chairs, November
2006. Available at: http://www2.bcu.ac.uk/docs/cuc/pubs/KPI_Booklet.pdf
(accessed 08.11.2013.)
INFORMATION TECHNOLOGY AND KPIS DEVELOPMENT AT UNIVERSITIES 47

4. EC (2005a). “Contribution to the Conference of European higher Education
Ministers in Bergen.” Brussels: European Commission. Available at: http://europa.
eu.int/comm/dgs/education_culture/index_en.htm (accessed 12.03.2013.)
5. EC (2005b). “Mobilising the Brainpower of Europe: Enabling Universities to Make
Their full Contribution to the Lisbon Strategy.” Brussels: European Commission.
Available at: http://europa.eu.int/comm/dgs/education_culture/index_en.htm
(accessed 12.03.2013.)
6. Eurydice (2008). “Higher Education Governance in Europe. Policies, Structures,
funding and Academic Staff.” Brussels: Eurydice. Available at: http://eacea.ec.europa.
eu/education/eurydice./documents/thematic_ rep orts/131EN.pdf (accessed
20.06.2013.)
7. HEA (2013). Towards a performance evaluation framework: Profiling Irish Higher
Education, Higher Education Authority Available at: http://www.hea.ie/node/1022
(accessed 01.03.2014.)
8. OGB&H (2010). Decision on Criteria for Accreditation of Higher Education
Institutions in Bosnia and Herzegovina, Official Gazette of Bosnia and Herzegovina
75/10.
9. Parmenter, D. (2010). Key Performance Indicators (KPI): Developing, Implementing
and Using Winning KPIs, Wiley, 2nd Edition, ISBN: 978-0-470-54515-7.
10. Rezić S., Gašpar D., Govaert A., De Lepeleer G., Zovko I. 2013. Tempus -
511262-TEMPUS-1-2010-1-BE-TEMPUS-SMGR – Strategic Management of
Higher Education Institutions Based on Integrated Quality Assurance System-
SHEQA: Project Outcomes
11. Salmi, J. (2011). The Road to Academic Excellence: Lessons of Experience in The
Making of World-Class Research Universities, Philip G. Altbach and Jamil Salmi
(eds), Washington, World Bank, ISBN: 978-0-8213-8805-1
48 Đuro Horvat • Marinko Kovačić • Ljiljana Kristijan Ivanek

PROCESS MANAGEMENT MODELS AND FUSION
ORGANIZATION CULTURE
Đuro Horvat, Ph.D.1, Marinko Kovačić, M.Sc.2, Ljiljana Kristijan Ivanek, B.Sc.3
1
College for Finance and Law “Effectus”, Republic of Croatia, horvat@edukator.hr
2
Croatian Chamber of Economy, Republic of Croatia, mkovacic@hkg.hr
3
Lekcio Ltd.,Republic of Croatia, ljiljana.kristijan-ivanek@lekcio.hr

Abstract
Radical new technologies like the Internet technology and multimedia, tele-
communication technology, nanotechnology and new material technology form
completely new economic reality in an evolutional way. Existing organizational
structures, mainly in creative industry segment and high technologies, are not in
the position of achieving maximal result. It is due to the strong traditional resource
influence and classical managerial concepts. Finding out suitable organizational
forms for acting in contemporary conditions is one of the biggest challenges of
contemporary economy. Because of everything mentioned above, our team pres-
ents new organizational form called fusion organization. This organizational form
is suitable for acting within creative industry and high technologies and for all the
activities based on innovation and knowledge. Fusion organization enables maxi-
mally rational usage of alpha employees’ creative potentials as well as other resourc-
es like data base and informal network. Our research is based on relevant empirical
research results presented in the literature, corporative practice, theoretical models
comparison and categorial ideas synthesis. That theoretical effort resulted in new
organizational structure formulation and new approach to human resources. In the
process, we point out the importance of finding out, engaging and suitable manag-
ing of extra talented individuals. While doing so, suitable organizational structure
should be articulated. The importance of hyper trust stands out and it is neces-
sary to ensure the transparency of all the business processes. Gradual articulation
of new economy demands the establishment of new organizational forms. A new
structural form called fusion organization is suggested by our team. Also, essen-
tial elements of managerial model suitable for managing new organizational form
PROCESS MANAGEMENT MODELS AND FUSION ORGANIZATION CULTURE 49

mentioned above are pointed out. Polycentric power system, hyper trust, alpha and
beta employees and hybrid model of managing intellectual property, knowledge
in particular, are characteristic for this organizational model. It is also necessary to
make all the processes and sub-processes and extremely important essential activi-
ties transparent and networked, integrating them within local, regional and global
surrounding. In brief, development and the importance of managing processes will
be analysed. The findings confirm that the fusion organizations are appropriate
forms of action in the field of high technology and the creative industries. To prove
the hypothesis scientific methods of analysis and synthesis, induction and deduc-
tion, and the comparative method were applied.
JEL Classification: L22
Key words: alpha employee, change, culture, extreme core activities, hyper
trust, holism, process

1. Introduction
Organizations of different sizes but primarily large ones significantly mark in-
dustrialization process and in the end mass production and society. This was the
first time that people started to feel they belong to a business organization which
enables security. It was written about by Whyte (Whyte; 2002, 32) who argumen-
tatively states it is a new phenomenon. In the first part of the 20th century, belong-
ing to a business organization is mainly existential but later it is more sophisticated
due to the organizational culture and it goes beyond existential needs.
Industrialization i.e. mass production eliminates artistic and creative elements
which craftwork was distinguished by. In the first part of the 20th century classic
industrial worker was not well educated and was focused on fulfilling simple work-
ing operations because management was above all focused on improvement of the
productivity and production of larger series.

2. Turning points
Even though market or better to say capitalist production is based on innova-
tion which is the basis of entrepreneurship, the process itself has not entirely been
established. Otherwise speaking radically new technologies have initiated social
transformation including affirmation of organizational entrepreneurship.
50 Đuro Horvat • Marinko Kovačić • Ljiljana Kristijan Ivanek

Nevertheless, it has to be said that the first research corporative laboratory ap-
peared in the second half of the 19th century, in time when first highly educated
individuals were employed. In 1872 Siemens, a German company employed uni-
versity educated engineer (Hefner-Altaneck) for the first time, the man who es-
tablished industrial research laboratory. In 1876 in the USA similar activity was
realized in Thomas Edison Menlo Park. Employees in factory research laboratories
had to develop new products in order increase profitability and market share.
In the second half of the 20th century, innovativeness became standard element of
the leading world companies. Significantly, innovations are result of knowledge or bet-
ter to say competency which employees own and which are just in the small amount a
result of intuition or luck i.e. they are achieved by a web of unplanned circumstances.
At that turning point of development two phenomena can be noticed and one
of the first people to analyse them was Daniel Bell. The first phenomenon consists
of strengthening service sector in the first place, transport, finance, trade, health
care, education and tourism. A new social phenomenon was first noted by Bell
(Bell; 1999, 127-128) who argued that tertiary sector marks social processes more
and more, thus increasing the quality of life and work. Second phenomenon is
gradually stronger affirmation of immaterial factors in production and service pro-
cesses like information, data, knowledge, quality, design, time and loyalty. Numer-
ous production processes which require high level of competency for its function
are being transformed, so Drucker (Drucker; 1993, 5-6) formulates new terms
“knowledge worker” and “knowledge work”. Post-industrial society is being evo-
lutionary articulated in which knowledge dominates while new corporation goals
and responsibilities like environment preservation, energy efficiency and respecting
variety are established.

3. Revolutionary changes
Social transformation is based on the development of technology. Social evolu-
tion is generated by technology revolution which began in car industry.
Womack, Jones and Roos (Womack et al.; 1990, 48) makes an important em-
pirical research worth over five million US $, argued that Toyota Motor Company
in 1950 produced only 2685 cars per year while Ford in its Detroit factory pro-
duced 7000 cars in only one day. These authors conclude that Eiji Toyoda and Tai-
ichi Ohno, an engineer genius, realized that they cannot compete with American
manufacturers with large batch but with quality short production run.
PROCESS MANAGEMENT MODELS AND FUSION ORGANIZATION CULTURE 51

At the very beginning of Toyota’s expansion to managers becomes clear that they
have to articulate new forms of organization. In Toyota, together with technologi-
cal innovation significance, the importance of human factor is also recognized so
they introduced quality circles. The teams were approached voluntarily and their
main task was to improve quality with the help of constant and at first small in-
novations. In the famous textbook Landy and Conte (Landy and Conte; 2007,
560) noting that team spirit was confirmed as an efficient generator of innovation
processes which was verified by numerous empirical researches. Organizational or
inner entrepreneurial spirit enables innovativeness not only for smaller companies
but also for large entrepreneur organizations.
Economical short run production includes elimination of all the unnecessary
stoppage and actions i.e. processes which do not create value. Womack and Jones
(Womack and Jones; 2003, 15) elaborated new structural forms and ways of manage-
ment thinking and conclude that for this way of work lean thinking which maximally
rationalizes the usage of human effort, time, equipment and space is indispensable.
Also Womack and Jones (Womack and Jones; 2005, 287-288) recognize the
importance of consumers and believe that lean thinking and lean enterprise were
developed as tools for more efficient realization of consumers needs. The customer
is started to be treated as one of the elements of business strategy and politics that
is included in business with the aim of maximally efficient and complete problem
solving, saving customers time, realization of his needs and providing expected
value in terms/time directed by them. Holistic focus on integrating processes en-
ables total satisfaction of customers’ interests which become more and more so-
phisticated with time and in the process managers often use the pattern known as
managing total quality.
For some time now a standard component of textbooks of operating manage-
ment including textbooks of Slack, Chambers, Harland, Harrison and Johnston
(Slacke et al.; 1998, 548) is the elaboration of the concept just-in-time stating that
just-in-time production or providing service enables temporary satisfaction of cus-
tomers’ needs and in the process offers top quality without waste. The concept of
managing of processes enables maximal productivity and minimal cost in which
all the elements of supplying-production chain including customers are integrated.
Economical short run production and just-in-time model enable realization of
personalized production or providing service. In that way the customer really be-
comes, and not only declaratively the element of corporative policy and strategy.
52 Đuro Horvat • Marinko Kovačić • Ljiljana Kristijan Ivanek

Japanese corporations were the first who started realizing new business philoso-
phy of personalized production which includes kaizen principle practice. Welling-
ton (Wellington; 1995, 17-23) systematically analyses the model known as kaizen,
and concludes that the kaizen is the way of thinking and acting and it is based on
ten principles:
1. Focus on customers,
2. Make improvements continuously,
3. Acknowledge problem openly,
4. Promote openness,
5. Create work teams,
6. Manage projects through cross-functional teams,
7. Nurture the right relationship processes,
8. Develop self-discipline,
9. Inform every employee,
10. Enable every employee.
In the book Connected Marketing edited by Kirby and Marsden (Kirby and
Marsden; 2006, 109) analysed the new communication forms and states that to-
gether with traditional communication with customers, online opinion leader be-
comes more and more important and it includes following processes: participate
in chat rooms: post to bulletin boards, post to new groups, post to listservs; send
emails to companies; send emails to politicians; make friends online; make business
contacts online; provide feedback to websites; forward news and website informa-
tion to others. The Internet and similar technologies strengthened the market posi-
tion of customers and different practical knowledge related to purchasing certain
product or service.
Information access became extremely easy for customers and employees them-
selves. Democratisation or dispersion of power articulated polycentric structural
mechanism of making decisions in which there is no classical centre of power. Pro-
cess managing presupposes enabling faster and timely information flow.
For the successful functioning of the fusion organization it is important new ap-
proach to employees. One of the managing models that were established with the aim
of strengthening the role of the employee was open-book management which pointed
out the necessity of articulation of new managerial philosophy. This model articulated
by Schuster, Carpenter and Kane (Schuster et al.; 1996, 35) states that with access to
PROCESS MANAGEMENT MODELS AND FUSION ORGANIZATION CULTURE 53

the right information in a timely fashion, individuals and teams in the organization
will put that understanding to work to improve their stake in the enterprise.
Lean production, open-book management, total quality management and kai-
zen are just some of the models that are used to try to design new mechanism of
entrepreneur or production processes function. Establishment of new way of en-
trepreneur or production process function and new organizational relations/struc-
ture can be carried through the entrepreneur re-engineering that was particularly
popular in 1990s. Later that managerial model upgraded but basic principles of
entrepreneur re-engineering are valid today.
Reengineering is an affective instrument of affirmation of talented individu-
als and alpha employees with the help of fusion organization. Champy (Champy;
1995, 48)stated that a surprising number of the re-engineering managers we talked
to recalled that whatever procedures they eventually used to prepare the company
for change-usually some sort of “focus” group, like the DELTA (“Develop Excel-
lence trough Leadership, Teamwork, and Accountability”)... To realize organiza-
tional changes successfully it is necessary to find the real situation or way of process
functioning and make the employees familiar with planned actions.
While managing processes one should always bear in mind the definition of re-
engineering: formulated by Hammer and Stanton (Hammer and Stanton; 1995,
3) “The fundamental rethinking and radical redesign of business process to bring
about dramatic improvement in performance”. In the process managers have to be
aware that radical process redesigning is an extremely complicated and demanding
task that requires multifunctional approach.

4. Managing the processes
Hammer (Hammer; 1997, 5) advocates a systematic approach to processes char-
acteristic of fusion organization and believes that the difference between task and
process is the difference between part and whole. A task is a unit of work, a business
activity normally performed by one person. A process, in contrast is a related group
of tasks that together create a result of value to a customer.
In the contemporary economy of core activities it is necessary to constantly im-
prove the engagement of talent and competent people at different areas. Tenner and
DeToro (Tenner and DeToro; 1997, 71) believe that the number of core processes
54 Đuro Horvat • Marinko Kovačić • Ljiljana Kristijan Ivanek

in the first place depends on the size of the corporation, e.g. the managers of Xerox
company established the following core processes:
1. Market to collection,
2. Integrated supply chain,
3. Time to market,
4. Customer service,
5. Corporate governance,
6. Infrastructure.
Similarly, General Electric managers established following core processes:
1. Advanced technology,
2. Offering development,
3. Go-to-market,
4. Order-to-remittance,
5. Service delivery,
6. Support.
It should be mentioned that both corporations act in the segment of high
technologies.
Contemporary process management presupposes involvement of more and
more people and support of the employees of the whole chain of value. In this, al-
pha employees play a key role in the implementation of the changes and the estab-
lishment of hyper confidence as a segment of a new organizational culture. Smith
and Fingar (Smith and Fingar; 2003, 117) advocate a new approach to managing
processes arguing that the third wave of process management takes process - based
methodologies out of the hands of specialists and technicians and provides busi-
ness people with the tools they need to create, improve and deploy processes. In
that way, entrepreneur excellence and top performance of organizational processes
are desired to be achieved. Science becomes the basic motive force of entrepreneur
organization function, too.

5. Elements of fusion organization
In our opinion, to realize those goals it is necessary to articulate new organiza-
tional form which we called fusion organization. Fusion organization is character-
ized by integrating of particular segments of organization like horizontal organiza-
PROCESS MANAGEMENT MODELS AND FUSION ORGANIZATION CULTURE 55

tion, virtual organization, project organization, learning organization and innova-
tive organization; in the process significant synergy effect emerges. Therefore, it is
necessary to continually and systematically implement changes. Fusion organiza-
tion is conducted with the help of combination of several managerial models like
project management, knowledge managing, innovation managing, process manag-
ing, total quality managing and change managing. In other words, fusion organi-
zation is holistically conducted with the fundamental goal of maximal flexibility
realization, dynamic and innovativeness which is entrepreneur imperative in global
hyper-competitive market surrounding.
Polycentric and asymmetric model of power and diffuse structure are specific for
fusion organization. Informal relations and constant redesigning of structure with
help of ad hoc projects teams enable open communication within whole fusion
organization. Paladino (Paladino; 2007, 40) advocates focusing on the processes
is conducted with help of CPM (Corporate Performance Management) where of-
fice and officer realize several forms of best practices on everyday basis like executive
sponsorship, leadership influence factors, collaborative maturity and ability to learn. It
is tried to maximally realize corporative performance by constant innovation and
outsourcing and benchmarking practice for which the officer at the peak of manage-
ment takes responsibility.
Fusion organization consists of more than one core activity which is interlaced
with the basic aim of creating new added value. However, for fusion entrepreneur
organization generating new knowledge and new products and services and inno-
vation management is extreme core activity. Alpha employees who are characterized
with above-average creativity and competency are responsible for the realization of
extreme core activities. In fusion organization, together with alpha employees, there
are beta employees who are competent but without great creativity potential. In fu-
sion organization extra core managerial models are knowledge management and
management innovation even though other core managerial models like change
management and human resource management co-exist. In fusion organization
different managerial models and organizational processes are imbued, better to say
become one in which process significant synergistic effect develops.
Tiem, Moosley and Dessunger (Tiem et al.; 2012, 248) believe that knowledge
management consists of the following processes:
1. Knowledge identification and creation,
2. Knowledge collection and capture,
56 Đuro Horvat • Marinko Kovačić • Ljiljana Kristijan Ivanek

3. Knowledge storage and organization,
4. Knowledge sharing and dissemination,
5. Knowledge application and use.
While doing so one should bear in mind that in each company there are ex-
plicit and implicit knowledge that are equally important for new added value
development.
The new product development is extreme core process which integrates cer-
tain sub-processes: research, development, purchasing, marketing, sales, produc-
tion design and finance. Tenner and DeTorro (Tenner and DeTorro; 1997, 66)
point to weaknesses in traditional, hierarchical organizations by claiming that the
new-product development process would cut across half dozen or so functions
with a different executive responsible for each functional sub-processes. In fusion
organization sub-processes mentioned above are integrated within project teams
which are managed holistically and transparent. Project teams are an important
instrument of action of fusion organization whereby Jeston and Nelis (Jeston and
Nelis; 2008, 124) indicate that the structure of project teams can be very complex
because, for example, it includes project steering committee, project decision team,
project sponsor, project director and project manager. Successful functioning pre-
supposes networked and open communication channels and constant coordination
of activity.

6. Elements of organizational culture
Jones (Jones; 1995, 395-396) describes the case NUMMI. In 1963, General
Motors opened a car plant in Fremont, California, 35 miles east of San Francisco.
From the outset, the plant was a loser. Productivity and quality was poor. Drug and
alcohol abuse were widespread. GM closed the plant in 1981.
In 1983, GM and Toyota announced a joint venture. They would cooperate
to reopen the Fremont plant. GM wanted to learn how Toyota operated its pro-
duction system, and Toyota wanted to see whether it could achieve its customary
high level of productivity by using Japanese techniques with American workers. In
1984, the new organization NUMMI opened under the control of Japanese man-
agement. By 1986, productivity at NUMMI was higher than productivity at any
other GM factory. At the NUMMI factory, Toyota divided the work force into 350
flexible work teams. We have already pointed out the advantages of Toyota pro-
PROCESS MANAGEMENT MODELS AND FUSION ORGANIZATION CULTURE 57

duction system that enables world productivity and competitiveness. Even though
Toyota and General Motors business and some other leading car corporations have
lately marked difficulties it does not reduce the significance of organizational cul-
ture. Corporative culture is in many cases characterized by the system of value of
each country, even though it is not an absolute rule.
Hyper trust is based, together with transparency and trust in all relevant eco-
nomic agents, on “high” ethical principles, good business practice and appreciation
of personal integrity. Hyper trust enables self-confirmation through creative work
which is a framework of fusion organization. In the process, in fusion organization
within extremely important basic activities superior experts and creative people, i.e.
alpha employees motivated for self-articulation should be engaged.
Together with family values, elements from wider or national context like pa-
triotism are characteristic for fusion organization. One of the elements of rapid
development of Chinese corporation Lenovo are precisely patriot feelings of Chi-
nese customers. Daniel F. Spulber (Spulber; 2007, 176) wrote about it in his book
Global Competitive Strategy “A consumer purchasing educational software pro-
duced by Lenovo explained why he chose it over competing foreign brands: “It’s
cheap, it works and it’s Chinese”. Key elements of success, together with hyper trust
and other elements of culture are creative people or alpha employees and innova-
tion processes located within networked, horizontal and extra flexible structure.
At the same time, fusion organization functions with help of hybrid model of
managing property which includes patents, copyright and other and open knowl-
edge exchange. Open approach is focused on fundamental knowledge and knowl-
edge protection refers to innovation that is market profitable at the time. Manage-
rial concept is an amalgam of numerous managing models that harmoniously inte-
grated form a new managing style and in which holistic opinion is central element.

7. Conclusion
It is necessary to keep developing the model of fusion organization and it is
necessary to work out harmonious integrating of numerous managerial tools in the
process. Hyper trust and holism are important elements of entrepreneur culture
and philosophy and also the basic way of strategic thinking in fusion organization.
It is necessary to develop suitable way of recruitment and motivating alpha em-
ployees who are the generator of creating new added value in fusion organization.
Within fusion organization the following elements or processes are synthesized:
58 Đuro Horvat • Marinko Kovačić • Ljiljana Kristijan Ivanek

intellectual effort, innovation processes, creative potential of alpha employees and
hyper trust where with the help of networking open organization that is in dynamic
relation with the surrounding is created. Specific concept of intellectual property
management is also very important for a successful business. Fusion organizations
are suitable form for acting in the segment of high technology and creative industry.

References
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60 Linda Juraković • Ivan Herak • Romina Sinosich

ANALYSIS AND PERSPECTIVES OF TOURISM /
AGROTOURISM DEVELOPMENT IN ISTRIA
Linda Juraković, Ph.D.1, Ivan Herak, B.Sc.2, Romina Sinosich, M.Sc.3
1
Business College with Public Rights, Višnjan, Republic of Croatia, linda. jurakovic@gmail.com
2
Business College with Public Rights, Višnjan, Republic of Croatia, i.herak@yahoo.com
3
High Technical – Business Administration School Pula, Republic of Croatia, romina.sinosich@gmail.com

Abstract
Tourism, as an economic activity in Croatia and consequently Istria as a leader
of tourism development, has been facing a number of constraints for years ranging
from extrinsic ones i.e. legal to intrinsic i.e. those regarding the facilities used for
tourism purposes. Despite the existing opinion of political and social structures in
favour of developing tourism as a primary activity of Istrian development, there are
constant operating constraints occurring locally and at the state level. In view of pe-
rennial Istrian emphasis on the development of agrotourism as a perspective form
of tourist offer, authors are analysing development, advantages and disadvantages
in an analytically constructive manner for the purpose of stressing those elements
which need to become a part of development strategy in order to offer better qual-
ity agrotourism services in Istria and its wider area. Constraints have been detected
and guidelines for a more quality agrotourism offer development provided based
on research conducted in Istria Region from 2007 until today on a representative
sample by using various scientific methods.
JEL Classification: L83, O13
Keywords: agrotourism, Istria, development, quality.

1. Introduction
In order to raise the level of service quality in agrotourism, the Republic of
Croatia must first define the concept of agrotourism development and manage-
ment along with making significant investments into this segment of tourism via
various financial and economic incentives and subsidies. The existing experience
ANALYSIS AND PERSPECTIVES OF TOURISM / AGROTOURISM DEVELOPMENT IN ISTRIA 61

from neighboring countries and conducted questionnaires led to knowledge of
which concrete measures should be taken for raising the quality and appeal of the
Croatian (Istrian) agrotourism. The analysis of the current condition led to the
conclusion that the crisis of agrotourism in the Region of Istria results from un-
defined concept and undefined system of incentive measures which require a bet-
ter legal definition of the agrotourism status by providing certain benefits to farm
households which primary business activity is agrotourism as well as by defining
conditions which must be met if farm households wish to perform such activities.
‘It is necessary to pull together rural citizens savings and facilitate flexibility of
financial operations. We must get involved in establishing and constructing lo-
cal financial institutions which will be specialized in rural areas and agribusiness’
(Strategic Programme of 2008-2013 Rural Development of Istria County, from 25
January 2014)
One of elements strongly connected to the agrotourism product is hospitality.
According to Juraković, Tomčić, and Rajko, Istrian gastronomy has not been mar-
keted properly nor used all its resources, especially with regard to its diverse offer
with placing a stronger future emphasis on marketing mix. This means that the
strategy of tourism development must pay particular attention to better placement,
branding and permanent activities focused on emphasizing traditional, local delica-
cies. (Juraković, Tomčić, Rajko; 2007: 87– 92).

2. New products as elements of agrotourism development in leader
programme
“Rural development is a new developmental model of the agricultural sector”
(Plog et al., 2000., p. 392). “Apart from the increase in agricultural production
competitiveness, it also includes protection of the environment, land management,
diversification, improvement of life in rural areas and LEADER approach (Liaison
Entre Actions de Développement de l’Economie rurale), which means that all the
initiatives for starting of activities should come from the local community”
One of the basic characteristics of rural development implementation in rural
communities is putting an accent on local population, by which it is validated as a
main factor of the overall rural area development. It is this particularity of trust in
people who live in rural areas and in their abilities to discover what suits best their
environment, culture, work traditions and skills itself that makes the LEADER
Project special. Connecting at the local level brings people together in order for
62 Linda Juraković • Ivan Herak • Romina Sinosich

them to exchange their experiences and knowledge, inform themselves and pro-
mote rural development activities, find project partners, as well as create a feeling of
belonging to a larger entity, such as the local action group. (Ilak Peršurić, Juraković,
Tomčić, 2010:254 – 247).
During recent years in Croatia, there have been intensive talks about rural de-
velopment. Plans and programmes are being produced, development strategies
and laws are being proposed, legislation is being coordinated with the EU and the
means/funds from the EU programmes, intended for those purposes, are being
used (CARDS, INTERREG, SAPARD and other). However, in order to imple-
ment the rural development plans and programmes, Croatia needs expert consult-
ing assistance from the EU, as well as a greater self-initiative. Given that Croatia is
a candidate for accession to the European Union, it should dedicate itself more to
familiarising with the experiences of the other EU member countries in the process
of rural development in order to avoid other countries’ mistakes. The first analyses
and evaluations of the EU rural development policy show that the means from
the EU funds were mostly spent on structural measures, namely approximately
34%, which includes the increase in competitiveness, i.e. investment in companies
and food production, assistance to young farmers and earlier retirement. (Rajko,
Tomčić, Juraković, 2007). Approximately 38% of means were spent on environ-
mental protection, soil quality improvement, afforestation and natural resource
protection. “A large part of the means was also spent on the preservation of old,
traditional crafts, village reconstruction, improvement of life quality in rural areas,
as well as the preservation of tradition for the purposes of the development of tour-
ism in rural areas. Equally, rural tourism also, as a growing business in the tourist
industry offers many benefits to the local community development. It can be devel-
oped locally, in partnership with small businesses, local government, other agencies
in the area and its development is not dependent on external or large companies’
decisions. The Leader approach supports innovative approaches and stimulation
of unexploited resource development, or, just a different view on existing issues;
the problem of rural areas, its preservation and sustainable development had been
recognised in Europe much earlier than in Croatia. One more principle by which
this programme is recognisable is local financing and management, which gives
big powers to the LAGs in decision making and financing of specific programmes.
ANALYSIS AND PERSPECTIVES OF TOURISM / AGROTOURISM DEVELOPMENT IN ISTRIA 63

3. Leader Programme principles in function of development rural tourism
Istrian area
Fundamental principles of the LEADER Programme in the rural communities
sustainable development are based on the characteristics of the areas to which they
are applied, which means that an attempt has been made to use own unexploited
resources. This principle emanates from the participants’ need to base their devel-
opment on local values. According to the Leader’s action groups, there are four
main values of this programme:
1. decentralised, integral approach, based on a specific area’s characteristics
2. community involvement
3. uniting of development bearers at the local level
4. possibility of implementing in practice unrealised ideas (LEADER, 2004, p.
47).
The bottom-up approach (typical for Italy), as opposed to the majority of devel-
opmental plans, is a completely opposite approach, by which an attempt was made
to encompass the largest possible number of participants who would influence the
decision making process for an area. Literally everyone who wishes and believes
that they can assist the developmental process, whether it concerns the inhabitants
or the public, private, or some other sector representatives. (Herak, 2011 : 646 –
654). The bottom-up approach means that the local factors take part in the decision
making processes pertinent to the strategy and selection of the priorities which
should be implemented in their local area. The European experience has shown
that the bottom-up approach should not be considered as an alternative or contrast
for the top-down approaches of national and/or regional authorities, but that they
should be combined in order to achieve better overall results.
Therefore, the principles based on good European practice and LEADER ap-
proach are:
• Sustainable rural development which is based on preservation and develop-
ment of environmental, human, social and creative/productive capital.
• Approach based on area characteristics, as they form a foundation for quality
development.
• Starting up the community, as it lags behind in inclusion in developmen-
tal processes and needs support in order to get involved in developmental
processes.
64 Linda Juraković • Ivan Herak • Romina Sinosich

• Bottom-up approach – today’s development is not possible without involve-
ment of the public. This is why all available forces in local communities
should be involved in order to, by richness of ideas and possible solutions, as
high a quality as possible development could be achieved.
• Development of local partnerships in approaches and actions – presently,
fragmented initiatives are often condemned to failure beforehand, they lack
power and trust.
• Networking and cooperation, as well as connecting, synergistic acting in de-
velopmental processes, exchange of knowledge and experiences, both in to-
day’s modern Europe and here, in Croatia.
• Innovative quality and tradition, together with sustainable rural development,
but innovations are essential in order for traditional values to be represented
in a new and market competitive way.
• Integral approach – sector division is a frequent cause of problems in develop-
ment. Horizontally, inter-sector linking, as well as the vertical one, linking of
local, regional and national institutions, is of great importance in realisation
of sustainable rural development.
• Local financing and project management – it is extremely important that lo-
cal level activities should also be financed from local budgets.

4. Management of the resources of rural area and it’s role in rural / agrotour-
ism development in Istria
Member countries of the European Union apply the rural development pro-
gramme Leader in strengthening the local development as a counter-balance for
europisation. In the period between the years 1991 and 2006, Leader I, Leader II
and Leader+ Programmes demonstrated a new approach for integral and sustain-
able rural area development, strengthening local communities’ developmental poli-
cies. In the solution of the problem of a less favourable position of rural Europe in
comparison to the urban, the Leader programme represents a new social and eco-
nomic model. In analysing rural development programmes in the European Union
and in Croatia, an attempt was made to concentrate on the Leader Programme as a
new and innovative approach to the development of rural community, village and
agriculture. In the period when Croatia is negotiating its accession to the European
Union we can observe the results of the Leader Programme and principles and give
recommendations for its application in Croatia.
ANALYSIS AND PERSPECTIVES OF TOURISM / AGROTOURISM DEVELOPMENT IN ISTRIA 65

The main advantage of the Leader Programme was the bottom-up approach,
which helped activate local resources for the purposes of local community devel-
opment. Additionally, it involves the local population who has the closest insight
into the developmental opportunities and who is deemed partly responsible for
and more dedicated to the project than the external active participants. Such an
approach is not in opposition to the top-down approach in the sense of the influ-
ence coming from the top of the state, regional authorities or through relevant
ministries. For Croatia, the Leader Programme is considered to be positive for the
purposes of rural development and we expect fast adjustment of local active par-
ticipants in the creation of LAGs, as well as strengthening of their role as develop-
mental factors. For example, we find the first institutional initiative of that kind in
the Istrian County’s attempts to include the Leader Programme in their rural devel-
opment. One of the non-government organisations using the Leader Programme
principles is the Croatian Rural Development Network. After the years of informal
work, in January 2006, it was formally registered with the task of gathering and
representing civil society organisations which deal with the sustainable rural devel-
opment of Croatia.
The strategic guidelines for rural area development, which should form a base
for preparation of a comprehensive strategy of the development of the Republic of
Croatia, should be based on the five points which we quote below. According to
the studied documentation, Delphi method research and a many years long work
in that area, it is proposed that the following be acted on:

a) Increasing destination competitiveness
Rural area must develop a tourist offer which will be competitive by its quality,
price and attractiveness and that offer should particularly be based on originality,
historical, cultural and natural characteristics of that area and its other specific
qualities. Competitiveness is very important in achieving a strongly manifested
destination advancement; the destination will achieve the said goal by means of
offer differentiation and quality emphasising. Through field research the deficiency
of rural area management was determined. Apart from removing those drawbacks,
the activities directed to rural development must be focused on new products and
a new offer accompanied by adequate and systematic resource management. Qual-
ity-wise, the current offer does not satisfy the requirements of the modern market
and EU, which, in future, should be changed by bringing in new investors and
66 Linda Juraković • Ivan Herak • Romina Sinosich

retaining the existing ones, with a necessary measure of knowledge and expertise,
compatible with European and world levels.
In order to increase the number of visitors and tourists also in the geographi-
cally isolated and remote areas which contain less interesting attractions (natural,
historical and cultural), it would be necessary to unite all destination’s landmarks
by means of clusters.
Apart from this, associated itineraries for visits to attractions would also be cre-
ated. In such a way a visitor critical mass would be created even in less attractive
locations with less interesting contents. Owning an appropriate product is a part
of a successful equation. Branding is a path by which potential producers and
consumers are encouraged to purchase and to produce products. Apart from an
integral image, quality hallmarks for typical products can also be created. The goal
of development of Republic of Croatia’s rural areas according to the Leader Pro-
gramme principles:
Faster overall economic and social growth and development
A more dynamic overall development, which can be achieved by synergy of all
significant economic and managerial factors, is needed in the area.
Dynamic, quality and organised tourism development
Tourism in rural area does not follow in speed and quality the development of
Croatian coastal destinations. In that part, tourism is expected to provide greater
dynamics in development, improvement of overall quality, as well as a modern and
flexible management system. Rural areas have all the predispositions to become
recognisable eco-destinations, in which rural and all other sustainable forms of
tourism in protected natural areas will become prominent.
Multiplicative impacts (economy and overall)
The current position in the economic structure does not facilitate achievement
of remarkable multiplicative impacts on associated businesses. This area develop-
ment must commence noticeable activities also in the fields of agriculture, trade
and traffic.
Improvement of the lives of inhabitants
Rural area development will enable a decrease in unemployment and drain of
inhabitants, economic prosperity and security, as well as entrepreneurship and a
positive climate for further economic activities.
ANALYSIS AND PERSPECTIVES OF TOURISM / AGROTOURISM DEVELOPMENT IN ISTRIA 67

Giving meaning to programmes which provide a faster return on invested capital
In their work, proposers of all the contents in rural areas need to take into con-
sideration those products which will facilitate a faster return of invested means to
investors.

5. Conclusion
Despite Istrian (Croatian) abundant natural and other resources, we cannot
speak of its competitiveness in relation to worldwide tourist offer. Tourism rep-
resents one of the most dynamic world social processes. A better integration of
agrotourism into the offer of tourist destination development must be seen in such
a context as it results in a competitive ability of a destination on the world tourist
market offering a service of better quality. Insufficient tourism offer leads to ab-
sence of certain positive effects such as: increase of regional GDP, increased income
for local administration, enhanced quality and exclusivity of tourist offer, attract-
ing better paying guests, prolonged tourist season, increased number of tourists
and overnight stays, year-round tourism operations, increased foreign investments,
employment of new staff and local construction companies.
‘The survival of tourism destinations requires intensified trend monitoring re-
garding a permanent increase of tourism offer quality. In seeking new solutions for
enhancing competitiveness and monitoring world tourism market trends, the new
concept of integral quality management (IQM) was set up as a response to real
changes in behavior and differentiation of tourism demand resulting from new in-
fluences in all life segments’(Herak, Rudančić-Lugarić, 2014, in print). Apart from
the above, it can also be emphasized that the absence of proper resource manage-
ment can have adverse effect including the absence of destination image and loss
of quality guests leaving for other destinations with a more diverse offer and richer
traditional values.
According to Juraković and Sinosich, proper development and resource man-
agement requires the introduction of the Leader Programme principles i.e. involve-
ment of local community in the management system as the most important com-
ponent, which is not compatible with the current centralized system. Introduction
of new ideas from the level of local management is very functional as each local
community knows its own needs and constraints best. (Juraković, Sinosich, 2012:
1099-1108).
68 Linda Juraković • Ivan Herak • Romina Sinosich

References:
1. Herak, I., Rudančić-Lugarić, A. (2014) „Integralni management kvalitete turističke
destinacije-ključni čimbenik za postizanje konkurentske prednosti“, 2014.,
Ekonomski vjesnik Ekonomskog Fakulteta Osijek (u tisku)
2. Herak, I. (2011). Ulazak u Europsku uniju i utjecaj na turistički sektor. Znanstveni
rad. Zbornik radova sa Međunarodnog znanstvenog kongresa „Znanje i poslovni
izazovi globalizacije u 2011. godini“ . Celje, studeni 2011: 646 – 654. ISBN
978-961-6825-36-8.
3. Ilak Peršurić, A. S., Juraković, L., Tomčić, Z. (2010). Ekstrinzični i intrinzični
ograničavajući faktori razvoja agroturizma – primjer Istre. 45 hrvatski i 5 međunarodni
Simpozij agronoma 2010. Zbornik radova, recenzenti, Poljoprivredni fakultet
Sveučilišta J. J. Strossmayer u Osijeku: 254.-247., ISBN 978-953-6331-79-6.
4. Juraković, L., Tomčić, Z., Rajko, M. (2007). Ugostiteljska djelatnost – gastronomija,
smještaj u agroturizmu. Zbornik radova sa 1. Kongresa o ruralnom turizmu,
znanstveni rad. Hvar 17.-21. listopada 2007: 87-92., ISBN 978-953-6387-07.06.
5. Juraković, L., Sinosich, R. (2012). Analysis and role of leader programmein rural
development of Croatia. International conference in Opatija, 11.-13.05. 2012.
Zbornik radova „Interdisciplinary management research VIII“, Ekonomski fakultet u
Osijeku, znanstveni rad, recenzenti: 1099-1108. ISBN 978-953-253-105-3.
6. Rajko, M., Tomčić, Z, Juraković L. (2007). Upravljanje resursima ruralnog prostora
u funkciji razvoja agroturizma. Zbornik radova, 1. Croatian Conference of rural
tourism, Hvar 17.-21 october 2007., rec. Kušen E., Tomlenović R i dr.: 187-192.,
ISBN 978-953-6387-07-06.
7. Rajko, M., Tomčić, Z, Juraković L.(2007). Poticajne mjere u razvoju agroturizma.
Zbornik radova. 1. Croatian Conference of rural tourism, Hvar 17.-21. october
2007., rec. Kušen E., Tomlenović R i dr.: 181 – 186., ISBN 978-953-6387-07-06.
8. Strategic programme of rural area development in Istria (2008.-2013.). http://www.
istra-istria.hr., 25. 01. 2014.
9. Velenik, R., Juraković, L., Tomčić, Z. (2008). Proposal for promotial strategy for
agrotourism structures in Istria. 4th International Conference An Enterprise Odyssey:
Tourism - Governance and Entrepreneurship, Zagreb, Faculty of Economics and
Business, 2008.: 2048-2065, ISBN 978-953-6025-23-7.
WEB TECHNOLOGIES DEVELOPMENT SUPPORTING CONTEMPORARY PROJECT ... 69

WEB TECHNOLOGIES DEVELOPMENT SUPPORTING
CONTEMPORARY PROJECT MANAGEMENT NEEDS
Krešimir Jurina, bacc.ing.comp., spec.oec.1, Igor Vrečko, Ph.D.2, Zlatko Barilović, univ.spec.oec.3
1
College of Business Administration “Baltazar Adam Krčelić, Republic of Croatia, kresimir.jurina@vspu.hr
2
University of Maribor, Faculty of Economics and Business, Institute for Project Management, Repub-
lic of Slovenia, igor.vrecko@uni-mb.si
3
College of Business Administration “Baltazar Adam Krčelić, Republic of Croatia, zlatko.barilovic@vspu.hr

Abstract
During the last two decades, projects have become increasingly important and
recognizable tools for achieving competitiveness, strategic aims and much need-
ed positive changes. The consequence of this, among other things, is the growing
number of projects which emerge and are carried out in all business systems around
the world. With the growing number of projects, there arose the need for trained
project managers. In order to successfully do their tasks, it is very important for
project managers to know and understand various techniques and methods of proj-
ect management. The rate at which the number of formally trained project manag-
ers is growing and the dynamics of their adaptation to the specificities of today’s
business environment is still insufficient.
Development of user-friendly IT support tools which would enable project
managers to successfully implement projects without previous very long and in-
tense project training imposes itself as a possible and increasingly available solution
to the above mention problem.
The development of IT technology and software increased enormously in the
last decade. The emergence of Web 2.0 technology finds new solutions, very useful
and applicable also in the field of project management. These options are currently
still underutilized by companies when dealing with projects. Capabilities of exist-
ing and emerging solutions of Web 2.0 development and the open source commu-
nity create important value and the potential to increase the efficiency of project
management.
70 Krešimir Jurina • Igor Vrečko • Zlatko Barilović

The emergence of the Semantic Web (Web 3.0) currently being developed and
implemented, with its innovations and technologies based on semantic and ar-
tificial intelligence, is expected to greatly change the present concepts of doing
business. In the paper we will analyze the importance and possibilities arising from
new web technologies (especially Web 2.0 and Web 3.0) when dealing with project
management issues.
JEL Classification: L17, O22
Keywords: web technologies, projects, project management, Open source

1. INTRODUCTION
The needs of a contemporary project manager for successful implementation of
current projects significantly differ from those in the recent past. These needs can
be divided into the following nine groups (Figure 1): a) project preparation process
support, b) project implementation process support, c) project decision making
process support, d) communication management, e) virtual project teams coopera-
tion, f ) virtual project systems cooperation, g) permanent project tracking (moni-
toring) support, h) documentation management and i) lessons learned support.

Figure 1: Contemporary project management needs

Source: Authors’ own
WEB TECHNOLOGIES DEVELOPMENT SUPPORTING CONTEMPORARY PROJECT ... 71

Indications of all previously mentioned needs can be found in the basic docu-
ment of the International Project Management Association (IPMA), under the
name of IPMA Competence Baseline (ICB, Version 3.0). These needs are, directly
or indirectly, described through individual competence elements which are con-
sidered important for every project manager. Short information on particular ele-
ments is given further in the text.
In today’s modern business, good launching of a project provides the basis for
future success of any programme or project. The implementation of project manage-
ment includes defining the best possible processes, methods, techniques and tools,
the change in attitudes and the application of organizational change along with
permanent improvement. Project management must be implemented in ways most
convenient for the organization. Decision making can be universally defined as a
choice between more alternatives, which determines future actions. Decisions are
often the result of very long and complex decision making processes. Communi-
cation involves effective exchange and understanding of information between the
parties. Communication in a project should be useful, clear and valid. Projects are
carried out by teams of people who often meet solely for the purpose of project
implementation. Nowadays, teams do not necessarily meet at the same place (most
often because of geographical distance between them), so we can talk about coopera-
tion of virtual project teams. Besides the importance of connecting people (teams)
virtually, today we can also talk about virtually connecting different project systems.
Permanent project tracking (monitoring) during its implementation phase is of cru-
cial importance for the success of every project. It is important in order to notice any
deviation from the set objectives and project plans and to take corrective measures in
order to return the project into the framework of previously devised plans.
Information management includes shaping, collecting, choosing and storing, as
well as retrieving project data. Documentation includes all the data, information
and knowledge collected during the life cycle of a project, especially those concern-
ing project configuration, the changes and all the important contracts in the proj-
ect. It is also very important to record everything learnt in the course of the project
(since projects can also be regarded as processes of acquiring new knowledge) and
use that knowledge in future projects.
(In today’s business world) IT technology and the use of adequate software play
an important role in mastering the above mentioned processes.
72 Krešimir Jurina • Igor Vrečko • Zlatko Barilović

Although there are numerous IT solutions currently on the market, in most
cases they are very expensive. However, there are solutions based on Web.2 and
open source software, which are considerably cheaper or even free to use. This
paper will proceed to explain the concept and the advantages of Web.2 technolo-
gies, the open source and the new opportunities which arise from the forthcoming,
so-called, Semantic Web.3 technologies for the needs of a modern project manager.

3. WEB 2.0
Web 2.0 is the network as platform, spanning all connected devices; Web 2.0
applications are those that make the most of the intrinsic advantages of that plat-
form delivering software as a continually-updated service that gets better the more
people use it, consuming and remixing data from multiple sources, including in-
dividual users, while providing their own data and services in a form that allows
remixing by others, creating network effects through an “architecture of partici-
pation,” and going beyond the page metaphor of Web 1.0 to deliver better user
experiences (O’Reilly, 2005).
Some of the Web 2.0 technologies that can be useful for project management
are: Blog, Wiki, E-Portfolio, Rss–Really Simple Syndication, Social Bookmarking, Pod-
casting, Document Management System, Social Network.

4. OPEN SOURCE
Open source software (OSS) is software with an available source code that may
be used, copied, and distributed with or without modifications, and that may be
offered either with or without a fee. If the end-user makes any alterations to the
software, he can either choose to keep those changes private or return them to the
community so that they can potentially be added to future releases (Kenwood,
2001.)
OSS is software licensed in such a way that when distributed in binary form,
it comes with the source code. In addition to being available in source form, the
software is also freely redistributable, modifiable, without discrimination, without
ties to a specific product, without placing restrictions upon other software, and is
technology neutral (Perens, 1999.).
The community which emerged through open source was much distrusted and
denied phenomenon. It is made up of enthusiastic software developers who, in
WEB TECHNOLOGIES DEVELOPMENT SUPPORTING CONTEMPORARY PROJECT ... 73

addition to their jobs, develop software solutions in their free time and offer them
to the public for free. Since the code of this software is open and can be adapted
according to individuals’ or project teams’ needs, the only condition is that it is still
subject to free software licensing after the original software code has been changed,
which means that it can be used and modified without restrictions. Software devel-
oped by open source community can compete with a lot of commercial software,
but because of the amounts of money invested into commercial software, especially
into its marketing and design, a lot of people are not aware of the potentials of open
source software.
The biggest database of open source software on the web is called SourceForge.
net. and it comprises one of the largest open source communities. SorceForge is
a major website for open source development projects that provides a set of tools
to developers. It is also a virtual hangout, a place that open source developers visit
regularly to see what kind of projects are evolving and who is doing what in spe-
cific areas. Today SourceForge page has more than 430,000 projects and 3,7 mil-
lion registered users, connecting more than 41,8 million clients with over 430,000
downloads a day (sourcefoge.net).
Some of the open source software solutions concerning project management,
cloud, business operations and cooperation are the following: ProjectLibre, Open-
Project, ]project-open[, ProjectPier, ProjectHQ.

5. SEMANTIC WEB (WEB 3.0)
The idea behind the Semantic Web is to weave a Web that not only links docu-
ments to each other but also recognises the meaning of the information in those
documents (Frauenfelder 2001). In other words, when semantics technology is
implemented into the web, web browser would not offer search results according to
the entered key words; instead, it would understand the meaning of these words or
sentences and would offer search results based on the understanding of the entered
concept.
Transformation of the current Web from a series of interconnected, but ulti-
mately semantically isolated data islands into one gigantic, personal information
storage, manipulation and retrieval database (Kück, 2004.).
Tim Berners-Lee sees it as being an extension of the current World-Wide Web
that will bring a common structure to the content of Web pages, thereby providing
74 Krešimir Jurina • Igor Vrečko • Zlatko Barilović

such content with meaning which will allow external software agents to carry out
sophisticated tasks on behalf of the reader or user and, as such, promote a greater
degree of cooperation between humans and computers. In so doing, a new age of
computing will be ushered in where machines are better able to ‘process and “un-
derstand” the data that they merely display at present’ (Berners-Lee et al. 2001).
The Semantic web, or, as it is sometimes called, Web 3.0, could be described
as intelligent Web, Web combined with AI (Artificial Intelligence). The idea of a
semantic web as a place where all the information is categorized and saved so that
the computer can understand it in a way much the same as humans, is gradually
being realized.
There is a case to be made that the Semantic Web is doing just fine, in places
like e-Science and e-Research, and it is only a matter of time before that success
includes (more of ) e-Business as well (Smith et al. 2006).

6. CONCLUSION
Technologies mentioned in this paper and the open source software are widely
applicable in successful project management, although their potential has not been
fully recognized yet. Many open source solutions developed for project manage-
ment support in different project phases are currently available (table 1). These
solutions are primarily oriented towards supporting the project preparation and
implementation phase, while others are oriented towards decision-making support,
virtual project teams cooperation, virtual project systems cooperation and perma-
nent tracking / monitoring support. With their characteristics, Web 2.0 technolo-
gies can most often be used in cooperation of project teams and the entire project
community, as well as in acquiring new knowledge concerning experiences gained
on projects carried out worldwide. The open source community has gained mo-
mentum and started to grow rapidly in the last few years; it develops software
which is applicable in all parts and processes of project management and can com-
pete with large commercial software, and this is about to bring big changes on the
software market. The use of the Semantic web, the Web 3.0 technologies in the
field of project management is yet to take hold, but a lot of changes are to be ex-
pected in that respect in the near future.
Table 1: The application of web technologies and OSS in the field of project management

 CONTEMPORARYPROJECTMANAGEMENT’SNEEDS
Project Project Decision Virtualproject Virtualproject Permanenttracking Documentation Lessons
Communication
 preparation implementation making teams systems /monitoring management learned
management
processsupport processsupport support cooperation cooperation support  support
WEB2.0
        
technologies
Blog   9      9
Wiki   9      9
EͲPortfolio 9  9     9 9
RSS–ReallySimple
Syndication
  9    9  9
Socialbookmarking  9 9
Podcasting  9 9
Documentmng.
system
       9 9
Socialnetwork  9 9 9 9
OPENSOURCE
        
software
ProjectLibre 9 9 9 9 
OpenProject 9 9 9 9 9 9 
]projectͲopen[ 9 9 9 
ProjectPier 9 9 9 9 9 
ProjectHQ 9 9 9 9 
SEMANTICWEB–
        
WEB3.0
WEB TECHNOLOGIES DEVELOPMENT SUPPORTING CONTEMPORARY PROJECT ...

Source: Authors’ own
75
76 Krešimir Jurina • Igor Vrečko • Zlatko Barilović

REFERENCES
1. Berners-Lee, T., Hendler, J. and Lissila, O. (2001). The Semantic Web. [Online].
Available: http://www.scientificamerican.com/article/the- semantic-web/
2. International Project Management Association (2006). ICB – IPMA Competence
Baseline Version 3.0, Nijkerk (the Netherlands): International Project Management
Association.
3. Kenwood, Carolyn A. (2001). A Business Case Study of Open Source Software, The
MITRE Corporation. Washington C3 Center Bedford, Massachusetts.
4. Kück, G. (2004). Tim Berners-Lee’s Semantic Web, South African Journal of
Information Management.
5. O’Reilly, T. http://radar.oreilly.com/ [14.03.2013.]
6. Perens, B. (1999.). Open Sources: Voices from the Open Source Revolution, O’Reilly
Online Catalog.
7. Smith, D.A., Russell, A., Wilson, M. (2006). Semantic Web meets Web 2.0 (and vice
versa): The Value of the Mundane for the Semantic Web, IAM Group, Electronics
and Computer Science, University of Southampton, Southampton UK.
8. Sourceforge. http://www.sourceforge.net [09.03.2014.]
FRANCHISE RELATIONSHIP: FRANCHISEES’ SATISFACTION 77

FRANCHISE RELATIONSHIP: FRANCHISEES’ SATISFACTION
Zlatica Kavić, B.Sc.1, Mario Šercer, B.Sc.2
1
Ph.D. Candidate at Faculty of Economics in Osijek, Josip Juraj Strossmayer University of Osijek,
Republic of Croatia,zlatica.kavic@gmail.com
2
Ph.D. Candidate at Faculty of Economics in Osijek, Josip Juraj Strossmayer University of Osijek,
Republic of Croatia, bioplam@ck.t-com.hr

Abstract
Franchise as business method especially popular become in second half od 20th
century (Khams, 2013.,78).Since than as a significant factor in business growth
and lever of economic development attracts researches attention. In contest of fran-
chise way of doing business, relation between franchisor and franchisee is crucial
for success, not only for the individual member of franchise but for entire franchise
system. Franchise relationship actually begins with meeting the needs of clients
through cooperation of franchisor and franchisee. Each party is directly interesed
in success of franchise. The element that varies franchise from most other forms of
business is a symbiotic relationship of interdependence and confident of two legally
different economic. In focus of this research is franchisee satisfaction as a aquire
of the right of represenatation – contractor of the franchise agreement, franchi-
see as a member of distribution system and franchisee as individual that experi-
ence franchise as satisfaction for invested efforts, knowledge and money. Research
uses scientifically verified questionnaire of four university teachers (Abdullah and
other.,2008) satisfactory internal consistency (α = 0,87). Questionnaire contains
five dimensions of franchisees satisfaction: 1) social interaction, 2) service sup-
port, 3) financial, 4) assurance and 5) competence. Contains a total of 23 particles.
Recearch is conducted between owners of the right of represenatation (dealers) and
managers on the highest and middle level, employed in ten various automotive
sales and service representative (ten different principals) in the area of Republic
Croatia. After final analysis of the data obtained through the SPSS software pack-
age are discussed factors affecting the franchisee satisfaction. Also regression analy-
sis indicates that the relationship between competitive position and its franchisee
satisfaction shows meaningful, significant and consistent relationship.
78 Zlatica Kavić • Mario Šercer

JEL Classification: M21
Keywords: franchising, franchisor, franchisee satisfaction, relationship, auto
- industry

1. INTRODUCTION
Franchise is business format in which franchise providor (franchisor) replicates
its way of doing business – market positioning , brand and a series of procedures and
operations, allowing to smaller independent contractors franchise receipient (fran-
chisee) using of this business format with refundation (Davies et al.;2011.;322).
All around the world franchise way of doing business becomes an important in-
strument of contractors activity in a wide range of business like as retail sale, fast
food, constructions, catering, finance etc.(Szulanski & Jensen;2008.;1733). Rela-
tion between franchise providor and independent franchisee characterized interpen-
dence: franchisor expects that franchisee does business on certain level, inner defined
guidance and standards while franchisee count on franchise support. In growing
competition conditions for franschisor becomes imperative building of quality and
effective relationship with franchisee, that will become precondition for competitive
advantage aquisiton (Kuan;2008.;119).This relationship franchisor-franchisee fre-
quently instead of cohesion efforts is ballasted by opportunistic behavior tensions as
well as conflict of interests (Barthelemy;2008.;1453), this in certain extent influents
on reducing potentialy valuable elements of franchise relationship or contract. Ac-
cordingly, category of franchisor satisfaction as a signator of franchise contract, as a
memeber of distribution system and individual that experience franchise as satisfac-
tion for invested efforts, knowledge, time and money, leads to rapid development
and effectiveness of whole system (Rooh et al.;2008.;88). Pluralist attitude about
value and impact of company resurses (Barney; 1991), also and environment and
market (Porter; 1980) on reaching sustainable competitive advantage, raises need
for value analysis of franchise contract as a basic source for franchisee satisfaction –
intangible resurs that is basic predisposition of sustainable competitive advanatage,
that according opinion of Rindov and other (2010) builds both from resurs and
contingent environment.. Work deals with the influence of certain type of franchise
contract on franchisee satisfacation and organizational perfomances encompassing
five satisfaction dimensions: 1) social interaction, 2) service support, 3) financial, 4)
assurance and 5)competence. Research is conducted on luxury products market in
Republic of Croatia , on the examples of ten groups (ten different franchise provi-
FRANCHISE RELATIONSHIP: FRANCHISEES’ SATISFACTION 79

dors) of retail sales and service representatives, whose franchise contracts are strategic
different. This sector is very suitable for analysis of franchisee satisfaction of doing
business , because company business strategies varies, products and technology are
very complex, customers are sofisticated, brand value is important, and a competi-
tion is global and intense (Grünhagen, 2011.;58). Sector is very delicate indicator of
economic fluctuations and changes, a selling is done by retail network based on fran-
chise principle. Certain parts of the automobile industry value chain, are connected
with different global, regional and nacional access in forming strategies. Based on
a market approach differences of certain automobile producers through their retail
network representatives, regarding franchise contract regulations it should be termi-
nated market most optimal and most effective competitive approach that enables
the highest franchisee satisfation level regarding forces and weaknesses of franchise
system and according environment opportunities and threats.

2. CONCEPT OF FRANCHISEES SATISFACTION
Franchisees satisfaction is powerful concept of franchise business. It raises brand
value decreases franchisor’s costs, contibutes representatives and longterm franchise
network sustainability and mutually increases incomes (Abdullah et al.;2008.;183).
Concept of franchisees satisfaction gets more on its important, because many fran-
chisors recognize importance of measuring and valuation concept. Franchisees sat-
isfaction measuring is basis to improve relations in network. By regular level and
structure satisfaction researching, and consequently by redesigning elements that
causes dissatisfaction , attracts future franchisees and existing increases efforts aim-
ing better business results. Franchisees satisfaction as well as customer satisfaction
is abstract concept that exist only in franchisees mind (Gauzente;2003.;510). To a
certain extent concept is ambiguos because despite similar environment, franchisee
satisfaction level will vary from franchisor to franchisor , since it shows discrep-
ancies between expected performance and it’s perception. High satisfaction level
occurs when perception transcend expectations. Franchisees satisfaction is a term
that covers more dimensions. Because of the franchise relation nature, franchisee
will have expectations and perception according a lot of elements that covers brand,
marketing, training, manuals, leadership, employment, advices, finance etc. The
concept is further complicated by changing expectations and needs of franchisee
over time, and there is a difference between certain franchisees. Franchisor continu-
ously by learning, innovations and leadership should develop franchise network.
result, a franchisee satisfaction concept is liable to permanent changes.
80 Zlatica Kavić • Mario Šercer

2.1. Previous researches
Modern researches defines franchise as business relation that sales knowledge
and benefites of one organisational system (franchise providor, franchisor) to po-
tential franchise receipient or franchisee, consequently to an end customer. (Paswan
i Wittmann, 2009).The same authors thinks that the key for succes of franchise sys-
tem is management of invisible resources –knowledge, respectively contract inner
and between organisation. Model of franchise contract is important because of
legal and functional aspect, marketing, finance, production, supply chain manage-
ment, human resource management, and regulates relation between franchisor and
franchisee through its involved intense in business process and decision in spe-
cific area of responsability. (Lafontaine, 1993., Dant i dr., 1996., Bercovitz, 1998).
Importance od franchise contract especially accents Kashyap et al.(2012) in their
examination of contract incentive and relation of both side in franchise channel,
before and after contract signature. As organizational form , franchise is intensively
researched during past twenty years, when experience the most significant growth
and global presence. Alon and other (2010) write about franchise way of doing
business as a prevalent way in service sector, for example inner automobile indus-
try in sale and servise sector. Special attention is focused on trust and satisfaction
relations between participants in franchise network. Academical researches shows
significant correlation between large number of satisifed franchisees and longterm
growth and franschise development, which are part of:
1) Hing (1995) – discover positive correlation between satisfied franchisees and
their attention to recommend this franchise system to others
2) Hing (1995) – satisfied franchisee highlight that he wolud be part of this
same franchise again
3) Morrisson (1997) – satisfied franchisee accomplishe performances beyond
expected and is commited member of the organisation
4) Justis i Judd (2002) – ideal satisfaction inner franshise is accomplished when
both sides feel the same – than mutual useful and longterm relation is build-
ing and helding
5) Gauzente (2003) – franchisee satisfaction inner network is necessary precon-
dition for continuos business activity over years
6) van Wyk and de Jager (2009) – satisfied franchisee expects high level of in-
denpendence, potential income, education, market and inforamtion, opera-
tive support, marketing support, etc.
FRANCHISE RELATIONSHIP: FRANCHISEES’ SATISFACTION 81

7) Khams (2013) – highlight influence of system quality , franchise competitive
advantage, respect for franchisor and market activity to the satisfaction of
franchisees.
It is obvious that high level of franchisee satisfaction is not only desirable, they
are vital.

3. RESEARCH
3.1. The research problem
For contribution to the success of franchise it is necessary to create francshisee
satisfaction conditions by perfomances of franchisor in context of mutual rela-
tions , while identifying areas of satisfaction and their priorities based on franchisee
perceptions.

3.2. Research objectives
Primary research object is to determine total franchisee satisfaction level regard-
ing contract category which they are attached to franchisor , and after that to deter-
mine importance of five franchisee satisfaction factors that are researched.

3.3. Sampling
Electronic questionnaire includes retail representatives for car sale and service,
ten different franchise in Republic Croatia , owners of right of representation (deal-
ers) and managers on high and middle management level .They are divided in
four groups according franchise contract category: 1)each one is direct importer,
2) general importer for the teritory of RH, 3) participates in network management
through Franchise board, 4) without participation in network management. A total
of 248 franchisees were contacted and 72 responded, which represented a response
rate of 29%.

3.4. Q uestionnaire design
Questionnaire were developed by Abdullah et al. (2008) and it has been used
in previous researches, it is made of five dimensions of satisfaction (social interac-
tion, service support, financial, assurance and competence ) which contains total
23 particles. For valutaion of each particle it been used Likert’s scale from 1 to 5.
Second part of the questionnaire collects demographic data about respondents, and
a company data.
82 Zlatica Kavić • Mario Šercer

3.5. Data collection
Sent email to the respondents contained link towards questionnaire. Advan-
tage of such method include speed and economy, visual attraction, simplicity and
interaction.

3.6. Findings of the research
The level of overall franchisee satisfaction varies depending on the category of
franchise contract that defines business rules and interaction inner each franchise.
Franchisees that are part of the network in which business function on the principle
of general importer for whole Croatin market shows the highest satisfaction level
(M=4,32; SD=1,01). Respondents, franchise members without Franchise board are
the following in satisfaction (M=4,05; SD=1,09). Than follows franchise receipi-
ents where exists franchise board with M=3,51 i SD=1,22. Franchisees with the
lowest satsicfation level are network memebrs where each member is also importer
for it’s area of responsability. (M=3,27; SD=1,12). Research of the influence and
importance of five factors on franchisee satisfaction according category of franchise
contract gave following results (factors are sorted from the most influent towards
the less influent: 1) network with general importer: finance, service support, social
interaction, confidence, competence 2) network with dealer importer: compe-
tence, finance, service support, social interaction, confidence 3) network with fran-
chise board: social interaction, competence, finance, confidence, service support 4)
network without franchise board: finance, competence, service competence, confi-
dence, social interaction.
Demographic data determine tipical responder related to gender (male 82%),
age between 45-55 years(62%), university degree (52%) dealer experience 15-17
years (82%), manager experience in dealership 5-8 years (71%). Companies are
privately owned since its founding (100%) with the highest level of domestic capi-
talsa (74%). Majority of the companies are middle companies(62%) with number
of employees 25-35 (58%) and with two bureaus(59%).

4. CONCLUSION
Objective of this work is to illustrate levels of franchisee satisfaction inner fran-
chise. Franchisee satisfaction can result in positive and negative behaviour , and
according this and competence position on domestic market.
FRANCHISE RELATIONSHIP: FRANCHISEES’ SATISFACTION 83

There are few basic factors that influence on franchisee satisfaction and this were
used for research purposes: social interaction, finance, servise support, confidence
and competence.
Recearch shows that franchisors that are from the beggining better prepaired for
franchise business , gives to franchisee appropirate support in certain market condi-
tions, and also influence on mutual relation and franchise advancement, continuos
and longterm cause higher franchisee satisfaction levels, therefore ensure compe-
tence advantage with regard to other franchise.
Measuring franchisee satisfaction is very important instrument for franchise
management because it shows concerning and comitment to the franchisee. Object
of the measuring is an object of easier and more effective management. Based on
the maesuring results are developed practical strategies for furtherance of problem-
atic areas. Furthermore franchisee appreciate strong, frequently and meaningful
mutual communication and franchisee satisfaction measuring experience as respect
of their own opininos and attitudes.
Research has shown that relation between competence position of franchisee
and it’s satisfaction shows meaningful, significant and consistent relation.
At the end, implications for the practice. Franchisors should pay attention to
franchisee relation according each satisfaction instument, and a importance that
they are attach to, concerning categorie of franchise contract.

REFERENCES
1. Abdullah, F., Alwi, M.R.,Lee, N.,Ho, V.B. (2008.), Measuring and managing fran-
chise satisfaction:a study of academic franchising, Journal of Modeling in Management,
Vol.3.,No.2.,pp.182-199.
2. Alon, I. (2010): Franchising globally: Inovation, Learning and Imitation, Palgrave Mac-
Millan, Basingstoke, UK
3. Barney,J., (1991.), Firm resources and sustained competitive advantage, Journal of Man-
agement, Vol.17.,pp.99-120.
4. Barthelemy,J., (2008.), Opportunism, knowledge, and the performance of franchise
chains, Strategic Management Journal, pp. 145-1463
5. Davies, M.A.P., Lassar, W., Manolis, C., Prince, M., & Winsor, R.D. (2011), A Model
of Trust and Compliance in Franchise Relationships, Journal of Business Venturing,
26(3), 321-340.
84 Zlatica Kavić • Mario Šercer

6. Gauzente, C. (2003), Measuring franchisees’ satisfaction: theoretical considerations and
empirical testing, International Journal of Retail & Distribution Management, Vol.
31 No. 10, pp. 508-17.
7. Grűnhagen, M., Flight, R.L., Boggs, D.J., (2011) Franchising during times of economic
recession: a longitudinal analysis of automotive service franchises, Journal of Marketing
Channels,18, pp. 57-77 ISSN: 1046-669X
8. Hing, N. (1995), Franchisee Satisfaction: Contributors and Consequences, Journal of
Small Business Management, 33(2): 12-25.
9. Justis, R.T., Judd, R. (1986), Master franchising: a new look, Journal of Small Business
Management, July, pp. 16-21.
10. Kashyap, V., Antia, K.D., Frazier, G.L., (2012), Contracts, extracontractual incen-
tives and ex post behavior in franchise channel relationship, Journal of Marketing
Research,Vol.XLIX, pp. 260-276
11. Khams, M.H.M. (2013), Investigation of effective factors on franchisee’s satisfaction in
the process of franchising, World of Sciences Journal, vol.1,pp.78-89
12. Kuan-Yin Lee, Ying-chiech Hsu and Hui_Ling Huan (2008), “The lmpact of Com-
munication on Satisfaction and Loyalty in the Franchise System: Subjective Viewpoints
of Franchisees”, European Retail Reserch, Vol. 22, 2008, pp. 117-136.
13. Morrison, K. A. (1997), How Franchisee Job Satisfaction and Personality Affects Perfor-
mance, Organizational Commitment, Franchisor Relations, and Intention to Remain,
Journal of Small Business Manag., July: 39-67.
14. Paswan, A.K., Wittmann, C.M., (2009), Knowledge management and franchise sys-
tems, Industrial Marketing Management 38, pp.173-180
15. Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980.
16. Rindova,V.P.,Wiliamson,I.O.,Petkova,A.P., (2010.), Reputation as an Intangible as-
set: reflectians on theory and methods in two empirical studies of business school reputa-
tion, Journal of Manag.,Vol. 36.,No.3.,pp.609- 619.
17. Roh, E.Y and Yoon, J.H. (2008), Franchisor’s ongoing support and Franchisee’s stista-
ction: a case of ice cream Franchising in Korea, International Journal of Conteporary
Hospitality Management, Vol. 21 No. 1, pp. 85-99
18. Szulanski, G., & Jensen, R.J. (2008), Growth Through Copying: The Negative Con-
sequences of Innovation on Franchise Network Growth, Research Policy, 37(10),
1732-1741.
19. Van Wyk,G.J., De Jager,J.W., (2009), Franchisees’ level of satisfaction with the fran-
chise relationship,Independent Research Journal in the Management Science,
Vol.9.No.1.,pp. 119-128
USE OF ELECTRONIC RETAIL IN THE REPUBLIC OF CROATIA 85

USE OF ELECTRONIC RETAIL IN THE REPUBLIC OF CROATIA
Sandra Mrvica Mađarac, M.Sc.1, Igor Kukić2, Matej Galić3
1
Polytechnic “Lavoslav Ružička” in Vukovar, Republic of Croatia, smrvica@vevu.hr
2
Student, The Faculty of Tourism and Hospitality Management in Opatija,
Republic of Croatia, igor.kukic@gmail.com
3
Belje Inc, Republic of Croatia, matej.galic@belje.hr

Abstract
In the modern trade business the application of IT achievements has the great
usage opportunities. Electronic commerce is a form of trade that includes com-
mercial transactions that take place via electronic networks. The course of the sales
process in the electronic commerce is almost identical to the conventional course
of the sales process: initiative, business operations, contracting, product delivery
and payment.
There are numerous advantages of electronic commerce: a huge selection of
products, time availability, lower product prices due to high competition, shopping
convenience. However, electronic commerce has its disadvantages such as cultural
differences in business between different countries, legislation, the inadequacy of
some products for this form of shopping, doubts about the security of payment...
Electronic retail or B2C (business to customer) is a computer store in which the
entity aims at the ultimate consumer, whereat they notice a wide range of products
and businesses engaged in trade new possibilities and advantages of this way of
doing business.
With the increasing number of Internet users in Croatia, the question is wheth-
er they use the electronic shopping and to what extent? A survey on the use of
e-commerce in Croatia was conducted in three counties for the purposes of this
paper: Zagreb, Vukovar-Srijem and Šibenik-Knin county for belonging to different
regions, different levels of economic development as well as because of the differ-
ent structure of their population. The study was conducted on 150 examinees, by
means of a questionnaire with structured questions. The examined sample of this
86 Sandra Mrvica Mađarac • Igor Kukić • Matej Galić

study will show the extent to which residents of the Republic of Croatia as the ulti-
mate consumers of non-business consumption use electronic shopping, the reason
why is not used, if they believe in the security of payment over the Internet, who
the users of e-commerce according to demographic characteristics are, as well as
differences in regional affiliation with regard to the use of electronic commerce, etc.
JEL Classification: L81
Keywords: electronic retail, electronic shopping, use of e-commerce

1. INTRODUCTION
Retail e-commerce is becoming common way of doing business with the ap-
plication of information technology due to its simple application and low costs
compared to conventional retail. In the modern fast rhythm of life, online shop-
ping doesn’t take a lot of time and it is accessible at any time. The basic difference
between conventional shopping and retail e-commerce is how the information is
transferred from seller to buyer and vice versa. Online shopping uses e-forms (or-
ders) and e-mails (confirmation of the order). The part that remains the same is the
delivery of the product with its documentation. Payment can be made in different
forms, usually credit cards.
The question is how much do the citizens of the Republic of Croatia use online
shopping? Are there any differences in use of online shopping regarding the resi-
dence and demographical characteristics? If they don’t use it, why is that?

2. E-COMMERCE
E-commerce is the process of shopping, selling or trading items, services or
information using Internet with significant cost and transaction time reduction.
(Panian, 2000). Online seller is a mediator between the manufacturer and ultimate
buyer, so his position in the value chain is somewhere in the middle and usually
determined by himself. (Babić et al, 2011).
E-commerce can be defined from for perspectives (Spremić, 2004):
1) communicational perspective; e-commerce enables the delivery of informa-
tion, products/services or payment using public telephone lines, public com-
puter networks or in any other electronic way.
USE OF ELECTRONIC RETAIL IN THE REPUBLIC OF CROATIA 87

2) business process; e-commerce represents the application of the new technol-
ogy for automatisation of business transactions and business improvement
3) provision of services; companies, users and managers use e-commerce to
reduce provision costs and increase the quality level of goods and delivery
speed
4) virtual perspective; e-commerce enables shopping and selling of products,
services and information on the Internet
E-commerce consists of trading activities over the Internet and cannot be equat-
ed with the wider notion of e-business which performs all business activities elec-
tronically. (Andam, 2003)
E-commerce can be divided in two basic areas (Ružić et al. 262): trade between
business entities - Business-to-business (B2B) and commerce oriented on the ul-
timate consumer market - Business-to-consumer (B2C). Retail e-commerce B2C
is the computer commerce in which business consumer is aiming for the ultimate
consumer. While consumers discover the whole new world of online shopping and
payments, sellers – network providers discover insatiable infinite market because
Internet gives them access to a wide range of demographic segments (Panian, 2000).
The advantages of e-commerce can be divided into advantages for sellers and
advantages for consumers. Advantages for sellers are market expansion, improved
marketing, product width, cost reduction and longer working hours. In the offline
world it is hard to get the buyer’s opinion on success of certain part of marketing
mix. In online world buyers gladly share their opinion by e-mail so companies get
feedback and can react faster and change unsatisfying components of marketing
mix. Internet shops offer the unique possibility to take the direct marketing to a
higher level – individual marketing. These shops have unlimited sales space since
it’s measured in bytes.
E-commerce also has certain disadvantages like fast technology change, interna-
tional problems, regulations, lack of marketing concept, inappropriateness of some
products and digital divide. E-commerce technology is changing exceptionally fast
and companies have to pay off their high investments in a short period of time.
Other problem is the lack of IT experts. Cultural and linguistic differences cause
international problems that are trying to be fixed by adding multilingual content
in the online shops which causes additional expenses. Concerning the regulations,
the main problem is that the documents cannot be found in written and a lot of
88 Sandra Mrvica Mađarac • Igor Kukić • Matej Galić

countries do not except digital signatures in court and it is difficult to make credit
card payment in these countries. One of the problems is complicated shopping sys-
tem. Some products were not suitable for selling over the Internet, but e-commerce
is important for these products too. Ernst % Young discovered that 64% of the
Internet users does a research on the product on web sites and then buys them in
traditional shops. (Ružić et al., 2009).

3. RESEARCH RESULTS OF USING E-COMMERCE IN CROATIA
The research for this paper was conducted in May 2013 using questionnaire in
three Croatian counties: Zagrebačka, Vukovarsko-srijemska and Šibensko-kninska.
The research involved 150 examinees, 50 from each county. These three counties
were chosen for their geographical position and their different economic growth
rate. The questionnaire consisted of 13 questions.
The research involved 41,06% of men and 57,62% of women. 15,89% of them
were aged 18-25, 39,74% were 26-40 years old, 23,84% of examinees were 41-
55, 14,57% were 56-65 and finally 4,64% were 66 years old or more. Accord-
ing to their educational level, 2,65% of the examinees finished elementary school,
48,34% had secondary education, 26,49 had associate degree and 19,87% had
university degree. 60,93% of the examinees were employed, 11,26% were unem-
ployed, 14,57% were retired, 2,65% of the examinees were housewives and 9,27%
were students.
To the question How do you assess your computer skills? 20,53% of the exam-
inees answered they have poor Internet skills, 47,68% think they have good Inter-
net skills and 29,80% think they have very good Internet skills.
To the question Do you use online shopping? 43% of the examinees had an
affirmative response. From those who don’t use it, 33,33% say they do not use it
because they don’t know how, 32,14% say they don’t find online payments safe,
29,76% say it is because of lack of physical contact with the product and 4,76%
don’t purchase products online because of delivery costs.
USE OF ELECTRONIC RETAIL IN THE REPUBLIC OF CROATIA 89

Picture 1. Reasons for not using online shopping – Lack of confidence in online
payments, lack of physical contact with the product, I don’t know
how, Delivery costs

Source: Author

As presented in Picture 2, the majority of users of the online shopping live in
the county Zagrebačka (56% of the total number of examinees); in the county
Šibensko-kninska 46% use online shopping, and in Vukovarsko-srijemska 32% of
the examinees County use online shopping.

Picture 2. Use of online shopping in counties Zagrebačka, Šibensko-kninska and
Vukovarsko-srijemska
1-Use online shopping 2- Do not use online shopping

Source: Author
90 Sandra Mrvica Mađarac • Igor Kukić • Matej Galić

Picture 3. shows how often the examinees use online shopping. 63,64% of the
examinees use online shopping few times a year, 16,67% once a month, 15,15%
once a year and 4,55% use it once a week or more often.

Picture 3. Frequency of the use of online shopping – Once a year, Few times a
year, Once a month, Once a week or more often.

Source: Author

50,03% of examinees who use online shopping say that their shopping depends
on the web site design and 46,97% says that the web design does not matter to
them. 59,00% of the examinees use payment services such as PayPal. 43,94% of
the examinees use online shops, 36,36% use auction sales, and 19,7% use online
advertisements. Most often, the examinees buy online (Picture 4): clothes, shoes
and accessories (50%), computer equipment (13,64%), books (10,61%), tickets
(6,06%), travel (6,06%) and other (13,64%).

Picture 4. Products bought online Tickets, Clothes, shoes, Books, Travel, Food
and drink, Computer equipement, CDs, Other

Source: Author
USE OF ELECTRONIC RETAIL IN THE REPUBLIC OF CROATIA 91

We used Ficher’s exact test for statistical data treatment. The results of the survey
point out that there is statistically significant difference (p=0.027) between coun-
ties in answers to why examinees do not use online shopping (Picture 5). 60% of
those who do not shop online in county Šibensko-kninska say they do not use
online shopping because they do not know how; 38% of those who do not shop
online in Vukovarsko-srijemska say it is because of lack of physical contact with the
product, 45% of the examinees in the county Zagrebačka say they do not shop on
line because of the lack of confidence in online payments.

Picture 5. Reasons for not using online shop in different counties

1-I don’t think online payments are safe
2-I can’t touch of feel the product
3-I don’t’ know how
4-Delivery costs
Source: Author

The results show a statistically significant difference between type of purchased
product depending on the gender (p=0.001). 69% of women using online shop-
ping for buying clothes, shoes and accessories while most of the men (39%) buy
food and drink computer equipment and CDs (Picture 6).
92 Sandra Mrvica Mađarac • Igor Kukić • Matej Galić

4. CONCLUSION
Modern lifestyle, lack of time, technology development and other numerous
advantages make online shopping acceptable solution for buyers and is becoming
the most profitable aspect of commerce. E-commerce has enabled the appearance
of new type of selling space- virtual stores.
The research for this paper was conducted in tri counties in Croatia: Zagrebačka,
Vukovarsko-srijemska and Šibensko-kninska and indicates the difference in use of
online shopping; online shopping is most common in countie Zagrebačka and
Vukovarsko-srijemska, the least developed county has the lowest number of online
shopping users. Of the total number of the examinees, last than half (43%) pur-
chase products online. This research also indicates the interdependence of demo-
graphical characteristics (age, gender, professional education) of the examinees and
the frequency of online shopping. The common reasons for not using the online
shopping are lack of internet skills and lack of confidence in payments made online.
It is necessary to bring e-commerce closer to the as bigger number of users as
possible to Croatian market and in that way to increase profitability of commercial
companies on our market.

REFERENCES
1. Andam., Z. R. (2003), E-commerce and e-business, dostupno na: http://www.apdip.
net/publications/iespprimers/eprimer-ecom.pdf (pristupljeno 16.07.2013.)
2. Babić et al. (2011), Dosezi elektroničke trgovine u Hrvatskoj i svijetu, Oeconomica
Jadertina,Vol. 1., No. 2-2011., str.48-68.
3. Panian, Ž. (2000), Elektroničko trgovanje, Sinergija, Zagreb
4. Panian, Ž. (2005), Poslovna informatika za ekonomiste, Masmedia, Zagreb
5. Ružić D. et al. (2009), e- marketing, Sveučilište J.J. Strossmayera u Osijeku, Ekonom-
ski fakultet, Osijek
6. Spremić, M. (2004), Menadžment i elektroničko poslovanje, Narodne novine, Zagreb
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM 93

MARKETING APPLICATION OF
SOCIAL NETWORKS IN TOURISM
Sanja Kršić, univ.spec.oec.1, Ivan Maloča, univ.spec.oec.2,
Dušan Ljuština,univ.spec.oec.3
1
Sales Representative at PIK Vrbovec Inc., Republic of Croatia, sanja.krsic3@gmail.com
2
Chief Executive Officer at Interfilm Zagreb Ltd. Republic of Croatia, alocazg@gmail.com
3
Theatre Manager at Kerempuh Theatre, Republic of Croatia, dusko.ljustina@kazalistekerempuh.hr

Abstract
Tourism is the most powerful initiator of activities in Croatia and one of the
strongest in the world. Despite the worldwide crises, the number of tourists is
increasing every year and the competition among tourism entrepreneurs is getting
tougher. There is a constant struggle for every guestroom among destinations and
hotels. Though quality offer used to be crucial, now the situation has changed.
Marketing activities took over. The most important rule of marketing is informa-
tion placement (in this case, the tourist offer). Therefore, traditional advertising
models that have prevailed so far, cease to be important. Internet and social net-
works took the leading role which brought the revolution in marketing activities.
Tourism is certainly one of the economic activities where the use of social net-
works has greatest success potential. Sharing photos, status, location and tips is
interesting and fun, and entertainment and leisure is one of the main reasons for
being on Facebook, Twitter, Instagram, Pinterest and other platforms. Through
this interesting contents on social networks tourism subjects or destinations can
increase visibility and define destination brands, attract new guests who will then
with one click attract new potential guests and thus increase the revenue. The pur-
pose of this study is to point out the extremely low level of knowledge and applica-
tion of Internet and social networks for promotion and placement of tourism and
catering companies and destinations in Croatia.
JEL Classification: L83, M15, M31
Keywords: tourism, marketing, social networks, promotion, marketing research
94 Sanja Kršić • Ivan Maloča • Dušan Ljuština

1. INTRODUCTION
Tourism is the most powerful initiator of activities in Croatia and one of the
strongest in the world, and amounts to 10% of world’s gross domestic product.
Words tourist and tourism have been domesticated in Croatian language long time
ago and are well-known. Both words come from the English word tour which ini-
tially had meaning only for the round trip. The first derivative of the word tour -
tourist - was first used two centuries ago in the pejorative sense. Even Adam Smith
had the opinion that the ideals of culture significantly eroded by placing a prior-
ity on fun and pleasure. That could justify the use of the term tourist, which has
marked the persons who briefly visited cultural sites, while spending most of the
time for pleasure. Although the concept of tourist and tourism is in use for more
than 200 years, scientists have not yet come to the generally accepted definition.
Tourism is a significant initiator of other branches of the economy because tour-
ists are consumers of other goods and services. The tourism industry operates with
thirty other industries, such as culture, sports, agriculture, etc. Tourism is the most
powerful initiator of activities and with financial sector and telecommunications,
makes the backbone of Croatian economy. Tourism can help solve world problems,
such as reducing the gap between rich and poor countries, with contributing in
revenue, development and education. In Europe, 95% of hotels and restaurants
are those with nine or fewer employees. The technological progress of our time is
a key factor for the modern world tourism. Internet, as one of the most significant
technological phenomena of our time, provides a completely new competitive op-
portunities. This makes the idea of this paper.

2. SOCIAL NETWORKS
Social networks are certainly one of the easiest forms of promotion and market-
ing that can reach specific target audience. When using social networks, the results
of invested time, effort and money are visible at any moment. Social networks allow
restaurant facilities feedback from their guests. Each remotely good quality restau-
rant wants to know the right opinion (praise and criticism) of their guests about the
services they received and the impressions and experiences they gained. That is one
of the important things through which we obtain information: whether the guest
will re-visit and what kind of service was he provided with? What kind of opinion
about the object will he share with his family and friends?
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM 95

Feedback obtained on social networks is far more realistic than the one gained
when asking the guests directly or asking them to write it in the guestbook. Many
feel uncomfortable when they have to share a bad experience while still in the
restaurant, and therefore, most of them just smile and say: “Oh, it was all right,”
while they hardly wait to share on a social network on the way home how they ate
in your restaurant and the food was undercooked, waiter unfriendly, drink warm...
Therefore, it is necessary to constantly monitor what is being said about your offer,
and improve service based on that criticism.
Social networks are a real revolution in the tourism industry, it is no longer
enough to accommodate guests in the hotel and give them a brochure with in-
formation about the location. It takes a lot more now, which is, in a way, good
because all have an equal opportunity to be among the first. Today, only diligent
succeed,there is no room at the top for slackers in the world of social networking.
Many local and tourist organizations neglect to use social networks. Individuals
even claim that social networks affect poorly on tourism industry due to the fact
that tourists can see and learn everything from customs to localities only on the
internet, so there is no reason to travel.
Social networks provide the opportunity for those worthy to become what they
want. People create digital identities on the social networks – a certain image of
themselves and their activities and lifestyle is sent to the public. The individual is
in the center of attention on social networks. Everyone wants to stand out from the
masses and present themselves in their finest. The number of likes and retweets is
“crucial”.

3. SURVEY ON THE USE OF INTERNET AND SOCIAL NETWORKS IN CROATIA
A survey has been conducted to research the attitudes and opinions on the use
and application of social networking in tourism. Research sample was made at
random. The survey was conducted via Facebook and email. The duration of the
survey was limited to two weeks. The survey included 537 respondents, of which
268 males and 269 females, so the percentage of both sexes was equal. The average
age of the respondents who participated in the survey was 25-34 years old, and
that is also the largest percentage (47%). 49% of respondents have a high school
education, 33% university, 16% of higher education and 8% are low-qualified. The
majority selected that they choose the tourist destination they want to visit over
the internet - 33%, and a smaller number of respondents take recommendations
96 Sanja Kršić • Ivan Maloča • Dušan Ljuština

from relatives or friends - 26%. Travel fairs, agency recommendations, articles in
newspapers and magazines, and last-minute offers take an insignificant percentage
by which service users get informed.

Picture 1: Response summary to survey questionnaire on choosing a tourist
destination

Source: Front page screenshot https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3ASRLdr
AcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)

How do you choose a tourist destination that you want to visit?
• Travel or tourism fairs – 1%
• Travel agency recommendations – 5%
• Tourism brochures – 5%
• Internet – 33%
• Recommendations from relatives or friends – 26%
• Previous stay – 16%
• Articles in newspapers and magazines – 5%
• No information was required – 4%
• Group travel, last minute travel – 5%

On a scale of 1 to 5 in order of importance for keeping users on the website and
potentially make them choose the hotel/apartment, primarily is a display of prices
followed by photographs (showing the hotel/apartment). Links to the social net-
works in Croatia are lagging behind compared to global trends, as can be seen from
the results. When traveling, in 74% cases tourists use Internet as an information
source to find out about events in a specific destination or the destination itself.
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM 97

Picture 2: Response summary to the survey questionnaire on using the Internet
as a means of informing on holiday

Source: Front page screenshot https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3
ASRLdrAcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)
When on vacation/holiday, do you use Internet as an information source to find
out about events in a specific destination or the destination itself?
• Yes – 74%
• No – 7%
• Rarely – 20%

Picture 3: Response summary of the survey questionnaire on using social
networks as a means of informing about a potential holiday
destination

Source: Front page screenshot, https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3ASRLdr
AcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)

Do you use social networks as an information source for a potential holiday
destination?
• Yes – 47%
• No – 15%
• Rarely – 39%
98 Sanja Kršić • Ivan Maloča • Dušan Ljuština

Social networks are used in 47% of cases as a means of informing about the
destination in which tourist tends to go. The importance of the site on which a
potential holiday is searched is very important. Time that users spend on social
networks is mainly an hour or more a day.

Picture 4: Response summary to the survey questionnaire on average time
spent on social networks

Source: Front page screenshot, https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3ASRLdr
AcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)

What is the average time you spend using social networks?
• 10 to 15 minutes – 11%
• up to 30 minutes – 17%
• up to 1 hour – 27%
• 1 hour and more – 38%
• I very rarely browse the content of social networks – 7%
• Other 1%

Picture 5: What social networks do you use.

Source: Front page screenshot, https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3ASRLdr
AcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)

Facebook is used by 65% of all respondents, followed by Instagram with sizable
13%. Other social networks and services have a very low rate of interaction. 43% of
respondents sought information about the chosen destination on social networks.
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM 99

Picture 6: Response summary to survey questionnaire on using social networks
during the holiday

Source: Front page screenshot, https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3ASRLdr
AcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)

Do you share holiday pictures, videos, or your location via social networks?
• Yes – 54%
• No – 15%
• Rarely – 31%
Over 50% of respondents share pictures and location via social networks, while
31% do it rarely.

Picture 7: Response summary to the survey questionnaire on authenticity of
information shared by other users

Source: Front page screenshot, https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3ASRLdr
AcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)

Do you trust the recommendations of other users on the social networks?
• Yes – 69%
• No – 71%
When talking about authenticity of recommendations of other users, 69% of
respondents trust other users and their suggestions.
100 Sanja Kršić • Ivan Maloča • Dušan Ljuština

Picture 8: Response summary of the survey questionnaire on social networks as
a media for promoting tourism and travel services

Source: Front page screenshot, , https://docs.google.com/forms/d/1p0nBKdgbIbYaibje3ASRLd
rAcsuIEPcHpuFojUodQIw/viewanalytics (13.10.2013.)

What do you think of social networks as a media for promoting tourism and
travel services?
• I think they have great potential for the promotion of tourism and should be
an important media in tourism – 42%
• I think that they might contribute to the promotion of tourism, but are not
crucial – 55%
• I think that they do not have an important role nor could contribute to the
promotion of tourism – 3%
• Other – 0%
55% of respondents think that social networks can contribute to the promotion
of tourism, but that it is not essential. 42% think that social networks have great
potential for promotion, and only 3% of respondents think that they do not have
an important role, nor could contribute to the promotion of tourism.

4. ANALYSIS OF FACEBOOK PAGE USE IN CASE OF CROATIAN HOTELS
The data (number of hotel units in the Republic of Croatia and their catego-
rization) of the Ministry of Tourism from January 2013, downloaded from their
website, was used for this analysis. According to that statistics, there is a total of
648 hotels in Croatia and one new hotel opened in July 2013, hotel Bevanda 5* (in
Šibenik-Knin County). Facebook page analysis of hotels in Croatia that have a fan
page has been made on 09/01/2013. According to those results, 59% of all hotels
in Croatia, 381 hotel to be exact, have a fan page on Facebook. Initially, that were
not bad results, but when looked at the number of likes on a single page, devastat-
ing results appear.
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM 101

The method of proof analysis of Croatian hotel fan pages shows that managers
of Croatian hotels do not have any specific strategy or plan for their ultimate goal,
that is how to achieve it by using social networking as a marketing tool that should
serve the purpose of increasing sales. It was found that the largest percentage of those
who do not use resources of social networks adequately do not actually know what
they are doing wrong. Lack of awareness of tourism organizations and operators on
the importance of social networks is one of the main causes of the current situation.

Picture 9: Display of hotels with Facebook fan page

Croatian hotels which have Facebook fan
page–41%

Croatian hotels which do not have a
Facebook fan page–59%

Source: Prepared by author, (12.09.2013.)

To show the number of likes by counties (adding up the number of likes of all
hotels in the county), the display would look like this. From the graph above it is
visible that the city of Zagreb is leading with the number of 59,019 likes, which is
not an enviable result compared to foreign hotels that individually have that many
likes. Požega-Slavonia County and Virovitica County do not have any hotel with
Facebook fan page so they are located on the last place in the graph.

Picture 10: Display of the number of Facebook likes by county

Source: Prepared by author, (12.09.2013.)
102 Sanja Kršić • Ivan Maloča • Dušan Ljuština

Picture 11: Display of the number of Facebook likes by county
County Number of likes Number of hotels Average number of likes
Istarska 27097 101 268
Primorsko-goranska 41990 106 396
Liþko-senjska 473 17 28
Zadarska 8160 39 209
Šibensko-Kninska 33830 62 546
Splitsko-dalmatinska 36029 130 277
Dubrovaþko-neretvanska 12976 80 162
Bjelovarsko-bilogorska 218 5 44
Brodsko-posavska 1679 7 240
Grad Zagreb 59019 52 1135
Karlovaþka 4722 12 393
Koprivniþko-križevaþka 853 6 142
Krapinsko-zagorska 18480 8 2310
Meÿimurska 16788 5 3358
Osjeþko-baranjska 9168 17 539
Požeško-slavonska 0 1 0
Sisaþko-moslavaþka 661 3 220
Varaždinska 1481 8 185
Virovitiþko-podravska 629 3 210
Vukovarsko-srijemska 1664 9 185
Zagrebaþka 2114 8 264

Source: Prepared by author, (12.09.2013.)

Picture 12: Hotels in the City of Zagreb by the number of Facebook fan page
likes

Source: Prepared by author, (12.09.2013.)
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM 103

Picture 13: 5* hotels by the number of Facebook fan page likes

Source: Prepared by author, (12.09.2013.)

If the Croatian hotels with 5* were separated from the others, the assumption
is made that these are hotels that have a service and management at the highest
level, and will also have the highest number of likes. However, the previous graph
number 8 shows that this assumption is not correct. Only some of the hotels that
are listed in 5* rank have a constant interaction with customers. The hotel which
is first by the number of likes and thus interaction quality is Spa & Golfer Hotel
Sveti Martin na Muri in Međimurje County, and belongs to a 4* hotel rank. On
09/01/2013 The Spa & Golfer Hotel had 16,161 likes. Facebook fan page was
founded on 18th May 2010. The hotel was opened in 2009, and from the first
publications it is visible that the Facebook fan page was made because of the Croa-
tian Miss and Mister contest. They have very good current interaction and almost
daily publications.
The Hotel Mediteran in Rabac is the hotel with the lowest number of likes. Fan
page was founded on 23rd March 2011. They have a total of four publication on
the site. The first release is on the date of original site, and contains information
in two sentences about the environment and beautiful beaches that surround the
hotel. The second one, from March 1st of the following year, contains informa-
tion of the site on which accommodation can be booked. The third publication,
from 9th May the same year contains a picture of Rabac and has two likes. The last
notification, from 29th June2013 re-releases the page “Adria24” where accommo-
dation can be booked. The number of photos on their fan page page is only two.
Profile picture shows blurry photo of the hotel. It can be concluded that it would
be better that this hotel does not have a Facebook fan page, rather than using it the
wrong way.
104 Sanja Kršić • Ivan Maloča • Dušan Ljuština

5. CONCLUSION
What is the expense of using social networks, which are now more popular than
any other social media? The answer is simple. Social networks are free! Everyone is
on social networks, around 80% of the population uses social networks. Of course,
to increase the business, a variety of paid promotions can be used, which are far
more cheaper and more accessible to everyone than other media. Social networks
are certainly one of the easiest forms of promotion and marketing that can reach
specific target audience. For example: if the target group are business people from
London, through a couple of clicks the promotion is directed at them in a simplest
way possible, while your precious time is not spent on teenagers from London. This
is a gigantic advantage over traditional types of media. If a facility/destination is
advertised, for example, on a national television, the expenses would be huge, and
the question which primarily sets would be: “Will our target group even see this
advertisement? Perhaps all the other groups will, except the businessman. “
When using social networks the results of invested time, effort and money can
be seen at any time. Each of our activity is recorded, and from the statistical data
the whole range of useful information can be made, while almost no television will
send a report on viewership or target groups. The research we have conducted on
the use of social networks has shown that the majority of respondents has a user
account on a social network, visits them at least once a day for an hour or more.
With the invention of smart phones, people have the possibility to use social net-
works at any time. Those few hours are slowly turning into a 24-hour online access.
These users are all potential guests. Tourists are on social networks now! One of
the very customary opinions is that social networks are used mostly by teenagers,
a group that has no income, therefore, no financial means to pay for holiday. In
other words,this consumers are not real. This is absolutely wrong notion. Perhaps
this statement was accurate at the beginning of social networks, but those students
which have been using Facebook for five or six years are no longer students and
most of them became economically independent.
In this survey, the highest percentage use of social networks have the people
aged 25-34, which means that, in the not too distant future, the numerical group
of older, even retirees will equalize with a number of teenagers. The conclusion that
emerges from this research on Facebook profiles of Croatian hotels is that, although
the figure of 59% is solid, most subjects do not use them properly. This means that
they do not have any specific strategy or plan for their ultimate goal, that is how
MARKETING APPLICATION OF SOCIAL NETWORKS IN TOURISM 105

to achieve it by using social networking. It can be said that this area is dominated
by ignorance! By this approach, positive results can not be achieved: the interest of
tourists, an increase of overnight stays, multiple reviews and, ultimately, strength-
ening the brand recognition. It was found that the largest percentage of those who
do not use resources of social networks adequately do not actually know what they
are doing wrong. Lack of awareness of tourism organizations and operators on the
importance of social networks is one of the main causes of the current situation.

References:
1. Čavlek, N., Bartoluci, M., Prebežac, D., Kesar, O., Hendija, Z., Bilen, M., Mikulić,
J., Tomašević, A., Čižmar S., (2011): Turizam ekonomske osnove i organizacijski
sustavi, Školska knjiga, Zagreb., str. 25
2. Morgan, M. (1996): Marketing for Leisure and Tourism, Prentice Hall Europe,
London
3. Ružić, D. (1997): Upravljanje marketingom u ugostiteljstvu, Ekonomski fakultet
Osijek, Osijek
4. Ružić, D., Biloš, A., Turkalj, D., (2009): e – Marketing, Sveučilište J.J. Strossmayera,
Ekonomski fakultet u Osijeku, Osijek
5. Akcija.com, (2013): Kakao koristiti društvene mreže u turizmu., Dostupno na:
http://akcija.com.hr/Kako_koristiti_drustvene_mreze_u_turizmu.pdf
6. World Trade Organization (2010) Trade policy review., Dostupno na: http://
search.wto.org/search?q=cache:sGpUG5rd4K0J:www.wto.org/english/
tratop_e/tpr_e/g238_e.doc+World+tourism+is+10%25+of+gross+domesti
c+product+in+the+world&access=p&output=xml_no_dtd&ie=ISO-8859-
1&client=english_frontend&site=English_website&proxystylesheet=english_
frontend&oe=UTF-8,(04.09.2013.)
106 José G. Vargas-Hernández

RESEARCH METHODOLOGY STRATEGIES
IN STRATEGIC MANAGEMENT
José G. Vargas-Hernández, M.B.A.; Ph.D.1
1
University Center for Economic and Managerial Sciences, University of Guadalajara, United Mexican
States, jvargas2006@gmail.com, jgvh0811@yahoo.com, josevargas@cucea.udg.mx

Abstract
This paper review and examine how strategic management researchers apply
research methods, and what strategies use as part of the research process, to locate,
organize, manage, transform, create, communicate and evaluate research tools, data
and information resources. It also analyzes recent developments on research meth-
odology to create scientific knowledge in theory building and practice in strategic
management offering an overview of methodologies used in strategic management
research. The assessment of strategic management’s research methodology is based
on a review and analysis of strategies for the incorporation of knowledge of mana-
gerial research methods. Finally, the paper identifies and discusses some method-
ological research issues and reviews future directions on research methodologies in
strategic management.
JEL Classification: A29, B49, M19
Keywords: Research methodology, research strategy, strategic management.

1. Introduction
Research methodology within strategic management has not been a well de-
veloped field in the academic and scientific literature. The field of organizational
research methods attracts more attention from scientists than the strategic man-
agement research methods and thus, focusing more on the micro analysis than on
the macro analysis. The study of strategic management is eclectic in nature, theory
based, with substantial empirical research. Much of the strategic management re-
search has been using surrogates for the firm’s strategic direction.
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 107

A good theory in strategic management must meet the criteria of being unique-
ness, parsimony, conservation, generalizability, fecundity, internal consistency, em-
pirical riskiness, and abstraction. “A theory is a systematically related set of state-
ments, including some lawlike generalizations, (sic) that is empirically testable”
(Rudner, 1966: 10). A scientific theory must have generalized conditionals, em-
pirical content, and exhibit nomic necessity. A theory that lacks support based on
scientific methodology, it cannot develop into a proposition, hypothesis, concep-
tion, or model subject to empirical testing (Van Maanen, Sorensen, & Mitchell,
2007; Xu & Zhou, 2004). Theoretical structures are intended to represent and give
insights into the phenomena of the real world. Representations of the real world do
not necessarily portray the real world itself. The dominant worldview is the form of
framing sciences at any given historical moment by a particular paradigm (Kuhn,
1970; Hesse-Biber & Leavy, 2008).
A paradigm is, “a system of ideas or theoretical principles that determine, main-
tain and reinforce our way of thinking about an issue or a topic” (Plowright, 2011,
p. 177). Plowright (2011, p. 177) argues that a paradigm is a scientific approach
in which “the world we inhabit has an ontological reality, an existence that is not
dependent on our perception, understanding or descriptions of that reality or
world… constructivist paradigm, in contrast, claims that reality is mind dependent
and is socially constructed through the relationships, psychological activities and
shared understandings that we all take part in”. Scientists describe perceptions of
the ontological reality through a framing process. “The work of Kuhn, and the so-
ciologists of science... showed that scientific change had little to do with the shape
science obtains through the application of a general rational method, and more to
do with the fact that it is a social institution.” (Hughes & Sharrock, 1997, p. 93)
This paper review and examine how strategic management researchers apply
research methods, and what strategies use as part of the research process, to locate,
organize, manage, transform, create, communicate and evaluate research tools and
data and information resources. The objective of this paper is to analyze recent
developments on research methodology to create scientific knowledge in theory
building and practice in strategic management. The objectives of the analyses offer
an overview of methodologies used in strategic management research. The assess-
ment of strategic management’s research methodology is based on a review and
analysis of strategies for the incorporation of knowledge of managerial research
methods. To identify and discuss some methodological research issues in strategic
108 José G. Vargas-Hernández

management, this paper reviews future directions on research methodologies in
strategic management.

2. Research methodology
Research methodology is defined as highly intellectual activity used in the inves-
tigation of nature and matter and deals specifically with the manner in which data
is collected, analyzed and interpreted. A research methodology defines the research
purposes, activities, procedures, measurements and applications. The background
of research methodology refers to philosophy of research conceived as the way in
which is formulated the research strategy and the way in which research is con-
ducted. The research methodology determines the framing of explanations arisen
from the analysis of data and observations.
Although the field of strategic management is growing, the development of re-
search methodologies applied has not the same tendency. Research methodology in
strategic management has developed from single case studies at firm and industry
levels on issues such as corporate strategies and firm performance (Rumelt 1974).
Rumelt (1991) based on some methodological features empirically demonstrated
that industry was less important that firm characteristics for firm performance.
Research methodology used in strategy has contributed substantially to the devel-
opment of the strategic management and can make significant contributions to
the knowledge and study of administration and strategy fields. Regardless of the
research methodology used, research methods of management strategy play a key
role in the advancement at a high level of methodological rigor, extending the em-
pirical analyses to more highly theoretical scientific principles.
Overarching research methodology goals can apply to individual specific proj-
ects managing their participants and deliverables. Sharing methodological expertise
involves knowledge dissemination of techniques and practices. Changes of research
methodology practices may involve some convenience in the use of research meth-
ods. Anshen and Guth (1973) argue that the field of research methodology requires
some research strategies to improve the research capital such as the study of sci-
ence and arts, the design and use of analytic concepts and operational approaches,
the study of historical relationships and the examination of interfaces with social
problems and other institutions. Research methodology is the rationale behind a
technique of collecting and analyzing data systematically.
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 109

A. Data collection
Research methodology is the system of collecting data for research projects,
either theoretical or practical research. Data collection is treated as a design issue
to enhance the construct and internal validity of the study, as well as the external
validity and reliability (Yin, 1994).

B. Data analysis
“Data analysis consists of examining, categorizing, tabulating, or otherwise re-
combining the evidence to address the initial propositions of a study” (Yin, 1994).
Research methodologies and data analysis are increasing in sophisticated domains.
More advanced tools for text-mining, grid and cloud computing, semantic web,
etc. can be used as part of the research methodology on strategic management. The
tools and methods for creating and using data analyses must be technologically
accessible.
Other data analysis are being used in strategic management research such as
repertory grid (Ginsberg, 1988, 1989; Reger & Huff, 1993), cognitive mapping
(Huff, 1990), and policy capturing (Hitt & Tyler, 1991). Alternative techniques
of data analysis use diverse methods as using arrays to display the data, creating
displays, tabulating the frequency of events, ordering the information, etc. (Miles
and Huberman, 1984). A good research strategy is one that allows for the observa-
tion of the interested phenomena and the data analysis that is being collected from
a variety of sources and perspectives.

C. Taxonomy of research methods
The taxonomy developed by Van Horn (1973) classifies empirical studies in case
studies, field studies, field experiments and laboratory experiments. Alavi and Carl-
son (1992) presented a taxonomy of research methods in three levels: Conceptual,
illustrative and applied concepts. Saunders and Thompson (1980, 129) compare
conceptual with empirical research and argue that a turn away “from feeble at-
tempts at the insight type and toward hard examination of applicable data in an
empirical framework is what is needed now.”Keegan and Kabanoff (2008) devel-
oped a measurement approach through applying content analysis to annual reports
that incorporates managerial discretion into conceptual and empirical models.
Thus, a mix of empirical testing and explanatory conceptual search aims at theory
building and development for the field.
110 José G. Vargas-Hernández

There is not any best single research methodology intrinsically better (Benbasat
et al., 1987). For example, it is required to have a more pluralistic attitude towards
strategic management research methodologies (Remenyi and Williams, 1996). To
improve the quality of research it requires adapting a combination of methods
(Kaplan and Duchon, 1988) and avoiding only using a single research method
characterized as methodological monism.

D. Theory-testing and theory-building
The research methodology should imply the use of both an inductive logic and a
deductive logic at different phases of the research based on previous findings and al-
lowing theory-testing and theory-building. Inductive methodology research can be
qualitative and quantitative and is being used to generate inductive theory. Quan-
titative techniques may be used as inductive methodology to generate inductive
theory. Empirical findings emerging from the strategic management research have
been for the most part inductive oriented in nature and aimed at theory building.
Research methods in strategic management provide the theory-testing and theory-
building and framework analysis to be applied to practical problems.
Theory-building research seeks to find similarities across many different do-
mains to increase its abstraction level and its importance. The procedure for good
theory-building research follows the definition of theory: it defines the variables,
specifies the domain, builds internally consistent relationships, and makes specific
predictions. Theory-building in strategic management is not developing evenly
across all methodologies. If strategic management theory is to become integrative,
the procedure for good theory-building research should have similar research pro-
cedures, regardless of the research methodology used. Jemison (1981) support the
integrative research in content and process advocating the mid-range theories and
hypothesis testing. Tyler (2000) discussed procedural justice sustaining that people
may apply the heuristic by proper procedures to achieve outcomes.
Theory-building of strategic management research has been approached from
the perspective of industry effects. Chandler reported in case study methodology
some strategy management problems providing the basis for theory-building. The
typology of generic strategies (Porter, 1980) is the framework that has fostered
theory-building and empirical work. Some theory-building borrowed from the
resource-based theory are amenable to empirical test through methods such as the
“rate perspective” (McKelvey, 1997: 365).
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 111

Scholars have some expectations of methodological tools and scientific criteria
in strategic management in order to share surprisingly similar practices in man-
agement theory-building, creation of managerial knowledge and collaboration in
scientific research. Despite the robust research methods used in theory-building of
strategic management and the substantial accomplishments, Ketchen, Boyd, and
Bergh () consider that the field confronts significant challenges. Research in theory-
building and operational procedures in strategic management needs to incorporate
rational-analytical, behavioral-neoinstitutional and political approaches.

E. Limitations of research methods
Given the nature of the phenomena investigated in strategic management, the
research methodology may have certain limitations. The research methodology is
better suited to investigate phenomena in strategic management where few mod-
erating or intervening variables have an impact on the relationships between de
dependent and independent variables. The methodological structure of strategy
investigations has enduring effects (Hitt, Gimeno, & Hoskisson, 1998). Strong
structures in the research methodology ensure guidance to be focused at all times.
Thomas (1984, 14) suggests that “theory development should be the most impor-
tant aim for research” in strategic management to have directions and traditions
because it suffers from an identity crisis and lack of consensus.

3. Research strategies
Strategic management uses a relatively restricted set of research strategies and
analytical methodologies of choice (Podsakoff and Dalton, 1987). The research
strategies adopted to improve research in strategic management requires analytical
concepts, theory building, formal analytical techniques and operational procedures.
Research strategies exist within the knowledge movement. Deploying knowl-
edge governance mechanisms that mitigate costs of creating, sharing and integrat-
ing knowledge may have normative and practical implications for the research strat-
egies in strategic management. Tripodi and Epstein, (1978) present potential uses
of two strategies for incorporating knowledge of research methods. Foss (2009)
discussed the dominant research strategies framed by the “knowledge movement”
(Eisenhardt and Santos, 2002; Nonaka, 1994; Spender, 2005) manifesting itself in
organization and strategic management. Foss (2009) sustained alternative research
112 José G. Vargas-Hernández

strategies distinguishing between “capabilities first”, “networks first” and “individu-
als first “strategies. A research strategy may begin from individual members.
Foss (2009) elaborates a simple taxonomy of research strategies within the
knowledge movement that he calls “Capabilities First,” ”Networks First,” and “In-
dividuals First”. The capabilities first and the networks first research strategies focus
on supra-individual antecedents seeking to account for firm-related outcomes such
as integration, knowledge sharing, innovation, etc.

4. Strategic management research approaches
The strategy research field borrows from different normative, interpretative,
analytic, positive, empirical and the quantitative-qualitative research approaches,
among others. The study and research of strategic management is eclectic in nature,
theory based and empirical research.

A. Normative approach
The development of normative theory is enhanced by the differences in deter-
mination and explanation of strategies as a salient goal of strategic management
research (Schendel & Hofer, 1979). The rational normative model assumes that
the nature of the theoretical problem may determine the choice of the appropri-
ate research method (Cohen, March, and Olsen, 1972, Martin, 1982). Normative
theory-building is enhanced if a causal relationship is supported between the per-
formance construct and other constructs, where performance is the outcome and
not the cause under consideration. As a research strategy, reaching derived norma-
tive implications of empirical findings gives greater confidence and accuracy in
developing and testing theory, although the parsimony of the study is diminished.
Hinings and Greenwood (1988a) identify configurations as containing elements
of both organizational structure and processes strongly underpinned by meaning
and interpretive schemes which bind them together in an institutionally derived
normative order. Configuration research in strategic management links constructs
of multiple domains such as complexity and uncertainty of the environment, or-
ganizational structures, organizational behavior and culture, technology process,
strategy making processes, content of strategies, etc. The research on strategic man-
agement has fruitful developments in strategy content and process research.
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 113

Multiple domain configuration research enables to study complex multivari-
ate relationships and the fit among constructs in multiple domains for findings
that have normative implications. A more integrated approach to theory-building
in strategic management research should consider normative results to guide for-
mulation and implementation of strategies in organizational settings. Erroneous
interpretations of firm-level performance may lead to inaccurate descriptions and
interpretations of observed relationships, which in turn mislead findings that may
have normative implications for researchers and practitioners alike.

B. Interpretative approach
One important component of the case studies is the criteria for interpreting
the findings (Yin, 1994, p. 20). The analysis and interpretation of research in case
studies is dependent upon the aggregation of data collected from many sources and
participants. The criteria for interpretation of the findings and data linked to the
propositions require development in case studies.
Phillips, N., Sewell, G. and Jaynes, S. (2008) suggests some research methods
based on a discourse analysis as a critical approach to strategic management to ex-
amine and interpret the social construction of reality and the roles of rhetoric and
narrative within strategy processes. In strategic management research, constructs
are presented as archetypes, gestalts, and configurations. In both normative and
descriptive strategy researches explore issues relevant to their configuration appro-
priateness (Mintzberg, 1990). Research methodologies should be appropriate for
configuration research. Configuration research has as an important role to classify,
describe and explain the phenomena. Researchers use configurations to develop
normative and descriptive theory. Strategic management research uses configura-
tions to represent and interpret the phenomena and to analyze complicated and
interrelated relationships among many variables which are collectively meaningful.
The discourse analysis provides a deeper understanding of the managers’ interpreta-
tions, intentions, motivations, expectations and decisions.
The critical theory research approach to strategic management opens possibili-
ties to examine, analyze an expose hidden agendas of the strategic agents and actors.
An alternative framing of research methods in strategic management may suggest
an additional layer and level of investigation when applying specific theoretical
approaches. Framing is described as the “selection, emphasis, exclusion, and elabo-
ration” (Weaver, 2007, p. 143). Framing is the way a phenomenon is seen which
114 José G. Vargas-Hernández

depends what is chosen to include or exclude aspects to emphasize or elaborate
on. Selection is inevitable arbitrary, “and, the greater the mass of information from
which a selection has to be made, the more disputable will be the investigator’s
choice.” (Toynbee, 1976, p. x).
Analyses may be valuable if focusing on data definition and interpretation con-
sidering institutional structures, and applying evidences from elsewhere. Institutional
structure, funding attached to issue‐specific research and data limitations the estab-
lished databases and large volumes of existing research may affect the research possi-
bilities. Triangulation of methods for interpretation occurs when there some followers
of one approach which can increase confidence in interpretation (Denzin, 1984).
Research on strategic management has not been consistently designing research using
adequate conceptualizations of managerial environments in the empirical research
which at the end derives wrong findings and misleading interpretations.

C. Analytic strategies
Significant analytical research has been made in strategic management beyond
the typologies and taxonomies of strategies. Any research methodology has a gen-
eral analytic strategy supported by some analytic techniques which rely on some
theoretical assumptions. Strategies for research in strategic management are chosen
to provide varying definitions of what strategic management research is, or should
be in the development of a theoretical body and formal analytic techniques. The
use of the analysis method can show a relationship between two variables, such as
the frequency of one term employed and the strategic management implications.
Researchers can demonstrate specialization in the craft of some methods which can
apply to the development of some other analytical tools.
Traditional approaches to strategic management research emphasize some sourc-
es of data and analytical technique downplaying some variables while overlooking
some others. Researchers that have access to data reduction analytical methods
and secondary data sources can develop and test hypotheses related to the field of
strategic management from multiple approaches (Ketchen, Thomas & Snow, 1993;
Nath & Gruca, 1997). The multiple methods involve data collection of behaviors
through personal interviews, focus groups, and webometrics. Thus, there is a range
of possibilities for more diverse approaches and sources of information, being aware
of limitations inherent in any research to avoid overstating the value of findings in
complex real phenomena.
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 115

Researchers in strategic management must frequently demonstrate their capa-
bilities of the archives and databases, which is a critical task of knowledge dissemi-
nation. Besides their activities of database development and digitization, they be-
come involved with development programming after they perceive a gap in either
content or analysis functionality. Data collection and analysis methods in experi-
mental and quasi-experimental research can hide some details (Stake, 1995). Cor-
pus based methods collect data using interviews and newspaper articles marking
up using some parts of the speeches to identity portions of sentences, frequencies,
concordances, etc., which are processed using text-mining and analysis tools.
The use of corpus-based methods in research requires creating instruments to
analyze the concordance through packages and resources such as newspaper data.
Corpus-based methods examine concordance by creating a spreadsheet to check
and reorder data. Corpus linguistics researchers’ methods rely upon machine-read-
able texts in the “analysis of specially-designed collections of texts by computer”
(Anderson, 2008). Corpus linguists use complex datasets, diverse methods and a
variety of theoretical perspectives to tackle research questions. The research strat-
egy as a field has received support from the literature on scanning activities and
may be framed by the research questions. Scanning activities are the gathering of
information “about events and relationships in a company’s outside environment,
the knowledge of which would assist top management in its task of charting the
company’s future course of action” (Aguilar, 1967, p. 1). For data collection in
case studies, participants can use text-based methods to gather and examine socio-
linguistic phenomena. Analyzing language fluctuations represents some method-
ological challenges.
Researchers and scholars show limited uptake of advanced tools for data man-
agement and sharing. Organizational strategies are formulated and implemented
among managers with the more savvy professionals using document management
systems, databases, LaTeX for word processing and other more sophisticated soft-
ware. Good quality of research methods are needed for effective data management
and sharing, although compliance with scientific requirements. The most common
practices of data management are usually accomplished on the computer desktop
and storage on PDF and image files.
An analytic statement requires further conceptual development to become a law
like generalization. The analytic generalizations of a case study can be informative
to other similar cases. Although there are some analytic statements that are true by
116 José G. Vargas-Hernández

definition these are not law like generalizations. An analytic statement based on the
commonly accepted definitions may be true when is accepted as a correct assertion.
Replacing definition of terms in a theory with its definition in the theory to deter-
mine if the statements are true by definition, it clarifies if the statements are purely
analytic without empirical data. Any literal or theoretical replication logic can both
strengthen and broaden analytical generalizations.
The difference between analytic generalization and statistical generalization was
explained in these terms “In analytic generalization, previously developed theory is
used as a template against which to compare the empirical results of the case study”
(Yin, 1984). The analytic strategy requires of the specific statistical techniques to
evaluate data gathered. Evaluative research methodology aims to provide some use-
ful feedback using standard social research methods. Some analytical tools as event
studies, event history analysis, logistic regression, simultaneous equations analy-
sis, and multidimensional scaling are used in strategic management research. Yin
(1994) presented some analytic techniques such as pattern-matching, explanation-
building, and time-series analysis. Pattern-matching compares a predicted pattern
with an empirically based pattern enhancing the internal reliability of the study
when both patterns match. An analysis may follow conventional analytic tech-
niques using anecdotal and statistical analysis.
Some analytical tools are become more used in strategic management research
such as repertory grid (Ginsberg, 1988, 1989; Reger & Huff, 1993), event studies,
event history analysis, logistic regression, simultaneous equations analysis, multi-
dimensional analysis, cognitive mapping (Huff, 1990), and policy capturing (Hitt
& Tyler, 1991). Narrow categories for analytic tools such as single versus multiple
regressions are used by Shook et al (2003). Multiple regressions became the domi-
nant statistical technique used in strategic management research after the research
in the strategic management field was dominated by cross-sectional, static studies
and employed few control variables (Ketchen, Boyd, and Bergh, ). Regression may
not be the most appropriate analytical method to apply where the research de-
sign and the causal relationship between two variables is not clear. Keats and Hitt
(1988) employed causal modeling approach with longitudinal or time ordered data
in their research in strategic management. Advanced methods of data analyses on
strategic management based on databases and text mining tools are bringing greater
changes in research methods.
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 117

Methodological contributions in conceptualization and measurement of firm-
level performance have implications (Meyer, 1991) to analyze formation, adaptation
and evolution of organizational configurations on strategic management research.
Some data analytic methodologies can be used on the configuration approach.
There is value in additional analysis of processes of change both for assessing
desirability and for understanding feasibility. Research value should not be judged
solely on the sophistication of the techniques or the quality of available data but on
the existing body of knowledge. Analytic modeling provides rational approaches to
research in strategic management. Some sophisticated analytical techniques used in
research on strategic management, such as for example the employment of archival
data bases that are applied to capture complexity of the phenomena, to achieve
more objective measures and data validation. However, to determine the correct-
ness of analytic data is not necessary the confrontation of these data with real facts.
Model estimation is only part of the way towards addressing feasibility, magnitudes
change, costs and benefits, etc., considering also the legitimate research questions
that incorporate additional factors. Research questions based on a particular theory
or technique may not consider other additional aspects.
The use of analytical techniques in management research to develop strategy
knowledge can be comparable in scope and impact to the behavioral approach.
Aldag and Steams (1988) review a sample of organizational research topics. Shook,
Ketchen, Cycyota & Crockett (2003) searched for data analytic trends on 297 pa-
pers published between 1980 and 2001 found that the use of analytical techniques
is growing, although many scholars report that they are ill-equipped to use these
techniques. Research in strategic management may be restrictive in the data and
methods to emphasize comparisons in a complex environment of real phenomena.
There is plenty of room for improvement on the use of a range of analytic tools for
research in strategic management.

D. Positivist approach
The positivist upbringing favor to have full control of field research under a well
structured research protocol. Amitabh, M. and Gupta, R. K (2010) found that the
logical positivism-empiricism paradigm, one way linear causality in the strategy-
structure-performance relationship is favored by researchers instead of two-way
causality that will increase contributions using innovative designs and archival data.
118 José G. Vargas-Hernández

There are several research methodologies that have been identified by Galliers
(1991, p. 149) in two paradigms, the positivist and interpretive. Lack of objectivity
associated with interpretive research methods has resulted in adopting a more posi-
tivist quantitative approach. Debate has arisen in between the areas of positive ver-
sus normative perspectives (Friedman, 1953). Mixing quantitative and qualitative
methods is becoming more common, and Guba and Lincoln’s criticisms of positiv-
ist approaches in the social sciences cannot be ignored. The positivist perspective
has been criticized in the social sciences field. Hughes & Sharrock (1997, p. 197)
argues that “Had the social sciences measured themselves against one or other of
the natural sciences apart from physics...then the status of the social sciences as sci-
ences might have seemed a good deal less problematic”.

E. Empirical research
Few studies have attempted to empirically determine the extent of the use of a
restricted and exclusively set of methodologies in strategic management. There have
been major changes in the methodologies of strategic management research despite
that the field is still very young.
Hoskisson, Hitt, Wan, W.P. and Yiu (1999) examine the primary theoretical
and methodological bases of strategic management through its history, which they
consider is eclectic in nature and theory-based with substantial empirical research.
They concluded that the early works (Chandler, 1962, Ansoff 1965) centered on
the relationship between strategy and structure can be characterized from a con-
tingency perspective. Early theoretical and methodological developments in strate-
gic management took a contingency approach in Chandler’s (1962) Strategy and
Structure and the resource-based framework in Ansoff’s (1965) Corporate Strategy.
Initial strategy research emphasized analytical methodology to explain the competi-
tive environment of firms and industries based on simple assumptions such as the
homogeneity of firms within an industry in terms of resources and strategies and
the mobility of these resources.
Miller & Friesen (1978) conducted empirical research to demonstrate the exis-
tence of configurations or archetypes that exhibit internal logic, stability and integ-
rity based on what Miller (1987) terms the imperatives such as environment, struc-
ture, leadership and strategy. However, due to difficulties in data collection and
analysis, empirical research in organizational configurations has lagged behind the
development of theoretical approaches. Empirical studies of configurations used
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 119

cross-validation of responses to assess reliability and convergent validity (Miller,
1986; 1987b; 1988 and Miller & Friesen (1980; 1983).

1) Theory of the firm
Theories of the firm provide a framework for analyzing important research is-
sues in strategic management (Seth, and Thomas, 1994). Seth and Thomas (1994)
demonstrate the usefulness of economic theories of the firm as a framework for
guiding and analyzing strategy research and evaluate the conceptualization of the
theory of firm to research strategic management compared to the traditional as-
sumptions of strategy. In turn, the research methodology and findings challenged
the strategic management principles supporting theory of the firm arguing that
industry characteristics have more impact on performance.
To enhance descriptive analysis of the firm as well as to the human agents in or-
ganizational research in strategic management, it has arisen a repertoire of cognitive
and motivational assumptions from very different sources, such as the economics
model of man, behavioralism, social and motivational psychology as a critical reac-
tion to the economic agent theory (Simon, 1955; Cyert and March, 1963).

2) Industrial organization economics
Industrial organization (IO) economics provides a foundation for research on
strategic management with some econometric tools for the analysis competitive
dynamics. The macroeconomic approach of industrial organization, the five-force
framework (Porter, 1980) and the resource-based view (RBV) (Wernerfelt, 1984)
Schmalensee (1985) of firm-specific qualities required new research methodolo-
gies, such as analyses of variance decomposition techniques and regression analysis
despite the operationalizing the attributes of competitive advantage and firm spe-
cific qualities. Empirically the relative advantage of small firms has advantages that
have been ill-understood by the discussion (Zenger and Lazzarini, 2004). Most
of the research conducted in strategic management among SMEs to explain the
relationship between scanning dimensions, activities and their performance are of
a descriptive nature.
Empirical analysis based on Porter’s framework has been conducted by Dess &
Davis (1984), Hawes & Crittenden (1984), Kim & Lim (1988), Miller & Dess
(1993), White (1986), Wright, Kroll, Tu, & Helms (1991). To test the arguments
of Porter the method of regression analyses was ushered. Other studies use other
120 José G. Vargas-Hernández

methodologies and analytical techniques to sample and measure the firm and in-
dustry effects on performance (McGahan & Porter, 1997; McGahan & Porter,
2005, and Ruefli & Wiggins, 2005).

3) Resource-based theory
The research on firm resources strategy has introduced some descriptive theories
from industrial organization economics such as the studies on teamwork produc-
tion (Alchian & Demsetz, 1972) and the relationship of price and quality (DeVany
& Saving, 1983). Conceptual and empirical research based on resource based-view
is very limited in terms of augmenting the original knowledge sustained by Barney
(1991) as it has been treated by Bates & Flynn, 1995; Brush & Artz, 1999; Litz,
1996; McWilliams & Smart, 1995; Michalisin, Smith, & Kline, 1997; Mosakows-
ki, 1998; Powell, 1992a,b; Rindova & Fombrun, 1999; Yeoh & Roth, 1999).
The industrial organization economics supports the resource based theory as a
descriptive and explanatory approach (Barney, 1992; McWilliams & Smart, 1995;
Meyer, 1991) whereas the strategic management has a prescriptive orientation.
Empirical research on strategic management based on the resource-based view has
used course-grained measures of firm intangible resources. The resource-based view
provides some foundations for research on strategic leadership and process research
on decision theory. However, the resource-base view of the firm supports the as-
sumptions of heterogeneity and the imperfect mobility of resources of firms within
an industry (Barney, 1991: 101). Recent research in strategic management has ac-
cepted the application of the resource-based view of the firm despite that it is dif-
ficult to test empirically because of the complexity and difficulties in operational-
izing and measuring idiosyncratic firm resources and capabilities that are valuable,
rare, costly to imitate and no substitutable (Barney, 1991). Armstrong & Shimizu
(2007) examined 125 papers employing methods in resource-based view studies
from 1991 to 2005 finding that although researchers have overcome some chal-
lenges in studying resources and their effects, others challenges still remain.
The research based-view strategy theory is criticized as being descriptively ac-
curate and correct but quite difficult to manipulate in real life, for not meeting the
operational validity criterion until managers can apply the descriptive theory to
manipulate the independent variables (Priem and Butler, 2001). Bacharach (1989)
and Hunt (1991) argue for some statements from the resource based-theory deal-
ing with competitive advantage that are not amenable to empirical tests. Accord-
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 121

ing to the analysis of Bacharach (1989), Hunt (1991) and McKelvey (1997) the
resource based view does not meet the empirical content criterion. The resource
based view theory is considered to have a static argument that identifies generic
resources without considering differing situations, posing potential limitations for
the advancement in strategic management research.

4) Capabilities
The dominant resource-based analytics in strategic management is considered
to be the sustained competitive advantage emerging through firm-specific capabili-
ties (Dierickx & Cool, 1989; Barney, 1991). Empirical research on the resource-
based view and capabilities theory has been using some course-grained measures
and proxies of firm resources, such as human capital leverage, intangible resources,
technological and organizational capabilities, etc. The notion of capability unites
sources of firm-level experiential knowledge and behavioralism as an analytical no-
tion of the knowledge movement of research in strategic management.
A critical methodological challenge for strategic management is the capabilities
development to offer evidence-based findings those organizations and managers
can use to improve and attain the best performance (Locke & Latham, 1990). A
starting point for scientific analysis in knowledge in firms is the collective levels
rather than an empirical proposition despite that there is significant evidence at
individual level, such as the empirical research on routines and capabilities pre-
dominantly mono-level (Gupta, Tesluk & Taylor, 2007).
Stinchcombe (1991: 379-380) argues that “[w]here there is rich information on
variations at the collective or structural level, while individual-level reasoning (a)
has no substantial independent empirical support and (b) adds no new predictions
at the structural level that can be independently verified, theorizing at the level of
[individual level] mechanisms is a waste of time.”The Knowledge-based theory of
economic organization (Grandori, 2001, Kogut & Zander, 1992; Nonaka, 1994;
Spender, 1996; Grant, 1996; Nickerson & Zenger, 2004) brought to research in
strategic management fresh concepts and analytical methods, constructs, dimen-
sions (Winter, 1987) and measures (Heimeriks & Duysters, 2007).
Empirical research within strategic management supports the argument that
productive knowledge at the firm level has an impact (Hoopes & Madsen, 2008).
However, the knowledge movement has some difficulties in identifying theoreti-
cally as well as empirically the causal mechanisms. Self-determination theory (Deci
122 José G. Vargas-Hernández

& Ryan, 1985), form motivational psychology has supported successfully both
theoretical and empirical research in knowledge-related behaviors (Cabrera, Col-
lins & Salgado, 2006).

5) Other empirical approaches
Stake (1995) proposed a naturalistic generalization as an intuitive empirical-
ly-grounded approach based on relationships between the experiences of the re-
searcher, the readers and the case study itself, facilitating the understanding and
explanation of the unit of analysis. The empirical implications regarding the unit
of analysis are related to the operationalization and the types and sources of data
in research using the configuration approach. The empirical use of more holistic
methods on the research of configurations (Venkatraman & Prescott, 1990) such
as canonical correlation analysis, cluster analysis and q- factor analysis empirically
facilitates to capture multivariate interconnections among strategy, structure, orga-
nizational behavior, process and environment.
The empirical research should refer only to taxonomy and not typology for de-
rived classifications. Empirical research use different operational types of tools and
sources of data according to object of study and the unit of analysis. The empirical
methods are classified as non-econometric and econometric.

F. Econometric methods
Empirical strategic management research may get more support from econo-
metric theory models. The empirical research in strategic management is increasing
with the use of econometric methods, changing the appropriate use of empirical
research methodologies in strategic management. Empirical methods centered on
the use of econometric techniques taking account for endogenous and omitted
variables for discrete strategy choices is becoming more widely applied in strategic
management research. Econometric data only describe and analyze situations that
are history because they have already occurred. Econometric techniques are such
as classical regression, limited dependent variables, and methods that account for
omitted variables.
Common econometric research techniques automatically exclude much available
information. An empirical research analysis of performance as a function of decision
variables, assume that are exogenous, to yield right results should correct endogene-
ity based on the assumption that managers make decisions to achieve higher perfor-
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 123

mance. The empirical research approach is common in experiments assuming that
strategy choice can be exogenous and assigned randomly to participants. Economet-
rics implicitly excludes from the analysis much of the information coming from a
variety of sources of data and research methods used by other sciences by selecting
only the functional forms and information suitable for econometric analysis.
Empirical research in the field of strategic management is concerned with endo-
geneity. Empirical papers should consider endogeneities to be corrected econometri-
cally. Empirical research in strategic management is beginning to focus on correct-
ing for endogeneity, and must benefit from econometric advances. To achieve highly
pertinent empirical strategic management research is required the implementation of
econometric methods to correct for endogeneity. Empirical strategy research in firm-
level performance outcome should consider correcting for endogeneity.
Hamilton and Nickerson (2001) reviewed more than a decade of empirical
research and assessed the econometric methods used and found that few papers
econometrically correct the endogeneity of management decisions and the expect-
ed performance. Hamilton and Nickerson (2001) report in their study that 169 of
the 196 performance-related papers (86%) do not control for endogeneity. They
also report that out of 601 papers, 426 empirical papers published, only 27 papers
explicitly econometrically correct for potential endogeneity concerns. The authors
argue that empirical research in strategic management is a failure due to the low
number of papers that account for endogeneity. Failure to statistically correct for
endogeneity leads to faulty conclusions contaminating the direction of empirical
research difficult to predict ex ante. The empirical research in strategic management
simply reports coefficient estimates and “robust” standard errors that account for
heteroscedasticity but not pre-estimation error.
From an alternative perspective to econometrics, it may consider a wider range
of not predetermined relationships between the chosen variables, but selecting oth-
er significant points to influence the choice.

G. No-econometric methods
Non-econometric are simple statistical descriptors or multivariate analysis, explor-
atory data analysis such as principal component analysis or clustering analysis, etc.
Research strategy in strategic management is having a major shift away from
more basic analyses, such as descriptive studies with a rise in the use of regression
124 José G. Vargas-Hernández

and ANOVA models. Empirical papers use descriptive statistics, means and cor-
relations as their primary analysis, chi-square tests of contingency tables, regression
and ANOVA for analysis, and discriminant and cluster analyses in the context of
strategic groups. Cluster analysis has been applied as a research technique in stra-
tegic management research since the late 1970s. Ketchen & Shook (1996) focused
on cluster analysis of 45 papers published during the period 1977-1993 found that
the implementation of cluster analysis methodology often less than ideal.
However, the implementation of this research technique has not been applied
properly to generate knowledge in strategic management. Cluster analysis as a mul-
tivariate technique enabled to reduce large data sets into groups and types. Cluster
analysis as a statistical technique requires several methodological choices to sort
data into similar groups or sets to give solution to the cluster. Research choices are
made within a bounded time and space which can justify the particular denials and
exclusions associated with our choice of approaches to research.
Logical empiricism as a research approach has been used for example to identify per-
formance indicators of implemented strategies. Empirical strategy research is emerging
in the form of a broad-based narrative reviews, content analyses and best practice
guidelines. Collaboration among researchers involves detailed methodological and
content analysis and discussions, often taking into account the established stan-
dards and even challenging them. The empirical research separates purely analytic
contents which are considered true because of their “either/or” form based on their
logic or because the definition of their terms, from synthetic statements, which are
true only after investigation. The empirical content criterion addresses the logic and
semantic of theory rather than vagueness, as Bacharach (1989) argues that many
organizational-level theories are so vague they can never be empirically tested.
Empirical strategy research has gained from the use of contingency tools. Boyd,
Haynes & Hitt (2007) identified moderation in form or strength (Venkatraman,
1989) such as interaction, as the most prevalent tool used to analyze contingency
studies. There is little empirical research to support the assertion that control of
strategic assets determines the profitability of firms (Miller and Shamsie, 1996).
An empirically based pattern may be confronted to the initial theoretical frame-
work for theoretical validation. Empirical tests include field-based case study and
comparative outlier (Hitt, Harrison, Ireland, and Best, 1996) and the case survey
(Larsson, 1993) methodologies used for theory development and for theoretical
replication and extension. Field research methods have been used to develop stra-
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 125

tegic management theory supported by a multiplicity of research approaches and
data analysis techniques. Field studies are classified according to their research goal
as descriptive, explanation, or predictive.
Results and research findings in empirical research should be reasonably accurate
despite despite the implicit assumptions due to loss of information to portray the
phenomena under investigation. Results based on empirical research pertaining to
scanning practices have contributed to the development to theoretical approaches
to strategic management. The result of research can be some absolute truths besides
it involves decisions on the choice of methods, questions and selection of the data.
Research methodological decisions are made regarding questions, sources of data,
methods, techniques, etc.
Anshena and Guth (1973) emphasize the need of integrative, multidisciplinary
research in strategic management. Empirical methodology research in strategy,
model building and new techniques should be emphasized (Saunders and Thomp-
son, 1980). Jeremy Bentham advocated utilitarianism, the dominant consequenti-
ality position. A utilitarian believes in ‘the greatest happiness for the greatest num-
ber.’ (PHG Foundation, 2011).

H. Case study
Case studies are fine-grained research methodologies (Harrigan, 1983). Case
study methodology has applications to investigate empirical phenomena in real-life
contexts. A case study model can be applied to explain and describe complex causal
links in real-life interventions, to describe the intervention itself and to explore
some situations (Yin, 1994). A case study can be used to analyze by building an
explanation as a pattern – matching, for exploration send a hypothesis-generating
process. The case study as a research method in strategic management has been useful to
analyze generic business strategies and corporate diversification strategies among other
important organizational areas. One of the characteristics of the research methodol-
ogy of case studies is that researchers have no control over behavioral events (Tellis,
1997).
Case studies have been used in varied investigations, particularly in sociological
studies, but increasingly, in instruction. As a research tool of strategic management
investigations, the case study methodology has been employed since the 1930’s
subject to criticisms that consider is not a reliable research methodology. The meth-
odology of case study recommended by Yin (1984) and a version of the question-
126 José G. Vargas-Hernández

naire developed by Levy (1988) were modified and adapted for use at Fairfield Uni-
versity. Levy (1988) used the methodology of the case study in his investigation
aimed to show the impacts of information technology at the University of Arizona.
Levy (1988) used a single-case design based on exploratory and explanatory meth-
odology strategies to conduct an in-depth case study of the pace of acquisition of
information technology at the University of Arizona was considered the most suit-
able for the investigation of information technology.
While the exploratory strategy examined the environmental and economic as-
pects of information technologies, the explanatory strategy analyzed the patterns
followed by institutions of higher education when acquiring and using information
technology. The single-case study methodology used by Levy (1988) was based on
the contributions of Yin (1984) and Feagin, Orum, and Sjoberg (1991).
Case study research is not necessarily sampling research considering that it is a
system of action focusing on some selective issues where the most critical factor is
the unit of analysis. Each case study is unique in such a way that the data collection,
questions and unit of analysis cannot have the same form. The unit of analysis in a
case study could be “an individual, a community, an organization, a nation-state,
an empire, or a civilization” (Sjoberg, Williams, Vaughan, & Sjoberg, 1991). Holis-
tic or embedded case studies can be revelatory of inaccessible phenomenon involv-
ing more than one unit of analysis. Case studies have been used in varied strategic
management investigations an ideal methodology when a holistic, in-depth inves-
tigation is needed (Feagin, Orum, & Sjoberg, 1991).
Intrinsic case studies are those on which the researcher has an interest. Instru-
mental case studies are those considered to contribute to develop more profound
understanding beyond the researcher. Collective case studies are those that belong
to a group of cases. The action research as a methodology provides to the involved
participants an insider view of the specific situations for the analytical and reflective
learning, although it has been criticized that it may lack objectivity.
The case study methodology requires a discussion of procedures and their appli-
cation. “good use of theory will help delimit a case study inquiry to its most effective
design” (Yin, 1993, p. 4).To consider case studies as a research strategy in strategic
management consideration must be given to construct internal validity, external va-
lidity, and reliability (Yin, 1989). Any case study should attain external validity and
must provide the reliability required of all research in strategic management. The
reliability, internal and external validity of any case study research can be enhanced
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 127

by the rules and procedures stated in the protocol, more essentially in multiple-case
studies (Yin, 1994) that follow replication logic. To ensure accuracy in case studies,
and to confirm vality of the research processes is required triangulation to establish
meaning with explanations using multiple sources of data (Yin, 1984). The types of
triangulation identified are data source, investigator, theory and methodological tri-
angulation. Case study as a research strategy can triangulate methods, data, theories,
researchers, etc. (Feagin, Orum, & Sjoberg, 1991) asserted that triangulation can
occur with data, investigators, theories, and even methodologies.
Case studies can be exploratory, explanatory, descriptive (Yin, 1993) intrinsic,
instrumental and collective (Stake, 1995) and multiple-case applications. Explor-
atory case studies may be used to prelude research. Exploratory case studies aim to
find causal relationships in research. Descriptive case studies are based on descrip-
tive theory. A case study may be organized around a descriptive framework leading
to the analysis that relies on theoretical propositions. If there are not any theoretical
propositions in the research design for a reliable analysis, still is possible to develop
a descriptive framework for a case study.
The multi-site study is a research strategy that combines several approaches
merging on case study research (Eisenhardt, 1989; Yin, 1993, 1994). Audet, J.
and d’Amboise, G. (2001) conducted a case study research in a multi-site study
to analyze data of an organizational phenomenon by combining the positivism,
interpretative and qualitative theoretical approaches using cross-case comparisons
and explanation building techniques.
Yin (1994) recommended as a case study methodology to design, conduct, ana-
lyze the evidences and develop the conclusions, recommendations and implications.
The development of the case study protocol is required in the case study method-
ology (Yin, 1994). A complete description of the research explains what available
information is necessary to used. Design of case studies as a research strategy should
satisfy the conditions of the research question posed, the extent of control and the
degree on focus over behavioral events (Yin, 1994). Case study as a research designs
are not variants of other research designs (Yin, 1994).
Case studies are designed to use multiple sources of data bringing out the details
from diverse viewpoints of the involved participants. The case study as a strategy
of research in strategic management has the characteristic to consider points of
view of all parties, agents and actors involved regarding the selected issues to study
(Feagin, Orum, & Sjoberg, 1991). The nature of the research questions lead to the
128 José G. Vargas-Hernández

relevant strategy to be used in an explanatory-exploratory case study (Levy, 1988).
The explanatory strategy determines the extent of similar patterns applicable in
other environments.
The analysis presented in a case study must include relevant evidence, use of
rival arguments. Using multiple sources of data for case study research based on
documentation, archival records, interviews, direct observation, participant obser-
vations and physical artifacts (Yin, 1994) is an important strategy to achieve reli-
ability of the research (Stake, 1995; Yin, 1994). Yin (1984) analyzed the strengths
and weaknesses of the different sources of evidence, which are presented in table 1.
Yin (1994) recommended conduct as the second stage of the methodology used
in a case study, to be carried out by the activities of preparation for data collections,
distribution of the questionnaire and conducting interviews. As a field method,
data collection is treated in isolation from the research process (Yin, 1994), al-
though this would not be productive in case study research. Doz (1996) conducted
an empirical test on field-based case study methodologies to collect both archival
and interview data from three sets of alliance partners, using a qualitative theory
building approach. Doz (1996) used field-based case study methodologies centered
on qualitative theory building approach to empirically test archival and interview
data from sets of alliance partners.

Table 1 Types of Evidence

Source of Evidence Strengths Weaknesses
Documentation • stable - repeated review • retrievability - difficult
• unobtrusive - exist prior to case • biased selectivity
study • reporting bias - reflects author bias
• exact - names etc. • access - may be blocked
• broad coverage - extended time
span
Archival Records • Same as above • Same as above
• precise and quantitative • privacy might inhibit access
Interviews • targeted - focuses on case study • bias due to poor questions
topic • response bias
• insightful - provides perceived • incomplete recollection
causal inferences • reflexivity - interviewee expresses what
interviewer wants to hear
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 129

Direct Observation • reality - covers events in real time • time-consuming
• contextual - covers event context • selectivity - might miss facts
• reflexivity - observer’s presence might
cause change
• cost - observers need time
Participant • Same as above • Same as above
Observation • insightful into interpersonal • bias due to investigator’s actions
behavior
Physical Artifacts • insightful into cultural features • selectivity
• insightful into technical operations • availability
(Yin, 1994, p. 80)

The case study methodology has the data analysis of case study as one of the
least developed areas of research methods. Research based on case study has a fre-
quent criticism of the generalization of results that are not being widely applicable
in real and some other specific situations. There has been a lot of criticism of some
research techniques and methodologies of not being scientific in nature, such as the
case study because it is not possible to replicate it.

I. Quantitative and qualitative research
There is a trend in strategic management research projects toward the integration
of both quantitative and qualitative data (Judge and Zeithaml, 1992) that requires
using multiple methods and measures (Hitt, Hoskisson, Johnson, and Moesel,
1996). The increasing sophistication of some research methodologies combines both
quantitative and qualitative approaches and statistical tools. Combined qualitative
and quantitative data approaches as a strategic management research design meth-
odologies is gaining more grounding and popularity. There is an increased tendency
in the quantity and quality of research developments in the theoretical and method-
ological fields of strategic management (Hitt, 1997). Research in strategic manage-
ment tends to integrate in complex models both quantitative and qualitative data
(Judge and Zeithaml, 1992) requiring multiple methods and multiple measures of
specific constructs (Hitt, Hoskisson, Johnson, and Moesel, 1996).
The research methodologies used in strategic management are becoming in-
creasingly sophisticated and frequently combine both quantitative and qualitative
approaches with new statistical tools. Quantitative measures attract the attention
to underlying objective facts that give evidence of the phenomena, while qualitative
data colors and enrich the analysis and interpretation of such phenomena.
130 José G. Vargas-Hernández

1) Quantitative research
The analytical mathematical research methodology, analytical statistical and
causal relationships are popular quantitative research methods used in strategic
management to test for internal validity. Quantitative research is the systematic sci-
entific investigation used to measure and gather quantitative data of everything that
is measurable. Research in strategic management is already developing complex
and sophisticated models though the integration of multiple theories and meth-
ods such as structural equation modeling, panel data analysis, network analysis
dynamic models of partial adjustment, logistic and Poisson regression analyses and
event history analysis.
Quantitative research methodology in strategic management emphasizes lon-
gitudinal data, dynamic analysis, and focus on specific strategic decisions and ac-
tions. Data for quantitative research can be collected through interviews, structured
questionnaires, surveys, etc. Quantitative measures are likely to facilitate cross-case
comparisons comparison between scores, and the use of multiple indicators with
scales provides more confidence in the validity of the measure. Comparison be-
tween the predicted pattern and actual pattern for internal reliability of the study
might not have any quantitative criteria, but discretion of the research is required
for interpretations.
Quantitative methodologies have some limitations if they are confined in study-
ing configurations, despite overcoming problems associated with conventional sta-
tistical analysis.

2) Qualitative research
Qualitative research methodologies have evolved beyond the techniques of
qualitative data collection helping researchers to improve understanding and ex-
plaining a variety of complex management phenomena. The qualitative research
approach can be used to analyze the strategic management phenomenon barely
researched that is both adaptive and innovative. Given the complexity an ambigu-
ity of the qualitative methodological components (Lee, 1999), the researcher has
more room to design a research strategy more suitable to his skills and his specific
objectives and needs. The qualitative research approach is being used for example
in the design of multi-site study research strategies to gain an in-depth knowledge
of strategic management in organizations.
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 131

Qualitative research is a multi-focal investigation to get an in-depth insight of
behaviors, values, attitudes, motivations, etc., based on unstructured interviews,
feedback and recordings methods. Qualitative data are useful for uncovering emic
views (Guba & Lincoln, 1994, p.106). In strategic management research it may
not be possible to undertake standard analyses limited by the etic or outsider theory
based on the knowledge of the countries’ firms’ economic, political, cultural, etc.
circumstances may not correspond within the emic or insider view.
Greckhammer, Misangyi, Elms, and Lacey (2008) introduce the research tech-
nique termed qualitative comparative analysis (QCA) for strategic management
research aimed to diagnose interdependent causal effects across different levels of
analysis. Longitudinal qualitative analysis as a research strategy in strategic manage-
ment provides meaningful insights about the inter relationships among the envi-
ronment, strategy, structure, processes and outcomes and the different constructs
of organizational evolutive configurations (Eisenhardt, 1989; Bourgeois & Eisen-
hardt, 1988). A qualitative research design may support and combine theory test-
ing and generation (Lee, 1999). Qualitative research does not require and justifies
probabilistic sampling (Merriam, 1998, p. 61). Patton (1999, p. 1190) argues that,
“it need not be antithetical to the creative aspects of qualitative analysis to address
issues of validity and reliability”. Other research methodologies such as case replica-
tion (Leonard-Barton, 1990) and retrospective event histories (Glick et al., 1990)
are designed to overcome some of these problems.
Some approaches to strategic management include action (Birks, 2010; String-
er, 2007) and grounded theory (Strauss & Corbin, 2008), approached that differ
from the “detached observer” view of research. Egon Guba describe action research
as a reaction to the search for common, general findings (Stringer, 2007, p. ix) that
combines qualitative and quantitative research methods in a close involvement in
specific situations. Personal experience and involvement supports grounded theory
approach that provides insights for the etic/emic analyses although it may result in
a limited range of possibilities because the difficulties to become impartial observer.
Qualitative studies are being the target of criticism which considers has limita-
tions because they are subject to the researcher bias, non-replicability and labor
intense (Van de Ven & Huber, 1990). It is also criticized the impartial observer
view of detached researchers (Guba & Lincoln, 1994) as unrealistic, because their
subjectivity. The concept of “street-level epistemology” (Hardin, 2002 states that
information and views are passed on from others, including academic disciplines.
132 José G. Vargas-Hernández

5. Strategic management research
As a field of strategic management advances, so should its level of research meth-
odological rigor. Research methodology improves the scientific background and
framework of strategic management, and contributes to enhance confidence in the
results and findings generated. McGuire (1986) argues that researchers and manag-
ers can benefit from each other if their needs and modes of thinking are compared.
Both have to abstract the general theoretical principles to be applied to specific situ-
ations and to assess the generalizability of their conclusions. Bower (1982) argues
that research in strategic management should concentrate on issues of concern to
the top management of the firm to enrich the field by well-structured problems
although it may emerge the problem of rewarding academics.
The interest in strategic management research has been increasing over the last
three decades. Research methods in strategic management have evolved over time
growing since its inception in the late 1970s (Bowman, Singh & Thomas, 2002;
Kay, McKiernan & Faulkner, 2003; Mintzberg, Ahlstrand, & Lampel, 1998). Some
academic papers presented the research methodological implications in a broad
overview of strategic management’s development, such as hypothesis formulation,
quantitative and qualitative analytic tools among other important methodological
issues (Hitt, Gimeno and Hoskisson, 1998). Empirical strategy papers increased
in number and in diversity of topics to create a strong research stream in strategic
management. However, there is a relatively limited set of research methodology
strategies and analytical procedures in strategic management.
Strategic management is one of the most recent fields of the management disci-
pline (Boyd, Finkelstein & Gove, 2005; Hambrick, 1990). Strategic management
has become one of the most popular fields (Bergh, 2001; Ramanujam & Varada-
rajan, 1989) since a pioneering research by Rumelt (1974) found that “strategy
matters” and gives rise to a notable research in the field (Bergh & Holbein, 1997;
Greve & Goldeng, 2004). Research in strategic management has focused on some
specializations such as strategic leadership, competitive dynamics, restructuring,
etc. The large number of topics and subjects covered by strategic management lit-
erature gives the idea that it does not have a unified, coherent and integrative sci-
entific field’s identity, object of study, research methods, conceptual and theoretical
frameworks.
The conceptual, theoretical and methodological frameworks challenged by
Williamson’s (1975, 1985) model of transaction cost economics, the following in-
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 133

vestigations on strategic management by Miles and Snow (1978), Meyer (1982),
Eisenhardt (1989), and Henderson and Cockburn (1994) produced influential
conceptual, theoretical and methodological frameworks. During the 1980s, dif-
ferent approaches to research methodologies resulted in the new theoretical devel-
opments of strategic management; among them the transaction cost economics
(TCE) (Williamson, 1975, 1985) that provided theoretical and conceptual frame-
works, although it is difficult to capture and measure not observed transaction costs
in bargaining and negotiating processes.
Content analysis in strategy research has been improving for the last three de-
cades (Bergh & Holbein, 1997; Boyd, Gove & Hitt, 2005; Shook, Ketchen, Hult
& Kacmar, 2004). Bergh & Holbein (1997) looking at longitudinal designs in
203 papers on strategic management from 1980 to 1993 found that more than
90% of studies had insufficient attention to methodological assumptions, thus,
the investigations were affected by type I bias. Sarker and Lee (2001) using a case
research methodology in business process reengineering to test competing theories,
found evidences to refute the dominant technocentric theory and the alternative
sociocentric view while providing support to adopt the socio-technical approach.
Bergh & Fairbank (2002) found that strategy researchers reach flawed conclu-
sions and inaccurate findings because when measuring changes they do not rec-
ognize the required research methodology. Hitt, Boyd and Li (2004) summarized
key content analyses of research methodology employed in strategic management.
Ketchen, Boyd and Bergh, D. D. (2008) reviewed the research methods applied in
strategic management between 1980 and 2004 observing a growth in the number
of articles devoted to strategy topics using empirical tools.
Lohrke (2008), Shook (2008), and Wright (2008a) have reviewed different top-
ics of research methodology, integrating them in a coherent analytic framework
and making important contributions to research on strategy methods. These pa-
pers review the application of some research methods employing traditional tools
and more specialized methods. Among the traditional methodological tools are re-
viewed meta-analysis, strategic groups, survey data collection, etc. Among the more
specialized methods the authors review cause mapping, conjoint analysis, internet
data collection, repertory grids, etc. Regarding the content analyses these authors
review some conceptual, theoretical and methodological frameworks, such as the
resource based-theory, discretion, upper echelons, etc.
134 José G. Vargas-Hernández

Research methods used address theoretical perspectives such as resource-based
view, traditional tools such as survey data collection, meta-analysis, etc., and more
specialized methods such as internet data collection, conjoint analysis, repertory
grids, cause mapping, etc. The methodological practices of strategic management
research strength the scientific character of the field to the extent that increase the
confidence in the findings resulting from a variety of research design, sampling,
measurement, analysis, and interpretation of results techniques.
Management research is aimed to analyze recent developments on research
methodology in strategic management. Organizational location using spatial re-
search methodology in strategic management is a research topic that has called
the attention of some researchers such as Dohn and Hahn (2008). Venkatraman
(2008) highlights the improvements on research methodological sophistication of
the strategic management field.
Research methods used at the different levels of analysis to capture motives,
preferences, and decisions of industries, firms, management strategic groups and
individuals are very limited on the design, implementation and monitoring strate-
gies. The simplicity of some methods used to analyze multi-level phenomena, such
as variance decomposition, is not suitable for more complex analysis of situations.
The integrative nature of strategy research leads to an imperative for adoption of
multiple theoretical frameworks. Innovations in research methodology provided
new insights out of the debate industry versus firm provided new insights. “…every
new innovation consists of a new combination of existing ideas, capabilities, skills,
resources etc. It follows logically from this that the greater the variety in these fac-
tors within a given system, the greater the scope for new combinations of these fac-
tors, that is, new innovations…” (Fagerberg, 2003, p. 7). Researchers and scholars
address identified methodological areas of omission.
Strategic management has borrowed some research methods and techniques
from other fields such as economics, sociology, psychology, politics, and more re-
cently geography, etc. Research in strategic management influences other fields
such as organizational theory (Oliver 1991, 1997) and human resource manage-
ment (Huselid, 1995; Wright, Dunford & Snell, 2001).
Ketchen, Boyd and Bergh (2008) argue that the research methodology used to
analyzed strategic management are as robust as the findings generated, although the
methods still face some challenges despite the accomplishments. Not all case stud-
ies require or have absolute necessity of statistical robustness. However, researchers
RESEARCH METHODOLOGY STRATEGIES IN STRATEGIC MANAGEMENT 135

in strategic management repeat past mistakes of adopting a technocentric or socio-
centric approaches without considering the interactions between the social and the
technological (Collins, R. S. and Cordon, C., 1997).

6. Challenges for research methodology strategy
New communication and information technologies have changed the pace, vol-
ume and nature of available information but also in the methods for analyzing such
data. Sources of data are more easily accessible and searchable depending of type
and mix of research methods and techniques used. Analysis of textual information
as an input derived from data sources and literature review has many forms and
is itself research (Johnson & Christensen, 2012; McKee, 2003) that may require
some quantitative, mathematical and econometric modeling. Meta analyses and
combinations of existing knowledge can give valuable insights.
Research methods in strategic management face several challenges due to the
methodological limitations for the examination and analysis of the strategy’s pro-
cesses and phenomena complexities. Longitudinal methods help to the analyses
of evolving events over time although the complexity, uncertainty and immeasur-
ability variables associated to these phenomena. The strategy phenomena pose a
challenge for researchers due to the multidimensional nature of constructs. Strate-
gic management might be enriched through inclusion and use of alternative tech-
niques in addition to conventional tools.
The strategies of research in strategic management should consider the actions
and interactions of all agents and actors involved in organizational activities. Re-
search on the processes of formulation, design and implementation of strategies
in organizations has called the attention not only of scientists, scholars and prac-
titioners but also common people interested in the topic, despite the fact that the
research methods have limitations.
Research methodology still has plenty of perverse problems that limit the ap-
plication of research findings in design, measurement and analysis. Research meth-
odological practices prevail that provide limited insights in strategic management.
Less developed economies have a small budget for scientific research, innovation
and technology transfer. It is difficult to introduce new research methodologies in
less developed countries where the scientific culture is not widely promoted and
adapted as the common ground among the scientific community. “Conventional
136 José G. Vargas-Hernández

wisdom” (Galbraith, 1999) considers that group culture and political influences
shape dominant views. Strategies for engaging strategic management research-
ers and scholars with new types of research methods and resources and new ways
of practicing and working with them require sensitivity to the existing scientific
cultures and practices. If researchers in strategic management want to be effec-
tive in optimizing the use and exchange of research methodology and resources,
they should be more sensitive to the practices and cultures of different research
communities.
Samik-Ibrahim (2000) proposes a grounded theory methodology (GTM) in
a developing country at the stage where research activities have a lot of obstacles
and many shortages such as low effectiveness-productivity and efficiency, lack of
funding, etc. Grounded Theory Methodology (GTM) is a “general method of com-
parative analysis” to discover theory with four central criteria: Work or generality,
relevance or understanding, fit or valid, and modifiability or control.
The future research in strategy process research has the tendency to be more
holistic, more integrative, with an emphasis on team work, corporate management
and be more oriented and supportive of action research methodologies (Hitt, Gi-
meno y Hoskisson, 1998). Future research in strategic management phenomena
will include integration of multiple theoretical and empirical complex models sup-
ported by sophisticated statistical tools such as structural equations modeling and
multinomial logit analysis.

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148 Dražen Barković • Ivana Barković Bojanić

SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING
THE ANALYTICAL HIERARCHY PROCESS METHOD
Dražen Barković,Ph.D.1 Ivana Barković Bojanić, Ph.D.2
1
Professor Emeritus, Josip Juraj Strossmayer University of Osijek, Faculty of Economics,
Republic of Croatia, barkovic@efos.hr
2
Faculty of Law, Josip Juraj Strossmayer University of Osijek,
Republic of Croatia, ivana.barkovic@pravos.hr

Abstract
This paper focuses on the selection of supervisor for Ph.D. candidate in general,
i.e. on the issue of establishing and sustaining a supervisory relationship between
the professor and the Ph.D. candidate. While this relationship is essential for the
success of the Ph.D. program in general and completition of dissertation in partic-
ular, there are many evidences in the practice that such a relationship may contain
imbalances in the power between the professor/supervisor and the Ph.D. candi-
date, which may be discussed in the terms of equity and inequality. Based upon the
literature review, this paper briefly presents the (in)equitable relationship between
supervisor and Ph.D. candidate, demonstrates the supervisor selection issue by us-
ing the analytical hierarchy process (AHP) method and discusses about the equity
theory as the guiding aid in establishing and sustaining a supervisory relationship.
JEL Classification: A23, C00, Z00
Keywords: analytical hierarchy process, thesis supervisor, equity theory

1. Introduction
Long term experience in managing postgraduate studies, especially master and
doctoral programs, reveals various significant aspects of managing those studies,
which are often underestimated yet they reflect themselves upon the efficiency and
effectiveness of Ph.D. students/candidates1, their professors, Ph.D. program and
the university itself.
1
There are variety of terms across universities that may be used for students beeing involved in the
doctoral programm-doctoral student, Ph. D. Student or Ph. D. Candidate. Doctoral student or Ph.
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING THE ANALYTICAL ... 149

The issue of establishing and sustaining supervisory relationship between the
professor and the Ph.D. candidate, i.e. the selection of supervisor for Ph.D. thesis,
is rather complex since it involves development of both professional and personal
relationship. Even though these relationships may be rewarding for both sides, such
relationships may contain imbalances in the power between the professor/super-
visor and the Ph.D. candidate. These imbalances are often regarded in terms of
equity and inequality.
The focus of this paper is the selection of Ph.D. thesis supervisor. The section
2 of the paper briefly discusses the complexity of supervisory relationship with
the particular emphasis on the existence of inequity on either side – professor’s or
Ph.D. candidates. It presents the equity theory postulated by J.S. Adams (1965)
which provides an insight how individuals evaluate social exchange relationships
such as those between professor and Ph.D. candidate. Section 3 demonstrate the
supervisor selection issue by using the analytical hierarchy process (AHP) method
and discusses about the equity theory as the guiding aid in establishing and sustain-
ing a supervisory relationship. Section 4 concludes the paper.

2. The complexity of supervisory relationship
Mentoring and supervision are important processes in educating and profes-
sionally developing the Ph.D. candidate to win the Ph.D. title. While mentors and
supervisors often have overlapping roles, one cannot use these terms interchange-
ably without emphasizing their important distinctions. Mentoring is a process for
the informal transmission of knowledge, social capital, and the psycho-social sup-
port perceived by the recipient as relevant to work, career, or professional develop-
ment; mentoring entails informal communication, usually face-to-face and dur-
ing a sustained period of time, between a person who is perceived to have greater
relevant knowledge, wisdom, or experience and a person who is perceived to have
less (Bozeman & Feeney, 2007). On the other hand, supervision in the academic
contest is a process to facilitate the student becoming an independent professional
researcher and scholar in their field, capable of adapting to various research arenas,
whether university or industry based (Pearson & Brew, 2002).

D. Student is every student involved in the doctoral programme. The doctoral /Ph. D. Student is
granted in the candidate status after competition and examination of all corsework required for the
degree, except the dissertation.
150 Dražen Barković • Ivana Barković Bojanić

As said, the focus in this paper is on the selection of supervisor and the issues
embedded in his relationship to the Ph.D. candidate such as trust, equity and the
like. Namely, the relationship between a Ph.D. candidate and an academic supervi-
sor is critical to the success of the Ph.D. program in general and it is crucial for the
completion of Ph.D. thesis in particular. Many scholars have been examining vari-
ous issues related to establishing and sustaining an equitable supervisory relation-
ship that leads to education and creation of science professionals (e. G. Bird, 1994,
Swayze & Anderson, 1996, Bird, 2001). Yet, it has proven to be very complex and
dynamic relationship which has multiple aspects such as managing and research
process time-wise, socialization of the Ph.D. candidate into the role of academic
researcher, supporting critical thinking, developing academic independence etc.
(see for details Lee, 2011). The professional relationship that results from these
interactions will help not only to Ph.D. candidates in their future careers, but also
professors in their growth as educators and researchers (Carter & Whittaker, 2009).
This is true only in the cases when there is trust and equity between these two sides.
However, this relationship may suffer from mismatched expectations, lack of trust
or equity, which may jeopardize its critical role.
The presence of inequity on either side – professor’s or Ph.D. candidate’s may be
costly in numerous ways. For example, the cost that Ph.D. candidate could bear is
related to obtaining Ph.D. degree from the institution, finding a job, ability to pub-
lish in desired journals. If one takes into consideration that drop-out rates at the
postgraduate/doctoral programs are rather high, approximately 40-50% according
to Smallwood (2004), then the relationship factors that can contribute to keep the
Ph.D. students /candidates in the program become of critical importance for both
Ph.D. candidates and faculty. According to the McWilliam et al. (2002) attrition
rates from doctoral programs have a tremendous opportunity cost in terms of re-
sources, time and energy waste, as well as adversely impact many involved – profes-
sor’0s reputation and in some cases the institution’s, schools, or doctoral program’s
reputation. In order to overcome these potential negative outcomes it is important
to understand how equity impacts relationships between Ph.D. candidates and su-
pervisors, as well as to understand what makes an equitable student – professor
relationship in the Ph.D. program.

2.1. Equity Theory in the Light of Supervisory Relationship
The equitable relationship between the supervisor and the Ph.D. student may
be observed and understood by studying theories that underline the equity. The
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING THE ANALYTICAL ... 151

notion of equity is usually understood as a kind of justice, but one can differenti-
ate two ways of it: equity is the same as a rectification of legal justice as stated by
Aristotel or equity is a justice conceived as fairness as stated by J. Rawls. When the
term equity is used in higher education, it mainly refers to different conceptions of
social justice as equality of opportunities:, e.g. to enroll in higher education institu-
tions (equity of access), to complete higher education studies (equity of results).
The equity theory has gained substantial popularity among social scientists due
to several factors: (i) the logic behind it is well understood by the scholars and
practitioners; (ii) equity is one of the operating norms of the stratification system of
Western societies and (iii) it reached rather sophisticated level of theoretization and
has been connected to other fields, such as psychology, economics, etc. (Neumann
& Neumann, 1984: 269).
One of the most discussed models explaining how individuals evaluate social
exchange relationships has been formulated by J.S. Adams in his “Equity Theory”
developed in 1965. Adams introduced the idea that fairness and equity are key
components of a motivated individual. In a nutshell, the equity theory is based in
the idea that individuals are motivated by fairness, and if they identify inequities
in the input/output ratios of themselves and their referent group, they will seek to
adjust their input to reach their perceived equity.
The inputs are factors that a person has accomplished (i.e. past experience, edu-
cation, and work) and perceives to be worthy to some return. The outputs are the
returns to the individual′s job investment. In modeling context, inequity exists for
person (p) whenever he perceives the ratio of his outcomes (O) to inputs (I) and the
ratio others (o) outcomes to others inputs are unequal. Mathematically expressed,
inequity exists when either of these relationships holds true:

as well as equity exist when

Adams’ suggested that the higher an individual’s perception of equity, the more
motivated they will be, and vice versa - if someone perceives an unfair environment,
they will be demotivated.
152 Dražen Barković • Ivana Barković Bojanić

Adams’ equity model consists of four essential postulates: (i) perceived inequity
creates tension in an individual, (ii) the amount of tension is proportional to the
magnitude of the inequity; (iii) this created tension motivates the individual to
reduce it; (iv) the strength of the motivation to reduce the inequity is proportional
to the perceived inequity.
Equity theory is a motivation theory with the prime interest to describe how in-
dividuals in organizations react to inequitable compensation compared to other co-
workers. Adam’s equity model alludes to the fact that an employee who believes to be
under rewarded for his or her responsibilities and efforts will strive to create a more
equitable balance regarding both monetary and nonmonetary rewards. The applica-
tion of equity theory is often extended to unfair situations, such as an individual who
has been allocated a much lighter or heavier work load than a comparative other.
Even though the steps are not always taken to fix dysfunctional relationships and alter
unfair situation, the inequitable relationship will probably create tension that may be
eventually reduced by making the necessary changes in the power base.

2.2. Inequity in the Supervisory Relationship
The existence of inequity in the supervisory relationship, i.e. between the profes-
sor and Ph.D. candidate opens the question of unethical people who, by default,
are taking the advantage of individual, particular in the cases when the individual
has a higher level of tolerance to inequity.2 Unethical individuals at the university
who might take advantage of others – e.g. supervisor is taking the advantage of
Ph.D. candidate - are harmful not only to the Ph.D. program but for the university
as whole. For example, one of possible effects is the lost in trust or loss of reputation
in the Ph.D. program and/or university. In order to avoid the persistence of such
detrimental behavior, one should be acquainted of what makes an effective and
equitable relationship between professor and Ph.D. students/candidates.
The Ph.D. candidate and professor relationship is rather complex since it is a
personal as well as a professional relationship in which the power may be unevenly
distributed. Due to the nature of Ph.D. programs, there are cases when Ph.D.
students/candidates are treated more like colleagues that regular students. This is
not surprising if one takes into consideration that Ph.D. students/candidates may

2
This is one of the complicating factor in the equity theory. Namely, some individuals have higher
level of tolerance for inequity than others and become the victions of unethical persons who use
them to satisfy their own interests (Tornow, 1971).
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING THE ANALYTICAL ... 153

be well positioned people in the business or other community that see the Ph.D.
title as the additional professional and personal achievement in their career and/or
the people that may be linked to the university through industry-university part-
nership. If the relationship is equitable, then it is rewarding for both sides and can
be promoted in so to say value added partnership resulting in joint publications,
contacts, research grants, and variety of other opportunities. Yet, if the professor
is inequitable in the treatment of the Ph.D. student/candidate, this can have an
adverse impact on both sides, especially if the student works to lessen the inequity.
There are also situations in which the student, despite being treated inequitably,
does not commit to an action to reduce inequity. When professor takes the advantage
of Ph.D. student, one can notice the existence of positional power of the professor in
their relationship. Literature review reveals that students occasionally ignore the fact
they are being treated inequitably because they view the professor as having power
over them: for example, supervisors have been known to change the requirements of
a thesis inappropriately in order to delay completion of the degree when a student
is especially talented or capable in providing computing or electronic skills to the
research group (Bird, 2001). Schniederjans et al. (2012) reviewed academic scholars
discussing the professional power being unevenly distributed: a part of the role of
a professor in the professor-student relationship is power inherent (Blevins-Knabe,
1992); professor’s power comes from the professor evaluating the student and having
the authority in the subject in which the professor is expert (Paludi, 1990; Zalk et
al., 1990). Not so many Ph.D. students/candidates have the courage to oppose to
someone who can significantly influence their careers. Those individuals that do
stand up against inequity may be role models to those who follow, but are often hurt
in the process, which is an inequity in and of itself (Schniederjans et al., 2012).
Opposite to inequitable professor-student relationship, a fair and equitable rela-
tionship with a professor is based on the attitude of the professor towards the student
and may encompass following: (i) professor’s role should be teaching, not only the
course material, but also modeling how to use the knowledge appropriately; (ii) being
trustworthy in offering faculty members sensitive information, including objective
and equitable evaluation as well as equal learning opportunities for all students with-
out preferential treatment; and (iii) the professor’s role should include demonstrating
power in the authority of the subject matter (see for details, Blevins-Knabe, 1992).
Schniederjans (2007) proposed a Ph.D. student bill of rights that dealt with is-
sues regarding what Ph.D. students should expect from professors who chair their
doctoral committees. This bill of rights contains a few requirements for both fac-
154 Dražen Barković • Ivana Barković Bojanić

ulty members and students, including: (i) faculty members should make sure the
right to select Ph.D. program committee members is given to the student; (ii) the
student should be given the right to permit changes in the program committee ei-
ther before or during the creation of the dissertation; (iii) a committee chair should
work with the student on research prior to, during, and after the dissertation; (iv)
a committee chair should set up codes of conduct between the student and the
chair based on sound ethical values. These are the rights a doctoral student should
have and a committee chair should ensure. If the program committee chair fails to
ensure these fundamental rights, a student will most likely have problems. Equity
theory proposed that when a state of inequity is perceived, that individual would
experience a state of distress Walster, Berscheid &Walster (1973).

3. Research methodology
There are not so many studies that have looked into the method of supervisor selec-
tion. This article proposes and demonstrates the application of a multiple criteria based
selection method using Analytical Hierarchy Process (AHP) for supervisor selection.
The Analytical Hierarchy Process is a popular decision-making tool developed
at the Wharton School of Business by Thomas Saaty [Saaty, T., 1991] and allows
decision makers to model a complex problem in a hierarchical structure showing
the relationships of the goal, objectives (criteria), sub-objectives, and alternatives
as shown in Figure 1. Uncertainties and other influencing factors can also be in-
cluded. It is used in wide variety of decision situations.

Figure 1: The AHP decision hierarchy process
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING THE ANALYTICAL ... 155

In AHP, the main problem is first decomposed into a hierarchy of simplified
sub-problems in which each can be analyzed independently. The elements of the
hierarchy can relate to any aspect of the decision problem, tangible or intangible.
Once the hierarchy is built, the elements are arranged systematically and compared
to one another in pairs using concrete data about the elements or based on hu-
man judgments about the elements’ relative meaning and importance. A numerical
weight or priority is derived for each element of the hierarchy, allowing diverse and
often incommensurable elements to be compared to one another in a rational and
consistent way. In the final step of the process, numerical priorities are derived for
each of the decision alternatives. Since these numbers represent the alternatives’
relative ability to achieve the decision goal, they allow a straightforward consider-
ation of the various courses of action Clety (2008).
To determine the weights of each evidence layer, each criterion (or layer) was
compared against each other and a judgment on the relative importance of each
layer was made and an appropriate score from 1 to 9 was assigned (Table 1). Pair-
wise comparison greatly reduces the conceptual complexity by comparing only two
criteria at a time. The pair-wise comparison is performed in a square preference
matrix from which eigenvalues and eigenvectors are calculated.

Table 1: Example scale for comparisons (Saaty T., Vargas, 1991)
Intensity of importance Description
1 Equal importance
3 Moderate importance of one factor over another
5 Strong or essential importance
7 Very strong importance
9 Extreme importance
2, 4, 6, 8 Intermediate values
Reciprocals Values for inverse comparison
In the first phase of the study Ph.D. students at the postgraduate doctoral pro-
gram “Management” of the Faculty of Economics in Osijek were asked to list all
factors they would consider or would recommend that one should consider before
selecting a supervisor for a Ph.D. thesis. The simple question – based upon the ex-
pert reasoning and academic literature - that was asked was “What are important
characteristics that you look for in a faculty member before selecting her or him as
a supervisor ?“ There were 47 students in the Ph.D. programme during the time of
study, of which 23 responded. This resulted in an initial list of 13 items, which is
156 Dražen Barković • Ivana Barković Bojanić

further reduced using 5 point Likert scale. The selection problem was then formu-
lated using the 6 elements that serve as criteria for selection.

3.1. Criteria for the supervisor selection
The problem in this research is to determine an optimal supervisor selection for
doctoral candidate. The criteria or objectives for supervisor are given in Table 2.

Table 2: Criteria summarized
No. Criteria Abbreviation
Freedom to work. The professor is open to ideas and is flexible about adopting
1 FW
alternative approaches.
Time conscious . The professor is conscious about time taken for completion and is
2 TC
generally willing to work towards it.
3 Reputation, publications. Reputation of professor in his or her field. RP
Personal relationship with the professor. Cordial and understanding relationship with
4 PR
the professor.
Social networks. The professors social network and relationship with other professors
5 SN
in the institute and outside.
6 Number of thesis guided. NT

3.2 Qualitative comparison by Analytical Hierarchy Process (AHP)
After defining the main criteria for supervisor selection, they are then ranked
against each other in terms of relative importance to the solution of the problem.
In this case, each objective is given a ranking of 1 to 4 relative to the other show-
ing how good one objective is better to the other. The results are shown in Table 3.

Table 3: Relative importance of the criteria
FW TC RP PR SN NT
FW 1 1/3 1/2 1/4 1/4 2
TC 3 1 2 1/3 1 3
RP 2 1/2 1 1/2 1/2 2
PR 4 3 2 1 1 4
SN 4 1 2 1 1 3
NT 1/2 1/3 1/2 1/4 1/3 1
The alternative professors who may be the potential supervisors are listed in
Table 4.
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING THE ANALYTICAL ... 157

Table 4: Alternative professors for supervisors
No. Potential supervisors
1 Professor A
2 Professor B
3 Professor C

The alternative professors and potential supervisors were ranked relative to each
other for each criterion reflecting their perceived strengths. Based on intuitive judg-
ments, the relative strengths of the alternative professors (supervisors) were evalu-
ated for each of the criteria above. The ranking of alternatives for each criterion are
as shown in Table 5.

3.3. Comparing of alternatives steps
The alternatives are compared by matrix evaluation. The following steps are used:
• The matrix from the relative ranking of the alternatives is squared
• The rows of the square matrix of alternatives is summed to form column
matrix
• Sum the column matrix resulting from sum of rows
• Divide each element of column vector by the sum to form eigenvector
• Multiply eigenvectors of objectives by that of alternatives
The result of product of the eigenvectors gives the overall comparison of the
alternatives. The results are discussed in next section.

Table 5: Relative importance of alternatives for each criterion
Freedom to work Time conscious Reputation, publications

A B C A B C A B C
A 1 1/2 3 A 1 1 3 A 1 2 2
B 2 1 4 B 1 1 1 B 1/2 1 2
C 1/3 1/4 1 C 1/3 1 1 C 1/2 1/2 1
Personal relationship with the
Social networks Number of thesis guided
professor

A B C A B C A B C
A 1 1/2 2 A 1 1 2 A 1 3 1
B 2 1 2 B 1 1 3 B 1/3 1 1/2
C 1/2 1/2 1 C 1/2 1/3 1 C 2 2 1
158 Dražen Barković • Ivana Barković Bojanić

3.4. Results of AHP
The AHP model was created and executed using a simple MATLAB code to
execute the matrices. The results from the AHP matrix calculations are summarized
in Table 6.

Table 6: Relative importance of the criteria
  FW TC RP PR SN NT
FW 1 1/3 1/2 1/4 1/4 2
TC 3 1 2 1/3 1 3
RP 2 1/2 1 1/2 1/2 2
PR 4 3 2 1 1 4
SN 4 1 2 1 1 3
NT 1/2 1/3 1/2 1/4 1/3 1
COLUMN SUM 14,500 6,166 8,000 3,333 4,083 15,000

  FW TC RP PR SN NT Priorities
FW 0,069 0,054 0,063 0,075 0,061 0,133 0,076
TC 0,207 0,162 0,250 0,100 0,245 0,200 0,194
RP 0,138 0,081 0,125 0,150 0,122 0,133 0,125
PR 0,276 0,487 0,250 0,300 0,245 0,267 0,304
SN 0,276 0,162 0,250 0,300 0,245 0,200 0,239
NT 0,034 0,054 0,063 0,075 0,082 0,067 0,062
λmax = 6,220, consistency index and consistency ratio are CI = 0,044, CR = 0,035

FW A B C
A 1 1/2 3
B 2 1 4
C 1/3 1/4 1
∑ 3,333 1,750 8,000
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING THE ANALYTICAL ... 159

  A B C Priorities
A 0,300 0,286 0,375 0,320
B 0,600 0,571 0,500 0,557
C 0,100 0,143 0,125 0,123
λmax = 3,023, consistency index and consistency ratio are CI = 0,012, CR = 0,023
TC A B C
A 1 1 3
B 1 1 1
C 1/3 1 1
∑ 2,333 3,000 5,000

  A B C Priorities
A 0,429 0,333 0,600 0,454
B 0,429 0,333 0,200 0,321
C 0,143 0,333 0,200 0,225
λmax = 3,148, consistency index and consistency ratio are CI = 0,074, CR = 0,142
RP A B C
A 1 2 2
B 1/2 1 2
C 1/2 1/2 1
∑ 2,000 3,500 5,000
  A B C Priorities
A 0,500 0,571 0,400 0,490
B 0,250 0,286 0,400 0,312
C 0,250 0,143 0,200 0,198
λmax = 3,061, consistency index and consistency ratio are CI = 0,030, CR = 0,058
PR A B C
A 1 1/2 2
B 2 1 2
C 1/2 1/2 1
∑ 3,500 2,000 5,000
160 Dražen Barković • Ivana Barković Bojanić

  A B C Priorities
A 0,286 0,250 0,400 0,312
B 0,571 0,500 0,400 0,490
C 0,143 0,250 0,200 0,198
λmax = 3,061, consistency index and consistency ratio are CI = 0,030, CR = 0,058
SN A B C
A 1 1 2
B 1 1 3
C 1/2 1/3 1
∑ 2,500 2,333 6,000

  A B C Priorities
A 0,400 0,429 0,333 0,387
B 0,400 0,429 0,500 0,443
C 0,200 0,143 0,167 0,170
λmax = 3,021, consistency index and consistency ratio are CI = 0,010, CR = 0,020

NT A B C
A 1 3 1
B 1/3 1 1/2
C 2 2 1
∑ 3,333 6,000 2,500

  A B C Priorities
A 0,3000 0,5000 0,4000 0,4000
B 0,1000 0,1667 0,2000 0,1556
C 0,6000 0,3333 0,4000 0,4444
λmax = 3,378, consistency index and consistency ratio are CI = 0,189, CR = 0,363
SUPERVISOR SELECTION IN THE PH.D PROGRAM BY USING THE ANALYTICAL ... 161

Criteria and its averages  
Alternatives FW TC RP PR SN NT Overall
0,076 0,194 0,125 0,304 0,239 0,062
A 0,320 0,454 0,490 0,312 0,387 0,400 0,386
B 0,557 0,321 0,312 0,490 0,443 0,156 0,408
C 0,123 0,225 0,198 0,198 0,170 0,444 0,206

The AHP analysis shows that the professor A is superior to the other professors
regarding the conscious about time taken for completion and is generally willing to
work towards it and regarding his reputation of professor in his field.
Professor B is the preferred when one considers his openness to ideas and his
flexibility about adopting alternative approaches, as well as his personal relation to
student and his social networking. On the other hand, professor B is rated poorly
in number of thesis guided.
Professor C is surprisingly rated least in all the objectives (criteria) except in
number of thesis guided.

4. Conclusion
As Ph.D. students/candidates are encountering various challenges during their
path to obtain the degree, they must realize that inequitable situations most likely
will arise. Selecting a proper course of action to inequitable situations may quickly
ease the situation and either resolve it or lead to potential option that eventually
provide resolution.
In this paper a decision making model based on AHP method has been il-
lustrated for the selection of most suitable professor for the role of Ph.D. thesis
supervisor. The method presented and results discussed may serve as the motivation
for academic scholars, professors and students. The complexity of establishing and
sustaining equitable supervisory relationship may be the focus of more in-depth
analysis using much more sophisticated qualitative and quantitative approaches,
while students may consider the approach shows to validate their tentative choice
and be more confident about decisions they have made or will make regarding the
selection of supervisor for their Ph.D. thesis.
162 Dražen Barković • Ivana Barković Bojanić

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164 Thomas Cleff • Klaus Rennings

ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES
FOR ECO-PIONEERS? LEAD MARKET STRATEGIES FOR
ENVIRONMENTAL INNOVATION
Thomas Cleff, Ph.D.1, Klaus Rennings, Ph.D. 2
1
Pforzheim University and Mannheim Centre for European Economic Research (ZEW),
Federal Republic of Germany, thomas.cleff@hs-pforzheim.de
2
Mannheim Centre for European Economic Research (ZEW),
Federal Republic of Germany, rennings@zew.de

Abstract
In environmental policy first mover advantages for environmental technologies
are often taken for granted. It is a popular view to see the state as a political en-
trepreneur who introduces a certain environmental policy instrument, e.g. feed-in
tariffs for renewable energies, and thus becomes the world market leader or the lead
market for the respective technology. Against this background, this paper wants to
find out if the idea of first mover advantages can be justified by theories and empiri-
cal evidence from the relevant literature on business administration, innovation,
environmental and development economics.
A review of theoretical and empirical studies at the firm level shows that first
mover advantages are not confirmed by empirical evidence. The successful innova-
tor is not necessarily the first but very often one of the early movers within the com-
petition of different innovation designs. Studies carried out at the national level
give however only anecdotical evidence on the existence of lead market patterns.
However, with regard to emerging countries, there is as well anecdotical evidence
on successful latecomers, i.e. states that follow a strategy of environmental leapfrog-
ging. The question under which conditions a country may switch from a second
mover to a first mover strategy can’t be answered by the existing literature.
This paper argues that it seems to be more reasonable to complement a lead
market strategy by a lead supplier position. The lead supplier strategy corrects for
the problem that the domestic industry may not participate sufficiently from the
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 165

growth of the national market due to the demand advantage. It considers also goals
from industrial policy, which play an important role also within latecomer strate-
gies in emerging countries.
JEL classification: Q55, L60, O33
Keywords: Lead markets, environmental innovation, first mover advantages,
innovation strategies

1. Introduction
The term “first mover advantage” is often cited in documents of environmental
policy. For example, in the justification of the Renewable Energy Act the German
government states that it will realize first mover advantages due to the use of renew-
able energy with modern technology (Bundesregierung, 2007). Another example
from the German Ministry of Environment (2008) is the report “Investments for
a climate friendly Germany” which mentions these technology investments will
create “first mover advantages” for the domestic industry. At the European level the
President of the European Commission, Jose Manuel Barroso (2008), argues that
the European energy and climate change package should be seen as an opportunity
to Europe in economic terms: “It will encourage innovation and it will increase
competitiveness. It is a mistake to oppose the fight against climate change to the
competitiveness of European industries. The Union should lead the global efforts
to tackle climate change. And European industries should continue to be world
leaders. At the same time, we will also create new markets and new jobs, and make
sure that we have the “first mover advantage” in many sectors.”
It seems that in the political arena first mover advantages for environmental
technologies are taken for granted. It is a popular view to see the state as a political
entrepreneur who introduces a certain environmental policy instrument such as
feed-in tariffs for renewable energies, and thus creates a profitable market for the
respective technology. However, with regard to lead markets, the question should
be allowed if it can be attractive for a country to invest in the development of a
market where the majority of goods and services is imported from other countries,
such as in the case of photovoltaics in Germany (Frondel et al., 2010). There would
also be an alternative strategy for government strategies in environmental technol-
ogy markets to wait and co catch up quickly later by leapfrogging, being a second
mover or a late follower, with likely giants steps in catching up (Hilton, 2001). This
is a strategic option especially for emerging countries such as China and India (but
166 Thomas Cleff • Klaus Rennings

the question of being a 2nd mover seems also be realistic e.g. for many South- or
Eastern European countries in the European Union).
Against this background, this paper wants to find out if first mover advantages
for pioneering firms are confirmed by theories and empirical evidence from the
relevant literature of industrial organization, business management, environmen-
tal and development economics. It starts with an analysis of market-oriented in-
novation strategies of innovating companies. It has however to be asked if such
strategies can easily be transferred to eco-innovations and to the level of national
policy strategies. In a second step we look at the case of wind energy in China as an
example for successful leapfrogging strategies at country level. The second case of
the feed-in-tariffs policy in Germany will show that a too narrow defined national
lead market policy – only focusing on the demand advantage of the market – may
not necessarily lead to advantages of the German photovoltaic industry. Industry
policy has to take into account the whole range of all lead market factors of the
lead market approach and the supply-side of the industry at the same time. Only
if the supply-side is able to develop high lead market potentials for all lead market
factors, country’s industry may benefit from a governmental lead market strategy.
Therefore the structure of this paper is as follows: While section 2 introduces the
concept of lead markets, section 3 reviews the theoretical reasons for first and sec-
ond mover advantages. Section 4 gives an overview about the empirical literature
on econometric analyses and case studies for first and second mover advantages,
country lead market strategies and leapfrogging. In section 5 the question of lead
markets vs. lead suppliers will be discussed. Finally we will draw some conclusions
regarding national lead market policies.

2. The lead market approach

Lead market factors
The lead market approach suggests focusing customer interaction on those re-
gions, which are likely to be ahead in international demand trends and show de-
mand preferences that are later adopted in other regions, too. It was first suggested
in the 1980s by Porter (1986) and Bartlett and Ghoshal (1990) and is receiv-
ing increasing attention worldwide during the last years (cf. e.g. Johansson 2000,
Commission of the European Communities 2006, Cleff/Grimpe/Rammer 2009).
Bartlett and Ghoshal (1990, p. 243) consider lead markets as “markets that provide
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 167

the stimuli for most global products and processes of a multinational company.
[…] [Local] “innovation in such markets become useful elsewhere as the environ-
mental characteristics that stimulated such innovations diffuse to other locations”.
A lead market can be defined as a country where users prefer and demand a
specific innovation design that not only appeals to domestic users, but can sub-
sequently be commercialized successfully in other countries as well. The technical
design preferred by the lead market squeezes out other designs initially preferred in
other countries and becomes the globally dominant design. The innovation designs
adopted in the lead market have an advantage over other country-specific innova-
tion designs competing globally to set the international standard. This advantage
makes consumers from other countries follow the technological standard of the
lead market and adopt the design preferred by users there. In some cases this means
abandoning a design that was previously preferred on the national market (Beise
et al., 2002). Where the scientific and technical knowledge for this purpose was
actually generated is mostly not relevant, as companies in the lead market are able
to appropriate this knowledge. More important for competitiveness is the ability
to learn on the lead market about the applications and production of innovations
(Meyer-Krahmer, 1997).
Therefore, lead markets have specific properties (lead market factors) that in-
crease the probability of a wide take-up of the same innovation design in other
countries (Commission of the European Communities, 2006). A theoretical lead
market model has to provide these lead market factors and has to give an answer
to the question under which market circumstances country’s market characteristics
are appropriate to the adoption of technological innovations that will succeed in-
ternationally and mark out the technological path to be followed worldwide.
At the moment there is no consistent and stringent lead market theory. Howev-
er, Beise (2001 and 2006) and Cleff/Grimpe/Rammer (2007) were able to develop
an eclectic approach of a lead market model. They have been investigating lead
markets on the basis of detailed ex-post case studies focusing on the mechanisms
at a national level and how these mechanisms are leading to global designs. Beise
himself (2001) has been derived a system of five particular country-specific success
factors for lead markets. A study on lead markets of environmental innovations
has added a sixth success factor, the so called regulation advantage (Beise and Ren-
nings, 2005). These factors are influencing the international competitiveness of
innovations and a good performance of these factors at the national level increases
168 Thomas Cleff • Klaus Rennings

the probability of the market becoming a lead market. The six factors, as shown in
Fig. 1, are:
- price advantage,
- demand advantage,
- transfer advantage,
- export advantage,
- market structure advantage and
- regulation advantage.

Fig. 1. Lead market factors

Source: Rennings and Smidt (2010)

A price advantage arises from national conditions that result either in relative
reductions in the price of a nationally preferred innovation design compared with
designs preferred in other countries or in anticipation of international factor price
changes. Countries can gain a price advantage if the relative price of the nation-
ally preferred innovation design decreases, thus compensating for differences in
demand preference to foreign countries. This price mechanism is the centerpiece
of Levitt’s (1983) globalization hypothesis, according to which consumers in for-
eign markets “capitulate” to the attraction of lower prices and abandon their initial
endowment of goods. Price reductions are mainly due to cost reductions based on
static and dynamic economies of scale (learning-by-doing). Market size and growth
are examples of country-specific factors creating economies of scale. Another price
advantage emerges from anticipatory factor prices in the lead market. Factor price
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 169

changes can induce innovation. If the new relative prices occur worldwide, the
same innovations are adopted worldwide as well. Price advantages play also an im-
portant role in leapfrogging strategies in emerging countries due to low labor costs.
Demand advantages originate from national conditions which result in the an-
ticipation of the benefits of an innovation design emerging at a global level. A good
example is provided by off-grid solutions in the energy and telecommunication
sector. Such innovations are more beneficial and thus more likely to be adopted
first in industrialized, geographically large countries with a low population density,
such as in Scandinavia (Beise and Rennings, 2005). When other countries catch
up, they demand the same innovation that has already been used in the country at
the forefront of the trend. Another example is provided by trends related to envi-
ronmental problems such as climate change. Some countries are more exposed to
the risks of rising temperatures (e.g. countries with above-average risks of flooding
like the Netherlands) than others and will thus anticipate these trends earlier.
Transfer advantages are national conditions that increase the perceived benefit
of a nationally preferred innovation design for users in other countries or by which
national demand conditions are actively transferred abroad. The perceived benefit
increases when information on the usability of the innovation design is made avail-
able. The initial adoption of an innovation of unknown merit reduces the uncer-
tainty and therefore the risk for subsequent adopters and kicks off a bandwagon
effect - also referred to as the demonstration effect of adoption (Mansfield, 1968).
With regard to eco-innovation, international reputation in the field of environ-
mental technologies plays an important role.
Conditions which promote the inclusion of foreign demand preferences in na-
tionally preferred innovation designs constitute a national export advantage. Three
national export advantage factors can be identified: domestic demand that is sensi-
tive to the problems and needs of foreign countries, the established export experi-
ence of national firms, and the similarity of local market conditions to foreign
market conditions. Dekimpe et al. (1998) support the hypothesis already proposed
by Vernon (1979) that the greater the cultural, social and economic similarities
are between two countries, the greater is the likelihood that an innovation design
adopted by one of the two countries will be adopted by the other country as well.
The market structure effect focuses mainly on the degree of competition. Com-
petition and entrepreneurial effort have been described as two of the main determi-
nants of international patterns of innovations by researchers such as Posner (1961)
170 Thomas Cleff • Klaus Rennings

and Dosi et al. (1990). The lead market is usually highly competitive. This is due
to the fact that faster development and more market-oriented innovations are sup-
ported by competitive market structures. Firstly, companies engaged in fierce com-
petition will demand more innovations from suppliers because they are able to reap
greater competitive rewards from using innovative parts than monopolies (Porter
1990). Secondly, competing firms are under more pressure to emulate firms which
have already adopted a new technology (Mansfield 1968). Thirdly, and possibly
most importantly, more innovation designs are tested in a competitive market than
in a monopoly market.
Regulation advantage is a specific determinant of environmental innovations
(Rennings, 2000), thus it will be explained separately in the next section.

2.2 Lead markets, eco-innovation and regulation
In this paper we define environmental innovation (or eco-innovation) as inno-
vation of new or modified processes, techniques, practices, systems and products
which are more environmental friendly compared to earlier innovations (Kemp/
Arundel 1998 and Rennings/Zwick 2002).1 Beise and Rennings (2005) have shown
that lead markets exist for environmental innovations, with demand advantages be-
ing especially relevant e.g. for eco-efficient cars. However, for other eco-innovations
such as renewable energies innovations are strongly driven by regulation. Beise and
Rennings added regulation advantages of a country as a sixth lead market factor
specifically for eco-innovations. Due to the – at least partial – public good character
of new environmental products and processes it is evident that regulation will have
an important influence on the innovation process and therefore on the lead market
position. Two different types of eco-innovations can be distinguished:
1. Environmental innovations can have a typical business objective with the
aim to reduce the costs in the production process or the product characteris-
tics, to raise the product quality and thus to improve the competitive situa-
tion – with a reduction of environmental impact at the same time. This type
of eco-innovation does not differ in its primary focus from other product
or process innovations, which also have as target the increase of process- or
market efficiency. Porter/van der Linde (1995) see this form of eco-innova-
tion especially there, where resources are privately owned or possess a regular
1
Innovation in the organization of firms as it is described in the OECD (2005) guidelines on the collection
and interpretation of innovation data is not within the scope of this paper.
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 171

market price and savings of respective resources are immediately cost-effec-
tive. Several eco-innovations have this “triple-benefit” for the environment,
the firm and the user. Examples for such eco-innovations are innovation in
energy and material efficiency (Rennings and Rammer, 2009).
2. On the other hand eco-innovations can have the exclusive focus on the re-
duction of environmental impacts. This is the case when policy regulations
interfere in the economy and thus cause innovations. The prohibitions to use
certain harmful products, resources or end-of pipe technologies are examples
for this. This type of regulation can improve the international competitive
situation for the home industry when the regulation policy is adopted by
other countries so that the innovation design established on the home mar-
ket can develop into a global design. One can speak – in terms of the lead
market language – of an anticipation of existing regulatory trends by a na-
tional government. It is not very difficult to observe such long term regula-
tion trends if we look at the issues of international agreements: low carbon
economy, energy and material savings are for example megatrends of the
current and future decades (Jänicke, 2008 ). Regulation can pick up such
regulatory trends and lead to the development of new markets, for example
for energy efficient refrigerators, dishwashers or washing machines. These
new markets however, must orient themselves along the lead market factors
and allow the development of a global design on the home market. However,
there is the risk that other countries will not follow the regulation process or
that that they will choose another form of regulation and that there develops
an idiosyncratic innovation design on the home market. But the develop-
ment of environmental markets such as the rapid worldwide diffusion of
energy efficiency labels shows that there is a quick adoption of innovative
regulation in the area of eco-innovations.

3. Innovation timing advantage

3.1. Sources of first mover advantages
The “first mover” in theory is the very first firm to bring an innovative prod-
uct or service to market, but in practice it means one of the first to do. Therefore,
Gilbert/Birnbaum-More (1996) recommend to use the term “early mover” since it
might be a more accurate description of most situations, which are discussed as first
172 Thomas Cleff • Klaus Rennings

mover. “Second mover” or “late mover” mean all firms entering the market after the
first mover(s). They typically imitate or adapt the innovation design.
Only the profits for innovation with well specified and protected intellectual
property rights (IPR) are limited to a single first user. Where do the first mover ad-
vantages result from and why don’t they come up in specific situations? Three basic
sources of first mover advantages and another three of second mover advantages are
often described in literature of business strategies (cf. e.g. Gilbert and Birnbaum-
More, 1996; Lieberman/Montgomery, 1988).
The first source of a first mover advantage is technological leadership due to a
quick reduction of costs, the learning or experience curve (Lieberman, 1987) or a
success in R&D or patent races (Mansfield, 1986). When IPRs are well-specified
and protected a firm gains competitive advantage through patenting or copyright,
or as a trade secret. Theoretically this leads to a temporary monopoly. Mansfield
(1985) however has found that successful protection of IPRs against imitation by
other firms is a rare case.
Secondly, a source of first mover advantages can be the preemption of physical
or spatial assets such as skilled workers, unique channels of distribution or manu-
facturing facilities. It is seldom the case however that those assets are completely
appropriated by a single firm (Lieberman/Montgomery, 1988). It can thus be ar-
gued that pre-emption of assets is a kind of timing advantage available to several
first movers, i.e. first movers securing anchor locations in a new shopping mall in a
desirable area gain advantage over latecomers.
The third category of advantages is buyer switching costs. Switching costs de-
velop due to initial transaction costs or investments when a user has to adapt to the
new product. First of all, the user must be convinced of learning another system.
This step demands for non-superior products specific marketing skills and addi-
tional costs from the followers. Additionally, there arise user-related qualification
costs, which must be covered by the supplier or the user. All these costs have to be
raised by the follower in order to compete with the first mover on the market. In
case the first mover is able to convince the buyer of the uncertainty of the follower`s
product quality, then the user will seldom turn away from the first brand, which
has already proven its quality. Switching costs may also arise through the users’
contractual restraints with the first mover (Lieberman/Montgomery, 1988).
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 173

It can be summarized that out of the three sources of first mover advantages,
only technological leadership – if at all is restricted to a single firm. And in the case
of technological leadership it depends on the existence and protection of IPRs, and
on the time potential imitators need to find ways around the restriction.

3.2. Sources of second mover advantages
Second movers have a competitive advantage in specific situations, which are
based on three theoretical arguments. There is no indication in the literature that
second mover advantages may be limited to a single firm.
The competitive advantage for second movers is simply to free-ride on first mov-
er investments. This is possible due to the positive spill-over of the first mover, es-
pecially when IPRs are not well-defined and specified. Many products and services
can be easily and inexpensively imitated. In many cases also second movers can
profit from improvements of the first mover regarding the learning and experience
curve (Lieberman 1987).
A second source of advantages is technological developments or customer needs,
which arise after the introduction made by the first mover. They may be over-
looked by the first mover due to incumbent inertia. This argument is taken up by
Markides/Geroski (2005) who argue that a first mover is colonizing the product
and typically has a different – in most cases technology-driven mindset, while a fast
second firm focuses on consolidation from niche to mass markets.
The third main advantage for second movers is leapfrogging (Fudenberg et al.,
1983), i.e. catching up to the first mover in fast, big or even giant steps. While the
developer of the new product or service had to experiment with a lot of different
variations of the original innovation design, and thus had to pay a large amount of
development costs, which are now sunk costs, the second mover has the advantage
of reduced market, technological and regulatory uncertainty.
In the following we want to present the results of some empirical studies that
have analyzed, which factors influence the innovation success of market pioneers /
of a follower in dependency on different factors.
174 Thomas Cleff • Klaus Rennings

4. Empirical evidence from the literature

4.1. Business management literature: Evidence on first vs. second mover
advantages of firms
The empirical literature brings up reasons for and against first mover advantages,
which have been analyzed broadly during the past decades. An analysis of studies
shows that until the mid 1980`s the opinion prevailed that only the market pio-
neer can secure a long-lived market share advantage (cf. e.g. Yip 1982, Urban et. al
1986, Robinson/Fornell 1985). Biggadike (1979) was convinced of having proved
in his study that even after 5 to 8 years later entrants were not able to catch up the
disadvantage.
This apparently natural symbiosis between the first mover and the innovation
success was questioned by more recent studies. Studies conducted by Tellis/Golder
(1996), Lellien/Yoon (1990) and Lambkin/Day (1989) confirm a higher failure
rate of market pioneers. Golder/Tellis (1993) ask rightly whether the pioneer ad-
vantages are a “Marketing Logic or Marketing Legend”. Olleros (1986, p. 8) even
states that „we see industries emerge over the dead bodies of their early pioneers “.
Markides/Geroski (2005, p. 2) give a great number of anecdotic examples for
unsuccessful pioneers, contributing to the discussion of first mover advantages for
radical innovation. The authors show anecdotically that the process for radical in-
novations is mainly driven from small firms or startups, very often without an
established brand name. Main criteria from Markides and Geroski are shown in
Table 1.
According to Markides and Geroski (2005), first movers typically They develop
a technology pushed innovation over a long period in niche markets and they feel
less risk to pioneer a radical innovation. The innovation design is being developed
in an elaborate exploration process, during which different variations have to be
checked with regard to the market preference. The major role of the pioneer is the
colonization of the new market. The established firms free-ride on the technologi-
cal and market experience of the pioneer. They make use of the developing mass
market and the dominant designs, by trying to drive out the first mover with rival
variants of the dominant design, and to consolidate the market into a mass market.
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 175

Table 1. First and second mover strategies for radical innovations

First Mover Fast Second
Exploration and Creation of product on Niche
Focus of activity Creation of Mass Market
Market
Firm characterization Young, small Established, big
Major role Colonization (creation of product) Consolidation (of market)
Innovation drivers Technology push Market pull
Rival variants of dominant
Object of competition Rival innovation designs
design
Dominant innovation
Variation, Exploration Selection
design
Market structure Large firm population Concentration, Shakeout
Source: Own overview according to Markides/Geroski (2005)

This can also be seen in the area of eco-innovations, e.g. in the case of E-Mobil-
ity. Up to now it is not decided, which engine technology – if at all - will win the
race for a sustainable transport technology, if it will be e.g. hybrid, fuel cell or bat-
tery cars? Thus, following Markides and Geroski, big firms should aim at a strategy
of consolidating markets, i.e. taking up a radical innovation early enough to be able
to develop it from niche to mass markets.
However, it is not the case that these results speak against a first mover advan-
tage. Robinson/Min (2002) observe a 66 percent survival rate during the same
time for market pioneers, whereas early followers only have a 48 precent chance.
The results could not be more diverging, so that Min/ Kalwani/Robinson (2006,
p. 15) come to the conclusion that first mover advantages depend on the respective
environmental circumstances.
One of the first studies that took into account the environmental circumstances
of the market is the study conducted by Urban et al. (1983). Data basis were the
sales of 38 and in a later analysis 44 brands of frequently purchased consumer
goods in connection with information from media audits and interviews. On the
basis of regression analyses the authors analyzed the influence of the order of entry,
the years between the entry, the product positioning, the preference of a brand of
interviewees, and the advertising intensity on the market share of first movers. The
authors assess that a later entrance has less market share on average than the market
176 Thomas Cleff • Klaus Rennings

pioneer, but pioneer`s share decreases with each new firm entering the market. This
decline is higher if other brands can achieve superior price and product position-
ing. In order to avoid this market pioneer should occupy and defend the preferred
product positioning.
Another regression-analyses approach was chosen by Robinson (1988). On the
data basis of 1.209 companies from mature industrial goods manufacturing busi-
nesses he confirms that market pioneers gain a sustainable market share advantage. In
addition, their products have a better quality and show a broader product line. While
the product quality advantage decreases over the time, the advantage of the breadth
of product line remains. Robinson (1988, p. 93) differentiates the results with regards
to the different velocities of the technological development on markets. The market
share of the pioneer decreases when the technological competition increases on the
market. Only if the value added of an industry is high, the market pioneer is able to
resist the technological competition and to extend the market share.
Some years later Gilbert/Birnbaum-More (1996) took up the findings of the
influence of dynamics in technology and on the market in the framework of a meta
study, in which they bring together the empirical results of different surveys. On
the basis of different sources of competitive advantages, they propose the important
influencing factors on the industry and technology level as well as on the product/
service level (cf. Table 2).

Table 2. Correlation directions between factors and timing advantages
Correlation with
Level Factor 1st Mover 2nd Mover
Advantage Advantage
Degree of fragmentation + -
Industry/
Velocity of innovation + -
Technology
Rate of innovation diffusion - +
Connection to technological infrastructure + +
Product/ Degree of novelty - +
Service Difficulty of production/complexity of technology - +
Customer resources invested (lock in)/switching costs + -
Cost leadership - +
Firm
Differentiation + -
Strategy
Core Competence + +
Source: According to Gilbert and Birnbaum-More (1996)
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 177

With increasing fragmentation of the industry and increasing velocity of the
innovation the first mover advantage rises. This effect is being emphasized when
switching costs are high and technological infrastructure is sufficiently available.
The implementation of a first mover strategy is successful under these circumstanc-
es only by taking-over technological leadership and the herewith connected R&D
expenditures. The diffusion rate, the degree of novelty and the complexity of the
product however, have negative effects on the first mover advantage. The second
mover has the advantage that the pioneer has already found technological solutions
and has developed these for the market preference. There are no such costs for the
followers, so that a cost leadership strategy is promising.
Min et al. (2006) look at radical and incremental innovation. The latter is „de-
signed to satisfy a felt market need and uses an existing technology or refinement of
it” (Min et al., 2006, p. 16). Using the Thomas’ Register of American Manufactur-
ers they identified 264 new industrial markets and they analyzed the influence of
different factors on the survival rate of first movers. Indeed, the multivariate hazard
rate analysis shows that market pioneers have a greater survival risk for radical than
for incremental innovation. This context is not significant for early followers. For
radical innovations the market pioneers show a significantly higher survival risk
than the early follower. For incremental innovation it is vice-versa. „In conclusion,
market pioneers are often the first to fail in really new product-markets. However,
this is not true in incremental new markets, in which market pioneers have consis-
tently lower survival risks than early follower” (Min et al. 2006, p. 30).
Summing up, it can be ascertained from the literature of business management
that the successful innovator is not necessarily the first but very often one of the
early movers within the competition of different innovation designs. The empirical
literature on the firm level finds evidence that there is no simple yes or no answer to
the question of first vs. second mover advantages. The studies based on correlation or
regression analysis are inconsistent in the choice of factors, which are finally respon-
sible for the development of successful global designs, but the results of the empirical
studies find different factors leading to a successful timing strategy. They range from
1) „Luck“, to
2) technological leadership, preemption of assets and buyer switching costs
(Lieberman/Montgomery, 1988) to
3) industry, technology, firm and product-specific factors (Gilbert/Birnbaum-
More 1996) and
178 Thomas Cleff • Klaus Rennings

4) leading time, market dynamic, and type of innovation (Min/Kalwani/Rob-
inson 2006). It seems that radically new technologies are difficult to defend
for a first mover, while it seems to be easier for incremental innovations.

4.2. Innovation and environmental economics literature: Evidence on first mover
advantages of countries
Characteristics of different national country markets for the global success of
an innovation design have hardly gained importance in the discussion. Although
Beise (2006) and Beise and Cleff (2003) carried out an ex-post analysis of suc-
cessful global innovation designs and identified typical patterns on the country
level. According to this anectdotical evidence, “successful” global designs can be
characterized by the to be following patterns (see.g. Beise 2006 and Beise and Cleff
2003). They
- firstly enjoy early national success,
- are then successfully commercialized worldwide and
- force other innovation designs out of the market in the medium term, to be-
come the global design or the world standard respectively.
There are many examples of global innovation designs emerging from the adop-
tion in one country, e.g. the cellular mobile telephony in the Scandinavian coun-
tries, the personal computer in the USA, the industrial robot or the fax machine in
Japan, the airbag in Germany and the smart card in France (Beise 2001). All these
examples show that the first country that adopts a specific design becoming the
global dominant design is often not the country where the innovation was invented
or the technology used for it mostly developed. On the contrary it is often another
country that is leading the worldwide adoption of an innovation: This country can
be called the lead market.
The pattern of successful lead market strategies was also confirmed by Beise
and Rennings (2005) for environmental innovations. They have applied the lead
market approach to the world market for renewable energies and especially wind
energy which has grown rapidly in recent decades, see Fig. 2. The developing world
market was in the 90ies dominated by countries that introduced feed in tariffs,
especially by the small Nordic country of Denmark. Substantial differences can be
identified where regulation systems are related to the development of a national
wind industry. A wind industry tends to develop rapidly in countries with a feed in
tariff system, such as in Denmark, Germany and Spain. Fig. 2 shows the penetra-
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 179

tion rate of wind energy use in different countries and identifies Denmark as the
lead market. Germany follows closely, while other countries are developing wind
energy with a considerable lag. The penetration rate has been measured as the per-
centage of exploitation of on-shore wind potential.

Fig. 2. International Diffusion of Wind Energy
60 Wind energy usage
as a percentage of
Wind potential

50

40
Denm ark

30
Germ any

20 Spain

10
NL

UK
0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
YEAR

Source: Beise and Rennings (2005)

It remains however unclear if a lead market position is really profitable for a
certain country. The discussion on this issue usually is very general and refers to
the so-called Porter hypothesis postulating improved competitiveness for a country
due to environmental regulation in the long run. A literature review on the Porter
hypothesis faces however the problem that a “[. . . ] systematic economic analysis
is hindered by ambiguity as to exactly what the hypothesis is” (Jaffe and Palmer,
1997). This critique refers to the initial paper of Porter (1991, p. 168), where
he claims: “Strict environmental regulations do not inevitably hinder competitive
advantage against foreign rivals; indeed, they often enhance it. Tough standards
trigger innovation and upgrading.” In the literature the positive link from environ-
180 Thomas Cleff • Klaus Rennings

mental regulation to competitiveness is known as the strong version of the Porter
hypothesis (Ambec et al., 2011).
In their recent comprehensive survey of the hypothesis Ambec et al. (2011) state
that the overwhelming part of the literature does not find evidence for the strong
Porter hypothesis. However Rexhäuser and Rammer (2011) find evidence that the
Porter hypothesis is true only for innovations in energy and material efficiency (i.e.
for type 1 mentioned in section 2.2, in contrast to eco-innovations aiming at a
general reduction of external effects which may only produce a public benefits but
not firm profits, i.e. type 2 in section 2.2.)

4.3. Development economics literature: Empirical evidence on leapfrogging
While a lead market strategy may be attractive for countries with a high repu-
tation in environmental technology, others as for example Eastern European or
emerging countries start from a “catching up” position. For them a first mover
strategy is not realistic since they are latecomers. And a late follower strategy is
more attractive for those countries since it allows to “leave the initial risks of de-
veloping new products to and establishing a market for a new product to indus-
trialized frontrunner countries” (Watson, 2011). This advantage of technological
leapfrogging has been formulated by Soete (1985) as follows: “The opportunities
offered by the international diffusion of technology to jump particular technologi-
cal paradigms and import the more if not most, sophisticated technologies that will
neither displace the capital invested nor the skilled labor of the previous technolog-
ical paradigm, constitute one of the most crucial advantages of newly industrialized
countries in their bid for rapid industrialization.”
Watson reviews the evidence on successful leapfrogging strategies by reviewing
three cases: The Korean Steel industry, the Korean automotive industry and wind
energy in China and India. He concludes that “key factors for success are different
in each case, but important latecomer advantages were in all three cases the cost ad-
vantage due to cheap labor costs. It is therefore not possible to generalize to a larger
degree” (Watson, 2011). But he perceives also barriers to successful leapfrogging
such as the lack of innovative capacities, lack of technological expertise, missing
access to markets and the missing appropriate institutions.
This explains to a large degree the international differences in the diffusion of
environmental technologies regarding abatement times. In a case study on the
worldwide lead phase out Hilton (2001), using data for 48 countries, observes a
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 181

faster abatement of latecomers that is triggered by lower costs and lower innovation
risks. The countries who started early with their abatement activities took about 50
percent more time (on average 15 instead of 10 years) than late abaters to complete
their abatement. The quick catching up was enabled by “giant steps”, i.e. at least
one very large reduction in a 2 year period. While none of the early abaters has ever
taken a giant step, 13 out of 20 latecomers have taken such a step. This is explained
by innovation spillovers or, in the words of Hilton (2001), by accrued wisdom. As
empirical studies show, historically late diffusion has been accompanied by faster
diffusion, e.g. already in the case of railroads and channels in the 19th century. This
accrued wisdom means that early abaters have demonstrated not only the feasibil-
ity of a new technology, but also showed how to implement the policy in practice.
The catching up of the Chinese and Indian wind industry is an impressive ex-
ample of a successful leapfrogging strategy. Both countries have established a home
wind industry within a decade. This was enforced by national renewable legislation
and policies in support of domestic industries (Watson, 2011). According to Zhang
et al. (2009) the progress can be explained by a bundle of domestic policies (such as
a mandatory renewable market share) and international support (such as the Clean
Development Mechanism). Jänicke and Rennings (2011) and Jin et al. (2010) see
the main driver of the success story in a policy push in terms of ambitious domestic
target setting. The Chinese renewable energy development plan from 1997 intro-
duced a targeted share of renewable energy which was quantified as 10 of the total
energy consumption by 2010 and 15 percent by 2020.
The change from a market dominated by foreign-owned manufacturers to a
domestic wind industry is shown in Fig. 3. The success can be mainly explained by
a requirement of the wind concession program that 70 percent of the added value
of the components of the wind turbine should be manufactured by domestic firms
(Zhang et al., 2009).
182 Thomas Cleff • Klaus Rennings

Fig. 3. Changes in market shares in Chinas wind energy market

Source: Zhang et al. (2009)

5. From lead markets to lead suppliers
5.1. Cost-benefit-analysis of lead markets: The case of feed-in tariffs
While there is agreement in the literature that lead markets for environmental
innovations exist, and that Germany has successfully established such a lead mar-
ket for renewables due to the system of feed-in tariffs, it is still controversial if it
is profitable to be such a lead market. It is argued that subsidies for suppliers of
renewables are much too expensive, and that the lead market position does not lead
to a dominant position for German exporting firms. Thus this section will discuss
the case of feed-in tariffs, based on this experience it will analyze if a lead market
strategy is sufficient in terms of industrial policy targets.
Germans renewable industry is rapidly increasing, and is exceeding it’s policy
targets. This is mainly a consequence of a subsidy policy based on feed-in tariffs
which was established in 1991, the year when the Electricity Feed-in Law was
introduced (Frondel et al., 2010). The government provided excellent investment
conditions in this Law by guaranteeing stable feed-in tariffs for up to 20 years, i.e.
a price up to 43 Cents/kWh for solar electricity.
This brought the German market quickly into a demand advantage position,
see also section 4.2. However, this did not lead necessarily to advantages for the
German industry. Most modules for photovoltaic energy are imports from Japan or
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 183

China. While the imports in the era of solar electricity were 1.44 Bn € in total, ex-
ports had only a value of 0.2 Bn € (Frondel et al., 2010). As is shown in Table 3, the
domestic production of installed capacities started in 2000 with only 16 percent.
Although the share of German production has grown substantially over the past
decade (the average growth rate is pgeom=61%), it is still lower than the growth of
the domestic PV capacity (the average growth rate is pgeom=75%), i.e. Germany
is still a net importer of photovoltaic cells. It seems that the German photovoltaic-
industry was not able to develop relative export- or price advantages compared to
producers from other countries such as China.
The debate on the cost-efficiency of feed-in tariffs is still ongoing. Wackerbauer
(2009) for example argues that in 2007 one employee in the renewables sector
needed public support between around 28.000 € for biomass and 41.000 € for
solar energy. Frondel et al. (2010) count even 175.000 € as per capita subsidy for
photovoltaics. According to Wackerbauer, the abatement costs of CO2 for photo-
voltaics in the year 2007 are estimated between 420 and 611 €/t CO2 since the
subsidies have crowded out much cheaper investments in the area of e.g. residential
buildings and heating systems. Frondel et al. (2010) estimate even higher abate-
ment costs for photovoltaics of 716 €/t CO2.

Table 3. Photovoltaics capacities and solar cell production in Germany
  2000 2001 2002 2003 2004 2005 2006 2007 2008

Capacity installed
100 178 258 408 1018 1881 2711 3811 5311
in MW

Annual increase in
- 78 80 150 610 863 830 1100 1500
MW

Annual cell
production in 16 33 54 98 187 319 530 842 1450
Germany in MW

Source: BMU (2009) and BSW (2009), cited in Frondel et al. (2010)
184 Thomas Cleff • Klaus Rennings

5.2. A lead supplier strategy: The case of e-mobility in Germany
The experiences from the renewables market have obviously motivated a change
of the German policy approach from an unexceptional demand-oriented towards a
broader approach, taking all lead market factors of the lead market model and the
supply-side of the innovation into consideration. We have also seen in the example of
the wind energy market in China that emerging countries do not follow an eco-inno-
vation policy without considering the interests of the domestic industry, but more an
industrial policy ensure a certain share of the production from Chinese firms.
The best example of the revised and broader German lead market strategy is
the case of e-mobility. The German government follows the target of developing a
domestic lead market for e-mobility. Until the year 2020 one million e-cars should
drive on German roads. However, the concept is not only demand oriented. Maybe
due to the negative experiences with the renewables market, a focus of the German
strategy lies on either market pull measures such as tax reductions and technology
push measures such as R&D and qualification (Acatech, 2010).
The German National Platform E-Mobility aims explicitly at becoming a market
with high lead market potentials for all lead market factors, including both, the devel-
opment of lead supplier structures by realizing price advantages through cost reduc-
tions in first market phase until 2014, a demand advantages by developing a pilot
market for cars and infrastructure until 2017, and start a mass market later (Nationale
Plattform Elektromobilität, 2011). A list of the foreseen policy mix is listed in Table 4.

Table 4. German measures for becoming a lead supplier in E-mobility

Technology Push Measures Market Pull Measures
R&D programme and networking in battery, engine, Privileges of e-cars regarding parking
lightweight, information and communication
technologies, recycling and integration
Academic and occupational qualification and education Compensation for users of company e-cars

Harmonisiation of international standards and norms Tax depreciations for firms

  Programs from the Kreditanstalt für
Wiederaufbau for private use of e-cars
  Annual tax incentives

Source: Acatech (2010)
ARE THERE ANY FIRST AND SECOND MOVER ADVANTAGES FOR ECOPIONEERS? ... 185

6. Conclusion
In this paper the sources of first mover advantages were presented. There is
agreement in the business management literature that first mover advantages de-
pend on the respective environmental circumstances. It can be ascertained that the
successful innovator is not necessarily the first but very often one of the early mov-
ers within the competition of different innovation designs.
The results of the empirical studies of successful timing strategies of firms find
different factors leading to a successful timing strategy. They range from techno-
logical leadership, preemption of assets and buyer switching costs to industry, tech-
nology, firm and product-specific factors, and leading time, market dynamic, and
type of innovation. It seems that radically new technologies are difficult to defend
for a first mover, while it seems to be easier for incremental innovations.
There is also anecdotical evidence on the country level of both successful lead mar-
ket and leapfrogging strategies. For countries with high reputation in environmental
technology it is attractive to join the race for a lead market. For emerging countries
however it seems reasonable to apply a leapfrogging strategy approach, by jumping
into a first mover position when innovation capacities exist, and when there is large
innovation pressure. However, the question under which conditions a country may
switch from a second mover to a first mover position can’t be answered by the existing
literature. With regard to this questions, research needs can be stated.
The case of the German renewable policy showed that a strong demand-pull
policy alone does not guarantee sufficient value added to the domestic industry.
Industrial policy has to take into account the whole range of the lead market ap-
proach and the supply-side of the industry at the same time. Only if the supply-side
is able to develop high lead market potentials for all lead market factors, country’s
industry may benefit from a governmental lead market strategy. This is also an im-
portant aspect for emerging countries, as it was demonstrated by the case of wind
energy in China.
Interestingly, in all cases industrial policy played an important role. In the case
of Germany this aspect can be identified as the reason why the country switched
from a strict demand-oriented strategy with regard to renewables to a complemen-
tary lead supplier strategy with regard to e-mobility. Thus, if also industrial policy
targets are relevant, a lead market strategy should be at least complemented by a
lead supplier strategy, leading to a policy mix of technology push and market pull
measures.
186 Thomas Cleff • Klaus Rennings

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190 Stefan Dilger

ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL
CONSUMPTION IN FRG DURING A SELECTED
PERIOD OF TIME
Stefan Dilger1
1
Ph.D.Student University of Konstanz, Federal Republic of Germany, stefandilger@freenet.de

Abstract
Rising raw material costs and a shortage in non-renewable energy sources lead
to rising energy expenses. In order to carry out business plans, budgets and forecasts
the Business management planning in companies is to remain especially important
due to divergences. If the need arises appropriate measures would have to be intro-
duced to remain competitive.
At times of volatile raw material prices, it has become increasingly difficult for
enterprises to carry out forward planning. Gone are the times when a country
could depend on its own resources and in fluence the domestic price structures.
Because the national resources are currently drying up moderate procurement costs
today still appear in the energy sector. This is the result of the financial and eco-
nomic crisis in 2008 which has led to a global economic collaps thus to a declining
demand and lower procurement costs for commodities, in particular well non-
renewable energy. Nevertheless well-known scientists, politicians as well as analysts
predict rising energy prices, should the economie´s the demand pick up again. The
international raw material supply particularly non-renewable energy is becoming
increasingly precarious.
This diploma thesis covers the structure of the primary energy supply in Germa-
ny from 1990 to 2008. It refers particularly to the non-renewable energy sources.
Further, it describes for a specially selected period from 1995 to 2008, how the
energy consumption developed within single sectors of the economy. Investigations
were conducted on carefully selected topics.
JEL Classification: Q31, Q48
Keywords: energy, cost, planning
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 191

1. Initial situation
Now it becomes more visible then before, how much the national economy de-
pends on an economic of save and more environment-friendly energy supply. The
global demand leads to rising energy prices and thereby burdens the industry. Ger-
many is dependent on energy imports. Oil and natural gas reach Germany from far
distant regions. Presently the worldwide energy consumption in higher than 1970
and the important sources are the non-renewable energies oil and natural gas. It
is to be assumed that the global energy consumption will further rise but to what
degree? The global energy consumption in particular is also driven by the emerg-
ing countries such as India, China and Brazil. They have during the recent years
achieved a high economic growth rate. During the last few years Germany, has also
experienced an increasing dependency on energy supply imports.
Increasing prices in the energy sector are bothering energy consumers. Other
contributing factors are the production and net expenses, as well as the state gov-
erned interventions. „Energy related questions in Germany and in the European
Union as well as in the emerging economic nations are at the center of political
discussions. A fully comprehensive and interdisciplinary approach is therefor es-
sential. In the past, such considerations were normally initiated only by energy
crises. Present opinions are calling for a substitution of the non-renewable energy
sources before they eventually dry up. But the question is, does the nuclear power
era arrive, or has the bioenergy time begun? Could the “energy efficiency”1, per-
haps solve, the problem? The scheme of the energy policy will have effects on the
industry as well as on the consumers, the growth and the quality of life“.2 What
does this mean for Germany, with regard to the production of energy to be utilized
in different sectors of the industry? What positive impacts could arise out of these
deliberations? There are good reasons to deal with this topic.

Aim of the work
The aim of this work is, to show companies residing in Germany how energy
consumption presents itself with regard to expenses the gross domestic product and
the utilization and how they have developed. The selected period refers in detail
to the period from 1999 to 2008. For this period all data required is ascribable.

1
Energy efficiency is a quotient from a use and the energy used for it.
2
Cf. Defilla, 2007, p. 10.
192 Stefan Dilger

Pre- and past investigations are also proportionally introduced. They merely serve
to indicate the association with this subject. Throughout the industrie single well-
chosen sectors have been singled out and are being examined and outlined.

Approach
Within this work stock levels of the energy of the earth as well as the develop-
ment of the primary energy consumption of the world are shown. In detail, dif-
ferent economic blocks for example, the United States of America, the European
Union and emerging countries are being analyzed and featured. For Germany,
the supply structures and the final utilization consumption are shown by means of
well-chosen examples from 1990 to 2008. Further representations follow relating
to electricity production, energy efficiency of the industry and the energy con-
sumption structure of industrial sectors in Germany.
Detailed information which is being analyzed originates from the syndicates
energy balances, the government institution of earth sciences and commodities
with its publication in 2009, of the Federal Statistical Office of Germany as well as
the Federal Office for environment protection and reactor security and the Federal
Ministry for Economy and Technology.
In the following chapter the problem of the restricted raw materials availabil-
ity is being outlined. Statistical examples referring to the non-renewable energy
source, the development of energy consumptions over a period from 1971-2002 in
the emerging, development, and industrial countries. The problem of the primary
energy supply is outlined. Also the development costs in the area of the heating
market should indicate the problems of the rising prices. National as well as inter-
national statistics about non-renewable energy sources will indicate the dependence
of Germany in this area.

2. Problem of limited resources
„Resources are part of nature and are being exploited by mankind. Among them
are the mineral commodities which originate from protracted geologic processes.
They play today an important role. The best known commodities are for example,
oil, and ores. In the business administration, commodities are in general utilized
in the manufacturing process. They are being used as auxiliary materials in inter-
mediate products. Since the beginning of the 20th century the raw material con-
sumption has increased tenfold. This is an exponential development. The natural
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 193

resources are in the opinion of the community of states endangered, because the
exploitation of this raw material progresses very fast. This situation is still aggra-
vated by conflicts and wars“.3
Our world is sustained by limited primary energy sources of fossil origin. The
demand of particularly non-renewable energy sources and the race for their posses-
sion has begun. Accelerated growth above all, of the Asian states in the near past,
the situation in the energy sector and the demand for non-renewable energy sourc-
es has strongly intensified. The problem is that these commodities will no longer
be available at one point in time. In the past various commissions were instructed
by the German Bundestag over and over again to examine the raw material energy
availability. These investigations were introduced to the public however they found
no resonance neither in the community nor in politics. In 1973 the first energy
crisis shocked national economies with full force. Up to 1973 no active energy
policy was pursued in Germany. In the German national economy the results were
clearly felt. In the following chapter the raw material availability in particular the
non-renewable energy sources of the world are being shown.

Short overview of the worldwide availability of energy sources
„In 2007 the reserves (Reserven) in non-renewable energy sources totaled of
38.695 Exa joules. Compared to 2001 of 2.200 Exa joules was achieved, particu-
larly due to the soft brown coal, natural gas and oil. Due to a high potential the
coal is the dominating energy source. The share amounts to 55%. 22,7% are at-
tributed to oil, and natural gas follows with 18,5%. The nuclear energy has got a
share of 4,2%“.4 The exploitation lay in the same considered time span at 439 Exa
joules. The resources (Ressourcen) in the non-renewable energy sources amount to
571.711 Exa joules. The represents compared to 2007, a share of 1,1%.

3
Cf. Brockhaus economy, in 2004, p. 498. If the current situation describes in the raw material area
and the fact that is fought for commodities also with military means. The security of supply with
commodities has become a political security assignment.
4 Cf. Bundesanstalt für Geowissenschaften und Rohstoffe, 2009, p. 11.
194 Stefan Dilger

Graph number 1: Interests of single non-renewable energy commodities in 2007
in the support, the resources and reserves, source: Bundesanstalt für Geowissen-
schaften und Rohstoffe (2009), side 11.

Ranking of the reserves in 2007 basis 38.695 Exa joules:
1. Coal 54.7% (21.166 Exa joules)
2. Oil 22.7% ( 8.784 Exa joules)
3. Natural gas 18.5% ( 7.159 Exa joules)
4. Nuclear 4.2% ( 1.625 Exa joules)

Definition: Raw material reserve and raw material resource
The rule does not clearly distinguish between raw material reserves and raw ma-
terial resources. Because the difference is not entirely known and clearly defined.
Both terms are also mistaken in the wide public. Therefore, the terms have to be
explained and then be differentiated from one another.

Definition resources (Ressource)
„The resources are all the commodities available in total, in particular including
those where locations can be only assumed or are still to be expedited with new
technologies where today’s available technologies are not economic cally viable “.5

5
Erdmann, 2008, p. 122.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 195

In 2007 the fossil energy commodities have reached about 571.700 Exa joules
(graph compares number 1). “In 2007 compared with 2001 this meant an increase
of around one and a half time. Decisive for this increase is a higher appraisal of the
coal and the additional occurrence in the natural gas area (coal gas and rocks)“.6

Definition reserves (Reserve)
„Reserves are a share of the resources. This share might in all probability exist
and can be placed on the market providet they can be expedited. At reasonably low
cost“.7 The share of the reserves within the resources (compares graph number 1)
amounts therefore to 6,8%.

Statistical reserves of the non-renewable energy sources
As already described, the non-renewable energy sources are finite therefore only
available within limits. In the graph number 2 shows the static reach of the non-

Graph number 2: Static reach of non-renewable energy sources, source: Bun-
desministerium für Wirtschaft und Industrie, Energie in Deutschland April 2009,
side 9.

renewable energy sources is. „The static reach is an approximation and is calculated
on the bases of present annual productions. For example the oil which is shown
with a period of 40 years. The oil reserves will be exhausted in 40 years if the exploi-

6
Cf. Bundesanstalt für Geowissenschaften und Rohstoffe, 2009, p. 11.
7
Cf. Erdmann, 2008, p. 122.
196 Stefan Dilger

tation rate remains unchanged every year and no new sources are being tapped“.8
Below the statistical reserves of some commodities have been listed.
The static reach is for oil is 60 years as well as, for natural gas for the coal (hard
coal) 139 years, for the brown coal 300 years and for the uranium are 70 years.
The biggest non-renewable energy source potential exist in the form of the coal,
followed by natural gas. The core fuel uranium books rank three with 290 years of
reach. As the last follows the energy source oil with a reach of 140 years. Compari-
sons the following overview.

Order of rank list of the reserves (static reach stood in 2009):
1. Brown coal 300 years
2. Hard coal 139 years
3. Uranium 290 years
4. Natural gas 60 years
5. Oil 60 years

Overview of the worldwide primary energy consumption
In graph number 3 the worldwide energy consumption is shown divided into
world regions comparins the years 1971 to 2002. In 1971 a share of the world
energy consumption of 62% was attributed mounted to the industrial countries.
In 2002 it was 52%, only a difference about 10%. The developing countries used
in 1971 only 23% of the world energy but their share increased to 37% in 2002.
The share of the reform countries was in 1971 at 15% and decreased until 2002 to
10%. Overall in total there has been an substantial increase in the energy consump-
tion since 1971 from 5.800 million tons of oil equivalent to 10.200 million tons of
oil equivalent. The world primary energy consumption has clearly increased from
1971 up to 2002. The big increase of the worldwide energy consumption is partly
due to the backlog demand of the developing countries. In particular the people’s
republic of China had an ever increasing demand. The attitude of the Chinese at
the climate-summit in Copenhagen from December indicated that the worldwide
primary energy situation will in future be intensified and more aggravated.

8
Cf. Bundesanstalt für Geowissenschaften und Rohstoffe, 2009, p. 235.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 197

Graph number 3: World energy consumption after regions in 1971 and 2002, source:
Energiewirtschaftliche Institut / Prognose Studie 545, side 14.

The power demand in 2002 of main energy consumers is shown in graph num-
ber 3. The following ranking shows the world energy consumption divided in
groups of consumers.
Ranking of the energy consumption after land markings (2002):
1. Industrial countries 52% (in 1971 = 62% correspond -10%)
2. Developing countries 37% (in 1971 = 23% correspond +14%)
3. Reform countries 10% (in 1971 = 15% correspond + 5%)
In the following chapter the German static reach of the primary energy sources
is analyzed and shown.
198 Stefan Dilger

National statistic reach of non-renewable energy sources
The reserves in non-renewable energy corresponded at the end of 2007 in Ger-
many to: Oil 37 million tones, (47 million tones, in 2001), natural gas 218 million
tones (343 million tones, in 2001), and coal 40.936 million tones. The national
Statistical reserves

Graph number 4: Statistic reach comparison the non-renewable energy sources
in Germany and the world, source: Own representation.

in non-renewable energy sources amount to 4 years for oil, for natural gas to 12
years and for the coal to 200 years. Since 1998 Germany does no longer produce
its, own uranium. Since 1990 there is no exploration activity in Germany in this
field either. The graph number 4 illustrates clearly the critical situation of the non-
renewable energy sources in Germany. Considering coal Germany owns very good
reserves. No realistic availability for Oil is given at a forecast of four years only. The
overall static reserves were at 216 years for the year 2007.
Order of rank of the static reserves in Germany (2007):
1. Coal 200 years (92.6% of share)
2. Natural gas 12 years ( 5.6% of share)
3. Oil 4 years ( 1.8% of share)
4. Total 216 years
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 199

The national contribution of our domestic non-renewable energy sources has
clearly declined by 2008. At the beginning of the nineties (1990) still nearly 44%
of the primary energy consumption was covered by the national sources. Currently
this share still reaches 3,5%. 96,5% are being imported. This is shown in the graph
number 5 (net imports). The blue line shows the primary energy consumption in
Germany which is limited to 100% at 15.000 Peta joules. Only in 2007 the net
imports could roughly cover the primary energy consumption.
The diminishing of the currently most important non-renewable energy source oil
is clearly shown. It is virtually no longer available in. This has an effect that the depen-
dence on imports will clearly increase in the following years and will also negatively
affect the development of the purchase prices and the national economy in Germany.

Graph number 5: Netimport and primary energy consumption development
from 1990 to 2008 in Peta joules and in percent, source: Bundesministerium für
Wirtschaft und Technologie, Energie in Deutschland 2009, side 15.

If we look now at the following segment of the sectorial energy use in Germany
in this context.

Sectorial energy use in Germany
In the picture number 5 indicates the primary energy consumption by power
stations to generate electric power. They make available to the consumers the so-
called end energy as in table number 1 enumerated.
200 Stefan Dilger

The development of the primary energy consumption with regard to non-re-
newable energy sources appears as follows. In 1990 14.905 Peta joules were re-
quired. In 2008 these were still 13.607 Peta joules. This corresponds to a decline of
8,7%. The development of the final energy consumption has decreased from 1990
at 9.472 Peta joules to 9.027 Peta joules in 2008. This corresponds to a decline
of 4,7%. The final energy consumption in 1990 in the sector industry amounted
to 2.977 Peta joules. This corresponds to an interest of 31,4%. In 2008 the final
energy consumption amounted to 2.589 Peta joules which corresponds to an in-
terest of 28,7%. The decline of the final energy consumption from 1990 to 2008
amounts therefore to 2,7%.
Table number 1 shows an overview of the development of the primary energy
input and the end energy consumption.

Table number 1: Development and structure of the German primary energy
consumption, source: Bundesministerium für Wirtschaft und
Technologie, Zahlen und Fakten Energiedaten Internationale
und nationale Entwicklung.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 201

The share of the industrial sector decreased from 1990 at 31,4% to 28,7% in
2008.
Order of rank of the proportional interests of the sectors stood in 2008:
1. Industry 28,7%
2. Transport 28,5%
3. Households 27,3%
4. Trade, Industry, services 15,5%
The detailed analysis for branches in the industrial sector is shown in the follow-
ing chapter. At the same time the structural analysis of branches with a particularly
high energy demand is in indicated. They are therefore also susceptible for high
energy expenses.

The use of non-renewable energy in the industrial sector
For the manufacturing of products and services commodities are being used.
The problem of the dependence on of the non-renewable energy natural gas for
example can be clearly indicated. In graph number 5 one can recognize that the
primary end energy consumption lies at 13.500 Peta joules for 2008. The German
static reserves of the non-renewable energy source accumulate to 12 years. The
industrial sector consumed natural gas in 2008 at the rate of 796 Peta joules (com-
pares table number 2). This corresponds to a share of 8%. The industrial consumers
of natural gas are: recovery of minerals, food / tobacco, paper trade, chemistry, rub-
ber and plastics, glass and ceramics, metal production, nonferric metals, mechani-
cal engineering and automotive industry. In 2008 the energy consumption of the
chemistry sector was at 197.3 Peta joules the highest. Followed by the food and
tobacco with 98,3 Peta joule as well as the metal production with 90 Peta joules
and the area of the paper+pulp industry with 76.8 Peta joules (table number 2).
202 Stefan Dilger

Table number 2: Amount and final energy consumption of natural gas Ger-
many, source: Bundesministerium für Wirtschaft und Technologie, Zahlen und
Fakten. Energiedaten nationale und internationale Entwicklung.

Order of rank overview of the sectors engaged with natural gas consumption in
2008:
1. Chemistry 197.3 Peta joules (share 24,8%)
2. Food, tobacco 98.3 Peta joules (share 12,3%)
3. Metal production 90.0 Peta joules (share
11,3%)
4. Paper + Pulp 76.8 Peta joules (share 9,6%)
5. Glass and ceramics 63.6 Peta joules (share 7,9%)
6. Recovery of minerals 55.0 Peta joules (share 6,9%)
7. Automotive industry 42.1 Peta joules (share 5,2%)
8. Metals 39.6 Peta joules (share 5,0%)
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 203

9. Mechanical engineering 29.4 Peta joules (share 3,7%)
10. Rubber and plastics 20.9 Peta joules (share 2,6%)

Price development of the energy commodities
According to calculations done by the Federal Ministry for Economy and work
in 2008, the prices of energy commodities would in future clearly increase, in par-
ticular for oil and natural gas. In graph number 6 the developments are retrospec-
tively shown for the period from 1995 to 2004 as well as a graph of the future price
development (inflation-adjusted). It is to be noted that oil as well as natural gas are
still going to be more expensive and that prices have escalated. According to graph
number 6 the costs for the oil at 2,30 euros in 1995 rose to 5,00 euros compared
to 2004. This corresponds to an increase of 2,70 euros (+117,4%). In the natural
gas area the expenses rose from 1,80 euros in 1995 to 3,20 euros in 2004. This cor-
responds to an increase of 1,40 euros (+77,8%). Coal shows a more moderate in-
crease of approximately 0,10 euros (+6,7%). An overview of the cost development
from 1995 at 1,50 euros up to 2005 at 1,60 euros follows.

Graph number 6: Real prices of oil, natural gas, coal, brown coal in 1995 to
2030, source: Bundesministerium für Wirtschaft und Arbeit, Dokumentation
Nummer 545.
204 Stefan Dilger

Order of rank overview of the real cost development in 1995 - 2004:
1. Oil 2,70 euros (+117,4%)
2. Natural gas 1,40 euros (+ 77,8%)
3. Coal 0,10 euros (+ 6,7%)
The Federal Ministry for Economy and Work had in 2008 forecast further de-
velopments for above described energy commodities. Correspondingly oil will sell
in 2010 at, 4,80 euros and develop until 2030 to 6,20 euros. This corresponds
to an increase of 1,40 euros (+29,2%). Natural gas offered in 2010 at 3,20 euros
could reach 3,90 euros in 2030. This increase corresponds to 0,70 euros (+21,9%).
A more moderate increase can be expected for coal and brown coal. Coal could rise
from a praising of 1,65 euros in 2010 to a max of 1.80 euro in 2030 equivalent to
0,15 euros (+9,1%). The brown coal area are can be calculated 0,90 euros in 2010
without any further increase following an order of rank overview forecast for the
delivery costs, for the described energy sources is shown.

Summary of the cost forecasts from 2010 to 2030:
1. Oil 1,40 euros (+29,2%)
2. Natural gas 0,70 euros (+21,9%)
3. Coal 0,15 euros ( +9,1%)
4. Brown coal 0,00 euros ( 0.0%)
The risks for further price increases after 2008 rose, because of the dependence
of the Germany on economically and politically unstable mining and transit re-
gions. „Another negative aspect is the future increase in demand and the fact that
there are not enough mining exploitation facilities available. This was triggered off
by absent investments in new plants or in investigations where additional resources
could be detected. The effect on the purchase prices due to a general supply short-
age leads therefore in total to higher purchase prices“.9 If we look next at the devel-
opment of the raw material prices for example of the heating market.

9
Cf. Campel, 2007, p. 7. Colin J. Campbell acted for decades in leading positions at oil companies,
and knows the circumstances like no one else. He is a respectable expert in this area. In this con-
nection he describes this situation in 2002 as a Peak Oil.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 205

Development of the raw material cost for example of the heating market
Primary energy prices are an important factor for the economic performance
and development of the German national economy. The relative height of competi-
tive energy prices can be determining factor for the business management planning.
It is furthermore also important for any financial economic planning. Domestic
energy prices are being influenced by the prize pattern and the development on
the world market. Other influential factors are the expenses for the procurement,
energy commoditie it self, energy taxes and various extra charges (for example,
service remuneration) as well as the delivery and conversion expenses. Availability,
expectations of the market participants and politically caused risks play an impor-
tant role regarding the prize development. Excluded from this development is the
mining of the national reserves which do not sufficiently exist in Germany. Graph
number 7 shows the development in the past using the example of the industrial
heating market in 1995 up to 2005. Here, increases are visible, above all in the areas
of Natural gas, heavy fuel oil and the purchases of import coal. Clear increases are
to be recognized as from 1999.
Referring to light fuel oil an increase is to be seen between 1999 at 5,20 eu-
ros and 2005 at 11.80 euros. This corresponds to an increase within six years of
126,9%. A similar course can be recognized in the area of Natural gas. In 1999 at
4,00 euros it rose to 7,40 euros in 2005. This corresponds to an increase of 3,40
euros (85%). In the area of the heavy fuel oil a price of 2,60 euros was paid in 1999,
in 2005 the costs were at 5,80 euros. This corresponds to an increase of about 3,20
euros or 123,1%. The imported brown coal the registers are more moderate in-
crease. The price for imported coal was in 1999, at 1,20 euros and in 2005 at 2,20
euros. This corresponds to an increase of 1,00 euro or 83,3%. The price for brown
coal was 2,20 euros in 1999. In 2005 the expenses lay at 2,40 euros. This corre-
sponds to an increase of 9,1% or 0,20 euros. The costs are to pay for Giga joules.
The indicated costs are per Giga joule.
206 Stefan Dilger

Graph number 7: Energy price development in the warm market of the indus-
try from 1995 to 2005, source: Bundesministerium für Wirtschaft und Technolo-
gie und Bundes-ministerium für Umwelt, Naturschutz und Reaktorsicherheit,
side 23.
Following is an overview of the cost development from 1999 till 2005.

Ranking overview of the real proportional cost development between 1999 and
2005:
1. Light fuel oil + 126.9% (in 2030 = 6,60 euros / Giga joules)
2. Heavy fuel oil + 123,1% (in 2030 = 3,20 euros / Giga joules)
3. Natural gas + 85,0% (in 2030 = 3,40 euros / Giga joules)
4. Import coal + 83,3% (in 2030 = 1,00 euros / Giga joules)
5. Brown coal + 9,1% (in 2030 = 0,20 euros / Giga joules)
The graph shows that the light as well as heavy fuel oil register the biggest in-
creases. These are followed by natural gas and the imported coal which also devel-
oped rapidly. The brown coal remains at a moderate cost increase.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 207

Summary:
The introduction shows that worldwide there are sufficient energy sources in the
medium term. The same picture also appears for the energy resources which means
that there is a good availability. This fact is supported by a good worldwide statistic
reach on non-renewable energy sources. They are sufficiently availabl. The statistics
reaches from oil at 40 years and the coal in excesses of 1.000 years availability. At
the same time a trend develops to substantially higher energy consumption rates.
From 1971 to 2002 the developing countries had a higher power demand in com-
parison to the industrial nations. The worldwide energy consumption has increased
within 31 years by 75,9%. The driving fore these are the developing countries and
industrialized nations.
In Germany is in a bad position regarding the national statistic range of the non-
renewable energy sources. At the end of 2007 the statistic range for oil in particular
was at only 4 years. The same picture appears in the area of Natural gas. Only the
coal can demonstrate a good availability at 200 years. The uranium production was
stopped in Germany and does not exist any longer. The nuclear energy has to be
inevitably imported. The primary energy consumption in Germany continuously
improved from 1990 at 14.905 Peta joules to 13.607 Peta joules in 2007. This cor-
responds to a decline of 1.298 Peta joules which corresponds to decline within 18
years to 8,7% equivalent to 0,48% per year. The German primary energy consump-
tion must be covered by imports. Therefore Germany is dependent on imports of
non-renewable energy sources.
With 28,7% the industry is the most affected sector as far as by these energy
imports are concerned. The final demand on utilized power was in 1990 at 2.977
Peta joules and improved by 2008 by 388 Peta joules to 2.589 Peta joules. This
corresponds to an improvement 13% in 18 years or 0,72% per year. Nevertheless,
the dependence on imports still remains. The sector chemistry within the industrial
sector is looking at the energy source natural gas for instance at 197.3 Peta joules
relying on stable energy supply to maintain its production rate. For example the
heating transfer marked showed real price increases during years from 1995 to
2005 (10 years) for the non-renewable energy sources like oil, natural gas and coal.
These increases lay inflation-adjusted for oil at 117,4%, followed by natural gas at
77,8%. The coal lies with a moderate increase 6,7% in the lower vicinity. In future
a more moderate forecast appears compared with the near past however there is a
rising cost development to be expected.
208 Stefan Dilger

Up to 2030 an increase for oil of 29,2%, for natural gas of 21,9% and for the
coal of 9,1% is forecast. Merely for the brown coal there is no reason to fear any
appreciable increase.
For the German industry a clear cost increase was recognized since 1999 for the
heating transfer media market. The increase will reach in 6 years for the light fuel
oil 126,9% and for the heavy fuel oil 123,1%. They are the biggest cost driving
forces, followed in the centerfield by natural gas with 85% and the import coal
with 83,3%. The tail ender is the brown coal with 9,1%.

Resümee:
Germany is very strongly dependent on energy imports of non-renewable en-
ergy sources. The reason for this is a lack of own resources in Germany itself. The
primary power demand is covered in Germany by imports. The expenses for the
non-renewable energy imports show for the period of observation of from 1999
to 2008 dramatic cost developments. The biggest consumer of the non-renewable
energy sources is the industrial industry with its biggest consumer, the chemical
industry.
The energy prices have not only an upwards trend, but at the same time they
show a manner of high volatility.

2. Analysis and investigation
The problems of the rising expenses and of the absence of domestic availability
of non-renewable energy sources asper 2007, have been shown. The investigation
on single sectors of the industry, the further subdivision of the primary energy de-
velopment, the import structure of the energy imports, the German primary power
production, the energy consumption in relation to energy sources, the German
electricity production and finally the development of the German energy efficiency
will be shown in this chapter. The period of observation entails a wide range from
1991 to 2008. Situatively some analyses are conducted for shorter time intervals.

Industry analysis of the industrial sectors
The table number 3 shows a summary of the final energy consumptions in Ger-
many from 1999 to 2007.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 209

Table number 3: Single sectors energy consumption structure from 1999 to
2007, source: Own representation.
Detailed industrial sectors are shown in table number 3, and the sequences of
the energy consumption of single branches are illustrated in graph number 8.
Detailsektorenübersicht

3000000
Ernährung und Tabak
Endenergieverbruach in T Joule

Papiergew erbe
2250000
Grundstof fchemie

Verarbeitung v. Steine u. Erden
1500000
Metallerzeugung

Metallbearbeitung
750000
Fahrzeugbau

Endenergieverbrauch in Tera Jo
0
1 2 3 4 5 6 7 8 9
Sektor

Graph number 8: Detailed sector overview of the sector industry from 1990 to
2007, source: Own representation.

Order of rank of the structural energy consumption of the sector industry (2007):
1. Metal production 561.846 Tera Joule (share 21,2%)
2. Raw material chemistry 460.104 Tera Joule (share 17,3%)
3. Paper and pulp 242.634 Tera Joule (share 9,2%)
4. Processing stones earth ware 221.802 Tera Joule (share 8,5%)
210 Stefan Dilger

5. Other industrial branches 215.970 Tera Joule (share 8,2%)
6. Food and tobacco 204.328 Tera Joule (share 7,8%)
7. Metals, - foundries 133.674 Tera Joule (share 5,1%)
8. Automotive industry 131.117 Tera Joule (share 4,9%)
9. Metal handling 114.476 Tera Joule (share 4,3%)
10. Glass and ceramics 92.501 Tera Joule (share 3,5%)
11. Other chemical industries 91.138 Tera Joule (share 3,4%)
12. Mechanical engineering 84.435 Tera Joule (share 3,2%)
13. Rubber and plastics 81.298 Tera Joule (share 3,1%)
14. Mining stones earth ware 17.777 Tera Joule (share 0,7%)
15. Total sum 2.653.101 Tera Joule

The sector metal production and the raw material chemistry amounted to an
energy consumption in 2007 of 1.021.950 Tera joules. This corresponds to a share
of 38,5% and more than one third of the whole sector’s needs. These sectors are
followed by the paper trade, processing stones and earthware, food + tobacco and
the automotive industry. The industries metal production and foundries need a to-
tal of 695.520 Tera joules. This corresponds to a share of 26,2%. This is more than
one quarter of the whole sector power demand. The utilized power demand has
risen from 1999 at 2.383.914 Tera joules to 2.653.101 Tera joules in 2007. This
corresponds to an increase of 269.187 Tera joules, or 11,3%.
In the following step industrial branches which are especially energy-intensive,
are being put into relation to the gross domestic product. These are the raw mate-
rial chemistry, the paper trade, the processing of stone and earthware, the food and
tobacco as well as the metal production and metals and foundries. The basis for the
calculation is the year 2003 (base 100). The analyzed period encomparses the years
from 2004 to 2007.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 211

Übersicht des Energiebedarfs in den Sektoren zum BIP von 2004 - 2007

45.000
Reihe1 2004
40.000 Reihe2 2005
35.000 Reihe3 2006
Reihe4 2007
30.000
TJ / Mrd. Euro

25.000

20.000

15.000

10.000

5.000

0
Grundstoffchemie

Verarbeitung v.
Papiergewerbe

Fahrzeugbau

Metalerzeugung
Ernährung u.

+ NE-Metalle,-
Steine Erden

gießereien
Tabak

Branchen des Sektor Industrie

Graph number 9: Energy application (in Tera joules) to well-chosen industries,
gross domestic product from jump in 2004 to in 2007: source: Own representa-
tion.
Graph number 9 shows the relation of the gross domestic product of the
branches to their energy input. From the diagram one a recognize the sectors metal
production and metals, - foundries as well as the processing of stone and earth have
a high share in energy input in relation to the GDP, followed by the raw material
chemistry and the paper trade. The automotive industry shows the smallest part.
For the period from 2004 to 2007, all industries remain nearly the same values.
Merely the industry metal production +Non ferrous– metals, foundries have regis-
tered an increase.
Order of rank of the power demand to the GDP to 2007:
(Unit Tera Joule/Milliarde euros)
1. Metal production and one metal foundries 29.000
2. Stone + earthware 15.500
3. Raw material chemistry 9.000
4. Paper + Pulp 7.500
5. Food tobacco 6.000
6. Automotive industry 2.000
212 Stefan Dilger

Global economic development
At the beginning the rapid development of the energy consumption of the
union of states was shown between 1971 and 2002. While the energy consumption
went down in the industrial countries within this period by about 10% of from
62% to 52%, the developing countries in the same period registered an increase
of about 14% of from 23% to 37%. Graph number 10 shows the development of
the energy consumption of the most important states and communities in 1990, in
2000 and 2006. The Organization for Economic co-operation and Development
has not been included here.
The world energy consumption rose from 1990 at 8.758.8 million tons of Oil
equivalent to 11,740 million tons of Oil equivalent in 2006. This corresponds to
an increase of 34% in 16 years or 2,1% per annum.

Übersicht der Primärenrgieentwicklung

12000

10000 1990
2000
8000 2006
Mtoe

6000

4000

2000

0
en
ld

na

d
l
A

l

l
ta
ta

i

an
az
US
or

di
i
to
to

Ch
Br

hl
W

In
27

D

sc
EC

ut
EU

De
O

Gemeinschaften

Graph number 10: Overview of the primary energy development from 1990 to
2006, source: Own representation.
In the European Union as well as in Germany the energy consumption at 1.700
million tons of oil equivalent and 340 million tons of oil equivalent remains for the
same period in each case nearly at a steady level.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 213

The USA had an increase of 1.926,3 million tons of oil equivalent from (1990)
to 2,320.7 million tons of oil equivalent in 2006. The energy increase amounts to
394,4 million tons of Oil equivalent or 20,5%. This corresponds to an increase of
1,3% per annum.
During the same period China had increase from 863.2 million tons of oil
equivalent to 1.878,7 million tons of oil equivalent (2006). The increase amounts
to 1.015,5 million tons of Oil equivalent or 117,6%. This corresponds to 7,4% per
annum.
Brazil had forceded its power demand of 140 million tons of oil equivalent in
1990 to 224,1 million tons of oil equivalent in 2006, and used 84,1 million tons of
oil equivalent more. This corresponds to an increase of 60% or 3,8% per annum.
The Indian energy consumption rose from 1990 at 319,9 million tons of oil
equivalent to 265,8 million tons of oil equivalent in 2006. This increase amounts
to 245,9 million tons of Oil equivalent and amounts to 76,9% or to 4,8% per
annum.
Order of rank overview of the primary energy development of selected regions:
1. China 117,6% (7,4% per annum)
2. India 76,9% (4,8% per annum)
3. Brazil 60,0% (3,8% per annum)
4. World 34,0% (2,1% per annum)
5. USA 20,5% (1,3% per annum)
6. European Union 2,9% (0,2% per annum)
7. Germany 0%
In the following segment the German primary power production is shown and
being evaluated from 1990 to 2007.

Primary power production in Germany From 1990 to 2007:
The primary power production in Germany was decreasing during to the period
of 1990 to 2007, according to the publication of the federal environment office
from February, 2009. “Between 1990 and 2007 the production of local energy
commodities decreased in Germany by about 35%, from 6.224 Peta joules to 4.077
Peta joules. The brown coal in 2007 represented a share of 39,9% (in 1990: 51%)
214 Stefan Dilger

and was the most utilized domestic energy source. The coal mining industry´s con-
tribution to the domestic energy provision is ranked second. The share amounts
to 16% in 2007 (in 1990: 34%). During the last 15 years the coal has registered a
decline of 68,7%. Oil and gas had a light increase of 11% for the same period. And
contributed 2007 a share of 13,3% (in 1990: 9,1%) towards the primary power
production. The production of the mineral oil is not relevant because of reserves
being absent. In 2007 only a share of 3,7% was reached.
The contribution of wind energy and water power in the past contributed a
minimal share to the primary power production in Germany. The amount of both
these primary energies has still almost quadrupled to 217 Peta joules in 2007 from
59 Peta joules in 1990. This corresponds to an increase of 267,8% or 15,8% per
annum.

Graph number 11: German primary power production after energy sources
from 1990 to 2007, source: Arbeitsgemeinschaft Energiebilanzen, Energiebilanz
Auswertungstabelle Deutschland 1990 bis 2007 Stand 09 / 2008.

The remaining primary energy sources which contain mainly renewable energy
sources like solar energy, biomass, Geothermal, but also, for example, waste incin-
eration have risen in this period since 1990 by six fold from 153 Peta joules to 890
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 215

Peta joules and (737 Peta joules +481,7% or 23,3% per annum) represented in
2007 a share of 21,8% in the primary energy sources“.10
Overview of the German primary power production from 1990 to 2007:
Coal - 68,7% ( -4,0%)
Overall development in Germany - 35,0% ( -0,5%)
Brown coal - 11,1% ( -0,7%)
Oil gas and oil + 11,0% ( +0,6%)
Wind and water power + 267,8% (+15,8%)
Rest (Biomass, Geothermal, Solar) + 481,7% (+23,3%)
In the following segment the relation structure of the energy imports for Ger-
many as well as the utilization of the energy source is being depicted. A trend is
visible here towards the use the renewable energy sources.

Supply structure of the Germany energy imports
The time considered runs from 1991 up to 2008. Table number 4 depicts the
energy sources coal, crude oil, natural gas and uranium for said period with the re-
spective imports. The change in the area of the coal is remarkable. In 1990 approx.
90% had been covered by the domestic production. In 2008 the demand was cov-
ered two thirds by the imports. In 1991 16,9 million tons of coal were imported.
Then in 2008 the amount rose to 39,1 million tons. The increase amounts to 22,2
million ton corresponding to an increase of about 131,4%. In 1991 573,2 Tera
watt hours of natural gas were imported. In 2008 the imports rose to 981.4 Tera
Watt hours. This corresponds to an increase of 408,2 Tera to Watt hours or 71,2%.
The natural gas imports emanated mainly from countries like the Netherlands,
Russia and from Norway. It can be recognized that the import structure has shifted
in this field in favor of the Norwegian and Russian natural gas deliveries. In 1991
the Imports amounted to 94,7 Tera watt hours and in 2008 they lay at 291,4 Tera
watt hours. This corresponds to an increase of 207,7% within the last 17 years.
Russia supplied the biggest share at 40% of the entire natural gas imports.

10
Cf. Umweltbundesamt, 2007, Energieverbrauch nach Energieträgern. http://www.umwelt-
bundesamt-daten-zur-umwelt.de/um welt daten/public/theme.do;jsessionid=7F068C3E4542E6
C9B53DA8DE7F043C36?nodeIdent=2326 (Datum 26.07.2010).
216 Stefan Dilger

Table number 4: The relation structure of the energy imports from 1991 to
2008. source: BMWI 2009, side 16.
In 1991 crude oil stand at 88.8 million tons and rose until 2008, to 105,3 mil-
lion tons. This corresponds to an increase of 16,5 million tons or 18,6%. The crude
oil import from Africa since 1991 at 27,1 million tons went down to 8.8 million
tons in 2008. This corresponds to a decline of 67,5%. Russia however has also
played an important role in the area of Crude oil. With imports in 1991 at 14.0
million tons, to a total of 33,6 million tons of oil in 2008. This corresponds to an
increase of 140%. The imports from the Middle East remained almost consistent.
In the uranium field the imported amounts from the listed supply countries
reached 3.09kt by 2007. This corresponds to an increase of 2.05 kt or an incline of
197,1% correspondingly.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 217

Order of rank list of the energy sources with imports from 1991 to 2008:
1. Uranium + 197,1%
2. Crude oil + 140,0%
3. Coal + 131,4%
4. Natural gas + 71,2%

In the following chapter the utilization of the energy sources is being analyzed.
The main focus lies on the industrial sector. Table number 5 shows the develop-
ment of the utilized energy consumptions by the sectors.

Table number 5: Final energy consumption after sectors from 1990 to 2008 in
PJ,source: BMWI 2009, side 23.
In the area of mineral oil products the consumption of 308 Peta joules in 1990
decreased to 160 Peta joules in 2008. This corresponds to a decline of 48,1%.
218 Stefan Dilger

In the area of gases a decline is to be registered by 136 Peta joules or 14,5%. If
in 1991, 936 Peta joules had been used, these were in 2008 only 800 Peta joules.
In the area of Coal the final energy consumption could be lowered from 884
Peta joules to 577 Peta joules. This corresponds to a reduction of 307 Peta joules
equivalent 34,7% by 2008.
In the electricity field a growth rate of 70 Peta joules was reached. In 1990 the fi-
nal energy consumption lay at 748 Peta joules and had increased to 818 Peta joules.
This corresponds to an increase of 9.4%. It has to be recorded that the industry is
the biggest final energy consumer concerning coal (interest 66%) and electricity
(42,9%). It takes up 2nd place regarding gas consumption at an interest of 35%.
With the mineral oil products the industry occupies place 4 with a share of 4,9%.
This is only very small part. Within the remaining sources a decline has to be reg-
istered. 101 Peta joules used in 1990, decreased to 44 Peta joules. This corresponds
to a reduction of 57 Peta to joule which corresponds to decrease of approx 56,4%.

Ranking of the final energy consumption of the industry from 1990 to 2008:
1. Remaining one - 56,4%
2. Mineral oil products - 48,1%
3. Coal - 34,7 %
4. Gas - 14,5 %
5. Electricity + 9,4 %
It has got to be recognized that all sources except electricity show a decline.
Merely the electricity consumption registers a growth of 9,4%. This is being ex-
amined in the following chapter. The gross electricity production for the whole of
Germany as well as the structural development are being depicted and described.

Electricity production in Germany from 1990 to 2008:
The imported as well as the domestically produced primary energy sources are
not utilized immediately. They usually through different processes of transforma-
tion. Thereafter they are being used in purified form to operate vehicles, machines,
production plants or are used as process energy and serve as a source for heating of
buildings. The biggest share of the conversion is being used for the electricity pro-
duction. Beforehand it has to be mentioned, that the power generation structure in
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 219

Germany, is the result of long-term investment decisions. „Because of an expected
life span of the plants of 35 years and more, the design of the power station park
can at a certain times be the result of economic, ecological, regional-economic-
political and energy-political factors of influence, which can partly be backdated
for“.11

Graph number 12: German gross electricity production of the power stations
after energy sources from 1990 to 2008, source: BMWI, side 19.
Thus it can be explained, that approx. half of the presently running plants have
been constructed 20 years ago or longer. At that time other basic conditions for
the power generation by coal applied than those valid today. In the graph number
12 the gross electricity production for Germany together with the primary energy
source input is shown. In 2008, 639 milliard kilos of watt of hour’s of electric
power were produced. This corresponds to a primary power demand of 5.494 Peta
joules. Compared to the whole primary energy consumption this represent approx

11
Bundesministerium für Wirtschaft und Technologie, 2009, p. 18. Books been getting on in years
power stations in Germany and how the decisions were made in the past.
220 Stefan Dilger

to 39%. 29% can be allocated to nuclear sources, 26% to brown coal, 22% to coal,
14% to gas and 8,4% to remaining energy sources.
As it can recognized in the graph number 12, the share in renewable energy
has increased. In 2008 an interest of 93 Tera watts of hours of electric energy was
produced from renewable energy sources. This corresponds to an interest of 14,6%.
In 1990 550 Tera watt of hours electricity were generated. This corresponds to an
increase of about 89 Tera watt of hours compared to 2008 to an increase of 16,2%
in 18 years. Representing a moderate increase of 0,9% per annum. What are now
the reasons of this moderate increase in the gross electricity production. Why does
it not rise as strongly as for example the world energy consumption? Let’s therefore
look, next at the energy efficiency in Germany.

Analysis of the energy efficiency of the industry
„Due to the improvement of the energy efficiency the energy consumption has
gone down in the industrial sector and has decoupled itself from the gross output
value. The industry could reduce the energy intensity for the production processes
by about approx. 35% from 1991 to 2008. This corresponds to 2.054 Mega joules
per 1.000 euros of gross output in prices compared to 2000. This was achieved by
high savings in the fuel sector as well as by small declines in the specific electricity
application. From 1991 up to 2008 the electricity application sank at an annual
average of 2,05%. The fact that the electricity utilization did not go down consider-
ably more, is due to an increased automation as well as replacement of fuels by the
electricity. The consumption of the fuel went down by 3,2% at an annual average.
The modern rotary furnaces in the cement industry have contributed to energy sav-
ings as well as the ongoing change of energy-intensive production processes. In the
cement industry the thermal demand of fuels has gone down by about 6% since
1991, and lies at 2.896 kJ / kilogram of cement produced. In the steel production
energy savings due to higher efficiencies have also been possible in all production
processes. In 1990 an energy input equivalent to 18,3 Giga joules was required to
produce 1 ton of raw steel. Presently the energy input lies at 15.5 Giga joules and
corresponds to a decline of 15,3%“.12

12
Cf. Bundesministerium für Wirtschaft und Technologie, 2009, p. 27f.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 221

Graph number 13: Development of the energy efficiency of the German indus-
try in unit gross output value in prices of 2000, source: Bundesministerium für
Wirtschaft und Technologie 2009, side 27.

The moderate increase in the power generation can also be attributed to new
investments by the industry for improved energy efficiency. Less energy being is
required for the gross output production.
„In a survey by the credit institute for the reconstruction (kfW) banking group
in 2005, 521 companies in Germany were questioned on the subject of energy
efficiency in their own plants. 60% of the interviewees stated to have attached an
high relevance to the questions of energy efficiency. 29% had already introduced
concrete energy efficiency measures. The measures were carried out in the areas of
Process head requirements, space heating as well as hot-water consumption (58%).
43% were invested for improved Building insulation and advanced lighting tech-
nologies. The main motive for 94% of the companies was lowering of energy ex-
penses. 55% explained to have introduced energy efficiency measures in order to be
able to react adequately to rising energy prices“.13

13
Cf. KFW-Befragung, 2005. Belegt wie sich die Einstellung und die Haltung zu steigenden Ener-
giekosten sich im Sektor Industrie am Beispiel der Stahl-, und Zementindustrie geändert hat.
222 Stefan Dilger

3. Results

Global results:
The global energy consumption from 1971 to 2002 developed rapidly, sub-
stantially more energy was needed. In 1971 the oil equivalent energy consump-
tion amounted to 5,800 million tons. In 2002 additional 4,400 million tons were
required . The increase in this period amounts to 75,9% and lies at the level of
10,200 million tons of oil equivalent in 2002. This corresponds to an increase of
2,4% per year. The driving force behind this development are the industrialized
countries and the reform countries. In the period from 1990 to 2006 the world
energy consumption rose from 8.759 million tons of oil equivalent to 11.749 mil-
lion tons of oil equivalent. This corresponds to an increase of 2.981 million tons
of Oil Equivalent or 34% which is an increase of nearly 2,1%. Compared to the
first annual increase at 2.4% the second increase of the recent past at 2.1% is
slightly lower by -0,3%. However this is still at a very high level. Respnsible for
this development since 1990 are in particular countries like India, China, Brazil
and the USA. Worldwide indications are the sufficient energy sources are available.
The worldwide static range on non- renewable energy sources is good and indi-
cates sufficient supplies. Worldwide enough non-renewable energy sources exist.
The worldwide exploitation lays at 1,1% compared to the reserves. This means that
there are enough resources of non-renewable energy source. The reserves compared
to the resources amount to 6,8%.

National results:
The problem portrayed and at the same time the challenges for the German
economy and its industry are as follows. The German energy exploitation is ex-
tremely precarious in the areas of Oil and natural gas. The static range is only four
and twelve years. Germany depends in all primary energy sectors on imports. The
primary energy consumption in Germany cannot be covered by own energy re-
sources. The biggest energy consumer in Germany is the industry, with a share of
28.7%. Between 1990 and 2008, the end energy consumption has fallen by about
4,7% in Germany. The industry could achive a decrease of the final energy con-
sumption of 2,7% in the same period. The most intensive energy industries are the
chemistry, food and tobacco and the metal production. A worrying factor are the
volatile energy prices. They manifest themselves clearly in the period from 1995 to
2004. Increased expenses for oil at 117.4%, for natural gas at 77,8% and for coal
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 223

at 6,7% are disturbing. Also the energy expenses forecast indicated in 2005 all-
clearance either. According to the forecast up to 2030 increases can be expected for
oil at 29,2%, for natural gas at 21,0% and for coal at 9,1%. Merely the brown coal
can get by well. If this investigation is more refined, other volatile energy expense
developments appear, For example, in the period from 1999 to 2005 increases in
the area of the light fuel oil of 126,9%, of heavy fuel oil of 123,1% and of the im-
port coal of 83,3% were to be registered.
In 2007 especially energy-intensive industries such as the metal production with
an interest of 21,2%, the raw material chemistry with an interest of 17,3%, the
paper industry with an interest of 9,2%, the processing of stones and earth ware
with an interest of 8,5%, food and tobacco with 7,8%, the one metal foundries
with 5,1% and the construction of vehicles with 4,9% have been susceptible. If
one looks at the above the gross domestic product of the industries referred to
above the same period in 2007 then the following energy input amounts had to
by invested by the sector raw material chemistry, at 9000 Tera joules per 1 milliard
euro turnover, the paper industry with 7.500 Tera joules per 1 milliard turnover,
the stone and earthware with 15.500 Tera joules per 1 milliard euros turnover, the
food and tobacco with 6.000 Tera joules per 1 milliard euros turnover, the automo-
tive industry with 2.000 Tera joules per 1 milliard euros turnover and in the metal
production and one metal foundries with 29.000 Tera joules per 1 milliard euros
turnover therefore they are the most susceptible sectors in the industry. Here the
metal production and non-ferrets metal foundries are the most susceptible sector in
place 1, followed by stones and earth ware place 2, the raw material chemistry in
place 3, as well as the paper trade in place 4 and food and tobacco in place 5. Place
6 is occupied by the automotive industry.
For the primary power production in Germany a trend can be not iced away
from various non-renewable energy sources. In the period from 1990 to 2007 the
coal with -68,7% and the brown coal with -11,1% lost impact on an overall con-
sideration of the primary power production in Germany, a decline of -35,0% was
registered. Merely the oil gas and oil production were able to improve by about
11,0%. At the same time the imports of non-renewable energy sources rose. In the
period, increasing imports of uranium of 197,1%, of crude oil at 140%, of the coal
at 131,4% and of the natural gas at an increase of 71,2% had be registered. At the
same time the imports structure for natural gas had moved towards Norwegian,
Dutch and Russian suppliers.
224 Stefan Dilger

The final energy consumption in the industrial sector is falling. There will 48,1%
less mineral oil products, 34,7% less coal, and 14,5% gas used. The remaining will
decline significantly with 56,4%. Only with electricity there is an opposite direc-
tion to be recognized. Here a growth of 9,4% was registered in the same period. In
particular the renewable energy sources like wind and water power have achieved
an increase of 267.8% from 1990 to 2007. If one examines the gross electricity
production in Germany from 1990 to 2008 an increase of 16,2% can be registered.
This corresponds to a year by increase of 0,9%. This is also not an exceptionally
high average due to an a reason for this improved contribution of the energy ef-
ficiency of the German industry. In the period considered from 1991 to 2008 the
energy intensity could be reduced by 35%. The energy efficiency of the German
industry has clearly improved over the last years. On a average of 2,05% per year.
Less energy is being used per gross output value.
In the following sectors of the industry the industries metal production, raw
material chemistry, the paper trade as well as the processing of stone+earthware
in particular must the subject energy seriously be locked into. They deliver a big
economical contribution to the prosperity and social well fare. Nevertheless, they
still have to remain internationally competitive at levels of high energy consump-
tions. Thereby volatil energy prices with a rising tendency are a disadvantage, in a
competitive market. This fact was confirmed with a survey by the loan corporation
for reconstruction in 2005.

References:
1. Short own definition of the author to the energy efficiency. Stefan Dilger.
2. Defilla, S. (2007): Energiepolitik Wissenschaftliche und wirtschaftliche Grund-la-
gen, 3. Band, S. 10.
3. Gräber-Seißinger, U./Günther, L./Haas, Jan W./Millinet, M./Reger, O./Schieberle,
A. (2004): Brockhaus Wirtschaft, Leipzig et al.
4. Bernhard, C./Fachautoren (2009): Energierohstoffe 2009, Hannover.
5. Erdmann, G./Zweifel, P. (2008): Energieökonomik, Theorie und Anwendungen,
Berlin et al.
6. Bernhard, C./Fachautoren (2009): Energierohstoffe 2009, Hannover.
7. Erdmann, G./Zweifel, P. (2008): Energieökonomik, Theorie und Anwendungen,
Berlin et al. S. 122.
8. Bernhard, C./Fachautoren (2009): Energierohstoffe 2009, Hannover.
ANALYSIS OF THE ENERGY SUPPLY FOR INDUSTRIAL CONSUMPTION IN FRG DURING ... 225

9. Campbell, C. J. (2007): Ölwechsel, Das Ende des Erdölzeitalters für die Zukunft,
Nördlingen, S. 7ff.
10. Umweltbundesamt, 2007, Energieverbrauch nach Energieträgern. http://www.
umweltbundesamt-daten-zur-umwelt.de/um welt daten/public/theme.do;jses
sionid=7F068C3E4542E6C9B53DA8DE7F043C36?nodeIdent=2326 (Datum
26.07.2010).
11. o.V. Bundesministerium für Wirtschaft und Technologie (2009): Energie in
Deutschland, Trends und Hintergründe zur Energieversorgung in Deutschland,
Berlin.
12. o.V. Bundesministerium für Wirtschaft und Technologie (2009): Energie in
Deutschland, Trends und Hintergründe zur Energieversorgung in Deutschland,
Berlin.

List of abbreviation
BIP - Bruttoinlandsprodukt
Exa - 1018
Giga - 109
Kfw - Kreditanstallt für Wiederaufbau
Kt - Kilo tonnen
Tera - 1012
USA - United States of America
NE-Metall - Nichteisen-Metall
226 Nedzad Fajic

RISK AS SOURCE OF RELUCTANCE TO SAAS
ADOPTION IN EUROPE
Nedzad Fajic, M.Sc.1
1
University Politehnica of Bucharest, Faculty of Engineering and
Management of Technological Systems, Romania

Abstract
Cloud computing is among the most discussed issues in the information com-
munication and technology (ICT) sector. Information technology (IT) infrastruc-
ture is altered by the business methods due to cloud computing and moved ahead
towards a utility model of ‘pay as you go’. Instead of spending time with con-
structing, managing, maintaining and running their own physical infrastructure,
now firms can host their applications, platforms and storage in data centers on
virtual servers supported by professional third parties. Such services based out of
the ‘cloud’ assist agile and cost efficient business surroundings. The most essential
economic influence of cloud technology could exist in developed competitiveness
and cost savings of existing IT services, as well as in introducing new services to
private and public companies. Because of the bulk buying of hardware and pro-
cessing power, demand aggregation, and decreased costs of labor per unit, cloud
providers can achieve essential savings on their running price and pass these on to
their customers. Businesses can utilize the cloud computing technologies, thereby
using better equipment with more flexibility, being faster, and having lower ex-
penditures of capital. Customers of cloud computing technologies make data and
online content interactive and accessible for users. Given the importance of cloud
computing, not many studies have been conducted from the adoption perspective
and, in particular, have not sought to identify factors of risk in the most popular
cloud computing deployment model, which is Software-as-a-Service (SaaS). This
paper provides an overview on the European cloud computing perspective and as-
sesses the risks in SaaS.
JEL Classification: L86
Keywords: Cloud Coomputing, SaaS, Software-as-a-Service, Europe, Risks.
RISK AS SOURCE OF RELUCTANCE TO SAAS ADOPTION IN EUROPE 227

1. Introduction to Cloud Computing
Cloud computing is a model for enhancing convenient, on demand and ubiqui-
tous access of network to shared areas of designed computing networks, resources,
applications, services, servers and storage that can be supplied and liberated with
reduced efforts of management or interaction of service providers. The most essen-
tial economic influence of cloud technology could exist in developed competitive-
ness and cost savings of information technology services available to private and
public companies as well as chances leading to new services. Because of bulk buy-
ing of hardware and demand aggregation cloud providers decreased costs of labor
per unit. They can achieve essential savings on their running price and pass these
on to their consumers. Businesses can utilize technologies of cloud computing for
information technology supply thereby using better equipment, being rapid, being
much flexible and having less expenditure of capital. For customers the technolo-
gies of cloud computing are making online data and content more interactive and
accessible. Cloud computing solutions are the solutions of the new age of informa-
tion technology offering numerous benefits to its customers. Cloud-based solutions
offer cost effective services to customers for which they can pay based on their us-
age. This makes cloud based solutions favorable for most of the customers in the
corporate world.

2. An overview of the European cloud computing perspective
According to Kushida et al. (2012) cloud computing is modifying the way busi-
ness is being performed by altering the underlying infrastructure of information
technology. Computing is moving ahead towards a utility model of pay as you go.
Rather than spending in constructing, managing, maintaining and running their
own physical infrastructure, now firms can host their processes of business on vir-
tual servers provided data centers in the state of art performed by professional third
parties. Such services based would one call “out of the cloud” and they would assist
agile and cost efficient business surroundings. The adoption rate varies around the
globe.
International Data Corporation (IDC, 2008) evaluated that in 2015 $9 Billion
will be invested in the services of professional cloud in Europe, a development from
$570 Million in 2010. While present applications provided in the cloud may be
basic backup/disaster recovery, management of electronic mail, web hosting and
storage, organizations are already initiating the usage of cloud for core applications.
228 Nedzad Fajic

TechMarketView recommends United Kingdom’s market of cloud computing will
increase from $3 Billion in 2010 to $6 Billion in 2014 and similar development is
anticipated by Experton Group in Germany from $2 Billion in 2010 to $9 Billion
in 2015. Such rates of development represent that Europeans view cloud as mov-
ing ahead spelling first mover benefits for those able to travel quickly. It is difficult
to align what Europeans expect from their cloud solution with the US American
market (IDC, 2010).
According to IDC (2008) a distributed group of data centers in Europe permits
cloud service providers to provide their consumers transparency and a selection of
free choice of storage locations. It is essentially critical for 3rd party owners of the
data centers to ensure integrity, availability and confidentiality of the entire data,
whether in a private cloud or multi-tenancy servers. The providers of data centers
must offer straight access to a vast number of local and international low latency,
high speed mobile and broadband networks preferably from numerous Tier 1 op-
erators. Their facilities must involve networks of content distribution, tracing plat-
forms and points of internet exchange as well as distributed but interacting hubs of
cloud supporting seamless pan-European and worldwide connectivity. With these
practical assurances, new entrants into the European market have a strong discus-
sion. The cloud expertise of cloud service providers constructed in the thriving US
market and integrated with a clear understanding of regional market drivers, local
business and law cultures plus assisted by best of breed hosted information technol-
ogy facilities from a trusted 3rd party could lead into a sustainable and rapid entry
into Europe. It is found that the European Union market of public cloud is devel-
oping three times more rapid than general information technology (EU, 2011).
According to Kar (2012) Europe needs coordinated action in the computing
field. But several users are still hesitant to face technical and complex difficulties
and security of data particularly when it comes to confidentiality of data. In Europe
the strategy of the Commission must represent 3 drawbacks of cloud: the contrac-
tual uncertainties of digital single markets, the fragmentation of data and the cloud
standards’ fragmentation. Therefore the Commission has declared 4 measures to
develop cloud computing productivity.
The 4 measures are:
1) Assist schemes of certification for reliability of cloud service across the Euro-
pean Union.
RISK AS SOURCE OF RELUCTANCE TO SAAS ADOPTION IN EUROPE 229

2) Assure portability of data, reversibility and interoperability for cloud service
users. Essential standards must be set up by 2013.
3) Develop fair agreements and safe standards for cloud computing including
service level agreements.
4) Undergo a partnership on cloud computing between businesses and member
states which would use the buying powers of the public and private sectors in order
to shape the cloud computing market in Europe, deliver better and affordable ser-
vices for e-government and business cloud service usage.

Figure 1: Cloud computing market development in European Union

Source: Adopted from Bradshaw et al. (2012)

3. Software-as-a-Service (SaaS)
The idea of using a software for service is as old as the corporate computing as
per Gerard (2008). From the beginning of the mainframe era of 1960s and into the
modern day minicomputer, computers were costly till 1970’s and various small and
medium enterprises (SME) possessed sources of computing as a way to gain distant
access. Software delivery modules, on request have been progressing in the late
1990’s that dwell in many forms and varieties incorporating provision for services
like application service provision (ASP) and business service provision (BSP). These
types of services that are supported by demand render users and enterprises, along
230 Nedzad Fajic

with an internet based retrieval of resources, proficiency, and a unique range of in-
tricate applications covering an organization’s complete real value chain. In the cur-
rent IT literature, concerned with research and management, arguments based on
ASP and outsourcing have been quite silent, importantly due to the reasons of very
few successful stories. As an alternative, a delivery model based on new on-demand
processes, which is known as Software-as-a-Service (SaaS) has gained consideration
of IT researchers and officials. In reality, SaaS is recognized as an on-demand soft-
ware service module and it is an integral part of cloud computing marvels.

Figure 2: Evolution of SaaS

Source: SaaSdevinmexico.wordpress (2009)

SaaS is forecasted to become significantly important in almost all enterprise
application software (EAS) markets as per a study conducted by Gartner (2011).
Throughout the globe software revenue related to SaaS was predicted to grow up
to 19.4% between 2008 and 2013. Professionals and researchers predict assured
RISK AS SOURCE OF RELUCTANCE TO SAAS ADOPTION IN EUROPE 231

prospects for the effective implementation of SaaS, particularly in all application
service markets that require low stages of system customization (e.g. Office suites).

Figure 3: SaaS revenue within sizing of enterprise software 2011- 2016

Source: Gartner (2011)

Even though, not everyone is positive about the implementation of SaaS. Partic-
ularly, few organizations and researchers are doubtful about its feasibility and func-
tionality in robust EAS markets like that of Enterprise Resource Planning (ERP).
The significant limits are noted as the issues concerned with reliability, (i.e., firm
access to the service), security for the stored information and confidential issues
(that is breach of information and inadequate protection for the stored data), and
the process viability (like execution capability and quality service rendered).

3.1 Salient risk beliefs in SaaS adoption
Cummingham (1967) developed a framework for the known risks to bring out
a Hypothesis on the risk factors that can influence an individual on the overall
risks. Known risks have been defined as the “expectation of losses associated with
purchase and acts as an inhibitor to purchase behavior”.
232 Nedzad Fajic

The inability of SaaS not delivering the level of services that is expected would
be referred to as performance risk, which is ‘SaaS cannot provide the availabil-
ity of application/network bandwidth as originally stipulated by the provider’. All
customers can be affected at once by connectivity problems and system outrages
which will imply a high value at risk. Additionally, performance risk includes those
risk problems which are related to the interoperability of the SaaS application with
the home grown applications that are located on the client side. Performance risk
can lead to potential losses crippling the day to day operation and this lack of sup-
port can lead to organizational inefficiency or great damage to the reputation of
the organization if a customer-oriented process is affected. Some potential sources
of failure are a lack of vendor capabilities, the poor service level agreement (SLA)
management and the inability to provide customers the agreed-upon resources.
Economic risk show that a SaaS client may be expected to pay more in order
to receive that level of service which he anticipated initially- the so-called ‘hidden
costs’. Specific investments are shifted to clients by the architectural approach of
SaaS, thus making the client responsible for maintaining the customized compo-
nents. Therefore, to own it is the only solution if the client wants to customize the
application core. In case the client is keen to use to standard core, he may want
to build components on top of the core functionality using application program-
ming interfaces (APIs) in order to suit his needs with regards to customization and
integration. These additional or changing future requirements may lead to higher
than expected costs and these increasing costs can emerge hold-up because the
ownership of the vendor regarding the application core provides with more power
to bargain in the future. This allows him to charge extra costs, increased prices
and also refused to invest for the client’s customized code in backward-compatible
interfaces.
Strategic risks are those risks in which a company will lose the capability and
the resources when sourcing applications via SaaS. This matters inadvertently in
cases of business critical application and those applications which support impor-
tant functional areas in an organization. If these resources are externally outsourced
they can lead to a high level of interdependence between the vendor firm and the
client. The adoption of SaaS can reduce the ability of a company to react quickly
to new internal forces (example by aligning itself with new business strategies and
external forces, example by seizing new market opportunities.) The reduction in
ability can be because of the SaaS provider having full control on the maintenance
and development of the application. Apprehending such potential resource depen-
RISK AS SOURCE OF RELUCTANCE TO SAAS ADOPTION IN EUROPE 233

dence, one can argue that the perceptions of the IT executives regarding the risk
associated with SaaS adoption are relevant, salient beliefs that can have an influence
on the overall vision of SaaS adoption risks.
A direct control of their data (and thus the valuable asset) is given by the SaaS
client to the provider without knowing how secured their data is and which disaster
recovery and backup procedures he has intact to secure the exact data levels. Service
level agreements can be used but however the experience of a client in sourcing
software through a service provider is often slight. Moreover, there is such a swift
progress in technological developments that clients are quite unaware about the
risks their data faces as regards security from contractual flexibility when signing a
service contract. Loopholes and equivocality in the contract can prompt the vendor
to take advantage of their client.
In addition, the characteristics of technologies that are web based and uncer-
tainties related to environment cannot be predicted easily. Incidences of security
breaches like theft of data or corruption might trigger stress, discomfort and anxi-
ety among potential SaaS customers. As IT executives anticipate these possible
security risks beforehand, it can be assumed that such security risks form a salient
feature that would affect the perceived risk.
Managerial risks, also known as psychosocial risks in earlier studies can oc-
cur if the software is outsourced to external firms, as it would put the reputation
and the career span of the manager, who bears this responsibility, at stake. This is
because the associate ventures that deal in outsourcing ventures usually associated
with negative aspects such as failure to provide outsourcing jobs within the deadline
or loss of jobs to the person responsible. This would also affect the way the peers,
staff and clients of a firm perceive their managers in terms of loss of power owing to
the inability to control the resources. During the process of SaaS adoption, it can
be assumed that the executives of IT departments are highly aware about all the
negative consequences that are personal in nature. This leads to the argument that
perceptions about the managerial risks of the IT executive influences the perceived
risks involved in SaaS adoption.

3.2 Major sources of reluctance for the adoption of SaaS
Various factors affecting the adoption of SaaS can be identified and addressed
with the help of prescriptive theory. This paper has classified reluctance factors into
technology, psychology, security risk, financial risk, strategic risk, psychosocial risk,
234 Nedzad Fajic

service provider and product provider risk. In terms of technology, the major sourc-
es of risk are lack of adequate computer skills, lack of user friendly SaaS programs,
data storage issues, information security and compliance issues. Under psychology,
the major non-adopting factors are personality and attitude barriers such as lack of
trust, resistance towards change, resistance towards taking risk and previous worst
experience. Similarly, the security risk factors identified from the study are lack of
reliability among service provided by SaaS provider, data security issues, privacy
issues and compliance issues. Strategic risk comprises limited flexibility of organiza-
tion, limited customer service and data security issues. In addition, lack of aware-
ness regarding actual cost and unexpected transactional costs are classified as finan-
cial risk of SaaS implementation. In this study, psychosocial barrier is described as
individual’s fear over their reputation due to SaaS implementation. It also includes
the fear of individual whether SaaS implementation affects their business relation-
ship. Service provider risks include lack of trust, reliability of the services offered by
provider, data security issues, compatibility issues and technical and maintenance
support issues. Finally, product provider issues comprise technical features of the
product, lack of reliability, price, security issues, and unexpected transition costs.

Figure 4: Reluctance of consumer buying

Source: Author (2013)
RISK AS SOURCE OF RELUCTANCE TO SAAS ADOPTION IN EUROPE 235

4. Conclusion
The present paper reveals the risks with regard to SaaS deployments. Hence,
SaaS providers should focus on training and awareness programs focusing on its
advantages, lower TCO, easy accessibility, integrity, ease of operation, and other
favorable factors. It is necessary to compare the benefits and risks associated with
SaaS and to utilize an appropriate decision-making strategy. Moreover, the impor-
tance of excellent customer service and of effective promotional strategies such as
free trial, pay per service, customer success stories is at hand. Furthermore, custom-
er success stories help to overcome financial, technological, psychological, strategic,
psychosocial, service and product provider barriers. Service providers should focus
on improving data security, privacy and technological features to increase the SaaS
adoption rate in the European region.

References:
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the Demand for Cloud Computing in European and the Likely Barriers to Take-up, Available
at: http://ec.europa.eu/information_society/activities/cloudcomputing/docs/quantitative_es-
timates.pdf
2. Cunningham, S. (1967) ‘The major dimensions of perceived risk’, In: Cox, D. F. (eds.) Risk
Taking and Information Handling in Consumer Behavior, Cambridge, MA: Harvard Univer-
sity Press.
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Strategy, available at: http://ec.europa.eu/information_society/activities/cloudcomputing/
docs/annexindustryrecommendations-ccstrategy-nov2011.pdf.
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Driver for Growth, mimeo, Available at http://blogs.idc.com/ie/?p=224.
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er Than the Overall Business Analytics Marke, Available at: http://www.idc.com/getdoc.
jsp?containerId=prUS22155410.
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org/2012/10/04/europe-strategy-cloud-computing/.
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Computing Ecosystem and Implications for Public Policy’, Communications and Strategies,
85, pp. 63-85.
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at: http://SaaSdevinmexico.wordpress.com/
236 Gerdesics Viktória • Mladen Pancić • Orosdy Béla

THE ROLE OF TOURISM IN PERCEPTION OF THE CROATIAN
COUNTRY BRAND IN HUNGARY AND CROATIA1
Gerdesics Viktória1, Mladen Pancić Ph.D.2, Orosdy Béla, Ph.D.3
1
University of Pécs Faculty of Business and Economics, Hungary, gerdesics@gmail.com
2
Faculty of Economics in Osijek, Republic of Croatia, pancic@efos.hr
3
University of Pécs Faculty of Business and Economics, Hungary, orosdy@ktk.pte.hu

Abstract
Today it is not easy to find the best choice as a tourist. There are not only count-
less opportunities but the competitive advantages of tourist destinations have to
be also identified within the endless bunch of information. Obviously, in a reverse
interpretation, neither the supplier countries have an easy job in gaining the tour-
ists. Among others this is one reason to consciously develop a good country brand.
A specific historical element of Croatia is its secession from Yugoslavia in 1991 by
which it had to develop an independent country image. For this tourism being a
decisive part of its economy seemed to be an adequate tool. The survey shown in
present study is the continuation of a last year investigation on the Croatian coun-
try image carried out in Hungary – this paper shows the results of a Croatian survey
as well. Based on Hungarian and Croatian questionnaire surveys it analyses the role
of tourism in Croatian country brand by the time of the country’s EU-accession.
JEL Classification: M30
Keywords: Croatia, Hungary, country image, country brand, tourism

1. Introduction
In our globalized world changes of the modern society have resulted intense
development of communication and fast flow of information has opened endless

1
This research was realized in the frames of TÁMOP 4.2.4. A/2-11-1-2012-0001 „National Excel-
lence Program – Elaborating and operating an inland student and researcher personal support sys-
tem”. The project was subsidized by the European Union and co-financed by the European Social
Fund.
THE ROLE OF TOURISM IN PERCEPTION OF THE CROATIAN COUNTRY BRAND IN ... 237

doors for people – in this world nation branding as a tool of enhancing competi-
tiveness is a must. This is especially true for a country development of which is
traditionally focusing on tourism andwhose visual picture originally connects it
to sea. It could simply been said that Croatia is a touristic country. However, the
one who knows the country better could see the things “behind the highway” and
could describe it in a more complicated way. Croatia’s 20th century-history was
glorious and sad at the same time while it recently has become the new member
of the European Union, twenty-two years after its secession from Yugoslavia. The
paper focuses on the touristic dimension of the Croatian country image; is Croatia
primarily a touristic country?

2. The country image
Country image is one of the most significant marketing concepts today. Accord-
ing to Kotler et al. (1993) it is the sum of different views, beliefs and opinions that
people have about a country. The country image has been present in the profes-
sional literature since the 1960’s, primarily from the aspects of the so called country
of origin effect, but the latest papers investigate the country image as a brand value.
(Jenes; 2010) Simon Anholt was the first to write the concept of country branding
down in 1996 (Papp-Váry; 2009). Every country has a continuously changing im-
age, varying spontaneously or in a managed way (Papadopoulos&Heslop; 2002),
and as all image types, it is a multidimensional concept; it can be inside and outside
image, or even current and wished image. (Sándor; 2003) In the paper both the
inside (Croatian survey) and outside (Hungarian survey) image is analysed, and
the one called “thought outside image” i.e. what could other think about Croatia
in opinion of the Croatians. However, there are some spectacular examples for
country brands also from the times before the appearance of the definition of na-
tion branding. The French nation brand was developed consciously in the early 18th
century but England, the nazi Germany, the fascist Italy or the communist Russia
could be also highlighted as examples. By the broke-up of great colonial empires
new nations appeared after the 2nd WW and this re-happened in the ‘90s by the
collapse of the Soviet Empire and Yugoslavia. The successor states are intensely
revealing their national consciousness, own personality, their cultural, linguistic,
ethnic, religious and economic status to the world. (Olins; 2004) According to
Anholt (2005) a good nation brand means “soft power” in this process. Opinion of
Kotler & Gertner (2002) is that a good country brand means competitiveness, first
of all, while it is called competitive identity by Anholt (2007).
238 Gerdesics Viktória • Mladen Pancić • Orosdy Béla

Papp-Váry (2009) says that the primary goals of nation branding are economic;
enhancing tourism, strengthening investments and development of export. Never-
theless, the country’s international judgement also has to be taken into consider-
ation in connection with the international relations and especially the process of
“europeanization”. (Skoko; 2009) These motivations has interlocked since 1991
in case of the independent Croatia – the country had to develop its own country
image after separation from Yugoslavia, had to vivify its economy weakened by the
Yugoslavian war and had to eliminate the negative stereotypes and people’s “bad
feelings” coming with it, while it wished to become part of the European Union,
shoving off everything connecting it to “the dark Balkans”.

3. Tourism as the tool of image development
Croatia thanks to its favourable geographic position has always been a signifi-
cant commerce centre during its history. In the early 6th century BC Illyrians dealt
with Greeks here while the presence of the Romans on the seaside is proven by sev-
eral buildings. By the time of the Slavs Dubrovnik played an important commercial
and cultural role. With the development of the infrastructure the first commer-
cial accommodation facilities occurred, first modern hotels were built in Opatija,
Crikvenica and Dubrovnik in the end of the 19th century. (Hitrec; 2002) Opatija
celebrates the 170th anniversary of its tourism in 2014.
Croatia used to be the second most developed member state of the former Yu-
goslavia after Slovenia. However, the Yugoslavian war had enormous consequences,
the direct devastation of the war resulted high decrease of the Croatian’s most im-
portant branch of economy, the tourism. (Reményi; 2006)By the collapse of Yu-
goslavia most of the Adriatic seaside remained within the Croatian borders where
there had been several nations during the centuries, thus besides the natural beau-
ties historical places compose the tourism potential showing the weird shared life
of the European, Bezant and Mediterranean world.
Based on Meler & Ružić (1999) the Croatian tourism began to be recognized
since the 1960’s, it showed upward development until the 1980’s when it began to
stagnate. Based on this it can be concluded that the Croatian tourism was already
at a cross-road that time – either makes steps toward its development or gets lost.
Discovery of the Croatian seaside was not a result of conscious mechanisms as well
as the enlargement of the number of accommodation facilities did not go hand in
hand with quality increase and there was no conscious positioning either. Jordan
THE ROLE OF TOURISM IN PERCEPTION OF THE CROATIAN COUNTRY BRAND IN ... 239

(2000) states similar as he says that tourism of the socialist Yugoslavia was ‘still
water”, most of the accommodation potential was state-owned having no competi-
tors, thus resulting bad quality in long-term.The usual social and economic life of
the country was broken between 1991 and 1995, thus the touristic development as
well, part of the accommodation potential became victim of the war. Besides, there
was a state on the map named “Croatia” again having several tasks – as a solution
for these tourism seemed to be an obvious tool.
Tourism had a significant role in the life of the new country since the beginning,
the law about the foundation, operation and financing the Croatian National Tour-
ist Board was enacted as early as in 1991. (Vukonić; 2005) According to Goluža
(2001) everything can be shown and advertised through tourism; history, culture,
gastronomy, people etc. Thus it seemed to be obvious to reshape the country’s
reputation through tourism, moreover, it was the easiest opportunity for economic
proliferation as well. Croatian National Tourist Board began its operation in 1992
and one of its tasks is to develop the three elements of Croatian image as well; the
country name, the slogan and the logotype. (Papp-Váry & Gyémánt; 2009)
Country name means the brand name in the process of nation branding as there
is always a picture coming into one’s mind when hearing the name of a country.
The country names as geographical phenomena usually have old historical roots,
however, there can be situations when these have to be changed – in case of colonies
when becoming independent, countries after the collapse of the Soviet block or
“new-borns” after the end of Yugoslavia. Thus Croatia is one of them as it had quiet
rarely been “Croatia” during its history until 1991.
The today known concept of country slogan had been used since the 18th cen-
tury as the textual message of the brand, actually containing the promise of the
product. In 1993 the already cited Goluža’s touristic slogan won the tender: “Mala
zemlja za veliki odmor” or “Small country for a great holiday”. This slogan was
considered to be the best as the attribute “small” is sympathetic and “great holiday”
does not only mean big in English but it is also a synonym for good. In 1997 a
new one was introducedcoming from George Bernard Show –“Raj na zemlji” – but
it was not successful as its focus is “heaven” that had been already used in many
countries. The third slogan “Mediteran, kakav je nekad bio” or “The Mediterranean
as it once was” had been used since 2005. (Skoko; 2005)
Third image element is the visual part of the brand, the logotype.(Papp-Váry &
Gyémánt; 2009)The blue colour of the logotype created by Boris Ljubičićis refer-
240 Gerdesics Viktória • Mladen Pancić • Orosdy Béla

ring to the sea and islands of Croatia, the yellow to the golden wheat fields and
green to the forests of inland Croatia. The most important elements of the logotype
are the two cubes (red and blue) that show the visual code of Croatia, the colours
of the flag. (Figure 1)

Figure 1: The elements of country image

Source: http://www.novacom.hr/korcula-velaluka/kako_do_nas.html

Croatian tourism began to develop after the war. 10.6 million tourist arrivals
were realized in Croatia in 2010 while in 2011 this increased to 11.46 million.
(Croatian Bureau of Statistics; 2012)

4. Appearance of tourism in the Croatian country image
Besides the literature base two researches are presented in the study carried out a
few months before the Croatian accession. The role of tourism in perception of the
Croatian country brand is investigated by the results shown in the paper.
The Hungarian investigation was executed with online questionnaire and the
answers were collected by snowball sampling, which means that it cannot be repre-
sentative neither for the European Union, nor for Hungary. Neither the Croatian
survey could show representative answers as its aim was to see the opinion of the
future Croatian EU-citizens, thus the sample consists of students studying business
economics in Osijek and Zaprešić. Although as both survey are done on quiet big
samples, they are both worth to consider.
During the survey done in Hungary, 681 valid questionnaires were collected in
almost two weeks. 59% of the Hungarian sample were women, average age was 29
(between 20 and 30), nearly 70% holding BSc or MSc diploma, 56% working and
43% living in Baranya Country, while 23.5% in Budapest or Pest County.
THE ROLE OF TOURISM IN PERCEPTION OF THE CROATIAN COUNTRY BRAND IN ... 241

The survey in Croatia was executed by paper based questionnaire where the aim
was to see the own image-sensation and the outside image thought by them. 434
fully completed questionnaires were collected, apart from a few exceptions. 68%
of the Croatian students were women, average age was 23, 80% study in Osijek
while 20% in Zaprešić near to Zagreb. As it could be seen, to achieve a recognizable
country brand different image elements could be used as marketing tools thus it
would be interesting to investigate what colours, words, symbols are connected to
a given country, and we could get useful basis in designing the marketing tools by
knowing whether our country is regarded to possess a male or a female character.
Both surveys shown in the study included these issues – regarding the outside im-
age in case of the Hungarian one, while the Croatian research aimed to study the
inside and thought outside image.
84% of the Hungarian respondents associate on some word in connection with
the sea, seaside, the Adriatic, holiday or the tourism itself regarding Croatia. The
same category appeared only in 34% in the inside image part of the Croatian re-
search and the answers are much more colourful. (Figure 2)

Figure 2. Please write down the first word that comes in to your mind in connec-
tion with Croatia! (results of the Croatian survey)

Source: own editing

Following the touristic words Croatian respondents mentioned such negative
concepts as corruption (11%), recession (8%) and unemployment (4%), but in a
242 Gerdesics Viktória • Mladen Pancić • Orosdy Béla

relatively higher percentage patriotism (3.5%) was also marked which latter – de-
spite the other previously mentioned negative ones – appeared also in the Hungar-
ian answers (1.5%). It can be concluded that tourism has a prominent role in the
Croatian image; highly in the outside image according to the Hungarians but it is
also important in the inside one although Croatians think more about their coun-
try than this, often even negative words. The Croatian respondents were asked to
write down what could foreigners associate on in their opinion; they think 67%
would say something in connection with seaside tourism that is quiet close to the
percentage mentioned by the Hungarians. Besides, often associated words could
be the Balkans (3%), the war (5%), Yugoslavia (1.5%), corruption (2.5%) and the
Croatian football but neither of them reached 1% in the Hungarian answers.
According to the literature, Croatians think they have three strong symbols: the
Croatian coat of arms with red and white chessboard, the tie and the Dalmatian
dog getting its name after the Croatian region Dalmatia. (Skoko, 2005) However,
results of the survey show something else. For the question about the Croatian sym-
bol the answer was in 42% something with sea or tourism according to Hungarians
(similarly to the previously shown issue of the first association). Significant percent-
age mentioned the red and white chessboard (18.5%), familiar from the coat of
arms but also from the football dresses or the several Croatian souvenirs, and obvi-
ous symbol was also the flag (10%) and the coat of arms itself (5%). According to
31% of the Croatians their symbol is given by the sea and the seaside tourism but
the red and white chessboard (17%), coat of arms (19%) and the flag (6%) was also
marked. It can be interesting that out of the 681 Hungarian respondents only two
and seventeen Croatian ones mentioned the tie, thus this symbol seems not to be so
well-known in Hungary. The Dalmatian dog did not appear in any of the surveys.
List of colours joining the country is lead by blue and red; 70% Hungarians and
40% Croatians said blue, while 13% Hungarians and 25% Croatians said the red
colour. Nevertheless, there is a greater difference in the answers in case of the ques-
tion regarding brand personality. 60% Hungarians think Croatia would be a male
if being a person and only 28% voted for female character, while 47% Croatians
said that Croatia would be a female and 30% voted for male. There can be several
psychological explanations behind this difference and also a linguistic phenomenon
may have some role as the Croatian word “Hrvatska” (Croatia) is even as feminine
as “domovina”, meaning home.
THE ROLE OF TOURISM IN PERCEPTION OF THE CROATIAN COUNTRY BRAND IN ... 243

5. Conclusion
Features and the constantly changing elements of the Croatian country image
could be analysed through long pages. Although one element can be considered to
be standard – the tourism. Not just because the Croatian economy is highly deter-
mined by seaside tourism but also because Croatia being independent since 1991
based its independent country image on tourism and the touristic image. This was
probably a good decision as the peculiarity of tourism marketing is that emphasizes
generally accepted positive values, moreover, these pictures are usually connected
to our holidays calling negative feelings only in a few cases.Present study focuses on
these positive values and investigates whether Croatia is primarily a touristic coun-
try besides is analyses how successful its touristic image creation was.
Based on the relatively new research findings shown above, Croatia’s touristic
image creation was absolutely successful in Hungary, moreover, even Croatians
know that abroad they are considered to be a touristic country. Results show that
Hungarians explicitly interpret Croatia from touristic aspects while the most inter-
esting thing coming from the surveys is that opinion of the Croatians is not so posi-
tive about themselves. In the Croatian survey more often appear negative words as
more than 36% listed some negative feature as the first association while this rarely
happenamong the Hungarian answers. Obviously this can be explained by the fact
that residents of a country are more clear with own weaknesses and everyday prob-
lems than the “outsider eyes”, e.g. tourists. However, findings of outside image not
showing negative stereotypes regarding Croatia mayonly tell us that if there could
be one word said, this would be seaside tourism.

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Croatia, Tourism Management 20635-643
Olins, W. (2004) A márkák – A márkák világa, a világ márkái, Jószöveg Műhely, ISBN 978-963-
705-204-0, Budapest
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PROJECT MANAGEMENT OF LYME DISEASE THROUGH MONITORING OF ... 245

PROJECT MANAGEMENT OF LYME DISEASE THROUGH
MONITORING OF SEROPREVALENCE OF ANTI-BORRELIA
ANTIBODIES IN MACEDONIAN PATIENTS
Dr. Ivanka Hadži-Petruševa Meloska1, Dr. Anica Hadži-Petruševa Jankijevič2
1
Avicena Laboratory, Skopje, Macedonia, ivahpm@gmail.com
2
Clinical Hospital Acibadem Sistina, Skopje, Macedonia, anicahpj@yahoo.com

Abstract
Lyme disease is a worldwide zoonotic disease and the most common tick-borne
illness in Europe and North America.  It is caused by at least three species of bacte-
ria belonging to the genus Borrelia (Borrelia afzelii and Borrelia garinii cause most
European cases, whereas Borrelia burgdorferi - is more frequent in North America).
Borrelia is transmitted to humans by bite of infected ticks belonging to a few spe-
cies of the genus Ixodes. Typical symptoms include fever, headache, fatigue, and a
characteristic skin rash - erythema migrans. If left untreated, infection can spread to
joints, heart, and nervous system. There are very little data about the seroprevalence
in our population, furthermore the relation to clinical data has not been previously
studied. IFA is a standard test for antibody detection of B burgdorferi sensu lato,
since cultural growth of the organism from skin samples and blood is very difficult.
The aim of this paper is to find correlation between Lyme disease and tick bites
in Macedonian patients. It was done through determining the seroprevalence of
Borrelia IgG and IgM antibodies using IFA test and relating that data to reported
tick bites.
The study was conducted on a sample of 240 patients, after suspected or ob-
served tick bite. Serum samples were collected in a four years period (June 2009-
June 2013). Borrelia specific IFA test - RIDA®FLUOR Borrelia burgdorferi (sensu
lato), R-biopharm, Germany, was performed for IgG and IgM antibody detection.
The positive titer was 1:16 for IgM and 1:32 for IgG. The sera were taken at least
10 days after confirmed or suspected thick bite. All patients also answered a short
questionnaire regarding the history of a thick bite and previous treatment.
246 Dr. Ivanka Hadži-Petruševa Meloska • Dr. Anica Hadži-Petruševa Jankijevič

Seropositive were 45/240 (18,8%) patients. Concomitant Borrelia IgG and IgM
seropositivity was noted in 9 cases, and only IgG or only IgM seropositive were
21 and 15 patients, respectively. A tick bite 10 -60 days prior the testing had been
noted in 62/240 (25,8%) patients. The ticks were removed in hospital settings in
approximately two thirds of the patients. Seropositivity in either or both classes of
antibodies in patients who reported a thick bite was 28,9% (13/45). Erythema mi-
grans as a symptom was noted in 9 patients, all of them reporting a thick bite and
being IgG positive. Approximately 50% of the patients bitten by a thick received
antibiotic therapy.
Having in mind that B burgdorferi in this area is being tested for only few years,
the results demonstrate IgG and/or IgM antibody seropositivity of 18,8%, whereas
approximately one third of those cases were associated with a tick bite. Very few of
those seropositive patients reported any previous symptoms. Those findings sug-
gest that exposure to B burgdorferi does occur in our population, mostly without
giving rise to clinical manifestations of Lyme disease. The need of applying precise
testing and treatment protocols is obligatory. Further seroprevalence studies on
human, as well as on animals are needed in order to create a correlation between
seroprevalence of anti- Borelia antibodies with tick bites, which ultimately means
better health protection of the population.
JEL Classification: H75, I10, I15, I18,
Keywords: Project management, Borrelia, Macedonia

1. INTRODUCTION
Lyme disease is a worldwide zoonotic disease and the most common tick-borne
illness in Europe and North America.  It is caused by at least three species of bacte-
ria belonging to the genus Borrelia (Borrelia afzelii and Borrelia garinii cause most
European cases, whereas Borrelia burgdorferi - is more frequent in North America)
(Table 1). Borrelia is transmitted to humans by bite of infected ticks belonging to a
few species of the genus Ixodes (Figure 1).
PROJECT MANAGEMENT OF LYME DISEASE THROUGH MONITORING OF ... 247

Table 1 Currently known Borrelia burgdorferi sensu lato complex
Borrelia species Vector Borrelia species Vector
B. afzelii I. ricinus I. persulcatus B. californiensis I. pacificus, I. jellisonii, I.
spinipalpis
B. americana I. pacificus, I. minor B. carolinensis I. minor
B. andersonii I. dentatus B. garinii I. ricinus, I. persulcatus, I.
hexagonus, I. nipponensis
B. bavariensis I. ricinus B. japonica I. ovatus
B. bissettii I. ricinus, I. scapularis, I. B. kurtenbachii I. scapularis
pacificus
B. burgdorferi sensu I. ricinus, I. scapularis, I. B. lusitaniae I. ricinus
stricto pacificus
Infection occurs primarily during the late spring and summer months when
nymphs are most active and persons spend the most time outdoors, but cases have
been reported throughout the year1. The duration of tick attachment is a critical
factor affecting the risk of transmission2. After attachment, the tick feeds and be-
comes enlarged, discharging its saliva into the bite wound. It takes 36 to 48 hours
after attachment for B. burgdorferi to migrate from the midgut of the tick to the
salivary glands3.  How long the tick is attached (usually at least 36 hours) and
whether it is enlarged are two of the most important factors to consider when as-
sessing the risk of transmission.

Figure 1. Ixodes ricinus tick feeding on human skin

Source: https://en.wikipedia.org/wiki/Ixodes (3.04.2014)

1
Bacon RM at all; 2008,57(10):1–9
2
Piesman J et all;1991,163(4):895–897),( Sood SK et al; 1997,175(4):996–999
3
Murray TS& Shapiro ED; 2010,30(1):311–328
248 Dr. Ivanka Hadži-Petruševa Meloska • Dr. Anica Hadži-Petruševa Jankijevič

1.1 Clinical Manifestations
Symptoms of early Lyme disease usually begin one to two weeks after a tick
bite (range of three to 30 days)4 . There are three well-recognized clinical stages of
Lyme disease, and clinical manifestations are different at each stage (Table 2)5 .  Ap-
proximately 80 percent of patients develop the characteristic erythema migrans
rash (Figure 2). Erythema migrans is classically reported as a single lesion, and most
commonly appears as a uniform erythematous oval to circular rash with a median
diameter of 16 cm (range of 5 to 70 cm). Nearly 19 percent of erythema migrans
rashes are a “bull’s-eye” rash. Multiple erythema migrans lesions may occur in up
to 10 to 20 percent of patients. Associated symptoms are similar to a nonspecific
viral illness and often include fatigue, malaise, fever, chills, myalgia, and headache.
Following this initial stage, the bacteria disseminate systemically via the lymphatic
system or blood. With untreated disease, the most common sites of extracutaneous
involvement are the joints, nervous system, and cardiovascular system.

Figure 2. An erythema migrans rash in a patient with Lyme disease

Source: http://lymepedia.org/lyme-disease-bullseye-rash-erythema-migrans-rarely-seen-
during-relapse-in-chronic-cases-of-the-disease/ (2.04.2014)
Common manifestations of early disease include transient oligoarticular symp-
toms of arthralgia or myalgia that may include joint swelling. Musculoskeletal
symptoms are the most common extracutaneous manifestations of disseminated
disease and can occur with early or late disease Arthritis is usually a manifestation
of late disease. Patients approximately six months after infection are affected with
joint pain and swelling, and synovial fluid findings that suggest an inflammatory
process.  Chronic arthritis primarily involves the knees and hips.  Neurologic in-
volvement, can include lymphocytic meningitis, cranial neuropathies, motor or

4
Murray TS& Shapiro ED; 2010,30(1):311–328),( DePietropaolo DL et all; 2005,72(2):297–304
5
Bratton RL et all; 2008,83(5):566–571),( Murray TS& Shapiro ED; 2010,30(1):311–328
PROJECT MANAGEMENT OF LYME DISEASE THROUGH MONITORING OF ... 249

sensory radiculoneuropathy, cerebellar ataxia, and myelitis.  Patients may present
with headaches neck pain and stiffness6. Lyme carditis is a less common complica-
tion of systemic disease, occurring in approximately 4 to 10 percent of patients. It
may present as chest pain, dyspnea on exertion, fatigue, palpitations, or syncope,
and often includes some form of atrioventricular block (Table 2)7

Table 2. Stages and Symptoms of Lyme Disease
STAGE SYMPTOM
Early localized Erythema migrans
Virus-like illness (e.g., fatigue, malaise, fever, chills, myalgia, headache)
Early disseminated Cardiac (e.g., atrioventricular block)
Dermatologic (e.g., multiple erythema migrans lesions)
Musculoskeletal (e.g., arthralgia, myalgia)
Neurologic (e.g., lymphocytic meningitis, facial nerve palsy, encephalitis)
Late Arthritis (e.g., monoarticular, oligoarticular)
Neurologic symptoms (e.g., encephalomyelitis, peripheral neuropathy)

1.2. Diagnostic Testing
Direct and indirect approaches have been used in the laboratory to assist in
the diagnosis of Lyme disease. Direct methods involve culture or techniques that
detect B. burgdorferi–specific proteins or nucleic acids, whereas indirect methods
involve serology to detect antibodies8.  Although culture remains the diagnostic
standard, it is not routinely available and its usefulness has been limited to skin
biopsy samples in patients with a single early erythema migrans lesion or plasma
in patients with multiple erythema migrans lesions. European and American pro-
tocols recommend serology as the preferred initial diagnostic test. Currently, the
CDC recommends a two-tier protocol using an enzyme-linked immunosorbent
assay initially, followed by the more specific Western blot to confirm the diagnosis
when the assay samples are positive or equivocal(Centers for Disease Control and
Prevention (CDC); 1995,44(31):590–591).  Polymerase chain reaction testing has
the highest sensitivity for Lyme disease in synovial fluid samples from patients with
untreated late Lyme arthritis, for patients with neurologic Lyme disease9 .

6
Steere AC; 2001,345(2):115–125
7
Bratton RL et all; 2008,83(5):566–571),Murray TS& Shapiro ED; 2010,30(1):311–328). 
8
Murray TS& Shapiro ED; 2010,30(1):311–328
9
Dumler JS. 2001;6(1):1–11
250 Dr. Ivanka Hadži-Petruševa Meloska • Dr. Anica Hadži-Petruševa Jankijevič

1.3. Immune response
It is necessary to understand the immune response to Borrelia, which will explain
the reasons for false-positive and false-negative results with serology and the limita-
tions inherent in this testing that often lead to an erroneous diagnosis and unneces-
sary antimicrobial treatment10 . During infection, B. burgdorferi is capable of dissemi-
nating and persisting in a variety of host tissues, suggesting that B. burgdorferi has
developed efficient mechanisms for evading the host innate immune response. In
fact, with regard to the major borrelial genospecies that cause Lyme isease, B.burg-
dorferi and B. afzelii are resistant to the complement-mediated bactericidal activity
of serum, while most strains of Borrelia garinii are killed by human serum11  Im-
munoglobulin M (IgM) and IgG produced in response to B. burgdorferi may persist
for years following standard antimicrobial therapy. These persistently elevated levels
are not an indication of ineffective treatment or chronic infection. Repeated serologic
testing for documentation of treatment effectiveness or cure is not recommended in
current guidelines. The immune response of Lyme Disease can be divided into three
stages. These stages can turn into each other, but they can also be separated by periods
of a symptom-free latency. The course of the disease is not obligate. Symptoms gen-
erally found in specific stages can be missed and spontaneous recovery may occur at
any point. With serological diagnostics it has to be considered, that in stage I 50 - 60
% as well as in stage II 10 - 30 % of the patients with clinical manifestations have no
sufficient antibody titers against Borrelia burgdorferi. In stage III of the disease high
antibody titers can be detected generally. Furthermore, it has to be considered, that
an early antibiotic therapy can prevent the occurrence of serious and chronic disease
manifestations. But, it reduces also the production of antibodies. Therefore, a pro-
phylactic antibiotic therapy should be avoided if only a tick bite has been reported.

2. AIM
There are very little data about the seroprevalence in our population, further-
more the relation to clinical data has not been previously studied. IFA is a standard
test for antibody detection of B burgdorferi sensu lato, since cultural growth of the
organism from skin samples and blood is very difficult. The aim of this paper is to
find correlation between Lyme disease and tick bites in Macedonian patients. It was
done through determining the seroprevalence of Borrelia IgG and IgM antibodies
using IFA test and relating that data to reported tick bites.

10
Murray TS& Shapiro ED; 2010,30(1):311–328
11
Alitalo, A. et all; 2001, 693685-91
PROJECT MANAGEMENT OF LYME DISEASE THROUGH MONITORING OF ... 251

3. MATERIALS AND METHODS
The study was conducted on a sample of 240 patients, after suspected or ob-
served tick bite. Serum samples were collected in a four years period (June 2009-
June 2013). Borrelia specific IFA test - RIDA®FLUOR Borrelia burgdorferi (sensu
lato), R-biopharm, Germany, was performed for IgG and IgM antibody detection.
The positive titer was 1:16 for IgM and 1:32 for IgG. The sera were taken at least
10 days after confirmed or suspected thick bite. All patients also answered a short
questionnaire regarding the history of a thick bite and previous treatment.

Table 3. Age structure of the examined group of 240 patients
0-9 years 5
10-19 years 79
20-29 years 65
30-39 years 40
40-49 years 51

3.1. Test principle
Inactivated Borrelia are fixed in defined wells on the surface of test slides. Dilut-
ed serum samples were applied to the wells. Present anti-Borrelia-antibodies bind
to cell surfaces and form antigen-antibody-complexes. After a washing step for
removing unbound antibodies, the complexes become visible by adding FITC-
conjugated anti-human-immunoglobulines (anti-IgG or anti-IgM-conjugate). Af-
ter a further washing step for removing excess conjugate, the test was analyzed by a
fluorescence microscope with 400x magnification.

Figure 3. Borrelia seen by fluorescence microscope with 400x magnification

http://www.orbio.fr/catalogue_details.php?item_id=109&g=canin&t=ANALYSE&c=S%E9rol
ogie%20chien (2.04.2014)
252 Dr. Ivanka Hadži-Petruševa Meloska • Dr. Anica Hadži-Petruševa Jankijevič

3.2. Evaluation and interpretation
Specific fluorescence is decisive for positive evaluation of a sample. The specific
fluorescence is a bright green coloration visible on the cell surfaces of the Borrelia in
a homogenous distribution within the wells. Intensity of the fluorescence can vary
from weak (1+ reaction) to very strong (4+ reaction). If no specific fluorescence is
visible, the test was valuated negative. The RIDA®FLUOR Borrelia sensu lato IgG,
IgM tests detect antibodies against Borrelia. The fluorescence intensity did not al-
ways correlate with the clinical data. Titers of 1:>64 (IgG) and 1:>32 (IgM) were
considered positive. Serum samples showing just a weak fluorescence (1+) with the
recommended initial dilution were considered equivocal, whereas serum samples
with titers of 1:<64 (IgG) and 1:<32 (IgM) were considered negative.

4. RESULTS AND DISCUSSION
Seropositive were 45/240 (18,8%) patients. Concomitant Borrelia IgG and IgM
seropositivity was noted in 9 cases, and only IgG or only IgM seropositive were 21
and 15 patients, respectively (Chart 1).

Chart 1. Distribution of seropositivity in examined sera
A tick bite 10 - 60 days prior the testing had been noted in 62/240 (25,8%)
patients. The ticks were removed in hospital settings in approximately two thirds of
the patients. Seropositivity in either or both classes of antibodies in patients who re-
ported a thick bite was 28,9% (13/45) (Chart 2). Erythema migrans as a symptom
was noted in 9 patients, all of them reporting a thick bite and being IgG positive.
Approximately 50% of the patients bitten by a thick received antibiotic therapy.
PROJECT MANAGEMENT OF LYME DISEASE THROUGH MONITORING OF ... 253

Chart 2. Seropositivity in patients bitten by a tick
A positive IgM result as well as a four fold IgG titer increase indicated an acute
infection. However, a positive result did not exclude the presence of other patho-
gens as a cause of an illness. Due to the low antibody titers at the beginning of an
infection, the test can show negative results, so negative antibody findings cannot
exclude a Borrelia infection. Even in stage II of the disease, no detectable antibody
levels might be found in up to 30% of cases. In the cases when there is a clinical
suspicion for a Borrelia infection, a further patient sample after three weeks should
be taken and tested. IgM-antibodies are usually detectable five days after a tick bite
with Borrelia infection at the earliest. There were cases when antibiotics were given
directly after the tick bite. There was a possibility that the immune response was
reduced so that despite of an infection, antibodies were not detectable with this
diagnostic test. Furthermore, the antibody IgG as well as IgM titer could often
decrease, evan in months after a successful therapy. Additionally, IgM-antibodies
in these cases persist, too.

5. CONCLUSION
Prevalence of Borrelia burgdorferi sensu lato species in Ixodes ticks in Europe has
been studied frequently (Rauter C & Hartung T;2005,71:7203–7216). However,
investigations for seroprevalence of B burgdorferi in human population in this area
are performed for only few years. Our results demonstrate IgG and/or IgM anti-
body seropositivity of 18,8%, whereas approximately one third of those cases were
associated with a tick bite. Very few of those seropositive patients reported any pre-
vious symptoms. Those findings suggest that exposure to B burgdorferi does occur
254 Dr. Ivanka Hadži-Petruševa Meloska • Dr. Anica Hadži-Petruševa Jankijevič

in our population, mostly without giving rise to clinical manifestations of Lyme
disease. The need of applying precise testing and treatment protocols is obligatory.
Further seroprevalence studies on human, as well as on animals are needed in order
to create a correlation between seroprevalence of anti- Borelia antibodies with tick
bites, which ultimately means better health protection of the population.

References:
Alitalo, A., T. Meri, L. Ramo, T. S. Jokiranta, T. Heikkila, I. J. Seppala, J. Oksi, M. Viljanen,
and S. Meri. 2001. Complement evasion by Borrelia burgdorferi: serum-resistant strains promote
C3b inactivation. Infect. Immun. 693685-3691.
Bacon RM, Kugeler KJ, Mead PS; Centers for Disease Control and Prevention (CDC). Surveil-
lance for Lyme disease—United States, 1992–2006. MMWR Surveill Summ. 2008;57(10):1–9.
Bratton RL, Whiteside JW, Hovan MJ, Engle RL, Edwards FD. Diagnosis and treatment of
Lyme disease. Mayo Clin Proc. 2008;83(5):566–571.
DePietropaolo DL, Powers JH, Gill JM, Foy AJ. Diagnosis of lyme disease [published correction
appears in Am Fam Physician. 2006;73(5):776]. Am Fam Physician. 2005;72(2):297–304.
Murray TS, Shapiro ED. Lyme disease. Clin Lab Med. 2010;30(1):311–328.
Piesman J, Maupin GO, Campos EG, Happ CM. Duration of adult female Ixodes dammini at-
tachment and transmission of Borrelia burgdorferi, with description of a needle aspiration isola-
tion method. J Infect Dis. 1991;163(4):895–897.
Rauter C, Hartung T. Prevalence of Borrelia burgdorferi sensu lato species in Ixodes ricinusticks in
Europe: a metaanalysis. Appl Environ Microbiol. 2005;71:7203-7216. Sood SK, Salzman MB,
Johnson BJ, et al. Duration of tick attachment as a predictor of the risk of Lyme disease in an area
in which Lyme disease is endemic. J Infect Dis. 1997;175(4):996–999.
Steere AC. Lyme disease. N Engl J Med. 2001;345(2):115–125.
CROATIA AND NEW PROFESSIONS 255

CROATIA AND NEW PROFESSIONS
Barbara Marušnik, univ.spec.oec.1, Luka Stanić, M.Sc.2
1
College for Technology and Business - Pula Polytechnic, Republic of Croatia,
bmarusnik@politehnika-pula.hr
2
Merkur osiguranje JSC, Republic of Croatia, luka.stanic@merkur.hr

Abstract
Imbued with the global economic crisis and contemporary trends of techno-
logical development, the question is where to find Croatia in relation to the need
for the creation of competent human resources in the response to the high rate of
unemployment and the need for training for jobs of the future, in order to create
the basis for sustainable and inclusive growth and development.
The paper gives an overview of the current state of the Croatian employment
and the current demand for occupations, as it points the need for qualifications
which would be aligned with the needs of the labor market in the future. The paper
also includes contemporary, global trends of technological development and gives
a list of potential future jobs as the result of predictions in accordance with these
trends.
JEL Classification: D83
Keywords: knowledge, new professions, technological development, GCI

1. Introduction
The current technologicaldevelopmentproceeded according to the well-known
dynamicsstarting from the 2nd half of 18th centurywith the use of steam, generat-
ing machine,steamship, railway, etc. This is followed by another technological revo-
lution through the development of electricity, mechanization, telephone, radio, car,
airplaneetc. There was a third technological revolution which was marked by the
IT specialists through the developmentof electronics, microprocessor, rocket, tele-
vision, robot, etc. After that, started a fourth technological revolution which was
market by the scientists with the development of photonics, the fusion of atoms,
256 Barbara Marušnik • Luka Stanić

Artificial Intelligence, biotechnology, and is emerging the so-called fifth techno-
logical revolutionthat should follow in the near future. It should be marked by the
teams of scientists, especially multidisciplinary teams that will seek globally to cre-
ate scientific preconditions for the knowledge society, learning society, intelligent
society, democratic society, a society of equal people, welfare society, a society of
sustainable development, etc. (Zelenika; 2011, 83-84)
Contemporary global trends are marked by the rapid technological and scien-
tific development and the accelerating exchange of knowledge.Croatian education
system is not enough flexible for implementing the development of changesin study
programs in time, and a large number of current studentsacquiresqualifications for
occupations that in the near future will no longer exist. The question is where
Croatia willbe positioned in this challenge for the training of human resources for
the future occupations.

2. The actuality of knowledge
Knowledge is a key resource in driving development.It drives the development
of techniques, technology and science, which results with the development of
economy as a hole.Creating an upgrade of existing knowledge acquired through
formal or informal education with the new knowledge is of a crucial importance.
Sucha processof continuous learningin conditions of globalizationensures labor
force competitivenessin domestic and foreign labor market. To insure the success of
above mentioned, it is necessary to define the period of actuality of certain knowl-
edge.It is known that there are basic groups of knowledge that do not change and
do not become obsolete during the time. For example there is knowledge from
Croatian language, mathematics or physics. On the other hand, there is knowledge
that grows through building on the already existing, and well established that is
changing in accordance with the technological and science development.Because
of this group of knowledge it is important to follow global development trendsand
create conditions for the implementation of novelty in existing educational system.
For easy understanding of actuality of knowledge it will be explained the term of
half-life of knowledge.
CROATIA AND NEW PROFESSIONS 257

Figure 1 – Half-life of knowledge

Source: Schüppel, J. (1996.) Wissensmanagement, OrganisatorischesLernenimSpannungsfeld
von Wissens-und Lernbarrier. Wiesbaden: DeutscherUniversität-Verlag

Half-life of knowledge implies a time during which half knowledge is being
substituted with a new one. (Benčić; 2009, 101) The reason of exchange of the
knowledge is obsolescenceof knowledge or falsity of existing knowledge.During the
half-life of knowledge it is created more new knowledge than it can vanish. That
is how the total amount of knowledge increases.Therefore, the time of observation
declining of knowledge should be limited to the time interval of half-life of knowl-
edge... The definition of half-life of knowledge does not imply that knowledge
decreases exponentially. (Benčić; 2009, 101)
Figure 1 shows a graph that indicates the trend of decliningof the relevance
of knowledge in time in relation to the type of knowledge acquired. It is evident
from the Figure 1 that knowledge in the field of information technology (IT),
technology and professional knowledge, and knowledge acquired in higher educa-
tion have exponential decreasing trend, in relation to school knowledge that has
a linear trend. Around 50% of IT knowledgebecomes obsolete after a year and
a half, technological after three, andprofessionalafter five years. 50% of tertiary
258 Barbara Marušnik • Luka Stanić

knowledge becomes obsolete after twelve and school knowledge after twenty years.
Fully obsolescence of IT knowledge appears after nine and technology after twenty
years. Approximately 10% of professional, 30% of tertiary and 50% of the school
knowledge, remains real even after twenty years.
Half-life of knowledge in the most fields lasts from two and a half to four years.
(http://www.hzz.hr/default.aspx?id=11946, access: 21-02-2014)It can be conclud-
ed that it is extremely important to determine the time intervals in the global
development of science and technology, strive to anticipate changes and systemati-
cally create conditions for the implementation of changes, both in education and
in raising the level of infrastructural equipment.
Technological and scientific development occurs in even shorter time interval
compared to previously recorded, and the impact it has on the individual areas is
significant and has an ever-expanding range of effects that are not limited to just
one field of science. For example, the development of applied research in medicine
made it possible to cure certain diseases from which people earlier died, the devel-
opment in technology has enabled modern transport equipment, which improved
the quality of human life, etc.Over time, the result of this development has proven
to be in a growing number of populations in the Earth, among them a large num-
ber of older populations. With the increase of populationproblems emerged in the
absence of food, resulting in resorting to genetically modified food, and also inthe
absence of energy, which were launched researches of the possibility of using alter-
native energy sources. Increasing of pollution, which affected the enormous global
climatic disturbances,has been also the result of all this development activities, etc.
Every development made some changing and any change fostered the need for
new knowledge and new training for the challenges of the future.
The measure used to evaluate the development of the country is covered by the
Global Competitiveness Index which is in detail discussed in the sequel.

3. The Global Competitiveness Index of Croatia
The Global Competitiveness Report is written bythe World Economic Forum-
based on twelve criteria called twelve pillars of competitiveness, and they define
competitiveness as „set of institutions, policiesandfactorsthat determine the level
of productivity of a country...The concept of competitiveness thus involves static
and dynamic components. “(Schwab; 2013, 4) GCI includes a weighted average
of many different components, each of which measures a different aspect of com-
CROATIA AND NEW PROFESSIONS 259

petitiveness and also includes long-term and short-term period. GCI includes three
stages of development of the country:
• first stage represents factor – driven economiesand is contained of the first
four pillars,
• second stage represents efficiency – driven economies and is contained of the
next six pillars, then follows the
• third stage thatrepresents innovation – driven economiesand is contained of
the last two pillars of competitiveness.
Figure2shows thestructureof the Global Competitiveness Indexaccording to the
stages listed.

Figure 2 – The Global Competitiveness Index framework

Source: Schwab, K. (2013.), The Global Competitiveness Report 2013 – 2014, World Economic
Forum, Geneva, p. 9

According to the latest Global Competitiveness Index Report Croatia is defined
as an economy that is in transition between the second and third stage of develop-
ment, along with 22 other countries, among which is located in the sixth place.
260 Barbara Marušnik • Luka Stanić

(Schwab; 2013, 11) In the overall ranking of 148 countries, Croatia is ranked in
75th place in 2013, with an average score of 4.13 in a scale of 1 to 7. In the sub
index of basic requirements Croatia took a 61st place with the score 4.69.In the
sub index ofefficiency enhancers Croatia took a 68th place with the score 4.05,
and ultimately in a sub index of innovation and sophistication factors Croatia took
an80th place with a score 3.46. (Schwab; 2013, 17) A detailed view of the Global
Competitiveness Index of Croatia in the year 2013 is shown in Table 1.
Table 1 demonstrates that Croatia is the best developed in health and primary
education which are included in factor – driven economies and weakest in the in-
novation which is included in innovation – driven economies.
The highest average score is the set of indexes in the first stage of development,
and the lowest is the set of indexes in the third stage of development of the country.
As the highest grade is 7, it is evident that in front of Croatia isa lot of work and un-
dertaking for better positioning among developed countries. Higher education and
training index is rated with the score 4.53 and the percentage ofhighly educated
population according to the census of year 2011 is 16.4% (http://www.jutarnji.hr/
template/article/article-print.jsp?id=1116540, access: 21-02-2014).

Table 1 – GCI Croatia 2013
GCI Pillars Rank Score (1 - 7) Key for
1 Institutions 93 3,60
Factor-
2 Infrastructure 42 4,66
Basic requirements 4,69 driven
3 Macroeconomic environment 68 4,71
economy
4 Health and primary education 66 5,80
5 Higher education and training 51 4,53
6 Goods market efficiency 111 3,92
Efficiency-
7 Labor market efficiency 114 3,94
Efficiency enhancers 4,05 driven
8 Financial market development 78 3,90
economy
9 Technological readiness 45 4,41
10 Market size 74 3,59
11 Business sophistication 88 3,81 Innovation-
Innovation and
3,46 driven
sophistication factors 12 Innovation 79 3,12
economy
Source: Author by Schwab, K: „The Global Competitiveness Report 2013 – 2014“, World Eco-
nomic Forum, Geneva, 2013
CROATIA AND NEW PROFESSIONS 261

This situation does not provide a development perspective with which Croatia
would gain a comparative advantage over other European countries, as it lags con-
siderably in the number of highly educated population.Currently, the European
average is 30 percent, and by 2020 the planis to achieve a result of 40 percent
of the highly educated at the European level. (http://www.mojfaks.com/vijesti/
zemlja-znanja-i-obrazovanja-gdje-se-nalazi-najvise-i-najmanje-obrazovanih-hrvata,
access: 21-02-2014)Innovation should be partially initiated also from the field of
higher education. It is shown that the innovating index is rated 3.12. The number
of patent applications in Croatia in the year 2012 totaled 249, and is a decline of
1% of patent applications in relation to the year 2011. (DZIV; 2012, 25). 2011
was reported 251 patent, as compared to 2010 accounted for 10% less. (DZIV;
2011, 33-34)From these data it is evident that innovation declines, although there
is a growing number of a highly educated population in Croatia.

4. Contemporary trends in the Croatian employment
Currently most requested jobs in the Croatian labor market are: waiter, chef,
salesman, graduated economist, cleaner, kitchen worker, educator, chef assistant, a
lawyer and a hair stylist. (http://burzarada.hzz.hr/Default.aspx, access: 03-03-2014)
The unemployment rate in December 2013 was 21.6%. (CES, 2014, 4)In the
educational structure of the unemployed were the most numerous people with
secondary vocational school for up to three years and schools for skilled and highly
skilled workers (33.9%), followed by those with secondary professional school for 4
and more years and gymnasium (28.9%), people with primary education (20.4%),
people with university and postgraduate degrees (6.5%), people with no schooling
and primary education (5.1%) and people with the first college degree, college
education and professional studies (5.1%). (CES, 2014, 4) It is evident that the
unemployment rate is very high, and that the largest share of the interest rate is re-
lated to secondary education, which is not surprising because the proportion of the
population in the Croatian educational structure, is also the largest. The percentage
of unemployed with a university degree is also high considering that Croatia has
only 16.4% of highly educated population.
Even more disheartening is the fact that 43% of the workforce in the EU does
not have the qualifications to what employers are looking for today. The number
of unemployed is increasing, and the stagnation of the economy is still present.All
these negative trends are affecting the decrease in employment.Change is inevitable,
262 Barbara Marušnik • Luka Stanić

and education and knowledge are the key factors that can change things.The future
of the Croatian labor market cannot be accurately predicted, but can suggest some
trends. Due to the aging of the nation the working life will extend and thus will get
to extend the duration of career. Therefore, it is important for employers to invest
in their people and their education. The demand for workers who perform routine
tasks will reduce and these jobs will be taken by the automatization, technology
and robotics. For such work it will be required workforce that has the competence
to manage the technology and in the future will be an emphasis on workforce
with digital competencies and ICT occupations. (http://eskills.hr/?p=550, access:
28-10-2013)

5. New professions
Global trends in scientific and technological development points to the fact
that some occupations are vanishing andthose which still exist today will van-
ish till year 2025. It is emphasized the importance of knowledge and knowledge
application,lifelong learning and investment in employee training, creating special
laws for the effective regulation of part-time study and various continuing educa-
tion programs.
Some analysts of the labor market predict that will grow the future demand
for workers in the field of health, science and technology, and it is anticipated
that the new global jobs will be opened specifically for the production of organic
food, microbiology, computer biology, genetics, robotics, nanotechnology, space
technology, advanced medical services and etc. In accordance with the above men-
tioned, it is important to plan educational programs to keep pace with technologi-
cal development and create a staff of trained and prepared human resources for the
future. Trends show that the emphasis will be on technology and natural-oriented
professions, which will have an increasing dominance in the global labor market.
(http://eskills.hr/?p=550, access: 28-10-2013)
According to the previous researches it is made a list of the potential future oc-
cupations. These are: a lawyer for virtual property, house coordinator for children’s
education, professional friend, an expert in cataclysm, death coach, traceability
manager, architect of the body, 3D construction worker, consultant for simplic-
ity, broker for online education, and occupations in the field of health services.
(http://www.jutarnji.hr/zanimanja-buducnosti--nasa-djeca-bavit-ce-se-svemir-
skom-tehnikom--pomagat-ce-umirucima-i-proizvoditi-organe/1019089/,access:
CROATIA AND NEW PROFESSIONS 263

28-10-2013)It is obvious that the future demand for occupations will be based on
ICT technology and literacy, and that the technological and scientific development
in the future will produce enormous changes in the labor market and society in
general.

6. Conclusion
According to previous researches of technological and scientific development, it
is evident that we are entering in a time of a new technological revolution. Knowl-
edge is changing at an increasing pace and only in a few years there will be a modi-
fication of the acquired knowledge which points to the growing need for lifelong
education and training of human resources.
Croatia is a country situated in the transition from the second to the third stage
of development according to the Global Competitiveness Index, which is assessed
as 4.13 out of a maximum possible score 7.
To maximize its business sophistication and innovation, Croatia needs to de-
velop more effective interinstitutional cooperation that will facilitate the smooth
flow and acquisition of new knowledge and its application in the development of
its own know-how.
The current state of the Croatian labor market indicates a very high unemploy-
ment rate. Among them is the high percentage of people with tertiary education.
It has been established that it is necessary to invest in knowledge and competence
in the field of ICT because of the insufficient computer literacy and use of this
technology without which it is impossible to imagine a workplace in the future.
Occupations that could occur in the near future are in the area of technologi-
cal and natural-oriented professions. The educational system of Croatia has to
face great challenges and the changes are happening in even shorter time inter-
val. It is necessary to establish a systematic model of managing these changes
and their implementation in order to ensure Croatia sustainable and inclusive
growth and development in the future.
264 Barbara Marušnik • Luka Stanić

References:
1. Benčić, Z. (2009.), Bolonjskistudijivrijemepoluraspadaznanja, Automatika 50, 101-
106, ISSN 0005—1144
2. Croatian Employment Service, (2014.), Monthly Statistics Bulletin, XXVII / 2014,
CES, Zagreb (http://www.hzz.hr/UserDocsImages/stat_bilten_01_2014.pdf, access:
03-03-2014)
3. Schüppel, J. (1996.) Wissensmanagement, OrganisatorischesLernenimSpannungs-
feld von Wissens-und Lernbarrier. Wiesbaden: DeutscherUniversität-Verlag
4. Schwab, K. (2013.), The Global Competitiveness Report 2013 – 2014, World Eco-
nomic Forum, Geneva, 2013
5. Zelenika, R. (2011.), Znanost – polugaodrživeegzistenciječovječanstva,
EkonomskifakultetSveučilišta u Rijecii IQ Plus d.o.o., Rijeka
6. http://www.hzz.hr/default.aspx?id=11946, (access: 21-02-2014)
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21-02-2014)
8. http://www.mojfaks.com/vijesti/zemlja-znanja-i-obrazovanja-gdje-se-nalazi-najvise-
i-najmanje-obrazovanih-hrvata, (access: 21-02-2014)
9. http://www.dziv.hr/files/File/go-izvjesca/godisnje_izvjesce_2011.pdf,(access:
03-03-2014)
10. http://www.dziv.hr/files/File/go-izvjesca/godisnje_izvjesce_2012.pdf,(access:
03-03-2014)
11. http://burzarada.hzz.hr/Default.aspx, (access: 03-03-2014)
12. http://eskills.hr/?p=550, (access: 28-10-2013)
13. http://www.jutarnji.hr/zanimanja-buducnosti--nasa-djeca-bavit-ce-se-svemir-
skom-tehnikom--pomagat-ce-umirucima-i-proizvoditi-organe/1019089/, (access:
28-10-2013)
THE NIGHT OF THE MUSEUMS EVENT AND DEVELOPING NEW MUSEUM ... 265

THE NIGHT OF THE MUSEUMS EVENT AND
DEVELOPING NEW MUSEUM AUDIENCE – FACTS AND
MISAPPREHENSIONS ON A CULTURAL EVENT
Igor Mavrin, Ph.D.1, Jerko Glavaš, Ph.D.2
1
Independent Consultant, Republic of Croatia, imavrin@gmail.com
2
Josip Juraj Strossmayer University of Osijek, Faculty of Economics,
Republic of Croatia, jglavas@efos.hr

Abstract
The Night of the Museums (originally Long Night of Museums), an event held
in the Republic of Croatia since 2005, is continuously setting up new records – the
number of cities and museums involved in the project records the continuous in-
crease, along with the rising number of visitors to the museums, heritage and cul-
tural institutions in the few hours of the event. In 2013 the Night of the Museums
project involved 226 museums, galleries and cultural institutions. According to the
Museum Documentation Center’s Registry of museums, galleries and collections
in the Republic of Croatia, there are 281 museums at the state’s territory. It is obvi-
ous that there is a tendency for the inclusion of all Croatian museum institutions in
the Night of the Museums project. The event is an excellent promotion of museum
activities and also the promotion of the project itself. The question remains how
much individual museums themselves can highlight the quality of their programs
in this mass event. Also, a continuous increase in the number of visitors to the
Night of the Museums does not necessarily create a new museum audience. This
paper provides an overview of the success of the Night of the Museums project, and
seeks to identify the extent to which these events contributed to the development
of the recognition of museums themselves, but also the creation of a new museum
audience.
JEL Classification: Z11
Keywords: the Night of the Museums, museum marketing, museum manage-
ment, museum audiences, cultural events
266 Igor Mavrin • Jerko Glavaš

1. Introduction
Museum institutions in the Republic of Croatia come into the spotlight and are
probably the most successful segment of Croatian cultural life. The Night of the
Museums manifestation certainly contributes to the success of the museum proj-
ect, but one should not ignore the impact of reinventing and redesigning existing
museums (e.g. Museum of Contemporary Art in Zagreb), nor the visiting mega-
exhibitions (Picasso exhibition in Zagreb in 2013, Caravaggio’s Supper at Emmaus
in Zagreb 2013). The greatest media attention was given to the Night of the Muse-
ums project, which itself becomes the most recognizable Croatian museum brand.
The question remains as to how the individual museums themselves involved in a
project can get a long-term benefit from it, and come out from the shadow of the
Night of the Museums popular event?

2. Developing museum audiences – global trends
Museums of the 21st century get beyond their usual functions - preservation,
conservation and presentation of heritage, along with bridging the time barrier
between present and past. Today, museums are the places that combine educa-
tion and entertainment, using all the advantages of modern technology. Museum
institutions that have recognized its new, additional role in modern society, con-
tinue paths to success, and the museums that held its traditional role remain closed
guardians of heritage that attracts less interest. One of the key roles of modern
museums in the digital age certainly is - continually create new museum audi-
ences. Visiting the museum exhibitions and their visibility (media) recognition is
increasingly becoming a benchmark for determining the available (and all the more
limited) funds from the public and private sectors. Development and maintenance
of the museum visitors become key to the survival of the museum. Successful mu-
seum can be considered only the one which is “... recognized by their identity not
composed only from exclusive exhibitions, research and scientific work, but also
the relationship with the audience”. (Subotić, 2005:27)
Mat et al (2002:109-110) considered that museum management should con-
stantly ask the following questions:
• “Does the offer continue to meet our commitment? (...);
• With what additional offers (...) can we expand the range of services? (...);
• What services could be abolished? (...)
THE NIGHT OF THE MUSEUMS EVENT AND DEVELOPING NEW MUSEUM ... 267

• What makes us unique and clearly identifiable? (...);
• With which service offers we can bind our visitors?”
Waltl (2006:4) emphasizes the following goals, aimed to creating sustainable
museum audiences:
• „To refine and enhance communication withvisitors.
• To achieve an attainable and sustainableaudience.
• To turn non visitors into visitors, visitors into repeat visitors and regular mu-
seum goers into supporters.
• To enhance access.
• To offer multiple experiences.
• To engage visitors (hands on & minds on).
• To establish an active network with specialtarget groups.“
Richardson (2011:1) believes that today’s cultural consumers can no longer be
described by the term audience, and it is more appropriate to use the term partici-
pants, because “…these are people who live increasingly digital lives, where they
are not spectators, but active participants, positively engaged through outreach pro-
grammes and projects“.
Using the term audiences or more recent term participant, it is certain that the
Night of the Museums event continuously breaks all the records, in terms both pas-
sive (audience) and active visitors (participants).

3. The Night of the Museums project development (2005-2013)
Project Museum Night has European roots and is associated with the inten-
tion of attracting a younger audiences, which no longer visits the museum institu-
tion organized (because you do not attend primary or secondary school, where the
practice is applied). “Directorate of Museums of France (Direction des Musées de
France) in Paris gathers the European museums on joint projects for nearly twenty-
six years. Since 1999 it was a Spring project in museums, and in the 2005The Long
Night of the museums was launched. The project is aimed to inspire and encourage
museums to hold numerous events, from artistic performances, unusual guided
tours through the collections and exhibitions, tours of the museum by candlelight
concerts and lectures, to heritage made more attractive and interesting for younger
users and families.”(Margetić; 2007:145)
268 Igor Mavrin • Jerko Glavaš

Since 2005 and the first Night of the Museums, until today, the event has be-
come the most recognizable museum brand in the Republic of Croatia, which can
be seen by the attendance during the same period (Table 1).

Table 1: The Night of the Museums event in the Republic of Croatia (2005-2013)
Number of museums, galleries and
Year Number of cities Number of visitors
other cultural institutions
2005 1 6 10.000
2006 0 0 0
2007 8 27 70.000
2008 20 60 111.000
2009 31 73 140.000
2010 43 116 278.000
2011 60 150 300.000
2012 80 180 315.000
2013 100 226 324.000
Source: Croatian Museum Association; available on http://nocmuzeja.hr/o-nama/

The Night of the Museumsoutgrows the usual concept of the museum event,
which seeks only to draw attention to the existing museum exhibition. Numbers
from the 2013 event show that “... there were 129 exhibitions, 40 lectureswere
held, 57 professional guided tours through the museum’s exhibition organized, 40
screenings held” along with “… 9 plays, 41 workshops, 67 music programs, two
fashion shows (....) literary evenings, storytelling and performances.”
(Croatian Museum Association; available on http://nocmuzeja.hr/o-nama/)

3.1. The Night of the Museums 2014 and the new visiting records
The record-breaking trend was continued in 2014 – the number of visitors to
the Night of the Museums event grew once again, so there were “…350.900 visi-
tors in 100 cities and more than 200 institutions”. (Croatian Museum Association;
available on http://www.hrmud.hr/)
The following table brings information on visiting numbers of the Night of the
Museums 2014 event in Croatian cities.
THE NIGHT OF THE MUSEUMS EVENT AND DEVELOPING NEW MUSEUM ... 269

Table 2: The Night of the Museums 2014 event –visiting numbers
City Number of visitors
Zagreb 138.278
Split 51.633
Zadar 33.187
Rijeka 21.306
Dubrovnik 15.094
Pula 12.288
Osijek 11.760
Varaždin 9.600
Source: edited by authors, according to Croatian Museum Association; available on http://www.
hrmud.hr/

As it can be seen, Croatian capital (and the most populated city) Zagreb leads by
the number of visitors, followed by Split. The following table displays the numbers
of visitors in the most popular museums.

Table 3: Top 10 most visited museums in the Republic of Croatia – the Night of
the Museums 2014 event
Museum City Number of visitors
18.127
National Museum Zadar Zadar
(Note: museumon 6 different locations)
Museum of Contemporary Art Zagreb 14.970
Car Museum Ferdinand Budicki Zagreb 14.500
Croatian National History Museum Zagreb 11.800
Mimara Museum Zagreb 11.501
City of Split Museum Split 9.925
Archaeological Museum in Zagreb Zagreb 9.053
Archaeological Museum in Zadar Zadar 8.960
Museum of Arts and Crafts Zagreb 8.764
7.780
Dubrovnik Museums Dubrovnik
(Note: 5 museums in total)
Source: edited by authors, according to Croatian Museum Association; available on http://www.
hrmud.hr/
270 Igor Mavrin • Jerko Glavaš

As it can be seen, the most successful museums are in Zagreb (6 of 10 museums
from the list), while an exceptional success record the museums from the Adriatic
part of Croatia (Zadar, Split and Dubrovnik).

4. Comparing the most visited museums in 2006 and 2011
Museum Documentation Center (MDC) provides statistics on visiting num-
bers for year 2006 and 2011. Data on the period since 2000 to 2006 show contin-
ued growth in visitor numbers.

Table 4: Number of visits to Croatian museums 2000 – 2006
2000. 2001. 2002. 2003. 2004. 2005. 2006.
845.000 1.402.500 1.474.000 1.901.000 2.352.000 2.260.627 2.505.636
Source: Franulić, 2007:2

An interesting detail of these statistics is the Year 2005 – the only one with
decreased the number of visits to museums in the period since 2000 to 2006. It is
also the first year the Night of the Museums in Croatia (six museums from Zagreb
involved in the project). The upward trend was repeated since 2006, and this was
the year in which the event was skipped (it continued in 2007). Let’s compare the
data on the most visited individual museums in 2006 and 2011.

Table 5: Comparison of the most visited museums in the Republic of Croatia
(2006 and 2011)
Most visited Number of Most visited museums in Number of visitors
museums in 2006 visitors in 2006 2011 in 2011
Dubrovnik Museums Dubrovnik Museums,
445.000 385.421
Dubrovnik Dubrovnik
Archaelogical Museum Archaelogical Museum of
444.952 314.674
of Istria, Pula Istria, Pula
Klovićevi dvori Gallery,
200.000 Museums of Croatian Zagorje 181.503
Zagreb
Brijuni National Park –
Cultural and Historical 155.410 Museum of technics, Zagreb 159.316
Heritage Department
Museums of Croatian Museum of Contemporary Art,
95.986 112.485
Zagorje Zagreb
Source: edited by authors, according to Franulić, 2007:6 and MDC, 2012:1
THE NIGHT OF THE MUSEUMS EVENT AND DEVELOPING NEW MUSEUM ... 271

As shown in the previous table, the two most visited museum institutions are
on top both years, but the number of visitors to both institutions has considerably
declined in 2011 compared to 2006. Number of visitors to the Museum of Croa-
tian Zagorje (five museums in one institution) was almost doubled in the same
period. The Night of the Museums event reached 300.000 visitors infor the first
time reached, noting the continued growth earlier, but also in the coming years.
This may lead us to the conclusion that the Night of the Museums event benefited
the museum institutions from periphery, while most visited institutions failed to
achieve additional growth. In fact, the most visited museums recorded a decline
compared to the period 5 years ago.
Continuous increase in number of cities, museums and visitors as part of the
Night of the Museums project speaks in favor of the event and the creation of its
brand. However, it remains in question whether the success of the event reflected
on branding museums involved in the project. The opposite is more likely. A qual-
ity museum programme becomes invisible in mass museum offer concentrated in
one (free) museum day (or night, as the event typically held in the period between
18 hours and 1 hour after midnight). For most recognizable museums, the event
participation becomes a certain prestige, but the long-term success of the institu-
tion still depends more on the organization of the programme, strategic planning,
management of the museum and marketing campaigns carried out during the year.
The Night of the Museums certainly drew attention to the visibility of the museum
in Croatian cities, and there has been some impact on the marketing activities of
museums themselves. Quality and effective leadership of the museum will take ad-
vantage of this attention and visibility. It will use it for the implementation of con-
tinuous activities, which will in turn result in a permanent increase in attendance
to regular and occasional activities offered by museum institution.

5. Research: The Night of the Museums and new cultural audiences
Research conducted on the student population at the Josip JurajStrossmayer
University in Osijek shows the trends of the new museum audiences and their mu-
seum’ preferences, with special emphasis on the Night of the Museums event. 61
students of Management at the Faculty of Economics in Osijek took the survey(30
male students and 31 female students). The following graphic summarizes the basic
preferences of the student population associated with the event and museums in
general.
272 Igor Mavrin • Jerko Glavaš

Graphic 1: The Night of the Museums and museum offer – students’ preferences

Wouldvisitmuseummorewithno…
Wouldvisitmuseumsmoreifthere…
Wouldvisitmuseumsmoreifopen…
Visitingmuseumsasmuchasthey…
Visitedtheeventin2013orbefore
Visitedtheeventin2014

0 10 20 30 40 50 60 70

YES NO

Source: edited by authors

As can be seen from the graph, the majority of respondents did not visit the
Night of the Museums in 2014, neither the earlier years. Most of them still do not
visit the museums to the extent they would like. They would visit the museums
more frequently if there are more events like the Night of the Museums, if the
museums would work in the evening and night hours, and if the entrance to the
museum was free of charge.

6. Concluding remarks and recommendations
The year-to-year continuously growing numbers of the Night of the Museums
visitors proves that it is possible to create a new museum audience, but data on vis-
its to the museums outside of the event are proof that the new museum audiences
is difficult to retain and it is also difficult to attract them to museums more than
once a year. Some of the possible directions of development of the museum audi-
ence outside the event model are as follows:
• museum late evening/night event once a week – museums open to the audi-
ence in the evening once a week free of charge;
• ensuring active participation of the public in the exhibitions, and increased
interactivity of museum exhibitions;
• greater connection between the museum displays and modern technology –
attractive presentations connecting museum exhibition and modern mobile
communication technology;
THE NIGHT OF THE MUSEUMS EVENT AND DEVELOPING NEW MUSEUM ... 273

• increasing the accessibility of the museum offer – reverse distribution process
in which part of the exhibits of the museum comes to citizens (set in the
streets , squares, shopping malls).
Previous recommendations can be implemented successfully through two sig-
nificant changes in the museum expertise:
• strengthening the museum marketing activities - training museum experts
in marketing skills and/or employment of individuals with marketing educa-
tion in museums;
• strengthening the leadership of the museum – the implementation of mana-
gerial skills from the business sector and application in museum sector.

Changing the communication strategy and attracting younger people to the mu-
seums (as a future permanent museum participants) has become imperative for mu-
seums which do not want to be interpreted likeuninventive, unattractive places fo-
cused exclusively on the preservation and conservation of heritage, without adequate
presentation strategy for museum content. Creating new and maintaining existing
audience (i.e. museum participants) are the tasks which arisefor the 21st century
museums. Events such as theNight of the Museums are a good way, but are still
insufficient. Without defining a clear strategy in each institution, museums would
gradually become part of the culture of spectacle, in the form of one night attraction.

References
1. Franulić, M. (2007): Posjet hrvatskim muzejima – Statistika broja posjeta (2006. g.)
i trendovi; available on: http://www.mdc.hr/UserFiles/Image/projekti/statistika/old/
Broj%20posjeta%202006.pdf; accessed on: 11th February 2014;
2. http://nocmuzeja.hr; accessed on: 15th January 2014;
3. http://www.hrmud.hr/; accessed on: 10th February 2014.;
4. Margetić, M. (2007): Noćni posjet muzeju; Informatica Museologica 38 (1-2), 2007;
pp 145-146; available on: http://www.mdc.hr/UserFiles/File/IM_38(1-2)_WEB.
pdf; accessed on: 10th February 2014;
5. Mat, G., Flatz, T., Löderer, J. (2002): Menadžment muzeja; Clio, Beograd; ISBN:
86-7102-048-7
6. Museum Documentation Centre (2012): Posjet muzejima u Hrvatskoj 2011. g.;
available on: http://www.mdc.hr/UserFiles/Image/projekti/statistika/Posjet_muzeji-
ma_%202011_posjecenost.pdf; accessed on: 11th February 2014;
274 Igor Mavrin • Jerko Glavaš

7. Richardson, J. (2011): The audience is dead – let’s talk participants instead; Museum
Next, available on: http://www.museumnext.org/2010/blog/museum_audience_de-
velopment; accessed on 1th February 2014;
8. Subotić, I. (2005): Stvoriti i voleti publiku; in Gilbert, C. (2005): Muzej i publika;
Clio, Beograd, ISBN: 86-7102-225-0
9. The Art Newspaper (2013): Visitor Figures 2012 – Exhibition & Muesum Attendan-
ce Survey; The Art Newspaper, Section 2, No 245, April 2013; available on http://
www.theartnewspaper.com/attfig/attfig12.pdf; accessed on: 15th January 2014;
10. Waltl, C. (2006): Museums for visitors: Audience development – A crucial role
for successful museum management strategies; available on: http://www.intercom.
museum/documents/1-4Waltl.pdf; accesed on: 10th February 2014.
CUSTOMER EQUITY IN A NETWORK DRIVEN CONTEXT  CONTRIBUTIONS FOR ... 275

CUSTOMER EQUITY IN A NETWORK DRIVEN CONTEXT -
CONTRIBUTIONS FOR EVALUATING CUSTOMER EQUITY
Dipl.Ing. Markus Moritz1, Sonja Keppler, Ph.D.2
1
S-Y Systems Technologies Europe GmbH, Federal Republic of Germany
2
Cyprus International University, Republic of Cyprus, sonja.keppler@eu-edu.ch

Abstract
Customer Equity Management (CEM) is not only a method to analyze future
customers’ behavior but also a segmentation tool for identifying customers that de-
liver a great value to a company and those that should be eliminated from a compa-
ny’s customer portfolio. One problem companies in industry are facing nowadays is
the heterogeneous customer portfolio structure and the fact, that customer equity
(CE) calculation models are referring to a company’s turnover and are not profit
oriented. Thus, a customer (that can be an organization, company or an individual)
providing the selling company with a big turnover is more or less of greater value
than a customer delivering a minor turnover. This may lead to mismanagement and
wrong budget decisions. Therefore CE is a key indicator for a company’s Customer
Relationship Management (CRM) environment.
In this paper, first the customer equity will be explained with its monetary and
non-monetary dimensions. Secondly a new and applicable model will be intro-
duced and discussed before starting with solving the problem of a heterogeneous
customer portfolio, which is very important for companies dealing with a multi-
level key market (e.g. lighting industry). The outcome of this paper is a network
based CE calculation model, which is dynamic and can be used for different net-
work structures - not only in an industrial environment.
JEL Classification: D11, P36, P46
Keywords: Customer Equity; Customer Equity Management; Customer Be-
havior; Customer Segmentation; Customer Portfolio Management; Customer Re-
lationship Management
276 Markus Moritz • Sonja Keppler

Introduction
Customers in a network context mean companies, organizations, and individu-
als delivering a certain monetary and non-monetary value to another network actor,
which also can be a company, organization or just another individual. In this case
always a bidirectional relationship between a seller and a customer is described. As
a result two main perspectives can be defined, (i) customer value from a customer
perspective where the focus is on delivering value from a company to a customer,
and (ii) customer value from a company’s perspective where value is delivered from
a customer to a company (Verhoef & Lemon; 2013, p 1). From a seller’s perspec-
tive, of course, customers are very important as they are the primary source for
bringing value into the business (Amue et al.; 2013, p. 1).
However, value can only be measured in the first instance in a profit and loss
(earnings and expenses) context, where profit means the value delivered by a cus-
tomer and loss means the customer driven expenses a company needs to invest in.
As already stated above, there is a difference between monetary (e.g. turnover and
profit) and non-monetary value (e.g. cross-buying and referrals). CEM as a network-
oriented management approach leads to a more specific view on customer-driven
costs versus customer generated value. The outcome is a more efficient and effective
allocation of the actor’s own resources as well as metrics not only to measure but to
make the network structure more transparent (Villanueva & Hanssens; 2007; p. 3).
One famous method for analyzing the CE is the so called Customer Lifetime
Value analysis (CLV), even if it is not easy to use, but its structure reminds of finan-
cial discounting investment strategies (Jaeck; 2014, p. 2). CLV displays the current
financial situation and the prospective cash flow of a customer relationship but
has its limitations for using it, like predicting customers’ behavior or the limited
amount of considered non-monetary values (Abdolvand et al.; 2013, p. 42). Due
to these limitations and because of the fact, that CE’s main drivers are also non-
monetary values an applicable metric must be found combining the past and future
company’s perspective as well as CE non-monetary dimensions, that combine the
customer’s market potential (earning potential, loyalty potential, growth potential,
cross-buying potential) and resource potential (reference potential, synergy poten-
tial, information potential, cooperation potential) from a past-to-current and a
current-to-future perspective (Moritz; 2011, p. 11). In a network- driven context
the CE is a key driver for evaluating a certain network value if considering a full set
of actors on shareholder and stakeholder side.
CUSTOMER EQUITY IN A NETWORK DRIVEN CONTEXT  CONTRIBUTIONS FOR ... 277

Customer Potential and Customer Profit
For evaluating the CE it is necessary to consider past-related as well as future-
related figures, because if the CE is only considered past-related we only have a
one-dimensional perspective, which leads to wrong strategy definitions and imple-
mentation. Thus, the whole customer lifetime circle must be considered (Carr;
2012, p. 1). On the one hand, there is the future-oriented CE, which can also be
called Customer Potential (CPO), and on the other hand the past-oriented CE,
called Customer Profit (CPR), can be introduced. Combined, this will be the first
step to evaluate the Delivered Customer Value (DCV), which will be used as a key
dimension for the Network or Node Weight in a network oriented approach.
Even though CE is meant to combine customer value management, brand
management, relationship management, and retention management (Abadi et al.;
2013, p. 2), CE should be not only be considered for marketing activities in a short
view but for evaluating a company’s strategic thinking cross-functionally. From a
user’s point of view the CE calculation model needs to be as simple as it can be in
usage and understanding, as well as adaptive, easy to control and it must focus on
relevant elements for a company’s strategy (Villanueva & Hanssens; 2007; p. 10).
First it is necessary to define the Customer Profit in order to find a more practical
approach (see figure 1):

Fig. 1. Customer Net Profit Evaluation

Source: Authors’ own work.
278 Markus Moritz • Sonja Keppler

The above-mentioned calculation is a template which can be changed accord-
ingly to a company’s specific needs, as the usage of the different modules (Costs of
Sales, Costs of Marketing, etc.) are based on the company’s own business as well
as network structure. One advantage is: it is very easy to implement also in project
organizations or other network-driven business environments.
The next step is to evaluate and calculate the CPO in order to implement a
future-related perspective into the CEM framework:

Fig. 2. Definition of Customer Potential

Source: Authors’ own work.

Therefore it is recommended to use a scoring model based on monetary and
non-monetary dimensions, as scoring models can be found in various ways to en-
hance a CEM perspective by evaluating the CE core metrics (Wortmann; 2012, p.
58). As the name tells us, the CPR is a profit-related figure. In order to calculate a
more profit-related value for the CPO, we have to adjust the following calculation
in correlation to a trend analysis:
CUSTOMER EQUITY IN A NETWORK DRIVEN CONTEXT  CONTRIBUTIONS FOR ... 279

Fig. 3. Calculating the Customer Profit and Customer Potential

Source: Authors’ own work.

The assumption would be to just add the CPR and CPO to get as a result the
needed Delivered Customer Value (DCV). However, the problem is, that accord-
ing to the above-mentioned calculation processes, also the values are still turnover-
related, and this could lead to problems if a company does not have a homogeneous
but heterogeneous customer portfolio, as it is the case for companies dealing with
a multi-level key market (e.g. lighting industry). Additionally it is important to
add the non-monetary values as modules to the future margin and future expenses
driven by the customer, because customer loyalty, customer satisfaction and cus-
tomer retention do have a significant impact on the CE and vice versa.

Customer Investment Rate
Thus, next step is to solve the problem that the output of both metrics is still
turnover-related and thus in a heterogeneous customer portfolio not every cus-
tomer can be compared or segmented properly. This leads to a simple question: If I
280 Markus Moritz • Sonja Keppler

invest 1 Euro in my customer, which amount of money can I get out of it? Because,
as already mentioned, the problem with customer segmentation based on turnover
is: (i) the customer with the highest turnover will be classified as a top-customer,
and (ii) the customer with the highest CPO will also be classified as a top-customer.
The question can be answered by taking the ROI (Return on Investment) as a basis:

Metric 1. Calculating the Return on Investment (ROI)
Total Benefits - Total Costs
ROI =
Total Costs
Source: Corman; 2012 p. 6

Once again: If I invest 1 Euro in my customer, which amount of money can I
get out of it? The solution might be to implement a new KPI (Key Performance
Indicator), where it is not important to take the turnover as a basis but the profit
as an outcome of the relationship between seller and customer. And the ROI (Re-
turn on Investment) provides a first approach to solve this problem. Investments a
company places throughout its customer portfolio need to be valued more profit-
related, therefore the Customer Investment Rate (CIR) will be used with the ROI
as a basis:

Metric 2. Calculating the Customer Investment Rate (CIR)
Customer Investment Rate =
Customer Profit + Customer Potential
Customer Expenses
Source: Authors’ own work.

“The Customer Investment Rate defines the ratio from the monetary values your
company gained in the past and the monetary and non-monetary value is about to gain
in the future in relation to the capital invested in the customer, and the amount of mon-
ey your company is going to invest in the customer in the future (Moritz; 2013, p. 52).”
The CIR is the main driver for evaluating heterogeneous nodes in a network
defined as customers. Referring to customers, the model introduced above is called
the CIR-Customer Equity Model and can be used for any network related CE in-
vestigation or evaluation. In order to apply this model, the CIR-Customer Equity
Model needs to be evaluated for every single customer in a network and can then
CUSTOMER EQUITY IN A NETWORK DRIVEN CONTEXT  CONTRIBUTIONS FOR ... 281

be used to segment or group customers not only for marketing activities but also in
areas like Key Account Management.
The result is a combination of CPR, CPO and CIR to evaluate the DCV:

Fig. 4. DCV Calculation

Source: Authors’ own work.

For further segmentation processes, the correlation between CPR, CPO and
CIR can be visualized in correlation to a multi-dimensional strategy definition, as
follows (example):
282 Markus Moritz • Sonja Keppler

Fig. 5. Correlation between CPR, CPO and CIR

Source: Authors’ own work.

A multi-dimensional strategy formulation means that every dimension (KPI -
Key Performance Indicator, etc.) needs to be ranked in the overall context. After
this it is recommended to set the priorities for the different dimensions in context
to and with regard to a company’s targets and objectives. Regarding the DCV, it
could be characterized in different ways:

Fig. 6. Different value specification regarding the DCV dimensions

Source: Authors’ own work.

Of course, if we do not only consider the DCV but also the other Networking
Management forces like (i) RI (Relationship Intensity), (ii) TL (Threshold Level),
(iii) IQ (Information Quality), (iv) NW (Networks/ Node Weight), (vi) SV (Sup-
plier Value), strategies need to be formulated for all of them according to a com-
pany’s set of targets. One way is to use a 3-level strategy definition:
CUSTOMER EQUITY IN A NETWORK DRIVEN CONTEXT  CONTRIBUTIONS FOR ... 283

Fig. 7. 3-Level Strategy Definition

Source: Authors’ own work.

Conclusion
The CIR-Customer Equity Model combines three different approaches for eval-
uating the CE or so called DCV in a network-related context by valuing the CPR,
CPO and the CIR. It is not only possible now to compare heterogeneous customers
but also to define strategies along the different approaches in order to increase the
CE of a customer or a group of customers. Future attempts will show that a three
level strategy definition can be used to control not only a single customer but also
different customer groups. In a network-driven environment it is essential to realize
that there is a bidirectional exchange of information between two or more actors
and that one actor may play a significant role in a company’s business relationship
in order to acquire or retain other current and future customers.
However, as it is known that acquisition costs beat retention costs it is also necessary
for a company to keep their customer-driven costs as low as possible. Efficiency versus
effectiveness nowadays is a key issue for companies and thus it is necessary to make cus-
tomers as much transparent as could be from a cost point of view. And this can only be
achieved by using metrics that allow a company to compare heterogeneous customers.
284 Markus Moritz • Sonja Keppler

The advantage of the CIR-Customer Equity model is that it is easy to use and easy to
extend by putting additional modules into the metrics that play a significant role for the
company, considering monetary as well as non-monetary CE dimensions.

References
1. Abadi, H. R. D., Kabiry, N., and Forghani, M.H. (2013). Analyzing the Effect of Customer
Equity on Satisfaction, International Journal of Academic Research in Business and Social
Sciences, May 2013, Vol.3, No.5, pp. 600 – 610, available at: http://www.hrmars.com/ad-
min/pics/1904.pdf, (accessed 03-22-2014)
2. Abdolvand, N., Albadvi, A, and Koosha, H. (2013). Customer Lifetime Value: Literature
Scoping Map, and Agenda for Future Research, International Journal of Management Per-
spective, Vol. 1, No. 3, pp. 41 – 59 http://profdoc.um.ac.ir/pubs_files/p11038250.pdf (ac-
cessed 03-21-2014)
3. Amue, J. G., Levi, A.H, and Micheal, N.N. (2013). Building Profitable Relationship through
Customer Equity: A Study into Customer Lifetime Value of Commercial Banks in Nigeria,
International Journal of Business and Behavioral Sciences, Vol. 3, No.7, July 2013, pp. 30-44,
available at: http://cprenet.com/uploads/archive/IJBBS_12-1261.pdf (accessed 03-21-2014)
4. Corman, A. (2012) Calculating ROI for technology investments, available at: http://www.
tfpllc.com/Collateral/Calculating%20ROI%20for%20Technology%20Investments.pdf, (ac-
cessed 03-22-2014)
5. Jaeck, H.-F. (2014). Wertorientiertes Management von Kundenbeziehungen – Berechnung
des Customer Lifetime Value und Einsatz als Steuerungsgröße im CRM - Summary zur
Dissertation, available at: http:// http://www.mhp.com/fileadmin/downloads/insights/crm/
Dr.HorstFlorianJaeck_Dissertation_Summary_Wertorientiertes_Management_von_Kun-
denbeziehungen.pdf, (accessed 03-21-2014)
6. Moritz, M. F. (2011). Customer Equity 1 - Einführung in den Kundenwert aus Anbieter-
sicht, Editor: Deutsche Gesellschaft für Projektmanagement e.V., available at: http://www.
competence-site.de/vertrieb/Customer-Equity-Management-1, (accessed 03-21-2014)
7. Moritz, M.F. (2013). Scientific Report No. 3 - The strategic and operational framework for
managing internal and external networks of companies, University Politehnica of Bucharest,
Doctoral School of Engineering and Management of Technological Systems
8. Verhoef, P. C. & Lemon, K. N. (2013). Successful customer value management: Key lessons
and emerging trends, Peter C., European Management Journal, Volume 31, Issue 1, February
2013, pp. 1–15
9. Villanueva, J. & Hanssens, D. M. (2007). Customer Equity: Measurement, Management and
Research Opportunities, Foundations and Trends in
10. Marketing, Vol. 1, No 1 (2007), pp 1–95, available at: http://www.anderson.ucla.edu/fac-
ulty/dominique.hanssens/content/FnT_Customer_Equity.pdf, (accessed 03-21-2014)
11. Wortmann, A. (2012). Der Entwicklungsstand des Kundencontrolling in der Unterneh-
menspraxis, Ergebnisse einer empirischen Studie im B2B-Bereich und Herausforderungen
für die Zukunft, Schriften der Wissenschaftlichen Hochschule Lahr, Nr. 30, available at:
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Nr_30.pdf, (accessed 03-22-2014)
REDUCING DELIVERY TIMES OF PRODUCTS USING DMAIC METHODOLOGY 285

REDUCING DELIVERY TIMES OF PRODUCTS
USING DMAIC METHODOLOGY
Robert Obraz, univ. spec. oec.¹, Zlatko Rešetar, univ. spec. oec.²
Nikolina Pavičić univ. spec. oec.3
¹Klimaoprema Inc., Republic of Croatia, robert.obraz@zg.ht.hr
² College of Business Administration “Baltazar Adam Krčelić”,
Republic of Croatia, zlatko.resetar@vspu.hr
3
College of Business Administration “Baltazar Adam Krčelić”,
Republic of Croatia, nikolina.pavicic@vspu.hr

Abstract
The global market is a challenge for Croatian companies because the current
business paradigm applied in the domestic market can hardly be applied globally.
Faced with changing customer demand and increased competition, companies in
the manufacturing sector have continued to question the production processes and
continuously improve them if they want to survive in the global market and keep
pace advantages over market competitors. One way of questioning, enhancement
and improvement of existing business systems is DMAIC methodology.
This paper presents the application of the DMAIC methodology to a product
that has lost its market position. Although the product price was competitive, the
delivery times of products for customer were too long. To solve this problem, ob-
served business entity starts DMAIC project of improvement operations. The proj-
ect covers all functional units and their operating procedures, and the end result of
the project activities were new working procedures. Changing its operating modes
observed business entity is able to shorten delivery times and win new geographical
segments of the global market without additional financial investment.
JEL Classification: D23, D24, O22
Keywords: Six Sigma method, DMAIC methodology, production improve-
ment, cost reduction, project management.
286 Robert Obraz • Zlatko Rešetar • Nikolina Pavičić

1. INTRODUCTION
The purpose of the business of each company is to make profit and create condi-
tions for further growth. Nowadays, the biggest challenge for almost all companies,
participants in the global market, faced with the economic crisis, uncertainty, in-
tense competition and a lack of funds to finance the production, is how to change
and adapt business goals and strategies to satisfy the preferences of customers. One
of the continuous questioning and improvement of production business systems is
DMAIC methodology. This methodology is being successfully used through sev-
eral decades by the leading global companies and their business results prove that
through a systematic approach and application of DMAIC methodology can im-
prove and enhance existing business systems.
The hypothesis assumes that the DMAIC methodology is a powerful and ef-
fective tool for improving the work of businesses at all levels of companies, and
that in addition to improving manufacturing processes can equally well be used to
improve everyday business activities in functional units, such as Sales, Purchasing,
Production planning, etc.
As a testing ground for research we selected business entity Klimaoprema Inc.
Samobor which operates 40 years on the market of equipment for ventilation.
Since the observed business entity has a wide range of products, for testing hy-
potheses selected product called kitchen hood. The product, in various sizes, can
be found in every contemporary restaurant, hotel and larger kitchens where they
thermally processed and prepared food for more people.

2. DMAIC METHODOLOGY
DMAIC methodology is one of two approaches to solve complex business prob-
lems by using a method of quality improvement called Six Sigma. DMAIC is a
systematic scientific approach based solely on the facts, where the main goal is
continuously improve the already existing and well-established business processes.
(Lunau et al.; 2009, 11). The term comes from the acronym DMAIC, English
name of the individual steps approach: Define, Measure, Analyze, Improve and
Control. (Eckes; 2003, 30). DMAIC methodology and the steps or stages of access
are shown in Scheme 1.
REDUCING DELIVERY TIMES OF PRODUCTS USING DMAIC METHODOLOGY 287

Scheme 1. Phases of DMAIC methodology

Source: adapted according to: Lazibat, T. (2009.) Upravljanje kvalitetom, Znanstvena knjiga,
Zagreb, pg. 259.

According to Scheme 1, DMAIC methodology presents a closed process that
takes place continuously over a long period of time, and whose application elimi-
nates unproductive business processes with the implementation of fixed measure-
ments and the application of techniques to improve. The most significant phase of
the DMAIC methodology is a phase change in the design of business processes.
It is repeated until the results of the activities is not an optimal process that will
enhance and improve the function of the observed system and annul the so called
“bottlenecks” business processes whose appearance causes higher overall operating
costs. In practice, the DMAIC methodology is most commonly used for constant
improvement by reducing or minimizing the causes of variation in existing process-
es. This approach makes it easier to make changes on an ongoing and progressive
basis and provides stability by minimizing variation that leads to additional costs
and customer dissatisfaction. (Lazibat; 2009, 258.)

3. APPLICATION OF DMAIC METHODOLOGIES
DMAIC methodology is used for enhancement and improvement of the well-
established existing business processes that take place over a longer period of time.
Consequently, the production process of kitchen hoods in the observed enterprise
can be categorized as previously mentioned process because the product is made
continuously over the past thirty years. The product is selling well in the domestic
market and the regional market and as such it was competitive, but with the arrival
of the economic crisis, demand for the product in these markets reduced and pro-
288 Robert Obraz • Zlatko Rešetar • Nikolina Pavičić

gressively declined in recent years. Turning out to the global market given product
is still competitive, but delivery times are too long for customers.
Applying DMAIC methodology in this particular case moves through the five
above-mentioned phase, starting the first phase - phase of defining the problem.

3.1. Defining the problem
Previous product delivery times of 12 working days customers are perceived as
too long and sales department has pointed out the need to shorten delivery peri-
ods if we want to attract new customers and retain competitiveness in the global
market. In order to shorten delivery times, a project team was formed responsible
for the project, and team members are assigned roles and duties in accordance with
the Six Sigma methodology. The team´s task was to examine the existing business
operations of the observed system and find ways to shorten the current terms of
delivery of the product.

3.2. The measurement process
After identifying the boundaries of the system and the problem of defining the
project moved on to determine the time required to produce the product. To deter-
mine the time of labor, or labor costs in each functional department, it was decided
to monitor document that passes through the entire system, and that is Production
order. With the help of Production order business process was measured by observ-
ing the time units required to perform any work procedures in the process, and the
measurement results are recorded in a standardized tables for data entry.

3.3. Process analysis
In the third phase of the DMAIC methodology previously obtained results of
the measurements were selected and analyzed using statistical applications. Result
of analysis is shown on the first diagram.
REDUCING DELIVERY TIMES OF PRODUCTS USING DMAIC METHODOLOGY 289

Diagram 1. Pareto analysis of working time spent by departments

Source: Authors’ calculations.

In diagram 1 can easily be seen that the largest part of the total time of mak-
ing an offer and closing the deal until the delivery of the finished product in a
monitored business system is spent on planning and design of the product and that
this working procedure is the “bottleneck” of the observed business system. Other
departments, according to the first diagram, participate in a smaller share of the
total cost of work time. Since it is according to diagram 1 process of designing and
constructing products demonstrated critical to shorten product delivery deadlines,
the project team was concentrated all of its activities on the analysis of the work and
working procedures in this section.

3.4. Improvement process
Preliminary analysis of the working procedures of the Department of product
design has highlighted the fact that the designer in charge of this group of products
is continuously working on the construction and design of the kitchen hoods. “Ad
hoc” solution that is immediately imposed, hiring another new employee, which
would speed up the process of constructing the product and avoid “bottleneck”
process in this functional department. Since the DMAIC methodology is based
290 Robert Obraz • Zlatko Rešetar • Nikolina Pavičić

on facts and not on an “ad hoc” approach, the project team decided that all efforts
and activities focus on the design and construction products and the development
of technical documentation and thus try to expedite the process. To speed up the
design process, it was necessary to examine the flow of information through the
business system and see which information entering and leaving the Department of
product design. Conducted activities have resulted in a flow chart of work through
the system, which can be seen in Scheme 2.

Scheme 2. Business processes and existing mode

Source: Authors’ calculations.

The Scheme 2 shows the current way of working in the observed business sys-
tem and the interaction between the individual functional departments. Accord-
ing to Scheme 2 it is evident that sales department sends Production order in the
Department of product design, where it prepares the necessary documentation and
after finish it Department of product design send it in the production planning.
The Department of production planning is determined dates for the manufacture
of products and documentation with Production order goes into production.
The further analysis of work in the Department of product design has been
extended to the type and size of the product produced on an annual basis. The ap-
plication of statistical methods for data analysis revealed that the data is grouped
around one type of product and that in some cases the products differ in size by
only a few centimeters. From the viewpoint of function and other useful properties
the minimal difference in size does not affect the function of the product because
they are designed with certain safety factor.
Review of annual production in the observed enterprise over the past five years
has shown that the average annual production is 200 pieces of product. This also
means that for more than 200 delivered products are made technical drawings, pro-
cess documentation and worksheets necessary to produce the product. In order to
improve the working procedures of designing and constructing the observed prod-
REDUCING DELIVERY TIMES OF PRODUCTS USING DMAIC METHODOLOGY 291

uct all the above-mentioned data were grouped and analyzed using a statistical com-
puter program. The results indicated that there is only one optimal model for the
enhancement and improvement of the observed business system. Computer simula-
tion indicated the need to change existing ways of working in the sales department
by introducing new work procedures, and these are graphically shown in Scheme 3.

Scheme 3. The process after analysis and implemented improvements

Source: Authors’ calculations.

According to Scheme 3, we can see that the new business process in the sales
department is more complex than the former because it involves several working
procedures that have so far existed. In addition to the increased complexity of the
new working process it requires a little more focused work of employees in the
sales department. In the optimal business process when a customer requests for a
quotation of the observed product, an employee in the sales department has at its
disposal a database of products already made. In the database are detailed descrip-
tions of all manufactured products, and a new database is fully compatible with the
ERP system used to manage at all levels of business in an enterprise. Employee in
the sales department, based on the information in the database, selects one of the
procedures by the method shown in Scheme 3.
If the query is related to a product already made in the observed business entity,
this means that there is full documentation for this product, Production order for
manufacturing opens directly into the sales department without having to con-
292 Robert Obraz • Zlatko Rešetar • Nikolina Pavičić

structor prepares complete documentation. Constructor’s task in the new process
is to control the opened Production orders in relation to the reference product and
the information system approved by the department of production planning ac-
cess, browse and use the necessary documentation. Further information and docu-
mentation flow goes, according to the working procedure scheme 3 to the produc-
tion department.
If in the database does not exist same product in accordance with the wishes and
needs of the customer, sales employee handles according to the procedure shown
on the left side of Scheme 3 and offers the customer first dimensionally similar
product that meets the tolerances field operating conditions. Thereby, Sales depart-
ment informs customer about the possibility of buying a similar product with the
same characteristics and seeks his approval. If the customer or the client is satisfied
and agrees with the characteristics of the offered product, a production order goes
in the standard way and it is approached to developing products according to exist-
ing documentation and the established operating procedures.
If a customer is not satisfied with the offered product and seeks product exclu-
sively to the desired dimensions, it is opened, according to the procedure shown at
the bottom of Scheme 3, the Production order to create entirely new products and
approaches to making the entire technical documentation for a new product. After
making all the necessary documentation and information about a new product, it
is promptly entered into the database of products made and designed new product
becomes a standard product offering.

3.5. Process control
After implementation of operating procedures shown in Scheme 3 employees
in Sales department started to work by new operations. The new work process was
monitored daily in order to avoid errors and delays, and the first problems were
related to products database. Issues regarding indexing the data have been removed
in the short term, and the base is flawlessly in daily operation.
The control process illustrated in Scheme 3 is carried out periodically and is
based on the principle of random sampling. Two to three times a month database
is checked, and daily backups are made.
REDUCING DELIVERY TIMES OF PRODUCTS USING DMAIC METHODOLOGY 293

4. EVALUATION OF IMPROVEMENT PROCESS
Shown DMAIC project after ending must go through the validation and evalu-
ation how we would be able to assess the actions taken. Since this project falls
into the category of simple projects with very short duration, the evaluation can
be carried out by simply economic principles - the process of evaluating the im-
provements carried out before and after the carried out process of evaluating the
improvements.
Diagram 1 shown the first Pareto analysis of total time spent working on the
functional units of the observed business entity. It is based on the analysis found
the “bottleneck” of the business system in the department of product design. After
the introduction of the new Operating instructions for the sales department based
on operating procedures shown in Scheme 3 it was re-conducted recording time
spent working by departments according to a predefined method. Once again for
the measure it´s used Production order that circulated among all functional depart-
ments in the observed business entity, the results of Pareto analysis of the recorded
working hours are shown in the diagram 2.

Diagram 2. Pareto
y analysis of time after the improvements
p

Source: Authors’ calculations.
294 Robert Obraz • Zlatko Rešetar • Nikolina Pavičić

In the second diagram it is clear that time of work in the Department of product
design significantly reduced and currently amounts 0.5 working hours. Working
operations design and engineering products is moved from the first position in
diagram 1 to the last place in the diagram 2 which indicates that this operation is
no longer a “bottleneck” in the observed business system. The main reason for this
significant reduction in working hours is the facts that during the thirty years are
designed and constructed thousands of concerned products and all products are
made with completed technical documentation. With new work procedures, as
shown in scheme 3 all information flows bypass the Department of product design
unless customer are looking for products according to special requirements. From
the second diagram it is evident that the trends observed during the total product
through the business system shortened so that according to the new mode of fin-
ished product delivery time is 5 working days instead of 12 days.

5. CONCLUSION
Most business paradigm assumes that the use of automated processes can re-
place manual work and that they can produce larger quantities of product per unit
of time in order to reduce the total time of the duty cycle and the total cost of de-
veloping the product. Applying DMAIC methodology on the present case, showed
that the delivery times of the product can reduced by using the same level of tech-
nological equipment. In our case, because of the steady operating mode, the “bot-
tleneck” of the business system is representing the working procedures of design
and construction products. Systematic approach, through five phases of DMAIC
methodology, observed operating system is analyzed and further enhanced without
large investments and additional costs, and the project resulted in the development
of optimal process flow of information and documentation. With new operating
procedures to the business process of the observed business entity is adapted to the
needs and demands of the global market for shorter periods of development and
delivery of finished products. Delivery dates are shortened from 12 days to 5 work-
ing days, and with a new way of working are achieved significant savings in time
working on design and construction products.
Applying DMAIC methodology to the present case shows that a systematic
approach and minimal investment can achieve big savings and reduce labor costs.
Our study can be extended vertically using the DMAIC methodology to produc-
tion process, which could cause further enhancement and improvement of the pro-
duction process of the observed product.
REDUCING DELIVERY TIMES OF PRODUCTS USING DMAIC METHODOLOGY 295

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296 Goran Pajnić • Davor Bošnjaković • Ivan Kelić

THE POTENTIAL OF MOBILE APPLICATIONSIN
ORGANIZATION AND PROMOTION
Goran Pajnić, B.Sc.1, Davor Bošnjaković, B.Sc.2, Ivan Kelić, univ.spec.oec, 3
1
Chief Executive Officer at Belje Inc., Republic of Croatia, goran.pajnic@belje.hr
2
Chief Executive Officer at Vupik Inc., Republic of Croatia, davor.bosnjakovic@vupik.hr
3
Faculty of Economics in Osijek, Josip Juraj Strossmayer University of Osijek,
Republic of Croatia, ikelic@efos.hr

Abstract
With the advent of mobile marketing and wide acceptance of the technology
among end users through smartphone devices, the conditions are ripe for devel-
oping new promotional channels. According to some estimates, smartphone sales
have exceeded one billion units, with no signs of slowing down. Through mobile
applications, these devices allow for two-way communication between business
entities and consumers. Initially, mobile applications were intended mostly for en-
tertainment and were simple applications for personal use. Over time, they have
evolved into sophisticated business-world functions, thus becoming an unavoid-
able trend in marketing activities. It is estimated there are 800,000 mobile applica-
tions on the market, with an incredible range of content. This paper aims to define
the potential of mobile applications in modern marketing activities. To that end, a
survey will be carried out with a sample of tourist board marketing managers. The
results of the survey will indicate the extent to which mobile applications are used
and considered important in modern business practice.
JEL Classification: M31, M37
Keywords: mobile marketing, Web 2.0, smartphone, e-business

1. Introduction
Competition in the modern market has been rapidly changing, mainlydue to
the development of Internet technologies where participants are invited to take
part in content generation. Consequently, participants become active users whocan
THE POTENTIAL OF MOBILE APPLICATIONSIN ORGANIZATION AND PROMOTION 297

fully use an application through a browser and have control over the content. As a
result of the development of digital and communication technologies, new chan-
nels were created for business entities to distribute information to their custom-
ers. The new channels for distribution of information are part of the current Web
2.0Internet technology,which includes e-mail, RSS, blog, forums, social networks,
and one of the fastest growing trends presently– location-based applications using
geographical location of the user. Tim O’Reilly defined the term Web 2.0 as: “...the
business revolution in the computer industry caused by the move to the internet as
platform, and an attempt to understand the rules for success on that new platform”
(O’Reilly, 2006). The main characteristics of Web 2.0 are openness, freedom and
collective intelligence (Strauss & Frost, 2009, 13-14), which all come together in
user participation in content generation. Mobile applications enable users to re-
ceive real-time information on the screens of their devices (mobile phones, laptops
or tablets) and then generate their own content and distribute it to others. To use
mobile applications,one needs a mobile device – a smartphone or a tablet that can
be connected to the Internet. Such devices have a built-in GPS tracker to locate the
user, thus enabling two-way communication.
There are various definitions of the term marketing. Most experts accept the one
that defines marketing as a social process by which individuals and groups obtain
what they need and want through creating, offering, and exchanging products and
services of value with others(Renko, 2009, 12). Marketing, as a business strategy, is
dependant on the orientation of an organisation towards the market and customers
whereinall employees of an organization should focus on the customer in perform-
ing their duties. Electronic marketing applications facilitate a more detailed insight
into consumers’ characteristics and behaviour patterns through the database and
technology that enables interaction with them. Unlike traditional, i.e., analogue,
offline marketing based on market research, electronic marketing facilitates strategic
targeting of consumers as well as quick customization and flexibility of all marketing
activities that respond to customers’ specific needs. In general, we can conclude that
e-marketing complements traditional marketing activities. Furthermore, e-market-
ing is closely linked to the development of new technologies, which seekto imple-
ment traditional marketing mix (variables) through network. It is the development
of technology that has created the preconditions for the implementation of mobile
marketing activities. Mobile marketing enables an organization or an individual to
communicate and engage with their audience in an interactive and relevant man-
nerthrough any mobile device or network (Venkatesh & Sridhar, 2009, 118). Some
298 Goran Pajnić • Davor Bošnjaković • Ivan Kelić

authors find that mobile marketing is any marketing activity conducted through a
ubiquitous network to which consumers are constantly connected using a personal
mobile device to transmit information (Kaplan, 2012, 129-139).
New global marketing trends developed as a result of an increasing number of
smartphone users. Mobile marketing features such as interactivity, measurability
and possibility of direct communication with the user open up enormous oppor-
tunities that all types of organizations recognize. Integration of mobile technology
into existing marketing campaignshas enabled usersto access additional informa-
tion easier and receive alerts about relevant events. Mobile marketing has enabled
advertisers to create personalized multimedia campaigns for their target audiences
and has given users the possibility to react, i.e., respond to the campaign directly.
The main goal of this paper is to collect and analyse data in order to determine the
extent to which business entities have recognized this technology. In view of the
research problem and objectives the following hypotheses were defined:
• H1: Mobile applications,as a powerful promotional tool for business entities,
record a steady growth in the number of users.
• H2: Business entities in tourism industry underuse mobile applications as an
information distribution channel.

2. H1:Mobile applications, as a powerful promotional tool for business
entities, record a steady growth in the number of users.
Internet, one of the most significant technological phenomena of our time, pro-
vides business entitieswith completely new competitive opportunities through mo-
bile marketing based on mobile applications. Links and search engines have created
a parallel world, in which information can be obtained and integrated with a single
click of the mouse. According to Chetan Sharma, an expert in the field of electronic
advertising, the benefits of mobile advertising are as follows (Sharma, 2011):
• Reach - quantified audience.
• Targeting - ICT management at the right time, in the right place.
• Engagement - possibility of engaging consumers in the process.
• Viral - how fast and wide can the message be spread through the medium.
• Transactions - how fast, painlessly and effectively can a consumer execute a
transaction that is advertised (buy a product, service, download...).
THE POTENTIAL OF MOBILE APPLICATIONSIN ORGANIZATION AND PROMOTION 299

User participation is a key feature of mobile marketing which gives it the ad-
vantage over other marketing channels (Griffiths and al., 2004). As a result of rapid
development of the Internet in the past few years, the devices that consumers use
to access the Internet and obtain information have also developed. Research shows
that after 2010 the sales of desktop computers compared to smartphones have
been constantly decreasing (Kadlec, 2013, 4). According to the results of another
research, the share of smartphone users worldwide amounted to around 29% (IDC
- Press Release, 2011). In 2011, 627 million people were using smartphones, ac-
counting for 12.3% of the total number of active telephone cards in the world. It
is expected that in 2015 more than 1.5 billion people could be using smartphones,
which would make 24.8% of active phone cards. Research has revealed that in 2012
there were 1.2 billion people using mobile applications worldwide. Statistics show
that this trend has been growing at an annual rate of 29.8% and that it will reach
4.4 billion in 2017(Portio Research, 2013). According to the results of research
conducted by Gartner, the world’s leading information technology research com-
pany, smartphone users downloaded more than 102 billion mobile applications in
2013 (Gartner, 2014). These results indicate that application downloading is on
the rise. However, it needs to be pointed out that the rise pertains to free applica-
tion downloading. Table 1 shows the number of paid application downloads in
relation to free application downloads, as well as predicted downloads and trends.

Table 1. Downloads of mobile apps from all stores worldwide, 2010-2016
according to Gartner.

  2011 2012 2013 2014 2015 2016

Free downloads 22.1 billion 40.6 billion 73.3 billion 119.9 billion 189 billion 287.9 billion
Paid-for
2.9 billion 5.0 billion 8.1 billion 11.9 billion 16.4 billion 21.7 billion
downloads
Total downloads 24.9 billion 45.6 billion 81.4 billion 131.7 billion 205.4 billon 309.6 billion
Percentage free
88.4% 89.0% 90.0% 91.0% 92.0% 93.0%
downloads

Source: Gartner; 2012, available at: http://goo.gl/amyytB (15.03.2014.)

Free downloads account for almost 91% of all downloaded applications. Busi-
ness entities that use applications as apromotional tool should therefore offer them
300 Goran Pajnić • Davor Bošnjaković • Ivan Kelić

for free. To achieve recognition, draw attention, and eventually gain the trust of the
community in online environment is a challenge for all business entities. The above
results indicate that the proposed hypothesis, i.e. that mobile applications, as a pow-
erful promotional tool for business entities, have recorded a steady growth in the
number of users,has been confirmed. In other words, in the future, business entities
will mainly use this technology in their promotional and organisational activities.

3. H2: Business entities in tourism industryunderuse mobile applications as
an information distribution channel.
Numerous factors depend on the product development strategy. Tourism, as a
specific activity mix, is characterized by a great deal of information playing a role in
business decision making. This information needs to be accurate, timely and reliable.
Marketing information system is an organized set of procedures and methods for
continuing and planned collection, analysis and interpretation of data; assessment,
maintaining and distribution of information to improve business decision making
(Marušić & Prebežac, 2004, 6). The focus is on availability of the relevant content.
Today, when all sectors of the economy are affected by the crisis, including tourism,
it is safe to assume that ICT is key to overcoming the difficulties encountered by
business entities in tourism industry all over the world. The answer to these prob-
lems lies in reinforcing e-marketing activities in all segments of business operation
andpromotion. As a result of rapidly developing ICT, allbusiness entities in tourism
industryhave an opportunity to use this technology in online distribution, organiza-
tion, marketing and sale and in doing so ensure their strong market penetration.
To gain a clear insight into the tourism board marketing activities on the In-
ternet, a survey was conducted with a sample of 101 tourist board offices across
different levels - county tourist board, city tourist board, municipal tourist board
and regional tourist board. The survey also included the main office of the Croatian
tourist board. The survey sample included a total of 14 county tourist board offices,
45 city tourist board offices, 39 municipal tourist board offices, two regional tourist
board offices and the main Croatian tourist board office. The data were collected
using a Google spreadsheet questionnaire which was sent to the official e-mail ad-
dresses of the tourist board offices from January to June 2012. The questionnaire
consisted of 62 questions, nine of which were open-ended questions where respon-
dents were required to write their response, while the rest were multiple-choice
closed-ended questions. In view of the aim of the paper, i.e. investigating the ap-
plication of Internet marketing tools and techniques in tourist boards, intentional
THE POTENTIAL OF MOBILE APPLICATIONSIN ORGANIZATION AND PROMOTION 301

sampling was used to select the target audience. Therefore, the survey was con-
ducted on a sample of employees of tourist board offices who are proficient in the
field of Internet marketing and whose knowledge would be useful for determining
the extent to which tourist board offices have developed mobile applications.
The aim of the questionnaire was to investigate whether respondents, i.e., tour-
ist board online promotion managers have used Web 2.0 applications and if so,
which applications have been used and to which extent, as well as to examine the
attitude of respondents towards the advantages and disadvantages of these applica-
tions. The study also looked into how much tourist boards invest in adapting the
content to mobile devices so that it can be used with the help of specialized mobile
applications by asking whether the tourist board has invested financial resources in
developing a mobile application. Figure 1shows the results of the survey.

Figure 1. Has the tourist board invested in a custom-made mobile application

Source: Research results by authors

The results indicate that only 17% (17 offices) have a (custom-made) mobile
application or some kind of application with features that identify the tourist board
office in question. Given the fact that mobile applications can provide most of the
information to their users, and can largely operate in the same form both offline
and online, the results show that tourist boards have not recognized the importance
of mobile applications. Tourist boards, as organizers and promoters of destinations
must allow unrestricted flow of relevant information to all potential guests. Mobile
applications enable all users to take part in the exchange of content. Most applica-
tions allow constant update of data and information (events, photos, links, con-
tact information, available accommodation units in the area covered by the tourist
board, etc.). Using mobile applications, tourist boards target their audience in or-
302 Goran Pajnić • Davor Bošnjaković • Ivan Kelić

der to conduct pre-sale activities by presenting information on a destination to pro-
spective guests. Since the application is constantly updated, the latest information
about the destination that guests had visited is sent out to them. They can browse
it, receive information about the upcoming events and perhaps decide to come
back. The survey results confirm the hypothesis that tourist boardsunderuse this
technology. Bearing in mind that the development of mobile applications has only
started to take off, some tourist boards may still not be aware of the need to have an
application developed. However, since there is a large number of applications that
can provide information about the relevant destination, tourist boards should look
into the existing ones and recommend them to their guests. A quality tourist ap-
plication can be used as a travel guide,navigation system, booking agency, shopping
guide, Wi-Fi hot spot locator, translator, information service provider (weather in-
formation, transit schedule, important phone numbers, exchange rates), historian,
etc. (Šipoš, 2012). Given that there is a need for practical and simple, yet attractive
mobile applications with quality content, the possibilities are limitless.

4. Conclusion
Business entities, as well as other networked application users have been in-
creasingly following the trend of providing relevant information to their customers
through mobile applications. It is expected that in the future customeranalysis will be
performed on a daily basis and mobile applications are the best tool for that. Since in-
formation flows and changes rapidly, it is necessary to select the information that will
be useful to customers and distribute it using the most adequate channel. The survey
confirmed the hypotheses that mobile applications represent a powerful promotional
tool for business entities, and that there is a steady growth in the number of users. A
customer using these applications becomes also an administrator, and a distributor
of information to other users, thereby creating a new kind of link between businesses
and customers, which confirms the importance of investing in mobile technology.
One-way communication, usually initiated by a business entity, has become an obso-
lete and inefficient promotionmethod. The latest trend favours two-way communica-
tion in which consumers are taking on an increasingly important role in creating a
long-term strategy of the business entity. As the technology develops, the number of
consumers using smartphones will grow. This creates a testing ground for location-
based services – customer locators and customer interaction applications. Individuals
receive relevant information through the information search/retrieval system in mo-
bile applications. The more product and service customers use these technologies and
THE POTENTIAL OF MOBILE APPLICATIONSIN ORGANIZATION AND PROMOTION 303

services, the more they will insist on obtaining useful and information-rich content.
It is therefore necessary for business entities to invest in mobile applications in order
to be recognized in the cyber world.

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953-303-079-1, Zagreb.
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304 Mirko Pešić • Teufik Čočić

ORGANIZATIONAL ASPECTS OF MODERN
MANAGEMENT IN 21ST CENTURY
Mirko Pešić, B.Sc.1, Teufik Čočić, M.Sc.2
1
Josip Juraj Strossmayer University of Osijek, Department of Cultural Studies,
Republic of Croatia, mpesic@unios.hr
2
Bajment Ltd., Sarajevo, Bosnia and Herzegovina, cocic.teufik@gmail.com

ABSTRACT
Everything is changing in the course of time, especially nowdays when the world
is in the globalization process and all business processes are subject to turbulent
conditions. Every organization in the market must adapt to the market conditions
and the environment. As the economy has its own laws and market conditions that
are changing on a daily basis, different models of leadership and management are
needed. So, this is the reason why management is the most important factor for
managing and leading organizations and companies on market effectively. Manage-
ment faces the biggest challenges and obstacles that companies and organizations
have in their work and must overcome in order to survive on the market in order
to achieve successful growth and development. Management in the 21st century
is probably in the most turbulent environmental conditions in the history of eco-
nomics. This paper provides an overview of modern management in the conditions
of the 21st century, as well as the factors that influence the management in the
process of creating successful companies and organizations, and the ways in which
management companies adapt to market conditions and to the environment.
JEL Classification: L10
Keywords: management, organization, modern management, 21st century

1. INTRODUCTION
The all areas in which the work of management is constantly changing, thus it is
necessary that management and organization operate and adapt to the conditions
and changes in the market. This includes monitoring of market trends and moni-
toring of all business factors.
ORGANIZATIONAL ASPECTS OF MODERN MANAGEMENT IN 21ST CENTURY 305

Modern Management has grown with the growth of social-economics and sci-
entific institution. Modern view consists that a worker does not work for only
money. They work for their satisfaction and happiness with good living style. Here
Non- financial award is most important factor.1
There are many different aspects of performance management, but in most cases
it can be broken down into a few simple steps. If you’re adopting a performance
management process for the first time or want to modify your current one to maxi-
mize its effectiveness, there are three key aspects that are the most important in
your performance management system. Obviously these are up for debate, but in
most cases of performance management you can plan on these to have the most
impact on the success or failure of your performance management efforts.2
Three the most important aspects of management are:
• Planning
• Monitoring
• Rewards

2. THE MOST IMPORTANT ASPECTS OF MANAGEMENT
Planning – The first step in any good performance management process is likely
also the most important. Haphazardly stumbling towards goals will usually only
end in disaster, so it’s important that proper planning is used during performance
management. This applies not only to the performance management system itself,
but also to the inner workings of the business. Speaking strictly about performance
management, good planning begins by analyzing the exact goals you want your
company to attain and to develop realistic ways to achieve them. It’s vital that your
goals be realistic, otherwise your performance management plan will fail. It’s also
important to take the time to create a real plan that can achieve your goals.
Monitoring – If any performance management system is to succeed it needs to
involve a very rigorous monitoring process. Closely surveying your overall com-
pany, each department, and individuals is vital for performance management and
for you to reach your goals. Monitoring during performance management involves

1
http://managementlearningcenter.blogspot.com/2012/09/modern-management-theory-in-princi-
ple.html (01.03.2014)
2
http://www.unicornhro.com/articles/the-three-most-important-aspects-of-performance-manage-
ment--what-to-focus-on (10.03.2014.)
306 Mirko Pešić • Teufik Čočić

not just monitoring the progress of each department and employee but also pro-
viding them with constant feedback whether it is in the form of praise and reward
or in constructive criticism. If you want your performance management efforts to
succeed you’ll have to monitor each step towards your goal very closely to ensure
everything is going according to plan. If areas seem to be lacking, you’ll need to be
able to take steps to improve them such as providing training.
Rewards – While some experts place this lower in importance than other aspects
of performance management, the truth is that your employees deserve rewards and
that few things will influence not only the success of your performance manage-
ment efforts but also the success of your entire company quite like appropriate
rewards. Whether it is simple public recognition or actual monetary rewards, no
performance management process will be complete or effective without good use
of rewards. They can improve morale and employee satisfaction, boost productivity,
and help you move closer to your goals. If you want your performance manage-
ment to be successful, take the time to utilize rewards.3
Planning monitoring and rewards are aspects which represent the most general
management and implementation of processes and functions of organizations.
From the above we can see the most important backbone around which all pro-
cesses are modeled management in the 21st century in which management operates.
According to the Scottish investors most detailed aspects of the management of
modern management are:
1. Focus and clarity of vision
2. Good leadership
3. Communication
4. Involvement and collaboration
5. Manage your assets
6. Different reactions
7. Fundamental needs must be met
8. Loss curve
9. Expectations must be met
10. Fears must be dealt with

3
Ibidem
ORGANIZATIONAL ASPECTS OF MODERN MANAGEMENT IN 21ST CENTURY 307

11. Create urgency
12. Form a coalition and create a dialogue
13. Remove obstacles
14. Build on the change
15. Anchor changes in culture
16. Incentives
17. Assess present situation clearly
18. Identify the current capabilities
19. Identify current mind sets that must change
20. Engage with the workforce at the earliest opportunity
21. Break down programs into initiatives
22. Leaders ensure that frontline staff feel ownership for change4
All those detailed aspects are making a detailed focus and elaborate parts man-
agement and modeling of the organization for current market conditions in the
21st century.
Due to the world economy, which is in the process of globalization and re-
cession management with all the detailed things to worry about unification and
connecting all these work activities to a company or organization adapted to the
market and adapt to any conditions on it.
For developing economies the development of enterprises should be a strategic
goal, this way of thinking may become viable only as a result of a combination of
judicious analysis based on specific local economic aspects and a set of actions to
correct any slippage or amplify existing development trends taken by the managers.
A better leadership would unequivocally lead to a better strategy but sometimes the
lack of information, first about the external environment, continuously undergo-
ing quick and radical changes, the political problems and the complexity of the
implementation of the strategy or the costs that it implies are not taken into consid-
eration. Therefore managers have two options: to establish strategies, which would
lead to the achievement of the objectives; evaluate them on the basis of economic

4
http://investorsinpeoplescotland.wordpress.com/2013/09/23/22-key-aspects-of-managing-change-
leaders-must-consider/ (11.03.2014.)
308 Mirko Pešić • Teufik Čočić

efficiency or to identify an already existent strategy and to adapt it to the environ-
ment changes in which the enterprise carries on its activity.5

3. ASPECTS AND STRATEGIES
According to Jeremy C Bradley,( Demand Media) there are other four impor-
tant aspects:
• Strategic Analysis
• Strategic Choice
• Strategic Analysis
• Strategy Implementation
• SWOT Analysis
Strategic analysis is an idea used within the broader field of strategic manage-
ment to help businesses understand where their companies fit into the broader
marketplace. This starts by looking inward -- evaluating the work environment, the
availability of resources and the relationships between various levels of stakeholders.
The aim of strategic analysis is to get you, the business owner or manager, to think
about the key influences on the company’s present position and to begin thinking
about how those influences can be manipulated to get the company where it wants
or needs to go.

Strategic Choice
Once a strategic analysis of the company’s environment has been carried out,
you can move onto listing the strategic choices your company can take to meet its
objectives. If you need to increase revenue by 25 percent, for instance, over the
next 12 months, listing your strategic choices will help you come up with ways to
scale up resources, change company policy and reinvent business processes so as to
reach the increased revenue goal. The key to this process is open communication.
Discussing your options with your stakeholders -- employees, customers, board
members and concerned community members -- will give you a 360-degree view
of where the company can tweak or modify its policies and processes to better posi-
tion itself for success.

5
Cristiana, POP Zenovia and Anca, Borza, (2013), New perspectives on strategic management pro-
cess, Annals of Faculty of Economics, 1, issue 1, p. 1573-1580.
ORGANIZATIONAL ASPECTS OF MODERN MANAGEMENT IN 21ST CENTURY 309

Strategy Implementation
Implementing the choices outlined in the strategic plan is likely to be a time-
consuming and, at times, frustrating endeavor. There are two things to keep in
mind allocation of resources and the organizational structure. If the organization
and its management are rigid and not very open to change, it will be much harder
to implement your strategic plan. You also have to think about access to resources,
such as manpower, money and tools. Implementing change within the business
will require a balance between pouring money into a problem and effectively using
resources to change business policies and processes.

SWOT Analysis
One of the main tools that can be used in bringing together a strategic man-
agement plan is called a SWOT analysis. SWOT stands for strengths, weaknesses,
opportunities and threats. The idea behind this tool is to list each of your organiza-
tion’s attributes in each section. If you have strengths in customer service, list that
here, but also don’t be shy about listing areas for improvement. If your facilities
need to be revamped, list that as an opportunity to better your company. If there’s
a competitor you can’t do much to control, list that as a weakness. Seeing all of
your business’s pros and cons in one place can you help decide a strategic plan for
accomplishing financial, operations and resource-based goals.6
At the present stage of the economy development of the country in conditions
of the crisis and the complex transformation processes, conditions of management
of domestic enterprises significantly become more complex The effectiveness of the
economic subjects activity is caused mainly by their organizational and managerial
structure, which leads to the necessity of consideration of the enterprise potential
formation problem in the organizational and managerial aspects.7
Businesses and organizations are in constant confrontation with improving their
performance in an environment that provides them with all the guarantees. This
improvement is increasingly sought through a decentralization of decision making
to ensure appropriateness. In these circumstances, the firm’s manager will normally
ask questions about the effectiveness of the functioning of the organization, exer-
cised by him and by his collaborators. In this context, communication between

6
http://smallbusiness.chron.com/aspects-strategic-management-64372.html (14.03.2014.)
7
Yu., Amosov O., (2012), The Formation of the Potential of the Enterprise: Organizational and
Management Aspects, Business Inform, issue 12.
310 Mirko Pešić • Teufik Čočić

management and audit committee, and internal auditor and external auditor could
be strengthened and formalized.8
The current crisis, more than any other disturbing factor, provoked a rough
breach in the management’s daily routine, involving major transformations, es-
pecially in the enterprises’ strategic management. The complex reality in which a
modern company activates, its position, role and responsibilities, makes its strategic
management an extremely complex one, a tridimensional process, its three dimen-
sions being: rational and analytic (economic dimension); political (human dimen-
sion); bureaucratic (organizational dimension). The strategic management implies
taking into consideration simultaneously the three dimensions, each dimension
having its role and importance according to the respective context.9
The current state of the recession and the current trends of globalization and
management can show their best moves and the adjustment thereto may withdraw
best moves and show off your most important aspects through which may lead the
company in the most turbulent times and market conditions.
Specifically, cost management has been created as a source of information for
managerial decision-making on matters of production. An increasing share of the
costs arised out of production in the total costs of the company encouraged the
process of developing instruments for managing costs that arise out of production,
primarily in marketing and logistics activities. Therefore, cost management does
not cover only the costs to the level of products and production departments, but
also the cost per channel of distribution and individual customers. Thanks to the
development of information technology and modern management methods, it is
possible to spread the areas in which cost management contributing to profitability
of the whole business process of companies in production, trade and services.10
Cost management must be the first item in the planning and a major factor by
which will be modeled all business processes in a company or organization capabili-
ties and there starts one of the most important items of management.

8
Botez, D. (2011), Some aspects regarding the relation between management, internal auditor and
external auditor, International Conference Modern Approaches in Organisational Management and
Economy, 5, issue 1, p. 95-99.
9
Deac, V., (2012), Strategic management in a crisis context, Proceedings of the International mana-
gement conference, 6, issue 1, p. 102-109.
10
Karic, M. (2010), The Impact of new Cost Management Methods on Business Profitability, Busi-
ness Logistics in Modern Management, 10, issue , p. 27-55.
ORGANIZATIONAL ASPECTS OF MODERN MANAGEMENT IN 21ST CENTURY 311

4. CONCLUSION
Aspects of modern management nowadays differ in economic activities and
management styles. But the main postulates of management and management
must be the basic principles of management and after them to specific areas can be
modeled and changed, and called aspects and attitudes by which the organization
adapts to market conditions and consumer needs.
Therefore, the conclusion is that the planning and development strategies must
take the aspects that require current conditions and trends in the markets and the
needs of consumers and customers

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nal auditor and external auditor, International Conference Modern Approaches in
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management process, Annals of Faculty of Economics, 1, issue 1, p. 1573-1580.
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national management conference, 6, issue 1, p. 102-109.
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itability, Business Logistics in Modern Management, 10, issue , p. 27-55.
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tional and Management Aspects, Business Inform, issue 12.
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theory-in-principle.html (01.03.2014)
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mance-management--what-to-focus-on (10.03.2014.)
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managing-change-leaders-must-consider/ (11.03.2014.)
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(14.03.2014.)
312 Andreja Rudančić-Lugarić

INTEGRATED QUALITY MANAGEMENT OF A TOURIST
DESTINATION – THE KEY FACTOR IN ACHIEVING A
COMPETITIVE ADVANTAGE
Andreja Rudančić-Lugarić, B.Sc.1
1
Doctoral candidate, Postgraduate Ph.D. study “Management”,
Republic of Croatia, alugaric@hotmail.com

Abstract
The dynamic changes in the global tourism market require qualitative transfor-
mation of nearly every segment of a destination’s tourism supply. The survival of
tourism destinations requires an intensifying tracking of trends relating to a con-
tinuous improvement of the tourism supply quality.
In the new economic, social and cultural frameworks of the tourism market
areas of new dialogue are emerging that treat the tourists as individuals rather than
mere demographic segments of the target market. There is a large number of ways
that brings to a competitive advantage of a tourist destination and all are based
on the interaction on what tourists consider as the superior value – the value for
money or a quality tourist product at the right price. This indicates that the changes
in the habits of tourists require the implementation of integrated quality manage-
ment (IQM) in a tourist destination as a fast and efficient response to consumer
preferences and the increasing competitiveness of destinations in the world tourist
market. Taking into account the above starting points, the main view is to recog-
nize and describe the integrated quality management model of tourist destinations
and to highlight the major factors of a qualitative tourist base on the examples of
Opatija and Porec as a precondition for building a competitive and market recog-
nizable tourist destinations.
JEL Classification: L15, L83
Keywords: tourist destination, integrated quality management (IQM), com-
petitiveness, Qualitest
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 313

INTRODUCTION
Tourism is rightly called “the industry of the 21st century”1(Pirjavec & Kesar; 2002,
5) and is characterized by the constant changing trends in tourism demand and the
development of new travel motivation. In addition, in the world tourism market one
must systematically answer the challenges of a competitive environment (Schaumann;
2004, 103). This requires a tourist destination’s proactive stance in the way of thinking
and acting. On the one hand, the supply tracks the changes in demand preferences,
while on the other hand, the demand’s expectations grow and it is increasingly diffi-
cult to meet it. The model of a tourist destination as a system deals with the processes
within which many elements or subsystems such as accommodation, entertainment or
transportation transform inputs into outputs (Dwyer et al.; 2011, 43).
In a world of growing competition the quality was no longer an option but an
integral part of strategic responses of a company as late as the 1990s. Quality is
achieved through a combination of better processes, better approaches, techniques
and efforts of those who create products and service (Barković; 2011,192-193). At
the same time, the quality of a tourist destination’s effects can be measured by the
survey results that are achieved by perceiving the quality of the respondents-tourists
and their experiences.
In search of new solutions to enhance the competitiveness and monitoring
trends in the world tourism market a new concept of integrated management of
quality of tourist destination has been established and it occurs in response to ac-
tual changes in behavior and differentiation of tourist demand resulting from the
new impacts on all aspects of life.
The paper defines concepts such as tourist destination and integrated quality
management and highlights their characteristics. The emphasis is put on the un-
derstandings and the views tourists, residents and destination management express,
and the correlation of the results obtained from the study in perceiving the quality
of the tourism supply on the examples of Opatija and Porec. Based on the present-
ed analysis data, the appropriate attitudes will be set forth, which incorporate cer-
tain views regarding the realization of a higher quality in these tourist destinations.

1
Although here is used this trendy term for tourism, it should, however, be emphasized that the defi-
nition of tourism introduced by Hunziker and Krapf in 1942, and later adopted and implemented
by AIEST, reads:” Tourism is the sum of relationships and phenomena arising from the travel and
stay of non-residents, Insofar as they do not lead to permanent residence and are not connected with
any earning activity.”
314 Andreja Rudančić-Lugarić

1. The integrated quality management model in support of the
competitiveness of a tourist destination
It is known that, due to the high degree of tertiarization, tourism directly and
indirectly affects the positive development of the tertiary sector, especially trade, ca-
tering industry, hospitality management, service trades and transportation in a par-
ticular tourist destination. Tourism is a field that is now being rapidly transformed
in the supply and demand spheres, which greatly affects the intensity and quality
of tourism development in many tourist destinations. The term “tourist destina-
tion” implies an optimally combined and market-adjusted environment that, by
developing important and dominant skills, advisedly creates assumptions that will
enable it to achieve long term and good tourist results compared to its competition
(Magaš; 2003,16).
The tourist destination is the reason for travel and tourism products make tour-
ists visiting it (Getz; 2008, 403-428). Tourists’ return in the same tourist destina-
tion depends upon the quality of the tourism product. From the point of view of
the tourist, the quality of a tourist destination is defined by the following elements
(Avelini Holjevac; 2002, 156): an image of the destination prior to arrival, in-
formation prior to arrival, reservation, journey to destination, arrival (reception),
information at the destination, place of staying, place of eating, attractions, infra-
structure and environment, farewell and return journey, contacts and memories
(impressions) upon return.
Furthermore, the World Tourism Organization emphasizes the importance of
the quality segment that a tourist perceives in a certain tourist destination. There-
fore, there are at least ten reasons for the introduction of the quality system in the
tourist destination management: (Camp; 1989,81) quality enables a competitive
advantage; quality services and products are more easily sold in the market; qual-
ity products and services encourage customer loyalty; quality brings higher profits;
quality management brings to the stability of the tourism industry and protects
jobs; improving quality betters the quality of life of the local population; qual-
ity management facilitates access to financing; an effective monitoring of progress
reduces repetition of costly mistakes; carefully collecting data provides the tools to
make the right management decisions; monitoring progress in quality management
enables the understanding that encourages proactive management.
In this direction, the IQM model serves as a support for the activities of re-
structuring and repositioning of the tourism destination whose task is to ensure a
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 315

higher level of quality elements in the structure of the tourism product. Integral
quality management (IQM) is a relatively new concept in the management of a
tourist destination that developed in the 1990s as a response to competitive pres-
sures on both the supply and the demand side. At least three reasons can be cited
to explain the late appearance of this concept: (European Commission; 2000, 13) a
more intense pressure of the competition both on the supply and on the demand,
a delayed emergence and development of quality management in the service sector
that occurred not earlier than in the 1980s; a complex nature of the overall quality
management of tourist destinations.
The approach to integrated quality management (IQM) recommended for
tourist destinations includes (European Commission; 2000,19): a comprehensive
plan supported by a leader who is capable of influencing and coordinating all the
partners within the destination; an access to the draft strategy and policy that re-
quires an integrated management (human resources, natural resources, quality of
life, cultural heritage, etc.) which can also be expressed in a formal form by the
partners involved, under the supervision of the authority; the foundations for the
implementation of measures by the various public and private service providers are
laid at this stage; the partners involved and the principal authority measure the ef-
fectiveness of approaches with the help of various indicators to track the satisfaction
of various target groups, the integration into the community and the conservation
of resources from the perspective of sustainable development; in this interactive
process the authority that leads the plan ensures that the results are analyzed and
that findings are deduced from them in order that corrections and additions which
are considered important could be inserted at every level of a chain to ensure the
proper functioning of the chain as a whole.
Here below is an overview of the scheme of the integrated quality management
(IQM) of a tourist destination.
316 Andreja Rudančić-Lugarić

Scheme 1. Overview of the integrated quality management (IQM) of a tourist
destination.
(1) (2) (3) (4) (5)
Five
Identification of Decision to Application Performance Evaluation and
stage
partner(s) action of action measurement adjustment
Individual Joint Strategies Operations Indicators Results
level and project and
key elements policies
Main concept Dynamics of Dynamics of Dynamics of Dynamics of Dynamics of evaluation and
partnerships devising application monitoring adjustment

Leading authority Analysis of Public Satisfaction Evaluation of results
(leads the current authority of tourists Recommendations to
partners), main situation initiatives leading authority and
Content partners participants in the public
and the way they Satisfaction and private sectors
interact Aims and Services for of tourism
overall professionals professionals
strategy and leading
authority
support
Environmentand Quality of life of
sustainable Tourist services local residents
development partners offer Impact on
Division of roles before, the local
between the Human resources during and economy
partners resources after the visit Impact ont he
environment

Leader, Leading Leading Leading
participants authority, authority, authority,
Leading
Involved in the public participants in participants in participants in
authority and
Integration

partners and private sectors, the public and the public and the public and
partners
citizens private private private sectors
sectors sectors

Continuous cycle

Integration

Source: European Commission: Towards quality coastal tourism; Integrated quality manage-
ment (IQM) of coastal tourist destinations and towards quality urban tourism; Inte-
grated quality management (IQM) of urban tourist destinations, Bruxelles: Enterprise
Directorate-General Tourism Unit, 2000. p. 19
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 317

IQM approach connects the five stages that mark the chain of the quality man-
agement applied to a tourist destination. This approach also seeks to explain the
most important driving forces, content and participants in each phase. It allows,
and thus also requires a vertical and horizontal integration. At the same time, the
integrated quality management (IQM) can be accessed in several ways, most of
which derived from the private sector. If any of these approaches want to be applied
to a tourist destination, they should be adjusted in two ways: they must integrate
the public dimension, and must take into account all public and private agencies
involved in the process as well as the complexity of their interrelationships.
The European Commission defines IQM as a systematic effort for internal and
external quality, i.e. an economic growth in the short term and local development
in the long term (European Commission; 2000, 19). The inner or internal qual-
ity is the value that tourists receive through a chain of experiences from the initial
information about the tourist destination to the “after-sales” services upon their re-
turn in the place of residence. Internal quality includes chain services in the public
and private sectors. The outer or external quality refers to the sustainable develop-
ment of tourism with the rational use of renewable and non-renewable natural and
other resources in order to prevent possible unintended consequences(Ritchie &
Crouch; 2003, 86).
Unlike traditional approaches to quality management - that refers to specific
tourist companies - integrated destination management involves coordination of
tourism and other tourism-related activities such as infrastructure, environmental
protection, protection of cultural heritage and equally satisfying qualitative needs
of tourist/visitors, local population and tourism service providers-management of
tourist destinations (Scheme 2).
318 Andreja Rudančić-Lugarić

Scheme 2. Integrated approach to quality management of a tourist destination

TOURISTS

LOCAL TOURIST
COMMUNITIE ECONOMY

DESTINATION
WITH THE
APPLICATION OF IQM

The well-being of the local Larger business excellence community
without conflicts
Satisfied guests and employees

Source: author analysis according to European Commission: Towards quality coastal tourism; In-
tegrated quality management (IQM) of coastal tourist destinations, Bruxelles: Enterprise
Directorate-General Tourism Unit, 2000, p. 31

The connection of the above structures in a joint operation can be achieved by
encouraging the organization of interest groups, meetings of local communities,
common supervision, control and evaluation of the results of the research and so
on. Experience shows that the quality of the destination management generally be-
gins to apply for tourist destinations that recognize their stagnation and when their
successful future is questioned and in this way quality management is introduced
in order to stop the negative trends. Thus, the qualitative approach is used more
as a corrective rather than preventive measure, which is wrong (Blanke & Chiesa;
2007, 22-25).
The integral quality management is usually part of a strategy of the developed
tourist destinations for specific providers of tourist services such as tour operators,
travel agents, hotels, restaurants and so on. However, from the standpoint of tour-
ists, the satisfaction with a particular tourist destination does not depend solely on
the experience of the providers of tourist services, but also on many other more
general factors such as kindness and hospitality, security at the destination, sanitary
and health conditions, traffic and management of tourist flows.
It can be concluded that many factors affect the tourist perception of a destina-
tion, and ultimately they influence the decision of tourists to visit again and/or
recommend a tourist destination to potential visitors.
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 319

2. The Qualitest concept as a support to integrated management model of a
tourist destination
To implement an integrated system of quality management (IQM) in practice,
it is necessary to choose an adequate methodology and integrate several internation-
ally recognized standards of quality management in one system. For this purpose
it is necessary to create conditions for the continuous monitoring of satisfaction of
tourists/guests, in parallel to the evaluation of the satisfaction of the participants
in the structure of the tourism supply. One of the modern tools that allow the
measurement, monitoring and comparing of the elements of the quality system in
a tourist destination with its competitors is Qualitest.
Qualitest is a tool that ensures different types of information according to the
needs of the destination management. It provides supervision of the achieved phase
of quality at different hierarchical levels in a tourist destination.
Qualitest is an integral measurement and control test of the achieved level of
quality of internal relevant tourism supply factors over a period of time. It is also a
reliable basis to compare one’s own performance with that achieved in similar tour-
ist destinations (European Communities; 2003, 3).
The starting point of quality indicators at Qualitest model is showed here below
(Table 1).
320 Andreja Rudančić-Lugarić

Table 1. Instrument of tourism destination management

Perception
Indicators Indicator of
indicator
Fields of quality quality results
of quality
management (performance)
requirements

1. Ability of local
tourism industry
2. Satisfaction of
local population
Quality of a destination

3. Support to local
tourism industry
4. Marketing and
publicity
5. Safety and
→ ↔ ↔
security
6. Air quality at
destination
7. Quality of
environment
8. Communication
before arrival
Quality of a tourism product

9. Availability
10. Transportation
11 Accommodation
12. Information
13. Food and beverage → ↔ ↔
14. Activities
15. Quality of bathing
water
16. Value for money

Source: adapted according to A Manual for Evaluating the Quality Performance of Tourist Des-
tinations and Services Enterprise, DG Publication, European Communities, 2003. p. 8

Qualitest is a practical tool comprised of 16 indicators that complement the
integrated management of quality tourism destination in a way that focuses on the
evaluation of four main elements:(European Communities; 2003, 2) satisfaction
of the needs of tourists with quantitative and qualitative elements of the tourist
supply; local people’s satisfaction with quality of life in the tourist destination and
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 321

the effects of tourism at the local level; participants’ satisfaction with local tourist
attractions achievements in the domain of the range and quality of supply as well
as their relationship with customers; finally, with satisfaction of all the participants
from the quality of the environment, the implementation of sustainable tourism
development, the impact of tourism on the environment of tourist destinations,
concern about the historical and cultural heritage.
Some of the tourist destinations use the Qualitest model along with its indica-
tors to evaluate the achieved level of quality, and it can be used by all interested and
responsible people for the quality management of tourist destinations (European
Communities; 2003, 5): a local DMO (destination management organization)
who intends to apply the concept of integrated destination management and needs
a tool for measuring and tracking (monitoring) the quality, and to compare the
results with similar destinations or competition; other public administration insti-
tutions interested in improving the quality of the tourism sector and looking for
practical advice and recommendations; providers of tourist services, from accom-
modation and food to the various activities that want to acquaint themselves with
the key points of measurement and monitoring their own performance and results
in the area of quality, tour operators and agents interested in monitoring the imple-
mentation of quality systems at destinations they send their clients and intend us-
ing the indicators as a basis for the dialogue with the destination’s local managers.
The paper provides an overview of the research elements of the tourist supply
and through comparative analysis compares perceptions of each target group of the
same elements of tourist attractions of Opatija and Porec as destinations.

3. Comparative analysis of tourist supply in Opatija and Porec as tourist
Destinations
In 2011 the Faculty of Tourism and Hospitality Management in Opatija con-
ducted an empirical research on the topic “Assessment of Kvarner’s tourism supply”2
For the purposes of this study separate data will be used for the tourist destination
Opatija and there are also explored the attitudes of tourists, local residents and

2
More about it in „Ocjena turističke ponude Kvarnera“, 2011 (Assessment of Kvarner’s tourism supply,
2011).,-research results of the project “Tourism Regionalization in global processes” (a project funded
by the Ministry of Science, Education and Sports, no. 011,603, previous research in the same project
was published in a special issue of the scientific journal Tourism and Hospitality Management - Faculty
of Tourism and Hospitality Management in Opatija
322 Andreja Rudančić-Lugarić

tourism management towards the quality tourism supply and the quality of Opatija
as a tourist destination. In 2011, in parallel with the above survey, a research was
conducted by the author with the same approach to Porec as a tourist destination.
For the purposes of this study there will be used primary data of the research
within the project “Assessment of Kvarner’s tourism supply”(interest limited to
Opatija as a tourist destination), in comparison with the data obtained relating
to Porec as a tourist destination and conducted by the author of this paper. The
emphasis is placed on the examination of attitudes and perceptions of the target
respondents about the quality of common and specific elements of both tourist
destinations.
The empirical research was conducted by the author in Porec during the year
2011 (from May to October) by using a survey questionnaire3 customized for each
target group of respondents (tourists, local residents and management of tourist
destinations). The survey was anonymous on a one-shot single stratified sample.
Besides Croatian, questionnaires were translated into three languages (English,
German and Italian). In the data collection it was mostly used the method of per-
sonal interviews while the method of self-completion was used only in a small part
of the survey. The questionnaires were designed in such a way that each group of re-
spondents was asked specific questions relating only to that target group of respon-
dents, while the second part of the questionnaire (survey about the satisfaction with
elements of the tourist supply) was identical for all target groups of respondents.
Both indoor and outdoor types of questions were used in the survey, as well as the
Likert 7 -degree scale (from 1 the worst to 7 the best). In Porec there were surveyed
284 tourists, 162 residents and 32 tourism managers. It was analyzed a total of
478 properly completed surveys out of the planned 600, which represents a 79.7
% feedback. Each studied element is represented with an arithmetic mean. The
collected questionnaires were encoded and all data were analyzed using statistical
methods and the SPSS computer program, as shown in the sequel. These data can-
not be fully accepted as relevant but they indicate some important facts while con-
sidering the qualitative tourism supply in Opatija and Porec as tourist destinations.

3
It was used the same type of survey questionnaires as those used in the project “Assessment of
Kvarner’s tourism supply, 2011” - conducted by the Faculty of Tourism and Hospitality Man-
agement in Opatija in 2011
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 323

4. Tourists’ satisfaction with the elements of the tourism supply in Opatija
and Porec as tourist destinations
As a group of respondents, tourists assessed their own level of satisfaction with
the elements of the tourism supply in both tourist destinations (Opatija and Porec).
In the evaluation it was used the Likert’s scale of priorities (from 1 to 7) for all 37
elements of the tourist supply, in which 1 indicates extreme dissatisfaction and 7
extreme satisfaction with that element, as shown in the following table.

Table 2. Tourists’ satisfaction with the elements of the tourism supply in Opatija
and Porec
ELEMENTS OF TOURISM SUPPLY IN OPATIJA AND POREC Opatija Porec
SPACE – RESOURCES AND ENVIRONMENT
Climate 5,69 5,89
Beauty of the landscape 5,73 5,84
Preservation of the environment 5,46 5,58
Cleanliness of the sea 5,53 5,71
5,60 5,75
POPULATION, EMPLOYEES
Kindness of the population 5,41 5,45
Kindness of the population employed in tourism 5,50 5,64
Knowledge of foreign languages of the population employed in tourism 5,38 5,51
5,43 5,53
RECOGNITION, SAFETY, INFORMATION
Feeling of safety and security 5,48 4,84
Tourist information prior to arrival at destination 5,10 4,98
Tourist signs at destination 5,09 5,18
Souvenirs 5,29 5,37
5,24 5,09
LEVEL OF ORGANIZATION AT DESTINATION
Transport accessibility 4,85 4,32
Local traffic 4,38 5,23
Car parks 3,93 4,01
Care for the appearance of the town 5,63 5,19
Urban harmony 5,31 5,11
Promenades (Opatija)/Old Town (Poreč) 5,88 5,53
Parks and green spaces 5,82 5,38
Tidiness and cleanliness of the beach 5,30 5,39
324 Andreja Rudančić-Lugarić

Crowded beaches 5,38 5,48
Opening hours in the service industry (banks, shops) 5,35 5,31
Opening hours in catering facilities 5,47 5,40
Shops 5,49 5,45
5,23 5,16
FACILITIES
Events 5,11 5,00
Historical and cultural heritage 5,30 5,29
Facilities for children 5,08 5,12
Accommodation facilities 5,56 5,74
Catering facilities 5,53 5,81
Cultural facilities 5,22 5,42
Entertainment facilities 5,35 5,60
Sports facilities 4,95 5,14
Conferences and congresses 4,88 4,75
Health tourism facilities 5,31 5,21
Nautical offer 5,17 5,24
Excursion offer 5,34 5,30
Local cuisine 5,68 5,74
Price and quality ratio 5,19 5,24
5,31 5,32
5,36 5,38
Source: Survey of the Faculty of Tourism and Hospitality in the project “Assessment of Kvarner’s
tourism supply,” - tourist destination Opatija, and the author’s analysis according to the
questionnaires related to the tourist destination Porec

The above table presents the comparative attitudes of tourists for each group of
elements at tourist destinations Opatija and Porec. It can be noted that the tour-
ists tested in both tourist destinations are extremely satisfied with natural resources
such as landscape beauty, cleanliness of the sea and preservation of the environment
and climate. Tourists rated very high (mark 5.73) the beauty of the landscape of
Opatija, while in terms of natural resources the highest mark (5.89) got the climate
in the tourist destination Porec. Tourists rated the elements “population, employees”
very high giving them more than five points in both destinations, which can be
interpreted that the most important asset in both tourist destinations are people.
A slight difference is perceived in the higher rating of courtesy of employees in the
tourism sector in Porec in relation to the destination Opatija. The third element
assessed by the tourists is “recognition, safety, information,” of a tourist destination.
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 325

It should be emphasized a slightly higher average score (5.24) of the tourist destina-
tion Opatija in relation to the tourist destination Porec in the sphere of this group
of elements of tourism, “recognition, safety, information,” because tourists in Porec
rated slightly lower the element of a sense of safety and security, which requires
further research in this tourist destination in order to take action to improve them
systematically. Within the group of elements related to the organization of both
destinations it can be noticed that the best marks obtained the promenades in
Opatija (5.88) and the Old Town in Porec (5.53). In the above mentioned groups
the “car park” obtained the lowest score which is a significant problem both in the
tourist destination Opatija and in Porec. For the assessment of service quality of a
tourist destination the largest number of elements is classified in the group “desti-
nation facilities” .Within this group tourists rated with the highest mark (5.68) the
quality of the local cuisine in Opatija, and in Porec the quality catering facilities
received the highest score which is associated with the promotion of gastronomy
and enology that is being nurtured in the whole Istrian region.

5. Local population’s satisfaction with the elements of the tourism supply in
Opatija and Porec
Tourist offer should be based on the principles of sustainable development and
- with the satisfaction of preferences of increasingly demanding tourists – it should
also contribute to meeting the needs of the local population. Therefore, the popula-
tion was also required to evaluate all elements of the tourist supply, in the same way
as assessed by the tourists. By analyzing the responses, it is possible to examine the
attitude of the population toward certain elements of the tourism supply.

Table 3. Local population’s satisfaction with the elements of the tourism supply
in Opatija and Porec
ELEMENTS OF TOURISM SUPPLY IN OPATIJA AND POREC Opatija Porec
SPACE – RESOURCES AND ENVIRONMENT
Climate 5,93 5,97
Beauty of the landscape 6,06 5,92
Preservation of the environment 5,14 5,03
Cleanliness of the sea 4,73 5,10
5,47 5,50
POPULATION, EMPLOYEES
Kindness of the population 4,99 4,83
Kindness of the population employed in tourism 4,46 4,67
326 Andreja Rudančić-Lugarić

Knowledge of foreign languages of the population employed in tourism 4,11 4,54
4,52 4,68
RECOGNITION, SAFETY, INFORMATION
Feeling of safety and security 5,58 5,42
Tourist information prior to arrival at destination 3,73 4,48
Tourist signs at destination 3,71 4,29
Souvenirs 3,62 4,93
4,16 4,78
LEVEL OF ORGANIZATION AT DESTINATION
Transport accessibility 4,34 5,04
Local traffic 3,35 3,83
Car parks 1,81 2,97
Care for the appearance of the town 5,10 4,79
Urban harmony 4,60 4,70
Promenades (Opatija)/Old Town (Poreč) 5,76 5,29
Parks and green spaces 5,85 5,11
Tidiness and cleanliness of the beach 4,30 4,38
Crowded beaches 3,86 4,02
Opening hours in the service industry (banks, shops) 4,36 4,31
Opening hours in catering facilities 5,10 4,95
Shops 4,60 4,68
4,42 4,50
FACILITIES
Events 3,88 3,90
Historical and cultural heritage 5,56 5,65
Facilities for children 3,78 4,10
Accommodation facilities 5,06 5,30
Catering facilities 3,78 4,22
Cultural facilities 4,11 4,12
Entertainment facilities 3,25 3,89
Sports facilities 3,34 3,57
Conferences and congresses 5,19 5,29
Health tourism facilities 5,04 4,81
Nautical offer 4,94 5,00
Excursion offer 4,89 4,96
Local cuisine 5,16 5,31
Price and quality ratio 4,36 4,68
4,45 4,63
4,60 4,82
Source: Survey of the Faculty of Tourism and Hospitality in the project “Assessment of Kvarner’s
tourism supply,” - tourist destination Opatija, and the author’s analysis according to the
questionnaires related to the tourist destination Porec
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 327

From this table one can deduce that the local population is satisfied with the
tourist supply in Opatija and Porec. The local population of both tourist destina-
tions ranked the elements of beauty of the landscape and climate at the top of
all elements. Also other elements based on natural resources are ranked very high,
which represents the best rated segment of the tourism supply. All three elements
related to “local population and employees” are rated on the high second place in the
overall assessment of satisfaction of the population with the existing elements of
their tourist destination (4.52 for tourist destination Opatija and 4.68 for tourist
destination Porec), annotating that in the overall segment the population is much
more critical than the tourists, who gave much higher marks to all those segments.
Elements of the tourism supply such as “recognition, safety, information,” were rated
relatively poorly by the local population. Safety achieved the best rate in the segment
(5.58 for Opatija and 5.42 for Porec), although this score is lower than that given
by the tourists in the same category. The population perceives the elements of traffic
as the biggest problem in both destinations, local traffic in Opatija was evaluated
with 3.35, while in Porec with 3.83 and the element of parking places deficiency (in
Opatija 1.81 and in Porec 2.97). In the segment “facilities” population of both des-
tinations worse rated some additional features such as events, activities for children,
entertainment and sports facilities, indicating that qualitative changes are necessary.
Population positively perceived cultural and historical heritage (tradition of tourism
in Opatija).

6. Management’s attitudes towards the elements of tourism supply in Opatija
and Porec
The continuation of the research related to the assessment of perceptions of
tourism management in tourist destinations Opatija and Porec, i.e. whether they
met the expectations of tourists about individual elements of tourism supply in a
destination. Based on the survey results, management’s attitudes of both tourist
destinations will be presented hereafter.

Table 4. Management’s attitudes towards the elements of tourism supply in
Opatija and Porec
ELEMENTS OF TOURISM SUPPLY IN OPATIJA AND POREC Opatija Porec
SPACE – RESOURCES AND ENVIRONMENT
Climate 6,00 5,99
Beauty of the landscape 6,00 5,95
328 Andreja Rudančić-Lugarić

Preservation of the environment 6,17 5,98
Cleanliness of the sea 5,33 5,44
5,88 5,84
POPULATION, EMPLOYEES
Kindness of the population 5,00 5,23
Kindness of the population employed in tourism 5,67 5, 97
Knowledge of foreign languages of the population employed in tourism 6,00 5,56
5,56 5,58
RECOGNITION, SAFETY, INFORMATION
Feeling of safety and security 6,33 6,00
Tourist information prior to arrival at destination 4,67 4,18
Tourist signs at destination 5,00 5,22
Souvenirs 4,33 4,60
5,08 5,18
LEVEL OF ORGANIZATION AT DESTINATION
Transport accessibility 5,67 5,51
Local traffic 3,50 3,82
Car parks 2,67 2,78
Care for the appearance of the town 6,17 6,23
Urban harmony 6,00 6,02
Promenades (Opatija)/Old Town (Porec) 6,50 6,10
Parks and green spaces 6,50 6,09
Tidiness and cleanliness of the beach 4,17 4,38
Crowded beaches 3,50 4,00
Opening hours in the service industry (banks, shops) 4,83 4,83
Opening hours in catering facilities 5,17 5,27
Shops 5,00 5,01
4,97 5,00
FACILITIES
Events 5,00 4,97
Historical and cultural heritage 6,33 6,05
Facilities for children 3,17 3,12
Accommodation facilities 5,83 5,99
Catering facilities 5,33 5,45
Cultural facilities 4,50 4,48
Entertainment facilities 3,50 3,41
Sports facilities 3,50 3,52
Conferences and congresses 5,83 5,71
Health tourism facilities 5,17 5,05
Nautical offer 4,67 4,79
Excursion offer 5,83 5,99
Local cuisine 6,00 6,46
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 329

Price and quality ratio 6,00 5,98
5,05 5,07
5,31 5,34
Source: Survey of the Faculty of Tourism and Hospitality in the project “Assessment of Kvarner’s
tourism supply,” - tourist destination Opatija, and the author’s analysis according to the
questionnaires related to the tourist destination Porec

The table 4 shows the comparative management’s attitudes about the elements of
the tourism supply in Opatija and Porec. In the opinion of the management of both
tourist destinations, natural resources arguably represent a significant comparative
advantage in these destinations. The management evaluates something better the
group of elements of the tourism supply that refers to “population, employees” (5.56
to Opatija and 5.58 to Porec). In the group of elements referring to “recognition,
safety, information,” the element “a sense of security and protection” is placed on the
top of the chart in both destinations – it gained more than six points. In Porec, the
management evaluates as the most critical the quality of tourist information (4.18)
tourists receive before arriving at the tourist destination. The results obtained in
the group of “organization” are equal but there are minor differences in favor of
Porec. Specifically, in Porec the highest marks are highlighted as follows; appearance
of the town, the Old Town, urban harmony and arrangement of parks and green
spaces. Furthermore, in the same group of elements in Opatija the highest marks
obtained are for the following: promenades, arrangement of parks and green spaces
and urban harmony of the facilities. For both tourist destinations the management
is critical in terms of the lack of parking places and an inadequately organized lo-
cal traffic. The highest ranking score given by the management within the group of
elements “facilities” for both destinations (more than 6 points) refers to historical
and cultural heritage and local cuisine. At the same time, the tourism management
in both tourist destinations expressed dissatisfaction with the lack of facilities for
children, as well as with entertainment and sports elements of the tourism supply
(rated less than 4). Despite the quality offer of autochthonous events and excur-
sions, the management believes that the quality elements from the group “facilities”
are not adequately offered and are unrecognizable in the wider tourism market,
which should certainly be improved.
330 Andreja Rudančić-Lugarić

CONCLUSION
An indicator of the degree of the impact of tourism on economic, social and cul-
tural prosperity of the local population is the tourists’ satisfaction with the tourism
supply and the satisfaction of the destination management with the economic ef-
fects of their activities. The emphasis is placed on the local population’s perception
of the economic effects of tourism. The need for an as harmonious coordination as
possible and the implementation and control of all aspects of tourism destinations
occurs accordingly.
Only an innovative and integrated destination management can manage a tour-
ist destination based on a IQM model, with the support of local authorities, the
tourist supply and the local population, that are funneled by the tourist demand.
The aim is to realistically consider all relevant elements of the tourist supply and to
achieve a higher level of competitiveness in the tourism market by valorizing the
available resources with the help of their optimal structuring and effective use by
the principles of sustainable development.
In this paper, the perception of the target group “tourists, residents and tourism
management” of the same elements of the tourism supply in Opatija and Porec has
been compared through a comparative analysis. Synthesizing information has led
to the following conclusions; the obtained results are similar in both destinations
but minor differences were observed in favor of Porec. Furthermore, all tested target
groups highly ranked the natural resources supply and this may be considered the
greatest comparative advantage of both tourist destinations in the world tourist
market. Deficiencies are perceived in the group “organization and facilities of tourist
destinations” in both destinations, which leads to the conclusion about the absence
of effects of tourism management in making and implementing significant business
decisions to improve the quality of supply in both tourist destinations. This may
positively direct both tourist destinations to a destination management organization
as a cohesive force that unites and integrates all the decision makers in linking the
needs and desires of tourists by taking into account the views of the local popula-
tion, and the application of the concept of sustainable development based on the
principle of IQM model.
Finally, it is necessary the use of the integrated management quality (IQM) in
the tourist destinations Opatija and Porec, which will provide them with a com-
petitive advantage in the market competition with the world’s tourist destinations,
aimed at the same target groups.
INTEGRATED QUALITY MANAGEMENT OF A TOURIST DESTINATION  THE KEY FACTOR... 331

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332 Đurđa Soleša Grijak • Dragan Soleša

HUMANISTIC APPROACH TO MANAGEMENT
Đurđa Soleša Grijak1, Ph.D., Dragan Soleša2
1
Preschool Teacher Training College in Kikinda, Republic of Serbia, gdjurdja@gmail.com
2
The Faculty of Economics and Engineering Management,
University of Business Academy of Novi Sad, Republic of Serbia, dragan.solesa@fimek.edu.rs

Abstract
Modern management is basically a humanistic approach, where the concept of
a man is understood as a whole, consisting of his skills, needs and ambitions. Al-
though science has much to object to modern management in “indulging a man”
and therefore losing its criticism, this discipline is under constant development and
has materialized in practice.
Successful management means understanding a man, where basic psychological
concepts are considered as guidelines on the road of a successfully accomplished
job. Psychology acts as a frame for understanding not only human motivation but
also interpersonal communication as a basic social need and as a basic means for
satisfying other psychological needs.
In the other side, modern management also includes connection between man
and technologies. This means understanding IT (Information technology) as one
of leading high technologies and specific knowledge about IT as necessity for any
kind of managers’ activity.
JEL Classification: D82, L86, M15
Keywords: modern management, hierarchy of motives, communication, IT

1. INTRODUCTION
The core of modern management is the ideas of humanistic psychology. The
first of the ideas is the one stating that each man is a good man in his very nature,
although this idea does not deny that a man can also be destructive. The good and
the bad in a person represent a cloak which is at a certain moment put on for justi-
HUMANISTIC APPROACH TO MANAGEMENT 333

fied reasons, while at another moment it seems very rigid and out of control. This
is where this theory is different from other theories which take a man to be bad
and selfish in his nature. The second of the ideas perceives a man only as a whole.
Humanists tend to use the notion of integration, meaning that we are responsible
for every part of our psychic and body and for all the parts as a unit. Therefore,
a person actually represents a harmonious whole of contrasts. The third of the as-
sumptions is that a man is under constant growth and development as these are his
inborn instincts. Still, the humanistic approach has often been characterized as too
“soft” and too people-oriented, but the humanists’ basic argument is that people
are the factor which can not be avoided in any job (Revelle, 1993).
Humanistic psychology also focuses onto man’s rich motivation. Other psychologi-
cal approaches consider the motives of lacking to be the basic generators of human
behavior – if food is insufficient, we shall look for it. Therefore, a man will start action
only if something goes beyond his defined boundaries. Humanists see in man a moti-
vation for accomplishment, the need for various experiences and the curiosity, which
takes him from the state of insufficiency into the area of cumulated experiences.
Modern management can be viewed as a mosaic consisting of the exact number
of parts as there are human characteristics and skills. Each individual colors his own
parts, while in successful management each part of the mosaic has to be there and
has to be understood. The part of the modern management mosaic elaborated in
this paper is human motivation.
Abraham Maslow is the founder of humanistic psychology. His greatest contri-
bution is the hierarchy of human needs and the concept of self-realization. Accord-
ing to Maslow, an ideal person is the one that can be referred to as caring, clear,
realistic, relaxed, self-sufficient, spontaneous, creative, direct with good intentions,
cheerful, and the one who successfully takes over risk and goes through life, it
seems, very smoothly (Griffin, 2006). According to this theory, there are four types
of needs that must be satisfied in order for a person to behave in non-selfish man-
ner. Although the urge for satisfying the needs is powerful, it is not too much of a
burden. A man can resist satisfying any need; still, it is not easy to do so. The needs
defined by Maslow are universal, while the manner in which we satisfy them is
individual. What this theory presents in a different way from the other ones is that
the motive is described as something having a power to initiate, therefore having
the most powerful influence over our actions. Each individual has such a need, and
it is the one which is the lowest in hierarchy and which has not been satisfied.
334 Đurđa Soleša Grijak • Dragan Soleša

Hierarchy of human needs is based on two groups of needs – motives of lack-
ing and motives of growth. The motives of lacking are the basic needs which must
be satisfied and neutralized since it is only then that they stop being triggers of
behavior. The motives are distributed in four levels of hierarchy. At the first and
the lowest level are physiological needs – breathing, thirst, hunger, sleep and sex.
Then come the psychological needs: the needs for safety – protection, stability; the
needs for others and for love – friends, partner, children, emotional relationships,
feeling of belonging to the community, communication. The last motive of lacking
is the need for respect where two levels are differentiated, according to Maslow.
The lower level is the need for being respected by other people, the need for a po-
sition in society, for fame and even for domination. The higher level of respect is
the need for self respect, accompanied by feelings of being competent, successful,
independent and free. Self respect is a higher psychological need, since once gained
self-respect is hard to lose. The motives of lacking function by the principle of ho-
meopathy – when insufficiency is present, human organism reacts and satisfies the
need. By the laws of nature in satisfying human needs those that are satisfied first
are the lower, basic needs. It is then that a higher, psychological need might occur
(Maslow, 2004).
Motives of growth trigger behavior with prolonged action, since they can never
be completely satisfied. A person constantly directs his ambitions towards higher
goals; therefore the motives of growth remain a constant motivation source. Maslow
considers only one need as a motive of growth – the need for self-realization. The
concept of self-realization represents the greatest power of motivation. It refers to a
man’s aspiration to know, to understand, to experience beauty, peacefulness and the
feeling of fulfillment. Referring to the researches, Maslow describes a self-realized
person in the following way (Patterson, 1985):
- Clear perception and very high consciousness of reality and the environment,
human and non-human – self-realized individuals are more relaxed towards
the environment; they do not have fears of unknown, of feelings of suspicion
and insecurity nor of the attempts of unifying the familiar and the new.
- Self- and outer acceptance – self-realized individuals are not ashamed of them-
selves, their weaknesses, imperfections and flaws and do not criticize these at
others; they respect themselves and others, are open-minded, honest, never
put cloaks on; are not self-satisfied and oriented towards the aberrations in be-
tween what there is and what should be in themselves, in others and in society.
HUMANISTIC APPROACH TO MANAGEMENT 335

- Spontaneity – self-realized individuals are neither conformists nor anti-con-
formists, but their motivation is oriented towards growing and developing
their own potentials.
- Outer problems orientation – self-realized individuals have a clear feeling of
responsibility, duty and obligation.
- Qualitative alienation – self-realized individuals enjoy privacy and being
alone; they remain immune to what is provoking to others; they feel self-
dependant and safe.
- Autonomy, independence from environment and culture in satisfying basic
pleasures – self-realized individuals depend on others in order to satisfy the
needs for growth and development of own potentials.
- Constant acknowledgement – in self-realized individuals’ everyday life, re-
spect, pleasure and surprise occur repeatedly.
- Mystic experiences – apart from respect, pleasure and surprise, self-realized
individuals experience the world as a constant source of new experiences.
- Empathy, acceptance of and respect for human beings – self-realized individu-
als are able to detect occasional fits of anger, hostility and loathing in others.
- Interpersonal relationships - self-realized individuals are selective and, most
often, their circle of friends is small, consisting of other self-realized individu-
als; other people admire them and follow their steps.
- Democratic character – a self-realized individual does not make a difference
among other people on the grounds of their race, social status or education,
but sees each person as a potential source of knowledge and is ready to learn
from everyone.
- The goal and the means - self-realized individuals are of high moral principles;
they make clear distinction between the goal and make the means subject to
the goal.
- Philosophic humor with good intentions – the humor of self-realized indi-
viduals is spontaneous, reflexive, suits the situation and has no intentions of
hostility, sarcasm or dominance.
- Creativity – here, creativity does not mean any special talent, but a fresh, naïve
and direct perspective of things.
336 Đurđa Soleša Grijak • Dragan Soleša

Maslow defines the need for self-realization as an “aspiration to become the
whole that a person is, the all of that which he/she is able to become” (Griffin,
2006). Self-realization is the need for self-accomplishment and for realization of
own potentials, but only after the basic needs, the needs of lacking, have been satis-
fied. The concept of self-realization might take the form of aspiration for knowl-
edge, for understanding, the essence of life, beauty or self-fulfillment, which de-
pends on the person itself and is not ordered in hierarchal sequence. Maslow’s
main stand is that self-realized individuals achieve wisdom and are therefore more
capable of managing themselves in the wide spectrum of various situations (Huitt,
2004).
Communication is the process of transferring a message from sender to receiver.
Each organism, in order to survive, has a specific ability to send and receive mes-
sages. Whenever an impulse is directed from one individual, other individuals react
not only directly (by their senses), but the impulse also tells them something or
provokes specific behavior in them. It is in this case that communication occurs
(Griffin, 2006).
Although all the living beings communicate, only communication among hu-
mans is precise and flexible, due to the use of language (Krauss, 2002). As a means
of communication, human speech comprises three levels: expression, information
and persuasion. Expression and information refers to notifying the other individual
about something and is the characteristic of animals, too, while persuasion is hu-
man specific and refers to communicative skill. The man is the only living being
capable of lying. Animals either do or do not do what they have expressed, while
a man’s word can refer to something completely different from what the person
pronouncing it is doing (Breton, 2000).
We can distinguish between verbal and non-verbal system of communication
depending on whether the speech is used or not.
Verbal communication is human specific and refers to the process of message
transfer using words. Speech enriches communication among people by its seman-
tics, its formation and its possibility of transfer that all makes people free to for-
mulate a number of messages that are not necessarily bound to the present. At
the primary level of communication, a verbal message transfers the meaning that
the speaker has transferred into words and sentences, while the recipient, by un-
derstanding the sentence, has overcome the literal meaning of the expression and
has reached the exact meaning that the speaker himself had in mind (Rot, 2004).
HUMANISTIC APPROACH TO MANAGEMENT 337

Semantics is understood as signals, which define objects which in turn have specific
meaning. Formation refers to the language with its possibility of various and nu-
merous combinations of symbols and of uttering expressions never uttered before
but understood by the speaker. As a characteristic of the language, the possibility
of transfer means that words – symbols denote objects movable in time and space
(Krauss, 2002).
Non-verbal communication does not refer to words and is most often unin-
tentional and unconscious, while messages are transferred by movements (gestures
and body posture, facial expression and eye contact), by spatial distance between
the participants and by vocal characteristics of the voice (pitch, force, rhythm).
Non-verbal communication is often referred to as a language – the body language
which is similar to speech, since both these kinds of communication are struc-
tured and governed by certain rules where it is also possible for nonverbal signs
to have particular parts of speech as their counterparts (Koneya&Barbour, 1976).
In communication, non-verbal signs often have multiple functions: prominence,
enhancement, exchange, contradiction and control. Prominence refers to drawing
attention to the message by the use of additional means (e.g. a knock at the table).
Non-verbal signals are also used in order to enhance the meaning of verbal symbols.
Exchange refers to non-verbal signal used instead of a verbal symbol. Contradiction
means that nonverbal signal bears different meaning of the message than the verbal
symbol. Non-verbal signals are used in order to control or complete the process of
verbal communication.
Communication has a double role (the goal and the means) when we look at
it within the context of motivation. If viewed within the framework of needs for
love and for belonging which themselves refer to the need for a partner, for having
and maintaining emotional relationships, for friends and for belonging to the com-
munity, it is clear that communication is one of the social needs (Krauss & Fussel,
1996).
At the same time, communication can be viewed as a means for reaching a
goal; actually, as a means of satisfying all the motives of lacking and the motive of
growth. Within the principle of satisfying the needs in hierarchy, communication
is an important and, very often, a necessary means of achieving homeopathy. The
motives of lacking trigger behavior, while satisfying them means relying on verbal
and non-verbal signals and signs. An individual gains the feelings of security, pro-
tection and belonging through interpersonal communication. All of these are pre-
338 Đurđa Soleša Grijak • Dragan Soleša

conditions for self-respect that is based, according to Maslow, on being respected
by other people. Therefore, feelings of being competent and feelings of pride, pres-
tige and position come out of the social context. Other people’s speech and body
language play key role in gaining a positive perspective of self. Self-realization, as
the highest of the motives in hierarchy, which can never be completely satisfied,
implicates communication as providing meaning and aim to what is being done.
Maslow himself refers to communication in a similar fashion (Kunc, 1992). His
claim is that most obstacles that we come upon in interpersonal communication
are the result of a bad intrapersonal communication, i.e. the communication in the
person itself. Successful communication is based on isomorphism existing among
the environment, other individuals and the individual itself. It means that a person
is able to receive from the environment and to offer to the environment only that
what the person itself is. The meaning of a message, whether verbal or non-verbal,
depends not only on its content but also on the individual’s ability to react at it.
Successful communication is achievable only if all the participants are at the same
level of hierarchy of motives (Leonard, 2004).

2. INFORMATION TECHNOLOGIES (IT) AS A PART OF MODERN MANAGEMENT
It is important for management to have specific knowledge about IT as pre-
condition for their activities to legitimately and proper connecting and analyzing
of necessary business processes in its own jurisdiction. In worldwide practice, we
distinguish two levels of relevant knowledge about IT - traditional knowledge (re-
sult of formal education (and new knowledge (lifelong continuous learning) (Gam-
melgard et al., 2006). Basic questions that modern manager has to find adequate
answers are – which is an adequate approach to new technologies, how to motivate
potential users of modern technologies, how to evaluate potential effects.
It is very important in practice to notice these questions ant treat them as busi-
ness phenomenon, recognize their potential hint of stagnation in applying of new
technological solutions and properly react.
IT paradox is that it cannot carry out any project by itself, but create new pos-
sibilities for realizing of final goals. Every project should have clear vision that
considers this paradox as well as clients’ needs. IT projects include transformation
of ways of work, system, process and relations in business system. It is also essential
to use planning framework even for small IT projects that open questions about
the impact that project will has to clients and different business systems. Managers
HUMANISTIC APPROACH TO MANAGEMENT 339

have to be aware of risks if IT system does not work properly and make any steps
to manage possible mistakes (Crouhy, 2001). Although there is most of work and
responsibility on technology, we cannot ignore human factor. This means necessity
of investing into skills and knowledge of IT experts and other stuff. Heeks (1999)
was the first who claimed that sources of errors in IT implementing are not from
technology but from management.

3. CONCLUSION
This paper tried to analyze humanistic aspects of management through connec-
tions between importance of satisfying of psychological needs of people in team
and human factor in IT as integral part of modern management.
Modern management bases upon many assumptions. Some of them are the
following: everyone should be trusted; all people have the impulse of achievement;
there is an active trend for self-realization; people prefer to feel important, needed,
successful, useful, respected than to feel unimportant, substitutable, failure, un-
wanted, not needed, not respected; each individual tends to be perceived as a whole
being, not as a part, a thing or an object, each individual prefers responsibility to
dependence and passive state, everyone likes to have enough information on what
should be done… Every individual has the need to be the creator of his own destiny
and the need to tell something on the subject of the determination of his future
(Maslow, 2004). People’s motivation is the elementary link between what a man
knows and what he is doing, between the thought and activity, competence and
behavior.
It is difficult to apply all of the assumptions to most people, since they do not
satisfy the same needs in the hierarchy. Some have not satisfied the need for securi-
ty, some for belonging, while others are already on the road of self-realization. Still,
these assumptions can help us in shaping the message we want to send to someone,
but also in understanding why there was no expected reaction (response).
Unless a man satisfies some of his psychological needs, he may feel unsuccessful,
inferior to others who have achieved to satisfy the need, and eventually may stop
communicating. It is very hard to exchange any clear messages with such people.
Communication itself means paying attention to own verbal and non-verbal mes-
sages, but also to messages received from others. Communication will be successful
or not depending on how relaxed, reliable and professional impression we give out
as individuals, i.e. recipients. If we are aware of our non-verbal signals, we can use
340 Đurđa Soleša Grijak • Dragan Soleša

them to persuade the other party into what we are talking about, to enhance the
verbal messages we send, to make the other party interested into what we are telling
and to interpret correctly the signals coming from the other person.
Man’s main goal in life is the by-product of self-realization through work and
self-realization through duty. The road to self-realization through commitment to
work which is important and purposeful is the road to human happiness. Self-
realized individuals assimilate work into identity, into their own being. Work can
be a therapy; it can make good people develop in the direction of self-realization.
By identifying with an important work, the person gains in his importance. People
who identify with work are those who are on the road of self-realization. However,
according to Maslow, a man can never completely satisfy the need for self-realiza-
tion. It would mean that the hierarchy of motives has reached its top and that a
man has realized himself fully, has become the best person he is able to become and
now feels as a complete individual. Such person has, therefore, learned all that can
be learned, experienced all that can be experienced and has no more room for intel-
lectual, emotional and spiritual development.
Management must take into account each man’s basic needs and must take care
of the way it treats each individual. The proper understanding of human com-
munication means taking into account individual differences in motivation (Rav-
elle,1991). Nobody wants to feel incompetent; therefore each superior manager or
team leader must bear in mind that, very often, no matter how much attention is
being paid to the words addressed to the team, he/she could unconsciously show
that there is a hierarchy within the team; hierarchy in professionalism, knowledge
and/or intelligence. Satisfying the need for respect and self-respect becomes blocked
in that way; therefore, the communication itself becomes blocked but also the road
to self-realization, which is important in every job.
Gardner (Gardner, 1993 according to Whitaker, 1998) defined two skills within
a new concept of integrative and holistic intelligence – interpersonal and intraper-
sonal intelligence. Interpersonal intelligence is the ability to understand other peo-
ple – their motives, the way they work and how to establish successful cooperation
with them. Intrapersonal intelligence refers to the ability to understand ourselves,
to become aware of our own potentials and motives and to use them in order to act
as efficiently as possible in life. It is these two abilities that make us competent in
every work we do and in every team we are part of.
HUMANISTIC APPROACH TO MANAGEMENT 341

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342 Nenad Stanišić • Jelena Stanišić

CONSUMERS PERCEPTION OF CRM AND E-COMMERCE1
Nenad Stanišić, Mr.Sc.1, Jelena Stanišić, univ.spec.oec.2
1
Hrvatskešume Ltd, Republic of Croatia, nenad.stanisic@hrsume.hr
2
Osimpex Ltd, Republic of Croatia, jstanisic8@gmail.com

Abstract
It is a fact that the Republic of Croatia, due to objective as well as subjective
reasons, has a permanently lower rate of development compared to the countries
that lead the global economy. Therefore it would be beneficial to conduct a research
to determine a current level of acceptance of e-Commerce among the consum-
ers in Croatia, as well as their willingness to paticipate in the CRM systems and
their understanding of CMR principles and benefits which they could have by
implementation of such systems in e-Commerce. Such research may be used as the
cornerstone for building an e-Commerce in the Republic of Croatia similar to the
e-Commerces based on the CMR potentials already existing in the well-developed
global markets,.
JEL Classification: D12, L81
Keywords: e-Commerce, CRM, management, ICT, marketing

1. Introduction
The research of customers understanding and knowledge of e-Commerce and
CRM was conducted by poll survey. The research main goal was to gain detailed
informations regarding the Internet use habits, the current levels of Internet-shop-
ping, and different channels mainly used to conduct such shopping. Such detailed
research will be a base for proposal of a model for building and implementation of
the e-Commerce CMR system suitable for the modern business market.
Having in mind pre-knowledge of the research theme, the following hypothesis
is formed:

1
This paper is based on Jelena Stanišić’s yet unsubmited Ph.D. dissertation paper.
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 343

• H1: E-Commerce in the Republic of Croatia is underdeveloped, considering
the level of development of the information-communications infrastracture
network and the level of use of that network by the Croatian population.
The specific topics of this research were: household use of Internet and e-Com-
merce, frequency of Internet use in regards of different purposes of use, frequency
of Internet-shopping, which products and services are mostly buyed, methods
of payment, level of established contact with consumers (CMR), motivation and
primary reasons for online shopping, as well as consumers perception of potential
problems which may arise in such shopping, their satisfaction with the informa-
tions provided by online shops, use of the social networks, and the general opinion
of research subjects on the informational technology development.
The results of this thorough, scientific research will show the state of existing
Croatian e-Commerce development, and be used in explanation of the reasons for
the current state of matters, as well as an argument to the thesis that the application
of CMR would help the Croatian e-Commerce development.

2. Explanation of research
The research was conducted by combination of field and online polling on the
appropriate (so-called „snowball“) sample of 569 people polled, 417 in the field
poll and 152 in the online poll. Due to the specifics of the data gathering, this type
of poll sample pattern does not allow extrapolation of results to the general popula-
tion, but still serves to identify the impact of different observed factors on use of
Internet and online shopping. Such factors include household size and income,
sex and place of residence (urban or countryside) of poll participants, number of
computers in household, etc.
The result data was collected in period from 17.10.2013. till 08.11.2013, on fol-
lowing locations: Economics university of Osijek, Law university of Osijek and Man-
agement college in Virovitica, and by online polling posted on Facebook and various
forums or sent by an e-mail. The poll questionary form had 48 questions; some of
them required only a single answer, while others allowed for multiple choice answer-
ing. After the data was collected, it was subjected to the logical control, aimed to find
eventual inconsistencies in the answers. Then it was processed by suitable statistical
methods and models to provide informations relevant to the abovementioned re-
search goals. All informations passed the statistical testing (on the α=0,05 level), so
they can be statistically generalised from the poll pattern to the population.
344 Nenad Stanišić • Jelena Stanišić

2.1. Description of the poll pattern
The poll participants were 60,4% male and 39,6% female. Majority of partici-
pants live in the households which have 3 to 5 members, while least of participants
live single. It should be mentioned that the „place of residence“ data refers to the
poll participants family residance, meaning that the polled students gave data about
their family (permament) residence, not a possible temporary one where they were
living during the poll (dorms and such). This particular data was needed for re-
searching the eventual connection between the variable of household size to the
variables of Internet use and online shopping. As for a size of income, most house-
holds were in the ‘5001-8000 kuna’ category (26,4%). Second place had ‘8001-
12 000 kuna’ category (24,8%), followed by ‘3000-5000’ (18,3%), ‘above 12000
kuna’ (18,1%), ‘1001-3000 kuna’ (10,4%), and ‘bellow 1000 kuna’ (2,0%).

2.2. Research of Internet and e-Commerce presence
Table 1. shows figures regarding the number of computers per household, the
number of household members which use a computer and Internet, own a mobile
phone, own a smartphone, and access Internet via a mobile phone.

Table 1: Number of computers, use of Internet, computer, mobile phone and
smartphone per household (%)

Arithmetic
4 and
0 1 2 3 mean
more
average
Total number of computers in household 0,5 27,9 39,8 21,7 10,1 2,17
Household members using a computer 0,7 10,2 34,4 26,9 27,8 2,81
Household members using Internet 0,5 9,8 31,1 28,5 30,1 2,88
Household members owning a mobile phone 0,0 1,2 16,4 25,4 20,0 3,64
Household members owning a smartphone 14,9 29,2 27,3 17,5 11,2 1,84
Household members accessing Internet via a 3,2 28,3 39,9 18,4 10,2 2,07
mobile phone
Table 2. shows the frequency of usage of different devices for Internet access.
As expected, the most used device is a personal computer (desktop and/or laptop),
being mainly used every day, but it is also notable that very high percentage of
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 345

poll participants use a smartphone2 for accessing the Internet, mainly very often.
Unfortunately, currenty available data from Eurostat for that topic are published
in 2010., when the procentage of smartphone Internet access in Croatia was most
certainly lesser that is today, but even than it was almost identical (7%) to the
average percentage of other EU countries (8%)3. Some rough estimates show that
currently worldwide over 1 billion people use smartphones for the Internet access,
so this 2010. data most certainly does not reflect the current conditions. The poll
participants stated that their least used device for Internet access is a game console
(such as Playstation, X-box etc.), but such result is probably founded in fact that
most of them don’t own a game console.

Table 2: Use of devices for Internet access
Never Rarely Occasionally Often Very often
Computer 1,1 1,8 3,0 13,0 81,2
Mobile phone 38,4 6,1 6,1 5,9 43,5
Smartphone 19,5 3,9 5,3 7,3 63,9
Tablet 67,7 7,6 7,8 4,5 12,5
Game console 81,8 8,2 5,0 2,0 3,0
TV 43,9 3,0 6,5 14,7 31,9
According to the latest Eurostat data, in the Republic of Croatia during 2012.
66% of households have an Internet access, which is still lower percentage than the
europian average of 76%4.
As for a mode of accessing Internet provider network, WiFi and ADSL are
mostly used - WiFi is used often or very often by 77,1% of participants, ADSL by
69,8%. Less often is used the mobile device access (mobile phones, USB portable
sticks and such), and by far least the dial-up connection.
Before presenting poll results regarding Internet use, let us review Eurostat data
of the same topic. According to the 2012. data, 58% of the Croatian citizens use In-
ternet almost every day, while the EU has a slightly bigger procentage of 70%. The
scale of procentages between individual EU countries highly varies, being highest

2
Although, it is logical to assume that most smartphone users bought them just for that reason, a
possibility to access the Internet anytime and everywhere.
3
Eurostat, StatisticsDatabase, http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_
database. (16.11.2013.)
4
Eurostat, StatisticsDatabase, same source.
346 Nenad Stanišić • Jelena Stanišić

for the Scandinavian and Benelux countries (around 90%), and lowest in Rumunia
and Bulgaria (around 50%)5. This also tell us that the Republic of Croatia is in the
lower part of the such scale. Similar indicator is the share of citizens that never used
Internet in general population: in the Republic of Croatia it is 35%, compared to
the EU average of 22%, but it should be mentioned that these percentages rapidly
decline in all EU countries.6.
Taking these two set of data in consideration together, it could be concluded
that populations of the Republic of Croatia and EU share the same trend: Internet
is either used on daily basis or not used at all. Therefore, it is very rarely used only
occasionaly. The frequency of connecting to Internet in the Republic of Croatia
and EU is shown below in the chart number 1.

Chart 1: Frequency of connecting to Internet in the Republic of Croatia and EU

The poll participants use Internet rather instensly. The results according to the
number of hours per day show that 21,1% participants use Internet from 0 to 2
hours daily, 43,3% use it from 2 to 5 hours and 19,9% from 5 to 8 hours. Very
high percentage of 9,8% use Internet 8 to 10 hours every day, and 5,9% use it for
even more than 10 hours per day.
Internet is mostly used for surfing and content browsing - by 97,5% of the poll
participants. This is followed by news reading (92,1%), social networking (91,2%),
file download (85,1%), etc. The lowest percentages have activities of watching the
Internet television (33,0%) and radio stations listening.
Next section of the questionary form contained the exploration of frequencies
of different types of shopping, comparing the Internet shopping to „regular“ retail
shopping. The poll participants were here also asked to state the frequency accord-
ing to the scale from „never“ to „very often“ (at least once a day). The results are
shown below in the table 3.

5
Same source.
6
Same source.
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 347

Table 3: Frequency of different types of shopping (%)
Never Rarely Occasionally Often Very often
(once a month (several times (several times (at least once
or less) a month) a week) a day)
Retail shopping
(going to a retail 0,4 3,8 16,5 45,1 34,2
store)
Internet shopping
(buying and paying 42,4 36,4 17,2 2,7 1,3
done online)
Combination of
retail and Internet 32,6 31,9 27,6 7,4 0,5
shopping1
The table data clearly shows that, as expected, the regular retail shopping is the
most prominent type of shopping, with only 0,4% of the poll participants which
never practice such shopping, compared to 79,3% that do such shopping several
times a week or more. Internet shopping is never practiced by 42,4% of the poll
participants, 36,4% do it once a month or rarer, 17,2% several times a month,
2,7% several times a week, while only 1,3% marked „at least once a day“ answer.
The combination of retail and Internet shopping is also quite frequent - several
times a week or more by 7,9%, and 27,6% by several times a month.
The poll results show that 57,6% of the participants practice Internet shop-
ping. But it should be mentioned once again that this pattern is very specific (the
participants were largely university and college students, which are quite possibly
a demographic group with the highest computer skills), so it can not represent the
state of this matter in the total population. To form more complete understanding
of Internet shopping, we can also look into the Eurostat Internet shopping data
gain by research in the Republic of Croatian and 27 others countries of EU, which
show current trends of online shopping.
Chart 2. shows that the Croatian citizens purchase goods and services online
only half as often as an average europian citizen. The question „Did you purchase
goods or service on Internet in the last 12 months?“ had 23% of a positive answer
in the Republic of Croatia, while the total europian average is 44%7. It should
be pointed out that the results are widely diffenent for particular countries. The

7
Eurostat, StatisticsDatabase, same source.
348 Nenad Stanišić • Jelena Stanišić

Scandinavian countries and United Kingdom populations have 70% of Internet-
shoppers8, while Rumunia have only 5% and Bulgaria 9%. But, it should be also
pointed out that all observed countries, including the Republic of Croatia, have a
yearly percentage growth tendency of 5-10%. The poll research data bear better un-
derstanding when observed and compared with the Eurostat data that relates only
to the population that use Internet at least occasionaly - the difference between
croatian and europian averages is still visible and very similar to the one of general
population: 36% croatian Internet users conduct online shopping, compared to
59% in the EU9.

Chart 2: Percentages of poll participants which have purchased goods or ser-
vices online during the last 12 months

Another interesting set of data related to online shopping provided by Eurostat
is shown in the next chart (chart 3.)10. Once again the croatian citizens fall behind
the europian averages - while in the topic of finding informations about products
and services online the percentage is fairly similar to the rest of 28 europian coun-
tries, other related percentages are visibly lower: using e-Banking (21% in Croatia,
40% in EU), selling goods and/or services (9% in Croatia, 16% in EU). The per-
centage of the croatian consumers buying or ordering the Internet content is (yet)
almost negliable 2%, while EU has 11%11. The term „Internet content“ relates to
different online services such as web-portals paid membership subsciptions (for
example, nba.com offers the video-streaming of sports events provided for monthly
payments), pay-membership-only Internet television, online courses etc.)

8
All poll participants very older than 15
9
Eurostat, StatisticsDatabase, same source.
10
Data relates to 2012.
11
Eurostat, StatisticsDatabase. Same source.
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 349

Chart 3: Comparison of using Internet for e-Commerce - the Republic of Croatia
nad 28 members of the EU

Our research also measured the correlation level between the frequency of differ-
ent types of shopping and the frequencies of Internet usage and usage of different
devices for connencting. Resulting Kendall’s tau_b correlations (table 5.) show that
these frequencies are indeed correlated. The total number of hours spent online,
and the frequency of using computer, smartphone, tablet or game console are cor-
related to both Internet shopping and combined retail shopping. The frequency of
connecting to Internet by „simple“ mobile phone has negative correlative factor for
Internet and combined retail shopping, but that has no significant statistical mean-
ing. The correlation is highest with the smartphone use12 – Kendall’s tau_b is 0,25.

Table 5: Correlation between Internet shopping and the frequency of use of
Internet-connecting devices (Kendall’s tau_b)13

Number Frequency of Frequency of Frequency of Frequency of Frequency of
of online connecting connecting connecting connecting connecting to
hours to Internet to Internet to Internet - to Internet Internet -
- computer - smartphone mobile phone - tablet game console
Internet 0,15** 0,15** 0,25** -0.10** 0,14** 0,12**
shopping
Combination 0,18** 0,10** 0,19** -0,04 0,14** 0,11**
After the introductory question about the types of shopping, the poll partici-
pants were asked to state how often they order products and services on Internet.
The answers to this question confirmed earlier observation that slightly less than
half of the participants, in this case 44,7%, do not shop online. Of these that do,

12
This can be explained by assumption that the smartphone owners usually fall into the high-income
category
13
* p < 0,05; ** p < 0,01
350 Nenad Stanišić • Jelena Stanišić

51,7% use Internet shopping 1-5 times a month, while 3,6% shop even more fre-
quently. Therefore, we can conclude that online shoppers among the poll partici-
pants on average shop couple of times a month.
Most Internet shoppers purchase clothes (38,3%). This is followed by electronics
equipment (25,3%), sports products (19, 5%), tourist travelling arrangements (15,1%),
books (14,3%), etc. Rarely purchased items are fuels & energy (5,4%), newspapers
(4,7%), stocks (4,2%), food (3,4%), and life and other insurance policies (2,9%).
Most of the Internet shoppers - 63,9% - spends less than 500 kuna monthly. Rest
of them spends between 500 and 1000 kuna (24,4%), or between 1000 and 5000
kuna (10,4%), while 1,3% spends even more than 5000 kuna per month. This shows
that the poll participants mostly buy low-cost goods, probably because the difficulties
with customs paperwork and taxes, lower costs of delivery, and similar reasons.
The poll participants stated around forty online shops that they could recollect
in mind. The mostly mentioned site by far was auction site eBay, mentioned by 306
poll participants. It was followed, by large margin, by small-ads site Njuškalo (63)
and auction site Amazon (49). Mentioned less than 10 times were sites Konzum,
Asos, Moje krpice i eKupi.

2.3. Research of level of established customers relationship (CMR)
This part of the research had a goal of determing how important is the custom-
ers relationship management (CRM) to the poll participants. From the answers
represented in chart 4. we could conclude that the poll participants deemed CRM
as important - „very important“ had 34,1%, and „mostly important“ 36,6%. The
percentage of ones that condisder CRM „neither important nor unimportant“ is
19,9%, while the „mostly or completely unimportant“ category had 9,5%.

Chart 4: Evaluation of importance of CRM by poll participants
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 351

Further analysis seeked to determine how important is CRM to the poll par-
ticipants grouped by the frequency of hours spend online and the frequency of
Internet shopping. Table 6. shows the statistically significant connection (measured
by Kendall’s tau_b ordinal association coefficient) between described variables and
the CRM importance evaluation, although this correlation is relatively low.

Table 6: Correlation of Internet use/frequency of Internet shopping and the CRM
importance evaluation14

Number of hours online frequency of Internet shopping
CRM importance 0,08* 0,10*
The results shown in table 7. list the reasons for the Internet shopping. The
most important one is lower prices (evaluated „important“ or „very important“ by
87,0% of the poll participants), possibility of purchasing products unavailable in
local retail stores (82,1%), bigger selection of products (85,7%) and home delivery
(84,6%). As „very important“ were also evaluated easier access to informations
(80,4%), easier comparison of prices and services (76,4%) and possibility to order
24-7 (79,%). Slightly less important were deemed vendor’s faster complience to the
customers demands (67,4%), avoidance of bothersome verbal sales pitch by retail
salespersons (48,3%), and convenience of this shopping type (45,7%). It is some-
how suprising that the reason particulary promoted by online stores, convenience
of „armchair shopping“, rated very low among the poll participants - even less than
half of them considered it important.

Table 7: Importance of reasons for the Internet shopping

Neither Arithmetic
Completely Mostly Mostly Very
important nor mean
unimportant unimportant important important
important average
Lower prices of
1,2 4,2 7,6 39,0 48,0 4,28
products
Purchase of products
unavailable in the 1,7 3,2 13,0 31,7 50,4 4,26
local retail shops
Better selection of
1,2 4,2 8,9 43,2 42,5 4,21
products

14
* p < 0,05; ** p < 0,01
352 Nenad Stanišić • Jelena Stanišić

Home delivery 1,5 4,9 9,0 40,6 44,0 4,21
Easier access to
3,2 3,0 13,4 41,3 39,1 4,10
informations
easier comparison of
2,7 3,0 17,9 35,7 40,7 4,09
prices and services
possibility to order
2,2 5,9 12,1 46,4 33,3 4,03
24-7
faster complience
to the customers 5,7 5,9 21,0 33,3 34,1 3,84
demands
avoidance of verbal
sales pitch by retail 11,4 10,4 30,0 30,2 18,1 3,33
salespersons
convenience of
15,8 11,2 27,5 34,4 11,2 3,14
„armchair shopping“
Next poll question probed the most important problems arising during online
ordering of products and services. The highest percentage had lack of warranty
that the purchased item will be delivered. This was followed by problems with
delivery service companies (79,7%) and unsecurity of online financial transactions
(74,5%). As least problematic were proclaimed problems of FBI and other similar
agencies Internet surveillance (43,1%), trade courts jurisdictions (42,8%) and lan-
guage barrier (40,3%).
As for reasons to shop in a particular online store, the most important one
was a money-back garantee policy, with 61,5% of „very important“ and additional
21,5% „mostly important“ votes. Other reasons include discounts (3,97%) and
no-extra-fees policy with credit-card payments. Least important reasons were re-
cieving a complementary greeting cards for birthday, hollidays and similar occa-
sions (almost half of the poll participants deemed it irrevelant), and recieving the
informations about new products and existence of customers-call service, voted
irrevelant by a third of the poll participants.
By far most popular social network in the poll was Facebook, used by 92,8% of
the poll participants. Every fifth poll participant uses Twitter or Instagram. Further
down the list were LinkedIn, MySpace, Pintrest, etc.
Statistically significant correlation was proven between the frequency of all types
of shopping and the number of social network memberships per poll participant
(table 8.). This shows that the poll participants that use more social networks also
shop more.
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 353

Table 8: Correlation (Kendall’s tau-b) between the frequency of all types of shop-
ping and the number of social networks memberships
Internet- Retail Combination of Internet and
shopping shopping retail shopping
number of social network
0,152** 0,069* 0,105**
memberships

3. MODEL OF ESTABLISHING E-COMMERCE BASED ON CRM IN THE REPUBLIC
OF CROATIA
Establishing any form of an electronic commerce in general demands process
of development steps, usually beginning with defining of the e-Commerce model
and ending in its implementation. If the building of e-Commerce is done without
proper prior planning, it is higly likly that it will end in failure. Therefore it is
prudent to define a model of e-Commerce structure and implementation before
implementing the e-Commerce system itself. Basic starting point of the structure
model definition is determing the type of e-Commerce, by deciding its customer
orientation - will it be B2B (business to business) type, or aiming to mass-market of
end-consumers, or being an intermediary between end-consumers (such as Kolek-
tiva.hr site). After deciding on a type of e-Commerce, next step is a formulation of
strategy dealing with establishment of consumers relationships in the online busi-
ness enviroment. Implementator of such strategy is a vendor’s management, which
formulates vision, mission statement and long- and short-term goals. The consum-
ers relationships management strategy implementation model has following steps:
1. management decide to implement new model of costumers relationships man-
agment in accordance to the general vision and mission statement of company. 2.
model of costumers relationships management is adapted in complience with the
marketing strategy and plan, which must be based on market research and defined
target segment.
CRM process encompass complete changes of organisational relationships. Or-
ganisation by process has a quality of linking every activity to activity next to it
in the chain of business, thus providing customers with products and services of
improved value and quality. After forming the process-orientated organisation, it is
important to consider the timing of an e-Commerce based on CRM implementa-
tion. Such timing largely depends on priorly conducted processes of linking dif-
ferent functional phases inside the organisation, and on the recognition of CRM
354 Nenad Stanišić • Jelena Stanišić

efforts by consumers. Implementation of processes and organisational changes may
take years to accomplish, but, as in every other project, it is important to determine
the duration of each separate activity.
Having in mind that every organisational model change is conducted in stages,
it is important to prepare employees for changes in advance, to expedite the imple-
mentation of new business processes. The finite stage of the implementation of
the e-Commerce based on CMR is application of suitable information-commu-
nication technologies that support e-Commerce. Electronic business in general,
therefore electronic commerce in particular, should be economical and efficient.
It is already stated that CRM depends on highly developed information process-
ing, which structuring and networking are based primary on the information-com-
munication technology. Therefore, by implementing CRM model, it is necessary
to formulate the financial project concept which promotes the investment in the
technological inovations, thus insuring e-Commerce which functions by relying on
a state-of-the-art system providing the informations about customers.

Picture1: Sheme of implementation of customers relationships management
model in e-Commerce (by stages)

After balancing the general vision, mission and business goals with the strat-
egy of e-Commerce, next step should be an analysis of the targeted market. Large
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 355

number of companies, particulary ones that are marketing-orientated, already have
developed market analysis procedures incorporated in their general business strat-
egy, using them to follow customers activities in order to upgrade product and
services quality. The target market segment analysis is a foundation for building
e-Commerce model, design and technical support. For instance, if a trade offer is
orientated to other business subjects, the online shop sheme should have frame-
work that provides a customer with quick and easy browsing of products or services
on sale, standard accounting ordering form and possibility of generation of an
electronic bill which can be transfered to the customer’s own business account-
ing database. Besides such features, most e-Commerce software by default have a
database which is filled by customers submitting an introductionary form, giving
basic informations about themselves (name, address, business activity etc.). Such
database enables a vendor to sort its customers into groups by specific criterions,
such as business field, geographical location, etc. This leads to better ability to fol-
low activities and behaviour of consumers/costumers. It should be noted that the
modern e-Commerce is almost exclusively conducted on Internet, World Wide
Web enviroment. Therefore the process of building an e-Commerce model must
include the software solutions suitable for Web enviroment. Such software must in-
clude applications for e-Commerce web-site administration, communications with
other Web sites and resources, and CRM support modules. Solid database is the
cornerstone of integrity for the entire e-Commerce system based on CRM.
Combining the implementation sheme presented in picture 1 with the experi-
ences of the leading trade companies in the Republic of Croatia, we can declare
that the e-Commerce based on CRM implementation model must have clear set of
activities terms and expected results. Such set should always be able to adopt to the
changes in the consumers market behaviour, as well as the changes in the needs of a
vendor company itself. Therefore such model generaly can not be a long-term one.
The customers relationships management is a live process that constantly changes,
adapting to its internal and external factors.

4. Summary conclusions regarding the conducted poll research
The research results show that Internet shopping is being done as „purely“ on-
line shopping, but even more often as „combined“ shopping, where the poll par-
ticipants find the informations about goods or services on Internet, but make a
purchase in a retail shop. The research results also show that Internet shopping is
356 Nenad Stanišić • Jelena Stanišić

done more in the households with higher incomes. The differences in sex or place
of residence (urban or countryside) shown no significant statistical value. The fre-
quency of Internet shopping has, as expected, shown considerable correlation with
the frequency of Internet access and the number of hours spent using the Internet,
but the strongest correlation was with the use of smartphone.
Large majority of the poll participants considered the costumers relationships
management (CRM) very important in regards of online shopping (36,6% marked
it as mostly important, and 34,1% as very important). The evaluation of CRM
importance has a positive correlation with the quantity of time spent on Internet
and the frequency of Internet shopping. Main reasons for Internet shopping were
lower prices of products/services, unavailabity of a certain product on the Croatian
retail market, better selections of products and home delivery. As least important
was deemed the convenience of „shopping from armchair“. The poll participants
voted the uncertainty of delivery and problems with the delivery companies as the
most important problems. These were followed by unsecurity of financial transac-
tions and fear of identity theft, while as least important were listed language barrier
and secret services surveillances. The main incentives for increasing the frequency
of Internet shopping were wider selection of offered items, security of purchase
transaction, and extra informations.
Certain money-back policy in case of unability to deliver purchased product
was the most important reason to regular shopping in a particular web-store. It
was voted as important by 83,0% of the poll participants. As important were also
considered discounts and no-extra-fees policy with the credit cards payments. The
poll participants use 2,31 social network in average, mostly Facebook, followed by
Twitter and Instagram. The number of the social network memberships has posi-
tive correlation with the frequency of Internet shopping. In other words, the poll
participants who use more social networks also shop on Internet more.
According to the 2012. Eurostat data, 58% of the Croatian citizens use Internet
almost every day, while the EU average is slightly average at 70%. Also, the per-
centage of population that never use Internet in the Republic of Croatia is 35%,
while the europian average is 22%. This data tell us that the Republic of Croatia
is at the lower part of the list of europian countries ranked by availability and us-
age of Internet, but that such setback is not greatly significant. In the other hand,
the Eurostat data shows that the percentage of Croatian citizens buying goods and
services on Internet is only half of the europian average. Only 23% of population
CONSUMERS PERCEPTION OF CRM AND ECOMMERCE 357

purchased something on Internet in the 12 months prior to survey, compared to
the europian average of 44%.
This lead to conclusion that Croatia, although not being far behind the euro-
pian average when it comes to availability and usage of Internet, falls greatly behing
in the matter of Internet shopping. Therefore we may declare that the starting hy-
pothesis, stating that „E-Commerce in the Republic of Croatia is underdeveloped,
considering the level of development of the information-communications infra-
stracture network and the level of use of that network by the Croatian population“,
has been fully confirmed.

References
1. Chaffey, D. (2009). E-Business and E-Commerce Management, Fourth edition,
Financial Times / Prentice Hall, ISBN: 978-0-273-71960-1, Harlow, UK
2. Eurostat, Statistics Database, http://epp.eurostat.ec.europa.eu/portal/page/portal/
statistics/search_database (16.11.2013.)
3. Finnegan, D. &Willcocks, L. (2007). Implementing CRM – From Technology to
Knowledge, John Wiley & Sons Ltd., ISBN 978-0-470-06526-6, Sussex, UK
4. Grbac, B. &Meler, M. (2007). Znanje o potrošačima-odrednicastvaranjako
nkurentskeprednosti, Ministarstvogospodarstva, radaipoduzetništva, ISBN
978-953-7509-00-2,Zagreb, 47-57
5. Kalkota, R. & Robinson, M. (2001). e-Business 2.0, Vodičkauspjehu, Mate, ISBN
953-6070-81-2, Zagreb
6. Kotler, P.(1994). Upravljanjemarketingom - analiza, planiranje, primjenaikontrola,
Informatord.d., ISBN 953-170-009-5, Zagreb
7. Laudon, K.C. &Traver, C.G. (2010). E-Commerce – business, technology, society,
sixth edition, Pearson, Prentice Hall, ISBN 10: 0-13-509078-4, New Jersey, SAD
8. Meler, M. &Dukić, B. (2007). Upravljanjeodnosima - odpotrošača do klijenta
(CRM), Ekonomskifakultet u Osijeku, ISBN 978-953-253-017-7, Osijek
9. Peppers, D. & Rogers, M. (2011). Customer Relationships-A Strategic Framework,
Second Edition, John Wiley & Sons, Inc., ISBN 978-0-470-42347-9, Hoboken,
New Jersey, SAD
10. Ružić, D., Biloš, A. &Turkalj, D. (2009). e-Marketing, II. izmjenjenoiproširenoizdanje,
Ekonomskifakultet u Osijeku, ISBN 978-953-253-071-1, Osijek
358 Slobodan Stojanović

CASH CONVERSION CYCLE
AS A COMPANY LIQUIDITY MEASURE
Slobodan Stojanović, univ.spec.oec.1
1
Polytechnic “Lavoslav Ružička” in Vukovar, Republic of Croatia, stojanovic@vevu.hr

Abstract
Effective and adequate management of a company’s liquidity position represents
a key element in securing the overall ability of a company to meet its short-term ob-
ligations using assets that are readily converted into cash. The company’s liquidity
position is especially important in today’s globalized and highly competitive busi-
ness environment, as well as in times of economic and financial hardships charac-
terized by decreasing cash inflows and deteriorating market conditions. In order to
predict, manage, and evaluate the liquidity position, the company utilizes specific
analytical tools and measures. Apart from usual static measures of liquidity such as
liquidity ratios (e.g. current and quick liquidity ratios), the cash conversion cycle
(or cash gap cycle) represents dynamic measure, which incorporates the element of
time in the consideration.
The cash conversion cycle is defined as a number of days between actual cash
outflows on a company’s purchase of needed productive resources and actual cash
inflows resulting from product sales. It measures the time between outlay of cash
and cash recovery from a company’s regular course of operation. During that pe-
riod of time, the financial funds are tied up in the current assets, such as payables,
inventories, and receivables. The shorter cash conversion cycle, stated in a num-
ber of days, indicates better liquidity and working capital position of a company.
Quick cash recovery is a permanent business consideration, especially in the short
term and in smaller firms. A successful management of the cash conversion cycle
implies the effective management of individual components of current assets. The
company management undertakes a different set of activities to decrease inventory
and receivables conversion periods, as well as to increase payables deferral period
in order to shorten the cash cycle and quickly release the funds that are invested
CASH CONVERSION CYCLE AS A COMPANY LIQUIDITY MEASURE 359

in a working capital. The concept of cash gap is closely related to the net working
capital management and it is regarded as a method for cash flow management.
Therefore, the aim of this paper is to present an overview of the cash conversion
cycle concept and its importance in relation to the measurement of the liquidity
position of a company. The relations between the cash gap and net working capital
management will be explained, as well as basic financial management implications
of the concept for the company’s business operations. Additionally, the concept will
be illustrated with a sample of companies that makes the index CROBEX10 of the
Zagreb Stock Exchange.
JEL Classification: G32
Keyword: cash conversion cycle, liquidity measure, net working capital
management

1. Introduction
One of the key elements in securing the everyday operations and the overall
ability of a company to meet its short-term liabilities is the effective and adequate
liquidity management. The adequate liquidity position of a company is especially
important in today’s globalized and highly competitive business environment, as
well as in times of economic and financial hardships characterized by decreasing
cash inflows and deteriorating market conditions. All sorts of market and other
risks directly influence business operations and the company’s cash flow dynamics
in a negative way, thus requiring active management of its working capital, which
should result with desired liquidity position. Many different unfavorable factors,
such as sudden particular and/or general fall in market demand, an increase in un-
collected receivables, raising prices of specific inputs, “frozen” credit markets and
similar, are threatening liquidity and survival of the company. The short-term (cur-
rent) liabilities can be met only by having enough disposable cash on hands and/or
having enough short-term (current) assets that are readily convertible into the cash.
Therefore, it is very important to actively manage working capital of the company
and keep cash balances at the required level, thus maintaining adequate liquidity.
In order to predict, manage, and evaluate its liquidity position with a satisfying
degree, the company must utilize specific analytical tools and measures. Apart from
usual static measures of liquidity such as liquidity ratios (e.g. current and quick
liquidity ratios), the cash conversion cycle (or cash gap cycle) represents dynamic
measure, which incorporates the element of time in the consideration.
360 Slobodan Stojanović

2. Key motives (reasons) for maintaining cash balances
Every businessman would say that “cash is king” when it comes to the com-
pany’s operations, because only the cash can pay the company’s bills. Therefore,
it is of great importance that certain cash balance is maintained by the company
management in order to meet its short-term liabilities. Generally, the company
holds the cash for reasons of transactions, compensations, precautions and specula-
tions, thus creating (1) transactional, (2)compensating, (3) precautionary, and (4)
speculative cash balances (Brigham & Houston; 2003, 698). Transactional balance
is associated with routine business transactions of payments and collections of the
bills. The amount of the transactional cash varies between different companies and
it is influenced by the specific industry setting. Compensating balance is often
maintained in order to compensate the banks for providing loans and services to
the company, while precautionary balance is associated with the cash held in re-
serves for random and unforeseen fluctuations in the company’s cash flow. Specula-
tive cash balance enables the company to take advantage of any bargain purchases
and profit making situations that might arise, especially in times of financial crises
when declining security prices and rising interest rates can be expected. The level of
the overall cash (or currency) balance is strongly influenced by other current assets
stated on a company’s balance sheet. The degree of the liquidity of current assets is
different in terms of their ability to be converted into the cash, quickly and without
any price discount, in the amount sufficient to fulfill company’s immediate short-
term liabilities. The cash is the most liquid asset and only with the cash the com-
pany can fulfill its obligations. The importance of cash as the ultimate liquid asset
is reflected in today’s cash positions of corporate America. According to the Federal
Reserve, U.S. nonfinancial companies had $1.984 trillion in liquid assets (cash and
cash equivalents) on their books at the end of the fourth quarter of 2013, of which
$464 billion in hard cash (checkable deposits and currency) or 23.39% of their
total liquid assets (Financial Accounts of the U.S.; March 2014). Total liquid assets,
which include foreign deposits, checkable deposits and currency, time and savings
deposits, money market fund shares, security repurchase agreements, commercial
paper, treasury securities, agency and GSE backed securities, municipal securities,
and mutual fund shares, accounted for 5.67% of total assets held by U.S. nonfi-
nancial corporations in the same period. However, if the company has a favorable
structure of its total current assets (e.g. more current assets with a higher degree of
the liquidity in the total structure of current assets when compared with some other
combinations), then it can have a lower cash balance. In this case, specific current
CASH CONVERSION CYCLE AS A COMPANY LIQUIDITY MEASURE 361

assets can be converted on time into the currency that is needed for whatever rea-
sons, thus making the liquidity position of the company stronger. Therefore, the
effective management of each component of working capital is a precondition for
achieving an adequate liquidity position of the company, thus decreasing the risk
of bankruptcy.

3. Cash conversion cycle
In order to achieve optimal level of liquidity, the company must pursue strong
liquidity management, which in turn requires strict and systematic financial plan-
ning of cash flows. Insufficient liquidity management may cause severe difficul-
ties and losses due to unfavorable short-term developments even for the company
with positive long-term prospects (Richards & Laughlin; 1980, 2). Liquidity has
to be monitored, managed and measured. Generally, the company uses static and
dynamic measures in assessing its liquidity. Static measures are defined as such
because they reflect the nature of the balance sheet structure, while dynamic ones
are connected to turnover metrics (Bolek; 2013, 3). The most common static mea-
sure is the current ratio(CR) and its variations (e.g. quick or acid ratio), while cash
conversion cycle (CCC) represents dynamic measure, which incorporates the ele-
ment of time in the consideration of liquidity (Cagle et.al.; 2013). Liquidity ratios
based on balance sheet do not take into account the different degrees of liquidity of
specific current assets. Therefore, two companies having the same CR might have
different liquidity positions due to the different structure of their current assets.
There are also other disadvantages of liquidity ratios such as difficult and ambigu-
ous interpretation, their static nature, possibility of manipulations through balance
sheet items etc. (Cagle et.al.; 2013).The CR is calculated as a ratio of current as-
sets and current liabilities. The net working capital (NOC) is also a static measure
of liquidity, which is calculated as a difference between current assets and current
liabilities, thus closely related to CR. It roughly measures the company’s reservoir
of cash (Brealey& Myers; 2003, 813). The positive and higher NOC signals better
liquidity position. On the other hand, there is a cash conversion cycle or cash gap
cycle, which complements static liquidity measures and provides deeper insights
into the company’s liquidity position. The CCC can be defined as a length of time
funds (cash) are tied up in working capital or the length of time between paying
for working capital and collecting cash from the sale of working capital (Brigham
& Houston; 2011, 521). It is a number of days between cash outflows needed to
purchase resources for production and cash inflows resulting from product sales.
362 Slobodan Stojanović

In order to compute the CCC the company must monitor and measure indicators
of three time periods, such as (1) inventory conversion period (or days inventory
outstanding, DIO), (2) receivables collection period (or days receivables outstand-
ing, DRO), and (3) payables deferral period (or days payables outstanding, DPO).
Inventory conversion period is the average time required to convert raw materials
and other needed resources for production into finished goods and then to sell
those goods to buyers. Receivables collection period (also average collection period)
is the average length of time needed to convert the company’s receivables into cash;
it is the time to collect cash from the buyers following a sale of goods on credit.
Finally, the payables deferral period is the average length of time between purchase
of resources and the payment of cash for those resources. The CCC model is pre-
sented in figure 1.

Figure 1. The Cash Conversion Cycle Model
Inventory Finish Goods and Receivables
conversionperiod Sell Them Collection Period

Payables Deferral Cash Conversion
Period Cycle
Days
Receive Raw Pay Cash for Collect Accounts
Materials Purchased Receivables

Source: Ehrhardt& Brigham; 2008, 550

The CCC can be computed by using a three-part formula as indicated in figure 1.:
CCC = DIO + DRO – DPO (1)
Generally, each component (indicator) in the formula (1) would be calculated
using items stated in the financial statements of the company. Thus, the days inven-
tory outstanding (DOI)is calculated as:

where COGS is a cost of goods sold, while the number of days in a year can be
360 or 365, depending on a selected method. Very often due to unavailability of
CASH CONVERSION CYCLE AS A COMPANY LIQUIDITY MEASURE 363

the COGS data in financial statements, the COGS is substituted with the net sales
item.
The indicator the days receivables outstanding (DRO) is calculated as:

Finally, the indicator the days payables outstanding (DPO) is calculated as:

where COGS is also substituted very often with the amount of material costs from
the income statement or some other item(s) of expenditures that can be related to
the COGS. The management of the company undertakes different activities to si-
multaneously decrease inventory and receivables conversion periods, while increas-
ing payables deferral period in order to shorten the CCC and quickly release the
funds invested in a working capital. The CCC concept indicates that the company
with shorter CCC also has a better liquidity and working capital position. Quick
cash recovery is a permanent business consideration. Successful management of the
CCC implies the effective management of individual components of specific cur-
rent assets and liabilities, and as such, it is closely related to the NOC management.
Additionally, it is regarded as a method for cash flow management. The CCC is
different from the operating cycle, which represents the time it takes the company
to turn its investment in inventory into cash and is equal to DIO and DRO.

4.. Application of liquidity measures in selected Croatian companies
The application and calculation of the static (current ratio and NOC) and dy-
namic (CCC)liquidity measures are presented with a sample of companies whose
shares are listed on the Zagreb Stock Exchange. Shares of those firms make the
CROBEX10 index, which is a specialized index of companies with the highest free
float market capitalization and the trade volume. Maximum weight of each stock
in the index is restricted to 20%. As of March 3, 2014, the index had a value of
981.61 (base value is 1000). The composition of the indexis presented in table 1.
364 Slobodan Stojanović

Table 1. Composition of the CROBEX10 index of the ZSE
Market capital.*
Nr. Ticker Company Industry (sector)
(in billions kn)
1. ADRS-P-A Adrisgrupa d. d. Management and investments 1.62
2. ATGR-R-A Atlantic Grupad.d. Wholesale 0.77
3. ERNT-R-A Ericsson Nikola Tesla d.d. Communication equipment 1.18
4. HT-R-A Hrvatski Telekom d.d. Telecommunication 2.45
Oil & gas (exploration, production,
5. INA-R-A INA – Industrijanafted.d. 2.00
retail)
Manufacturing (generators,
6. KOEI-R-A Končar – elektroindustrijad.d. 1.26
electro-motors, transformers)
7. KORF-R-A ValamarAdria Holding d.d. Tourism & Management 0.56
8. LEDO-R-A Ledod.d. Ice-cream production 1.24
9. PODR-R-A Podravkad.d. Fruit & Vegetable processing 1.11
10. PTKM-R-A Petrokemijad.d. Fertilizer manufacturing 0.17
* Market capitalization as of March 3, 2014
Source: Zagreb Stock Exchange (http://zse.hr/default.aspx?id=121)

Application of static measures of liquidity is presented in table 2. Current ratio
(CR) and NOC were calculated for each company in the period 2010 to 2012.
Generally, the company has a better liquidity position if the current ratio and NOC
have higher values. Although acceptable current ratio values vary from industry
to industry, a current ratio of 2:1 is generally considered to be appropriate. The
current ratio higher than 1, indicates a positive NOC, which is expressed in cur-
rency units. Also, the higher NOC connotes a better liquidity. The available data
indicate a general trend of deteriorating liquidity during the analyzed period. Only
three companies (ADRS, KOEI and KORF) have a greater CR values in 2012 if
compared with 2011, four companies have CR values higher than 2, while two
companies (INA and PTKM) have CR values below 1, which can be considered as
concerning because it indicates possible problems in the future with paying the bills
on time. The values of NOC correspond with CR values and confirm the results on
the liquidity of analyzed firms.
CASH CONVERSION CYCLE AS A COMPANY LIQUIDITY MEASURE 365

Table 2. Static measures of liquidity
Net working capital (in bill. kn) Current ratio
# Company
2010 2011 2012 2010 2011 2012
1. Adrisgrupad.d. 3.428 3.575 4.049 4.34 4.17 5.51
2. Atlantic Grupad.d. 0.512 0.980 0.913 1.40 1.97 1.84
3. Ericsson Nikola Tesla d.d. 0.920 0.655 0.604 6.08 6.06 3.91
4. HTd.d. 3.407 3.834 3.317 3.22 3.55 3.06
5. INA d.d. -0.940 0.174 -1.646 0.89 1.03 0.82
6. Končar - elektroindustrijad.d. 1.268 1.212 1.247 2.72 2.57 2.89
7. ValamarAdria Holding d.d. 0.037 -0.021 0.105 1.15 1.04 1.66
8. Ledod.d. 0.398 0.538 0.537 3.01 3.52 1.57
9. Podravkad.d. 0.156 0.696 0.672 1.15 1.71 1.70
10. Petrokemijad.d. -0.083 0.104 -0.029 0.90 1.11 0.98
Source: author’s calculation according to financial statements of companies

The values of CCC give further insights into the liquidity position of selected
companies. The results of CCC, which is a dynamic measure of liquidity, are pre-
sented in table 3. All components of cash gap are calculated in a three-year period,
thus providing better comprehension of liquidity and management efficacy in deal-
ing with specific current assets and liabilities, explicitly with inventory, receivables
and payables. The calculation of components had to be adjusted to the availability
of data in financial statements, meaning that specific balance sheet and income
statement items had to be used in order to get needed values. Therefore, CCC
components are calculated as follows: DOI equals 365/(net sales/inventory), DRO
equals 365/(net sales/receivables), and DPO equals 365/(material costs/payables).
The available data shows a general deterioration of the CCC for the most com-
panies in the sample.The number of days of the CCC is increasing for five firms
(ADRS, INA, KOEI, LEDO and PTKM), while one firm has a stagnant CCC
(PODR). Two firms have decreasing CCC (ATGR and ERNT), while two firms
have a negative CCC (HT and KORF).
366 Slobodan Stojanović

Table 3. Elements of Cash Conversion Cycle for companies in CROBEX10
2010 2011 2012
# Com.
DOI DRO DPO CCC DOI DRO DPO CCC DOI DRO DPO CCC
1. ADRS 93 114 77 130 93 115 77 131 92 138 72 158
2. ATGR 99 178 156 120 52 87 74 65 49 85 77 57
3. ERNT 13 145 86 72 7 117 63 61 6 62 47 21
4. HT 9 63 208 -135 8 59 203 -136 8 60 264 -197
5. INA 41 51 75 17 45 45 36 55 41 40 28 53
6. KOEI 72 131 82 121 79 144 92 132 73 142 71 144
7. KORF 6 20 44 -18 5 12 42 -24 4 13 48 -31
8. LEDO 50 55 64 42 55 81 61 75 69 55 45 79
9. PODR 73 103 83 93 74 103 83 94 70 107 86 90
10. PTKM 79 34 62 50 82 45 49 78 82 56 63 74
Source: author’s calculation according to financial statements of companies

The determinants of changes in CCC values can be found in management ef-
ficacy of each component. The two companies that decreased their CCC were very
successful in inventory and receivables management (thus decreasing their oper-
ating cycle, i.e. DIO and DRO), although they had to pay their bills (DPO) in
shorter periods.

Figure 2. Cash Conversion Cycle, 3-year comparison for CROBEX10 companies

Source: according to author’s calculation
CASH CONVERSION CYCLE AS A COMPANY LIQUIDITY MEASURE 367

On the other hand, the companies with deteriorating CCC had problems with
their operating cycle, i.e. with the management of their current assets. They did
not find a proper set of management activities in order to shorten their DIO and
DRO, while being confronted with suppliers to pay their bills faster at the same
time. The companies with the negative CCC managed to keep their operating cycle
very short, while compelling their suppliers to accept not so favorable credit terms.
In order to better comprehend and see relevant changes in a number of days of cash
conversion cycle in a sample of selected companies during the analyzed period, the
available data are presented additionally in figure 2.

5. Conclusion
The appropriate liquidity position should secure the capacity of the firm to pay
its short-term liabilities on time and maintain its business operations. Different
activities, aimed at optimization of current assets and current liabilities, have to
be undertaken by the management in order to achieve appropriate liquidity. To be
able to manage and evaluate its liquidity, the company utilizes specific analytical
tools and measures. Static and dynamic liquidity measures such as current ratio
and net working capital, as well as cash conversion cycle are used to assess the com-
pany’s liquidity position and to determine proper course of action in the future.
The CCC concept, which expresses the length of time (in days) that it takes for a
company to convert resource inputs into cash flows, is closely related with NOC
and its management. It clearly indicates where additional effort is needed regarding
the management of CCC specific components. Shorter CCC can be realized by
simultaneously decreasing the inventory and receivables conversion periods,while
increasing payables deferral period. The application and calculation of liquidity
measures for ten firms that make CROBEX10 stock index on the ZSE, evidently
showed a deterioration of their liquidity position during the analyzed period from
2010 to 2012. The values of net working capital and current ratio correspond to-
cash conversion cycle values; those measures together give clear insights in liquidity
positions of the analyzed firms. Additionally, the calculation of CCC components
revealed key determinants of their (un)favorable liquidity, thus directing further
working capital management activities in the field of inventory, receivables and
payables in order to shorten the CCC.
368 Slobodan Stojanović

REFERENCES
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Western College, ISBN 0324178298, USA
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cise Edition, Cengage Learning, ISBN 0538477113, USA
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Hill, ISBN 0072467665, USA
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COST EFFICIENCY OF AGROINDUSTRIAL COMPANIES IN VOJVODINA: DEA APPROACH 369

COST EFFICIENCY OF AGROINDUSTRIAL COMPANIES IN
VOJVODINA: DEA APPROACH
Vunjak Nenad, Ph.D.1, Davidović Milivoje2
1
University of Novi Sad, Faculty of Economics in Subotica, Republic of Serbia, vunjakn@ef.uns.ac.rs
2
University of Novi Sad, Faculty of Economics in Subotica, Republic of Serbia, milivojed@ef.uns.ac.rs

Abstract
The aim of this study is to assess the cost efficiency of 25 agro-industrial com-
panies in Vojvodina. The analysis covers the period from 2010 to 2012, and the
efficiency of the companies is estimated using the non-parametric DEA techniques.
Data Envelopment Analysis (DEA) is a linear programming technique that esti-
mates technical efficiency using the input-output model. This paper will apply an
input oriented model with (a) constant returns to scale (CCR model), (b) variable
returns to scale (BCC model). Results of CCR and BCC models indicate that
the agro-industrial sector in Vojvodina increased the average efficiency score (from
80.45% to 86.97% (CCR) and from 89.37% to 90.74% (BCC)). Also, research
indicates that the introduction of bankruptcy proceedings coincided with improv-
ing the efficiency scores and ranking of some companies.
JEL Classification: D24, L16
Keywords: cost efficiency, agro-industrial companies, DEA approach, BCC
model, CCR model

1.Introduction
Intersectoral analysis of comparative advantages suggests that the agro-industrial
sector could be a generator of development propulsion in Serbia. The agriculture
and food industry in Serbia have the potential to generate extraordinary positive ex-
ternalities on other sectors of the economy (Davidović; 2014, 229). The importance
of the agro-industrial sector in Serbia is confirmed by official data of economic sta-
tistics. According to the Statistical Office of the Republic of Serbia, the share of gross
value added in the agricultural sector in the gross domestic product of the Republic
370 Vunjak Nenad • Davidović Milivoje

of Serbia in the last ten years is 11.3%, while one-fifth (20%) of the gross domestic
product is created by agro-business companies. Also, the agriculture and food in-
dustry participates in the overall export of Republic of Serbia with 20.9% (average
for the last 9 years), and an aliquot portion of imports that can be attributed to
these activities is only 6.8%. Moving toward a more efficient, competitive, export-
oriented, healthier and more sustainable food system is a process that involves tack-
ling longstanding challenges and addressing more sophisticated demands at both the
theoretical and the empirical level (Adžić & Bolozan; 2013, 859). Bearing in mind
the above, the efficiency of the agribusiness company is a conditio sine qua none of
the economic development of Vojvodina (Vunjak; 2008, 62).
Empirical studies dealing with the evaluation of the efficiency of DMU (com-
panies and banks) typically use two techniques: parametric Stochastic Frontier
Analysis (see Farsi, Filippini & Kuenzle; 2006, Kiyota; 2009, Hasan et. al; 2011,
Holmgren; 2013) and non-parametric Data Envelopment Analysis (see Johnes;
2009, Yusof et. al.; 2010, Nigmonov; 2010, Castellanos & Garza-Garcia; 2013) or
both at the same time (see for example Andries & Cocris; 2010, Král & Rohácova;
2013).
Analysis of efficiency and growth potential of companies in the agro-industrial
sector should be the starting point for designing the model for sustainable econom-
ic development of Serbia. Therefore, the main objective of this study is to assess
the relative efficiency of 25 agribusiness companies from Vojvodina in the period
2010-2012. DEA approach will be used to assess the cost efficiency - input oriented
model with constant (CCR model) and variable (BCC model) return to scale. Both
models will include two input variables (operating expenses and financial expenses)
and two output variables (operating income and financial income).

2. Data and methodology
The data set includes annual operating and financial revenues and expenditures
of the 25 agro-industry companies in Vojvodina in the period 2010-2013. Data
are taken from official financial statements provided by the Serbian Business Regis-
ters Agency. To measure efficiency scores, we used Efficiency Measurement System
(EMS) software.
DEA evaluates efficiency compared to the reference (benchmark) organiza-
tional unit that has been identified as the most effective. DEA is then based on a
postulate of uniform error model. This implies that deviations in efficiency can be
COST EFFICIENCY OF AGROINDUSTRIAL COMPANIES IN VOJVODINA: DEA APPROACH 371

caused by random factors: any form of deviation in the current efficiency and the
estimated efficiency frontier represents inefficiency. It is also the main drawback
of this technique, since there are possible errors in assessing the effectiveness of
individual DMU and in assessing the reference benchmark value - the efficiency
frontier. However, the utility value of DEA methodology stems from a number of
advantages (Kho-Fazari et al.; 2013, 1-2): (a) it does not require a priori assump-
tion in the context of data distribution, (b) it gives the possibility of simultaneous
“handling” of multiple input and output variables, without previous assessment of
their relative importance, (c) it results in a single measure of DMU performances.

According to Chen-Guo et al. CCR model can be conceived as follows (Chen-
Guo et al.; 2007, 51-53):

(1)
If hj = 1, DMUj is relatively efficient, which implies that it is positioned on the
efficiency frontier (production frontier). If hj > 1, DMUj is relatively inefficient.
The more hj is “distant” from 1 to 0 (further from the efficiency frontier), DMUj is
less efficient (relatively inefficient). To improve the utility value of basic CCR mod-
el, the A-P super-efficiency model is used. The results of super-efficiency establish
rank of DMU that are relatively efficient. CCR model is based on the hypothesis
that potential production set is convex. However, if the product set is not convex,
then BCC model is used to evaluate the effectiveness of the DMU. Assuming nD-
MUs: (xj, yj), xj ϵ Rm, yi ϵ Rs, j = 1,…,n, BCC model can be conceived as follows:

(2)
Moreover, if ω ϵ Rm, μ ϵ Rs, duality (D) has the following algebraic expression:
372 Vunjak Nenad • Davidović Milivoje

(3)
BCC model efficiency frontier is not sensitive to the variations in the volume
of the input and output factors. This setting extends the DEA technique, since in
this situation it is not necessary that the values of input and output variables are
positive.

3. Research results
Descriptive statistics of input and output variables is the shown in Table 1.

Table 1: Descriptive statistics
Statistics FIN INC FIN EXP OPER INC OPER REV
Mean 195.0701 292.2713 5116.142 4520.947
Median 86.637 127.215 3734.888 3380.83
Maximum 1450.186 1550.662 21274.27 17992.76
Minimum 1.308 2.179 70.016 59.898
Std. Dev. 268.823 402.1339 5426.08 4631.609
Skewness 2.244987 1.996989 1.498152 1.437182
Kurtosis 8.799178 6.0789 4.408335 4.203569
Observations 75 75 75 75
Source: Author`s calculation

Individual and average efficiency score, ranking of companies by efficiency
scores and ranking of superefficient companies are given in Appendix 1. The mark
* indicates a super-efficiency score (shaded areas in the table). Companies that are
effective have 100% score, but super-efficiency analysis showed companies that are
most effective (with the highest score above 100%). However, for the calculation of
the average score in the efficient companies, a score of 100% is used.
Results of the assessment of efficiency are very interesting. They point to several
important implications. First, the results of both models indicate varying efficiency
score. Extreme examples of this variability are Fidelinka, Ratar Pančevo, Bečejska
Pekara, Trivit-Pek and Pik Bečej. Second, dramatic improvement in the technical
COST EFFICIENCY OF AGROINDUSTRIAL COMPANIES IN VOJVODINA: DEA APPROACH 373

efficiency scores of companies Pik Bečej and Fidelinka Subotica coincides with the
initiation of bankruptcy proceedings. This implies that the bankruptcy authorities
significantly improved the efficiency of these companies. Third, from all of the
companies in the sample, only Galenika-Fitofarmacija and meat industry Matijević
remained on the efficiency frontier (CCR and BCC estimate). Fourth, the imple-
mentation of the BCC model marked a larger number of efficient companies, than
in the case of CCR model results. Fifth, the average score for the agro-industrial
sector tends towards the efficiency frontier. This indicates that the agro-industrial
companies in Vojvodina have constantly increased the technical efficiency. Bearing
in mind the implemented input oriented model, the companies reduced the input
variables volume from year to year (operating expenses and financial expenses) in
order to achieve a constant quantum of output variables (operating income and
financial income).

4. Conclusion
Subject of the research presented in this paper is the technical efficiency of agro-
industrial sector in Vojvodina. Evaluation of effectiveness is realized by implement-
ing CCR and BCC models. Also, we have exploited the input oriented model to
determine whether the company can reduce the quantum of inputs (operating and
financial expenses), in order to realize a constant quantum of output (operating and
financial income). The results indicate that some companies significantly increased/
decreased efficiency score. Also, the initiation of bankruptcy proceedings coincides
with the recent increase in the efficiency of the individual companies. In addition,
the use of BCC model identified a number of companies which are relatively ef-
ficient. Finally, the agro-industrial sector has increased the average efficiency score
in this period. In addition, a significant increase in efficiency was recorded through
observation of the results of assessing the efficiency with CCR model.

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Appendix 1: Efficiency scores and ranking of companies 376
CCR * CCR rank BCC* BCC rank
Kompanija
2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012
CARNEX VRBAS 80.06 80.29 86.92 16 17 13 85.96 81.1 90.67 16 19 15
VETERINARSKI ZAVOD SUBOTICA 78.1 81.95 85.33 20 15 16 80.04 82.22 86.19 21 18 17
CRVENKA FABRIKA ŠEĆERA 84.68 87.89 92.60 7 9 8 146.47 94.80 96.14 5 10 12
BAG BAČKO GRADIŠTE 78.27 217.37 125.16 19 2 2 91.52 166.08 459.34 13 5 5
BANAT NOVA CRNJA 81.88 80.00 77.90 13 19 21 82.26 80.04 79.04 19 20 22
BANAT BANATSKI KARLOVAC 29.74 41.25 69.30 25 25 25 81.93 72.68 73.15 20 25 24
BEČEJSKA PEKARA 667.51 85.58 79.72 1 11 18 169.97 95.02 85.5 4 9 18
DUVANSKA INDUSTRIJA ČOKA 79.03 83.16 86.37 17 13 15 88.16 97.41 98.79 14 8 10
IMLEK 85.66 84.47 89.32 6 12 10 495.91 926.07 878.57 1 1 1
DIJAMANT 80.66 80.04 88.85 14 18 12 114.70 91.42 97.65 8 14 11
GALENIKA-FITOFARMACIJA 116.94 111.21 108.94 3 3 3 117.13 112.46 109.27 7 6 6
TRIVIT-PEK 80.56 93.38 156.47 15 7 1 140.29 94.36 597.18 6 11 3
VITAL VRBAS 86.73 76.42 77.02 5 21 22 102.87 78.37 79.08 10 21 21
ŽITKO 77.84 72.82 71.82 21 24 23 78.50 73.84 71.84 22 24 25
NEOPLANTA 78.9 82.95 84.7 18 14 17 84.65 85.85 88.18 17 16 16
MLEKARA SUBOTICA 82.64 79.94 78.68 11 20 20 87.52 82.23 80.17 15 17 20
RATAR PANČEVO 326 99.02 70.35 2 5 24 465.47 362.13 75.00 3 4 23
SEĆERANA ŽABALJ 84.62 86.78 89.77 8 10 9 91.53 88.97 91.2 12 15 14
TE-TO SENTA 83.98 96.02 95.67 9 6 6 112.63 109.77 101.92 9 7 8
PTUJ-TOPIKO 72.48 73.4 79.52 22 22 19 72.95 75.09 81.66 23 22 19
SOJA PROTEIN 82.04 80.36 86.40 12 16 14 95.64 93.76 94.78 11 12 13
DUKAT SOMBOR 83.5 90.49 95.13 10 8 7 84.00 91.67 107.18 18 13 7
MATIJEVIĆ 107.19 108.99 104.02 4 4 5 490.57 923.18 862.52 2 2 2
PIK BEČEJ 59.27 73.07 88.86 24 23 11 62.11 74.41 99.54 25 23 9
FIDELINKA SUBOTICA 60.55 336.14 106.53 23 1 4 67.61 479.78 462.76 24 3 4
Average score 80.45 84,37 86.97 ---- ---- ---- 89.37 89.33 90.74 ---- ---- ----
Vunjak Nenad • Davidović Milivoje

Source: Author`s calculation
GENERAL
ECONOMICS
FINANCING DEVELOPMENT PROJECTS IN NEW EU FINANCIAL PERSPECTIVE 20142020 379

FINANCING DEVELOPMENT PROJECTS IN NEW EU
FINANCIAL PERSPECTIVE 2014-2020
Gabrijela Žalac, B.Sc.1, Mario Banožić, Ph.D.2
1
Department for International Cooperation and EU Affairs,Vukovar-Srijem County,
Republic of Croatia, gabrijela.zalac@vk.t-com.hr
2
Department for Tourism and Culture, City of Vinkovci, mario.banozic@vk.t-com.hr

Abstract
The EU funds represent an important source of financing development proj-
ects in the Republic of Croatia. Only well-prepared projects on national, regional
and local level, involvement of potential beneficiaries of European projects in early
phases into the programming and planning process of strategic documents based
on bottom-up approach and larger investment of budget means through well-elab-
orated plan of development programs will be vital for successful use of structural
and investment funds in new EU financial perspective 2014-2020.
As the space for the increase of absorption of capacity of EU means existed even
in the pre-accession period, the need for additional improvement of capacities of
Croatian stakeholders for realization of financing their projects from EU funds
grew significantly with new and more abundant funds. Therefore, one of the most
important priorities of Croatian society as a whole is to focus their strengths to
making and implementing of high-grade projects that will compete for co-financ-
ing from EU funds, equally with projects from other member states.
In order to make the Republic of Croatia more competitive in using structural
instruments of cohesion policy it is necessary to involve relevant institutions into
the process of preparation of strategic documents in the next period, and especially
the present and future beneficiaries of the means to include and identify all needs
and development priorities of the Republic of Croatia.
Those that implement the projects know exactly which investments should be
supported. With this kind of bottom-up partnership approach the prioritising of
380 Gabrijela Žalac • Mario Banožić

strategic references of future Operational programs and Partnership agreement
would be made much easier, and based on that the member states use EU funds.
If this should not be the case with the Republic of Croatia as a new member
state, the priorities of financing will be general and not sufficiently adjusted to real
needs of those that will implement the projects on field, and that will negatively re-
flect development results we wish to accomplish in the future financial perspective.
It is important not to neglect financial aspect of the projects, i.e. to ensure
enough means for their pre-financing and co-financing, in order to implement
the projects until the end. In major infrastructural projects it is more important to
ensure financial sustainability after the end of a project and European financing.
JEL Classification: F63, O21
Keywords: financing development projects, EU funds, new EU financial per-
spective, bottom-up approach, development programs plan

Introduction – Cohesion policy and its guidelines
The preamble of the Roman Treaty of establishing the European Community
(1957) refers to the will of strengthening the economic and social cohesion of
the EU in respect of the harmonious, balanced and sustainable development of
the community. In the 1970s the European cohesion policy was equipped with
financial instruments in the form of structural funds, which were implemented in
frame of annual budget system. The main goal of the Treaty, as mentioned above,
was realized according to compensational criteria, which comprised of directing the
financial support towards solving the inner challenges of the EU, i.e. the help for
regions that suffer from structural problems. (Ministry of Regional Development
of Poland, 2009,20)
On June 24, 1988 the Council adopted the first regulation that integrated the
existing financial instruments under “the roof of Cohesion policy”. The total
long-term goal of Cohesion policy was clearly stated in the Art. 158. of the Treaty
under which: “In order to promote its overall harmonious development, the Com-
munity shall develop and pursue its actions leading to the strengthening of eco-
nomical and social cohesion. In particular, the Community shall aim at reducing
disparities between the levels of development of the various regions and backward-
ness of the least favoured regions or islands, including rural areas”. (Rybinski, 2009,
69)
FINANCING DEVELOPMENT PROJECTS IN NEW EU FINANCIAL PERSPECTIVE 20142020 381

Picture 1. Main components of Cohesion policy

Made by the author

If we add two more funds to the stated components, to be more precise the Eu-
ropean agricultural fund for rural development and European maritime and fisher-
ies fund, we place them under one common title, which are the European struc-
tural and investment funds (ESIF). The use of means from these funds represents
the foundation of sustainable and balanced economical growth.
As the Cohesion fund is mostly directed towards projects of national impor-
tance, such as the railway, roads and similar, we find Structural funds and Euro-
pean agricultural funds for rural development and European maritime and fisheries
funds especially interesting from the regional and local point of view.
The European fund for regional development has the aim to strengthen eco-
nomical and social cohesion and decrease the disparities in development between
the regions within the European Union. It is mostly directed towards infrastructur-
al investments, production investments with the goal to open job vacancies and to
local development and the development of small and medium enterprises, whereas
the European social fund tends to decrease disparities in standard of living and wel-
fare in member states and their regions, but at the same time promote economical
and social cohesion. (www.mrrfeu.hr)
Comprehensive aim of the Cohesion policy is to promote economical and social
cohesion in Europe by increasing the competitiveness of EU economy and by de-
creasing disparities in economical development between the countries and regions
in the European Union.
As the aims of the Cohesion policy are to be fulfilled by implementation and
investment into infrastructure such as the traffic, environment protection, ener-
getic, regional competitiveness and human potential development, Croatia faces a
great challenge that demands certain institutional adjustments. It is necessary, as
382 Gabrijela Žalac • Mario Banožić

on national and regional so on local level to ensure multiannual and strategic ap-
proach, partnership of all relevant stakeholders and ensure that with the EU funds
the investments on both national and local level that have already been financed
speed up, rather than invent new areas of investment (I’M, August 2013,13).
The Cohesion policy is at the same time expression of solidarity of the European
Union with less developed countries and regions, which concentrates means in
areas and sectors where they are most needed. The neglecting of these economical,
social and territorial disparities would mean undermining of basic principles of the
European union, including the common market and unique European currency.
Therefore, the significant part of the budget of the European Union is directed to
the Cohesion policy, what can be seen in the following graph:

Graph 1. – The budgetary importance of Cohesion policy in EU (in billions of EUR)
376
400
350 308

300
250 195
200 161

150
75
100
50
0
1989Ͳ1993 1994Ͳ1999 2000Ͳ2006 2007Ͳ2013 2014Ͳ2020

The Republic of Croatia in new EU financial perspective 2014-2020
The Republic of Croatia has so far had through pre-accession funds 1,12 billion
EUR at disposal, from which 820 million EUR or 73,15% have been contracted,
which puts us in the “upper-house” of EU member states. When it comes to the
pre-accession program IPA that has been implemented since 2007, from 823 mil-
lion EUR that have been at our disposal 582.871.983,15 million EUR have been
contracted. But, that amount, as the previous, will continue to grow, because the
non-contracted means can be contracted and spent until the end of 2016. (www.
mrrfeu.hr)
FINANCING DEVELOPMENT PROJECTS IN NEW EU FINANCIAL PERSPECTIVE 20142020 383

Table 1. – Total financial overview of pre-accession programs in the Republic of
Croatia in financial perspective 2007-2013
State: March 21st 2014
Contracted amount: 582.871.983,15 EUR
Paid amount: 383.111.380,63 EUR

Contracted Payment
Operational Allocated Paid amount Contracting rate
amount (in
program amount (in EUR) (in EUR) rate (%)
EUR) (%)
1 2 3 4 5 (3/2) 6 (4/2)
IPA I (2007-2013) 249.047.325,00 168.788.127,89 140.139.402,16 67,77 56,27
IPA II (Cross-border
cooperation + trans-
17.519.302,00 12.263.321,24 9.126.395,56 70,00 52,09
national program
2007-2013)
IPA V (2007-2013) 144.283.680,00 81.430.830,52 34.937.476,33 56,44 24,21
OP Traffic 2007-2013 236.983.305,00 80.264.872,60 54.880.827,41 33,87 23,16
OP Environment
281.099.011,00 96.290.130,65 41.760.986,20 34,25 14,86
2007-2013
OP Regional
competitiveness 187.779.595,00 69.336.849,96 46.121.774,37 36,92 24,56
2007-2013
OP Human resources
development 152.413.106,60 74.497.850,28 56.144.518,60 48,88 36,84
2007-2013
TOTAL 1.269.125.324,60 582.871.983,15 383.111.380,63 45,93 30,19

*Remark: The indicators of contracting and payment of means differ from former values presented in
regular reports every 6months on usage of pre-accession means, because for the first time the values of
allocated means from pre-accession and structural funds of European Union for 2012 and 2013 have
been included and therefore the total amount of allocated means from the funds of the European union
for the Republic of Croatia has been increased.
Source: www.strukturnifondovi.hr

The Republic of Croatia has for the first time begun to plan the investments
from European structural and investment funds for the period of seven years,
2014-2020 as an equal member state after July 1, 2013.
384 Gabrijela Žalac • Mario Banožić

The process of programming of multiannual financial framework on the level of
European Union is finished and we can conclude that the Republic of Croatia was
allocated financial envelope in the amount of 8,029 billion EUR, which includes
means of the European regional development fund, European social fund and Cohe-
sion fund. If we add stipulated means for common agricultural policy in the amount
of 2,336 billion EUR we come to a sum of 10,365 billion EUR, i.e. 77,7 billion
kuna. These means can, with good and smart application, turn the negative economi-
cal trend in Croatia and initiate investments, growth, development and employment.

Table 2. – Multiannual financial framework 2014 – 2020 2011. g.)
Allocated means from ESI funds for Croatia 2014-2020 in billions EUR
Cohesion policy ERDF, ESF i CF 8,029
Agriculture and rural development EAFRD 2,056
Maritime and fisheries EMFF 0,280
Source: www.mrrfeu.hr

The stated means are in harmony with the Strategy Europe 2020 and Common
strategic framework and are meant for the goals of employment, increase of invest-
ments into research and development, adjustment to climate changes, increase of
energy efficiency, use of renewable sources of energy, investment into education
and decrease of poverty and strengthening of social inclusion. Regarding Croatian
point of view, they are allocated exclusively to increase of competitiveness, decrease
of regional disparities and strengthening of human capacities.
They have been put on our disposal since January this year, but since the strate-
gic documents, like Partnership agreement as a top planning-programming docu-
ment with which Croatia reasons its strategy and justification for use of ESI funds
and Operational programs as program documents where measures and activities for
more efficient implementation and use of ESI funds are described in more detail,
have not been defined yet, we will have to wait for a while for using these means.
We consider it very important to emphasize that the projects from EU funds are
not co-financed in the amount of 100%, but it is also necessary to invest a part of
your own resources. The percentage of co-financing of projects through EU funds
depends from tender to tender, and minimum and maximum support that can
be allocated through individual call for delivery of project proposals is defined in
tender documents.
FINANCING DEVELOPMENT PROJECTS IN NEW EU FINANCIAL PERSPECTIVE 20142020 385

The EU funds are not only money, they give you the possibility of participation
in common market, labour market, then there is a possibility of studying, possi-
bility of self-employment and similar, and it is crucial to know them well and use
them efficiently.
We think that on the national level for the Republic of Croatia, there are not
enough financial means from the state budget allocated to major development
projects for preparation and implementation of development projects. The same
thing happens on regional and local level where the allocated means are insignifi-
cant or do not even exist.
In order to use European money put to our disposal on time, it is necessary to
prepare development projects in the value of more than 2 billion EUR on annual
basis. The stated implies that it is necessary to have a reserve of prepared projects
in double amount from European money at our disposal, which is on average 1
billion EUR annually. As 3-5% of total project value goes to the preparation of
projects it means that the Republic of Croatia would have to allocate annually
minimum of 100 million EUR for high-quality project preparation in new EU
financial perspective.
Therefore is every EUR from regional and structural funds of the EU planned;
it is managed in order to increase the means of local units that have the aim to
increase these units to the level of developed regions. Thus, the aim of managing
regional and structural funds of the European Union is balancing regional develop-
ment. (Kandžija, V., 2004, 67)
County development strategies, especially from the aspect of budgetary plan-
ning, defining of strategic goals and priorities and connecting goal and budgetary
means play crucial role for high-quality preparation of regional and local devel-
opment projects. County development strategies bear basic guidelines of regional
development policy and they are the basic plan document for sustainable socio-
economical development of regional and local units.
This way of strategic planning through development projects is excellent and
needs to grow in this financial perspective, considering that all development activi-
ties are based in budgetary items. That way it is very simple to follow the realization
of certain priorities, measures and development projects in certain time frame.
386 Gabrijela Žalac • Mario Banožić

Conclusion
The EU funds are main source of financing investments on European level that
help member states in economical revival and growth, preservation of existing and
creation of new jobs and give the possibility for sustainable development in accor-
dance with the Strategy Europe 2020. There, they should be recognized in Croatia
on all levels as major drivers of development in economy and competitiveness.
All investments in the Republic of Croatia can be significantly accelerated with
these means and things that were planned to be finished within twenty years with
own resources can be done in five years with mutual resources.
The basic condition for efficient implementation of European funds is to rec-
ognize in set goals and priorities all potential project leaders and that goals and
priorities should be defined coming from the needs of the local and regional self-
administration, entrepreneurs, scientists, non-profit organisations and similar (IM,
January 2014).
The issue of using European funds is pretty complex and sometimes even those
experienced in that area find it hard to manage all pieces of information and data
that appear in public.
We think that the main issue that stands out on the level of the Republic of
Croatia is that local and regional authorities do not have enough financial or hu-
man capacities in order to prepare development projects. They have to use the small
amount of resources they have efficiently and they have to know in advance what
will be financed in their area.
This is exactly where we see the role of the state in order to help according to
the development index both financially and administratively to units of local and
regional authority with preparation of strategic documents and pre-financing of
certain projects, as well as in co-financing of their implementation. If this does not
happen, the usage of means from EU funds will be very low on local level and they
will be mostly used by the most developed and fiscally strongest, which is totally
inconsistent with the goals of Cohesion policy.
FINANCING DEVELOPMENT PROJECTS IN NEW EU FINANCIAL PERSPECTIVE 20142020 387

References:
1. Jovančević,R. (2005). Ekonomski učinci globalizacije i Europska Unija, Makron
promet, ISBN 953-95180-0-8, Zagreb
2. Kandžija, V.(2004). Upravljanje regionalnim i strukturnim fondovima Europske
unije, Zbornik radova Ekonomska decentralizacija i lokalna samouprava, Karaman
Aksentijević et al (ur), str. 54-68, ISBN 953-6148-39-0, 2004, Rijeka
3. Rybinski, K.( 2009). Cohesion Policy post-2013, A final wake up call for the EU,
Cohesion policy facing the challenges of the 21st century-Materials from conference,
Ministry of Regional Development, ISBN 978-83-7610-078-4, Warszawa, Poland
4. Sumpor,M. & Petak, Z. (2013). 4.Forum za javnu upravu: Policy i strategija u javnoj
upravi-kako definirati i ostvariti ciljeve?, Friedrich Ebert Stiftung, Institut za javnu
upravu, ISBN 978-953-7043-47-6, Zagreb
5. Trnski, M. & Blankert, H. (2011). Hrvatske pripreme za korištenje Strukturnih fon-
dova Europske unije, Zbornik radova Ekonomska politika Hrvatske u 2012, Jurišić,
S. (ur), str. 317-337, ISBN 978-953-262-058-0, 2011, Opatija
6. I’M - Informativni mjesečnik zastupnice u Europskom parlamentu Ivane Maletić
(rujan 2013). Proračun EU i financijska omotnica za RH, 14-17
7. Dostupno na www.ivana-maletic.com
8. I’M (studeni 2013). Regionalne konferencije “Mogućnost korištenja EU fondova”,
22-28
9. Dostupno na www.ivana-maletic.com
10. I’M (prosinac 2013). Strateški dokumenti za korištenje EU fondova, 12-15
11. Dostupno na www.ivana-maletic.com
12. I’M (siječanj 2014). Pripremljenost država članica za sudjelovanje u Kohezijskoj
politici 2014-2020 s posebnim osvrtom na Republiku Hrvatsku, 21-25
13. Dostupno na www.ivana-maletic.com
14. The European Union Cohesion Policy Post-2013 (2009), str. 15-43, Cohesion
Policy Post-2013, Desired Directionsof the Reform, Ministry of Regional Develop-
ment, Warsaw
15. Zakon o regionalnom razvoju Republike Hrvatske, Narodne novine 153/09
16. Zakon o proračunu, Narodne novine 87/08, 136/12
17. http://www.strukturnifondovi.hr/financijski-pregled ( 25. ožujka 2014.)
18. http://www.mrrfeu.hr/default.aspx?id=1425 (26. ožujka 2014)
19. http://www.mrrfeu.hr/UserDocsImages/EU%20fondovi/Financijsko%20razdo-
blje%20EU%202007-2013/OPRK%202007-2013%20HRV%20NOVI%20-.
pdf (26. ožujka 2014)
388 Gabrijela Žalac • Mario Banožić

20. http://www.safu.hr/datastore/filestore/10/Ususret_fondovima_Kohezijske_poli-
tike_HGK.pdf (27.ožujka 2014)
21. http://ec.europa.eu/budget/mycountry/HR/index_hr.cfm (27.ožujka 2014)
22. http://ec.europa.eu/dgs/budget/index_en.htm (27.ožujka 2014)
MICROECONOMICS,
MACROECONOMICS
AND
MONETARY
ECONOMICS
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 391

THE REPUBLIC OF CROATIA EMLPOYMENT
STRUCTURE ANALYSIS FROM 2008 UNTIL 2013 AS AN
MACROECONOMICAL CRISIS INDICATOR
Besim Aliti, mag.kin.1, Marko Markić, B.Sc.2, Boris Štulina, B.Sc.3
1
Doctoral candidate, Postgraduate Ph.D. study “Management”,
Republic of Croatia,besim.aliti@hotmail.com
2
Oil AC Ltd., Bosnia and Herzegovina, marko.markic@oilac.com
3
Doctoral candidate, Postgraduate Ph.D. study “Management”,
Republic of Croatia, boris.stulina@gmail.com

Abstract
Employment (unemployment) is one of the most observed macro-economic
indicators with GNP and inflation (Ferenčak, 2003). Thus, it could easily be con-
cluded that employment analysis would give us a transparent data of the economic
situation of the Republic of Croatia and European Union. The paper puts forward
the curve of employment which shows the fluctuations of the employment struc-
ture at the period of past ten years (from 2003 to 2013). Statistical analysis in
programming language R have been used in order to give prospective on European
Union and Croatian employment past trends, its correlation with GDP and its
future predictions for period 2014 to 2016.
JEL Classification: E24
Keywords: Employment/Unemployment, GDP, European Union,

INTRODUCTION
Macroeconomics is a branch of economics dealing with the performance, struc-
ture, behavior, and decision-making of an economy as a whole, rather than indi-
vidual markets. This includes national, regional, and global economies (Sullivan,
Sheffrin, 2003, 57). Ferenčak (2003, 241) points out three main indicators of
macroeconomics: inflation, employment (unemployment) and GDP. Two of them,
GDP and unemployment are analyzed in the paper. The same author defines un-
392 Besim Aliti • Marko Markić • Boris Štulina

employment as a state of a part of the population without job and searching for
one. Also, he distinguishes four types of unemployment: frictional, cyclical, sea-
sonal and structural, from which emphasize is on frictional since it is the only one
where country must interfere. GDP is presented as the sum of final goods being
produced by an economy.
The paper analyzes two macro-economic indicators, GDP and employment
(unemployment) with data collected among Croatia and European Union from
2003 until 2013. Therefore, the paper analyzes the correlation between Croatian
and European Union GDP and the unemployment rate with the aim of predict-
ing trends of GDP and unemployment for next three years (2014-2016) in EU
and Republic of Croatia. According to European Communication Commission,
Europe Strategy 2020 puts forward three mutually reinforcing priorities: smart
growth (developing an economy based on knowledge and innovation); sustainable
growth (promoting a more efficient economy in terms of resource use, more eco-
logical and competitive); inclusive growth (fostering an economy with a high rate
of employment, to ensure social and territorial cohesion) (Iuga, Cioca, 2013, 71)
In conclusion, the paper is written with the aim to make a significant contri-
bution on the general macro-economic analysis of the Republic of Croatia and
European Union dealing with high unemployment rates. As it was mentioned pre-
viously, beside the analysis of past and current trends of unemployment rates and
GDP in EU and Croatia aim of this paper is to predict its future trends for period
2014 to 2016.

1. UNEMPLOYMENT – GENERAL ISSUE OF NATIONAL ECONOMIES
As it was mentioned previously, Ferenčak (2003, 241) defines unemployment as
a state of a part of the population without job and searching for one. Other authors
have also put various definition of unemployment. Bejaković (2003, 659) defined
unemployment as a state in which a capable of working part of society doesn’t work
or works under the standard working hours and with incomes under the mini-
mum salary. Kerovec (1999, 259) defined unemployment as a structure consisting
of three criteria: a person without a job, capable of working and searching for a
job. An unemployed person is defined by Eurostat, according to the guidelines of
the International Labor Organization, as:
• someone aged 15 to 74 (in Italy, Spain, the United Kingdom, Iceland, Nor-
way: 16 to 74 years);
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 393

• without work during the reference week;
• available to start work within the next two weeks (or has already found a job
to start within the next three months);
• actively having sought employment at some time during the last four weeks.
The classification of unemployment identifies four main types:
1. Frictional
2. Structural
3. Seasonal
4. Cyclical
According to Hughes, Perlman (1984, 27-30) both frictional and structural
unemployment arise because the labor market is not perfect in matching the vast
number of individual suppliers of labor services with a large number of employ-
ers who demand those services. This happens because in dynamic economy many
suppliers will keep contracting their traditional lines of business while others will
diversify their activities and therefore demand new operations. On the supply side
some workers will withdraw from the labor market, other might return to it or en-
ter for the first time. The net result is that the changes on the supply side will effect
that some of the workers will have to quit jobs, some of them will be laid off and
others will enter or re-enter. Cyclical unemployment occurs during the recession
phase of a business cycle when investments and consumption expenditures begin to
fall off and the economy is unable to generate the same number of jobs existing at
the previous cyclical peak. According to Ferenčak (2003, 251) seasonal unemploy-
ment include all workers being left without a job at some period of year because of
the seasonal characteristics of a job.
Unemployment is almost always expressed by the unemployment rate. Eurostat
(2014) define the unemployment rate as a number of unemployed as a percentage
of the labor force. The same formula will be used in unemployment analysis of
Croatia and EU, as well in their comparison and correlation. The unemployment
rate is an important indicator with both social and economic dimensions.
Rising unemployment results as: a loss of income for individuals, increased pres-
sure to government to spend on  social benefits  and a reduction in tax revenue.
From an economic perspective, unemployment may be viewed as unused labor
capacity. The unemployment rate is considered to be a  lagging indicator. When
there is an economic downturn, it usually takes several months before the unem-
394 Besim Aliti • Marko Markić • Boris Štulina

ployment rate begins to rise. Once the economy starts to pick up again, employers
usually remain cautious about hiring new staff and it may take several months
before unemployment rates start to fall (Eurostat, 2014). Europe 2020 strategy and
its two initiatives concerning unemployment issues, “An agenda for new skills and
jobs” and “Youth on the move” put forward by European Commission unemploy-
ment rates will be targeted via by a range of policies, including proposals aimed at
education and training institutions, or measures for the creation of an environment
conducive to higher activity rates and higher labor productivity (Iuga, Cioca, 2013,
71; European Commission, 2014). As well as for the EU countries, Europe 2020 is
implemented in Croatia and is expected to give positive results in the years.

Graph 1. Unemployment graph – Unemployment EU and Croatia comparison
form 2003 to 2013

Source: Author calculation
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 395

Graph 2. Unemployment graph – Unemployment EU countries and Croatia
comparison form 2003 to 2013

Source: Author calculation
On these graphs is presented comparison of unemployment between Croatia
and EU as a whole and comparison between Croatia and EU countries separately
in the period 2003-2013. Economic crisis in 2009 began to destroy the economic
stability of Europe. Until 2009, Croatia was not able to get back to the previous
year’s level and unemployment is still rising. Since 2003 Croatia has been above
EU’s average in unemployment except in 2009, which was a year after crisis began.
While Croatia’s labor force is sinking some of the EU members have woken up and
became a perfect example, like Poland and Slovakia. Unemployment in Croatia
is breaking all the records and unfortunately, the prognoses are still poor for the
Croatian economy. Since 2008 the unemployment rate has doubled from 8.6 % to
16.3 % in 2012, and most young people are affected. If Croatia is compared with
its neighbors, Slovenia or Hungary with the unemployment rate of 9 % and 11%,
Croatia is still deeply affected with economic crisis and its consequences.

2. GDP - REAL ECONOMIC STRENGTH MEASUREMENT FOR ANY COUNTRY
National accounts provide a comprehensive set of data about the economy, in-
cluding the widely reported indicator gross domestic product (GDP). GDP, the
most important concept of macroeconomics, refers to the total amount of goods
and services a country produces. As well as being an indicator of the overall size of an
396 Besim Aliti • Marko Markić • Boris Štulina

economy, GDP is also used as a benchmark for other indicators to facilitate compari-
son between countries and regions or over certain period of time, and as a standard
measure of economic progress. Useful for analysts, economists and investors, it is the
most followed, discussed and digested indicator. Looking backwards in time it allows
us to calculate economic growth. Truly economic growth is the change in the size of
the economy and the level of output, and for that reason we calculate GDP figures. It
is also a good way of assessing a quality and effectiveness of government policy that is
trying to achieve economic growth. Only by measuring the economy we will know if
these policies were successful or not. GDP has four components:
• private consumption (C)
• gross investments (I)
• government spending (G)
• net exports (X) – imports (M)
GDP at market prices, which is used in this paper’s analysis, is the final result of
the production activity of resident producer units and it can be defined in three ways:
• GDP Production approach – sum total of market value of final goods and
services produced an a country during 1 year
• GDP Expenditure approach – all expenditure incurred by individuals during
1 year
• GDP Income approach – sum total of incomes of individuals living in a
country during 1 year
GDP per capita is an approximation of the value of goods produced per person
in the country, equal to the country’s GDP divided by the total number of people
in the country. Economic variables such as unemployment are important factor
that influences the GDP and need to be controlled by the government to achieve
the stabilization of economy. The correlation between GDP and unemployment
which is analyzed in this paper can be seen as the higher unemployment rate will
contribute to lower GDP because it indicates the slower growth of the economy
by having too much jobless because of the unproductive economy. The effects of
the crisis can be seen in constantly increasing rate of unemployment, the continual
decline in GDP, and reduced share of exports to the EU and rest of the world
(M.Vedriš,The Republic of Croatia before its entry into the EU: expectations and
limits, zbornik radova sa Interdiscplinary Management Research). In 2012 GDP
in Croatia stood at € 43.9 billion equivalent to 0,3 % of the EU-28 total. Relative
to the size of population, GDP in Croatia was € 10.300 per capita, around 40 %
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 397

of the € 25.600 per capita average for the EU-27. It should be borne in mind that
the cost of living in Croatia is below the EU average. GDP per capita in Croatia
was around 61 % of the EU-27 average in 2011, above that of Latvia, Romania
and Bulgaria. Prior to the financial, economic and public debt crisis annual GDP
growth in Croatia exceeded that in the EU-27 but since 2009 this situation has
reversed. (Eurostat, Stat Portrait Of Croatia2013, 76).
Croatia faces a major challenge in terms of strengthening public finances and
promoting competitiveness. After five years of recession, the growth which is based
on the creation of new jobs is a major challenge in the short term. Europe 2020 is
a ten year strategy of growth of the EU. The goal is not only to overcome the crisis
that still affects most of our economies, but also to fix shortcomings of current
growth model and strategies and to create a different kind of growth that will be
smarter, sustainable and inclusive. Five main objectives are defined that EU must
achieve till the end of decade. These include employment, education, research and
innovation, social inclusion and poverty reduction and climate change and energy
(ec.europa.eu/europe2020/europe-2020-in-a-nutshell/index_hr.htm).
In 1962, Kuznets stated: „Distinctions must be kept in mind between quantity
and quality of growth, between costs and returns, and between the short and long
run. Goals for more growth should specify more growth of what and for what“(S.
Kuznets, How to judge quality, The New Republic, 1962).
398 Besim Aliti • Marko Markić • Boris Štulina

Graph 3. GDP - EU and Republic of Croatia comparison

Source: Author calculation Graph 4. GDP in 27 EU countries

Source: Author calculation
Graphs 3 and 4 show the change rates of GDP and GDP comparison between
Croatian and EU and Croatia and the EU member states individually. It can be
seen that in the period from 2003 until 2008 GDP grew, but the consequences of
the economic crisis, both worldwide and in the EU led to a decline of GDP of up
to 6.9% in 2009 and gradually stabilized on an annual basis. Expert’s predictions
are that GDP will achieve positive growth of 1 % in 2014. Peer countries such as
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 399

Czech Republic, Hungary, Poland, Slovakia, Slovenia, Bulgaria and Romania have
all managed to stabilize its own GDP.

3. GDP AND UNEMPLOYMENT ANALYSIS FOR EUROPEAN UNION AND
REPUBLIC OF CROATIA
3.1. Analysis for European Union
In this chapter will be analyzed GDP and unemployment of European Union
and Republic of Croatia. Main goal of this analysis is show GDP and EU and Re-
public of Croatia unemployment in the last 10 years, its correlation and to predict
its future trends.
Analysis of correlation between GDP and unemployment shown in past ten
years will be done by appliance of programming language R and its packages. All
commands in R language are intuitive and there is no need of higher level com-
puter programming knowledge to its understanding. All data for analysis, GDP
and unemployment rates in past ten years are prepared in dataset form and stored
in Excel worksheet.
Command conn=odbcConnectExcel(“C:\\MarkoAna\\euBN.xls”) connects with
data stored in Excel. In business intelligence system is usually to interpret data us-
ing three-dimensional visualization (in data cube form). In our example data cube
is formed by data of unemployment, and GDP in EU and in Republic of Croatia
for 10 years of time period, from 2003 until 2013.
Lines of commands in programming language R to create three-dimensional
data cube:
> library(RODBC)
> library(scatterplot3d)
> conn = odbcConnectExcel(“C:\\MarkoAna\\euBN.xls”)
> data = sqlFetch(conn, “euBN”)
> X<-data$Year
> Y<-data$Unemployment
> Z<-data$GDP
> scatterplot3d(X, Y, Z, pch=16, type=”h”, main=”Data cube: GDP versus unem-
ployment in EU from year 2003 to 2012”, xlab=”Year”, ylab=” Unemployment”,
zlab = “ GDP “.)
400 Besim Aliti • Marko Markić • Boris Štulina

Picture 1. Data cube showing GDP versus unemployment in EU from 2003 until
2012
20000 21000 22000 23000 24000 25000 26000
GDP

Unemployment
11
10
9
8
7
2002 2004 2006 2008 2010 2012

Year

Source: Author calculation
Picture 1 shows the correlation between GDP and unemployment for the pe-
riod from 2002 until 2012. Z-axis represents the amount of GDP in the EU in
thousands of €, Y-axis percentage of unemployment and axis-X represents years.
The picture shows that the lowest unemployment rate was in 2003, and the highest
unemployment rate was in the 2012 (Z axis). It is also evident that the increases of
GDP and unemployment have the same trend for several years.
The Y-axis illustrates the changes in the unemployment rate in the EU, and the
X-axis changes in GDP (in percentage), which is economically justified and logi-
cal, because unemployment is a function of GDP in every big economic system.
In other words, it is assumed that any increase in GDP at the same time reduces
unemployment (unemployment change is positive) and vice versa. Mathematically
said reducing unemployment is a decreasing function of GDP growth.
Analyzing changes of unemployment and changes of GDP in the EU, there are
visible periods for which is valid economic logic, but there are also other periods in
which such economic logic is lost.
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 401

Picture 2. Regression line showing unemployment changes versus GDP changes
in EU

Source: Author calculation

Picture 2 shows correlation between unemployment rate change and GDP
change in European Union during past 10 years (2003 to 2013).
There are two periods of unexpected changes in GDP and unemployment fluc-
tuations (section of a graph in which function has a positive incline). Polyno-
mial sixth grade (regression function), best adapts to the original data (best ap-
proximates them).
Ur = 0,0004GDP6 - 0,0128 GDP 5 + 0,149 GDP 4 - 0,8584 GDP 3 + 2,5467 GDP 2 -
3,6601 GDP + 2,0485
Ur is the change of unemployment rate and GDP is change in Gross Domestic
Product in European Union. The coefficient of determination is R² = 0.99. That
means that the regression function explains 99% of the original data (changes of
unemployment rate as a function of changes in GDP).
The original data of unemployment rate changes and changes in GDP for the
period from 2003. to 2012. can be visualized again (picture 3). For visualization are
used following sequence of commands of programming language R:
>library(RODBC)
>library(scatterplot3d)
402 Besim Aliti • Marko Markić • Boris Štulina

>conn = odbcConnectExcel(“C:\\MarkoAna\\UnGDPc.xls”)
>data = sqlFetch(conn, “List1”)
>X<-data$Year
>Y<-data$Unc
>Z<-data$GDPc
>scatterplot3d (X, Y, Z, pch=16, type=”h”, main=”Data cube: GDP change versus
unemployment change in EU from year 2003 to 2012”, xlab=”Year”, ylab=” Un-
employment”, zlab = “ GDP “).
After establishing connection with data source (file UnGDPc.xls) from relation
table next attributes are selected:
X<-data$Year;
Y<-data$Unc and
Z<-data$GDPc
These vectors keep data about year, GDP changes rate and changes of unem-
ployment rate respectively. In three dimensional data cube (picture 3.) are shown
all points/records of relational table. Because one of three dimensions is time di-
mension in three dimensional systems is not clear relation between values of GDP
changes and unemployment. These functional relations which are complement
with economic logic are shown in picture 2.

Picture 3. GDP change versus unemployment change in EU from 2003. until 2012

Source: Author calculation
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 403

3.1.1. Prediction of trend of unemployment rate and GDP for EU in period 2014 to
2016
It would be very interesting if predictions about the unemployment rate changes
in the EU, according to expected changes of GDP, would be implemented in the pe-
riod 2014 to 2016. Such predictions follow all weaknesses that are due to the qual-
ity of the data and imperfections of predicting analytical instruments. Nowadays,
in data analysis and predictions of variables future trends, methods of knowledge
discovery in data are used. There are more methods which stream to avoid strictly
mathematical functional dependence usually shown as regression. Implementation
of those methods is a special part of the scientific research which is not part of the
goals set in this paper. Those methods are called data mining and they are part of
process of knowledge discovery in data. Those are applicable mostly on the large
amount of data which detects hidden relations and connections between variables.
All data are specially prepared and filtered and are usually in form of dataset to
be analyzed with some of data mining algorithm or method. The most common
transformations of data in such system, also called the system of the business intel-
ligence, are: inductive rules (ID3 and C4.5 algorithm), Support Vector Machines,
multivariate methods (e.g. Principal Component Analysis), clustering methods (k-
means clustering, hierarchical and agglomerative clustering, fuzzy c-means cluster-
ing), neural networks, associative rules, Bayes algorithm etc.
Because there is fewer amount of data in process of analysis and prediction of
unemployment rate changes as function of GDP amount it will be used trend line
based on unemployment rate data in EU from period 2003 until 2012. Also, for
the analysis, again it will be used simple commands in programming language R.
Data are stored in file C:\\MarkoAna\\euBN.xl. After loading data it is enough to
call function lm(Y~X) that adapts to original data.
Result of calculation is trend function Y=0.1733*X - 339.0267.
> Unemployment prediction (2014 to 2016):
> Unemployment_prediction=round (0.1733*(2014:2016) - 339.0267,2).
Results of calculation in programing language R showed that the unemploy-
ment trend in period from 2014 to 2016 will be 10.00% (2014); 10.17% (2015)
and 10.35% (2016).
404 Besim Aliti • Marko Markić • Boris Štulina

GDP trend:
> X<-data$Year
> Y<-data$Unemployment
> Z<-data$GDP
> trendGDP<-lm(Z~X)
> abline(trendGDP)
> trendGDP

Call:
lm(formula = Z ~ X)
Coefficients:
(Intercept) X
-914280.0 467.3
Z=467.3*X-914280.0

Result of calculation is trend function Z=467.3*X-914280.0.
EU GDP prediction for 2014, 2015 and 2016:
> GDP_prediction=round (467.3*(2014:2016)-914280.0,2)
> GDP_prediction
[1] 26862.2 27329.5 27796.8

Results of calculation in programing language R showed that the GDP trend
in period from 2014 to 2016 in EU will be 26.862,2€ (2014); 27.329,5€ (2015)
and 27.796.8€ (2016).
Next regression function shows the functional relationship between unemploy-
ment and GDP in absolute values.
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 405

Picture 4. Correlation between unemployment rate and GDP in absolute
amounts in EU for 2003 to 2013
Regressionline
12,00 y=0,0043x5 Ͳ 0,1311x4 +1,4642x3 Ͳ
7,2005x2 +14,517x
10,00 R²=0,8881
8,00
6,00
Regressionline
4,00
Poly.(Regressionline)
2,00
0,00

Source: Author calculation
Picture 4 shows correlation between unemployment rate and GDP in absolute
amount in European Union during past 10 years (2003 to 2013).
Polynomial fourth grade (regression function), best adapts to the original data
(best approximates them).
Ur = 0,0043GDP5 - 0,1311 GDP 4 +1,4642GDP 3 -7,2005 GDP 2 + 14,517GDP
Ur is the change of unemployment rate and GDP is change in Gross Domestic
Product in European Union. The coefficient of determination is R² = 0.8881. That
means that the regression function explains 88% of the original data (changes of
unemployment rate as a function of changes in GDP).

3.2. Analysis for Republic of Croatia
The same methodology and procedure used in analysis for European Union is
also used in analysis of unemployment rate and GDP past trends and its future
predictions for Republic of Croatia.
Following the same methodology by analyzing relations between unemploy-
ment and GDP in Republic of Croatia there is significant similarity in the macro
economical variable changes with those in the EU countries. In fact, the results
showed the decrease of the unemployment rate in the periods of GDP growth. The
difference exists in the coefficients of the regression equation but slope and direc-
tion of changes is very similar to what is seen in the previous diagrams related to
European Union.
406 Besim Aliti • Marko Markić • Boris Štulina

> library(RODBC)
> library(scatterplot3d)
> conn=odbcConnectExcel(“C:\\MarkoAna\\HRVGDP.xls”)
> data=sqlFetch(conn,”CroGdp”)
> X<-data$Year
> Y<-data$Unemployment
> Z<-data$GDP
> scatterplot3d(X, Y, Z, pch=16, type=”h”, main=”Data cube: GDP versus unem-
ployment in Croatia from year 2003 to 2012”, xlab=”Year”, ylab=” Unemploy-
ment”, zlab = “ GDP “)

Picture 5. GDP versus unemployment rate in Republic of Croatia in 2002 to 2012

Source: Author calculation

Picture 5 shows the correlation between GDP and unemployment rate for the
period from 2002 until 2012. Z-axis represents the amount of GDP in the Re-
public of Croatia in thousands of €, Y-axis percentage of unemployment and
axis-X represents years. The picture shows that the lowest unemployment rate
was in 2003, and the highest unemployment rate was in the 2012 (Z axis). It is
also evident that the increases of GDP and unemployment have the same trend
for several years.
The Y-axis illustrates the changes in the unemployment rate in the Republic
of Croatia, and the X-axis changes in GDP (in percentage), which is economi-
cally justified and logical, because unemployment is a function of GDP. In other
words, it is assumed that any increase in GDP at the same time reduces unem-
ployment (unemployment change is positive) and vice versa. Mathematically
said reducing unemployment is a decreasing function of GDP growth.
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 407

Picture 6. Regression line of unemployment rate changes versus GDP changes
9000 10000 11000

Unemployment
GDP

8000

16
14
7000

12
10
6000

8
2002 2004 2006 2008 2010 2012

Year

Source: Author calculation

Analyzing changes of unemployment and changes of GDP in the Republic of
Croatia, there are visible periods for which is valid economic logic, but there are
also other periods in which such economic logic is lost.
Picture 6 shows correlation between unemployment rate change and GDP
change in Republic of Croatia during past 10 years (2003 to 2013).
There are two periods of unexpected changes in GDP and unemployment fluc-
tuations (section of a graph in which function has a positive incline). Polynomial
third grade (regression function), best adapts to the original data (best approxi-
mates them).
Ur = 0,0048GDP 3 – 0,0736GDP 2 + 0,2774GDP – 0,1289
Ur is the change of unemployment rate and GDP is change in Gross Domestic
Product in Republic of Croatia. The coefficient of determination is R² = 0,89. That
means that the regression function explains 89% of the original data (changes of
unemployment rate as a function of changes in GDP).
The original data of unemployment rate changes versus changes in GDP for the
period from 2003. to 2012. can be visualized again (picture 7). For visualization are
used following sequence of commands of programming language R:
> library(RODBC)
408 Besim Aliti • Marko Markić • Boris Štulina

> library(scatterplot3d)
> conn = odbcConnectExcel(“C:\\MarkoAna\\UnGDPcCro.xls”)
> data = sqlFetch(conn, “List1”)
> X<-data$Year
> Y<-data$Unc
> Z<-data$GDPc
> scatterplot3d(X, Y, Z, pch=16, type=”h”, main=”Data cube: GDP change versus
unemployment change in Croatia from year 2003 to 2012”, xlab=”Year”, ylab=”
Unemployment”, zlab = “ GDP “)

Picture 7. GDP change versus unemployment change in Republic of Croatia
from 2003 to 2012

Source: Author calculation 1

These vectors keep data about year, GDP changes rate and changes of unem-
ployment rate respectively. In three dimensional data cube (picture 3.) are shown
all points/records of relational table.

3.2.1. Prediction of trend of unemployment rate and GDP for Republic of Croatia
in period 2014 to 2016
Prediction of unemployment rate and GDP future trends for Republic of Croa-
tia will be done by the same methodology and procedures using programming
language R as prediction for European Union in the paper.
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 409

Sequence of commands in programming language R:
> library(RODBC)
> library(scatterplot3d)
> conn=odbcConnectExcel(“C:\\MarkoAna\\HRVGDP.xls”)
> data=sqlFetch(conn,”CroGdp”)
> X<-data$Year
> Y<-data$Unemployment
> Z<-data$GDP
> trendUY<-lm(Y~X)
> abline(trendUY)
> trendUY
Call:
lm(formula = Y ~ X)

Coefficients:
(Intercept) X
19.320000 -0.003636

Unemployment trend function - Y=-0.003636*X+19.320000

> UnEmploy_prediction=round(-0.003636*(2014:2016)+19.320000,2)
> UnEmploy_prediction
[1] 12.00 11.99 11.99
Results of calculation in programing language R showed that the unemploy-
ment trend in period from 2014 to 2016 for Republic of Croatia will be 12.00%
(2014); 11.99% (2015) and 11.99% (2016).

GDP trend and prediction:
> library(RODBC)
> library(scatterplot3d)
> conn=odbcConnectExcel(“C:\\MarkoAna\\HRVGDP.xls”)
> data=sqlFetch(conn,”CroGdp”)
> X<-data$Year
> Y<-data$Unemployment
> Z<-data$GDP
410 Besim Aliti • Marko Markić • Boris Štulina

> trendGDP<-lm(Z~X)
> abline(trendGDP)
> trendGDP
Call:
lm(formula = Z ~ X)

Coefficients:
(Intercept) X
-784934.9 395.6

GDP trend function - Z=395.6*X-784934.9

> GDP_prediction=395.6*(2014:2016)-784934.9
> GDP_prediction
> [1] 11803.5 12199.1 12594.7

Results of calculation in programing language R showed that the GDP trend
in period from 2014 to 2016 in Republic of Croatia will be 11.803,5€ (2014);
12.199,1€ (2015) and 12.594,7€ (2016).

Picture 8. Regression line unemployment change versus GDP in absolute
amount in Republic of Croatia for 2003 to 2013

Source: Author calculation
THE REPUBLIC OF CROATIA EMLPOYMENT STRUCTURE ANALYSIS FROM 2008 ... 411

Picture 8 shows correlation between unemployment rate and GDP in absolute
amount in Republic of Croatia during past 10 years (2003 to 2013).
Polynomial of sixth grade (regression function), best adapts to the original data
(best approximates them).
Ur = 0,0009GDP6 - 0,0316GDP5 + 0,4265 GDP 4 – 2,6741GDP 3 + 7,9267
GDP 2 + 11,2GDP + 19,88
Ur is the change of unemployment rate and GDP is change in Gross Domestic
Product in European Union. The coefficient of determination is R² = 0.9918. That
means that the regression function explains 99% of the original data (changes of
unemployment rate as a function of changes in GDP).

4. CONCLUSION
GDP and unemployment as two economic indicators are used to measure eco-
nomic growth and strength of any economy. Its analysis and attempts of predic-
tions are very important for establishing economics policies in every country.
In this paper those two indicators, its past values and future trends for European
Union and Republic of Croatia are presented.
Result of unemployment and GDP trend analysis for EU showed that the low-
est unemployment rate was in 2003, and the highest unemployment rate was in
the 2012. It is also evident that the increases of GDP and unemployment have the
same trend for several years. It is assumed that any increase in GDP at the same
time reduces unemployment (unemployment change is positive) and vice versa.
Mathematically said reducing unemployment is a decreasing function of GDP
growth.
Analyzing changes of unemployment and changes of GDP in the EU, there are
visible periods for which is valid economic logic (lower unemployment rate with
higher GDP), but there are also other periods in which such economic logic is lost.
Following the same methodology by analyzing relations between unemploy-
ment and GDP in Republic of Croatia there is significant similarity in the macro
economical variable changes with those in the EU countries. In fact, the results
showed the decrease of the unemployment rate in the periods of GDP growth. The
difference exists in the coefficients of the regression equation but slope and direc-
412 Besim Aliti • Marko Markić • Boris Štulina

tion of changes is very similar to what is seen in the previous diagrams related to
European Union.

References:
1. Europe2020: Europe 2020 in nutshell (2014). Eurostat, European Commission.
2. Bejaković, P. (2003). Pojmovnik. Zagreb: Institut za javne financije.
3. Economic Programme of Croatia (2013). European Commission.
4. Ferenčak, I. (2003). Počela Ekonomike. Osijek: Sveučilište J.J. Strossmeyera u
Osijeku, Ekonomski fakultet.
5. Hughes, J. J., Perlman, R. (1984). The economics of unemployment: A comparative
analysis of Britain and the United States. UK: Cambridge University Press.
6. Iuga, I., Cioca, I. C. (2013). Analysis of correlation between the unemployment
rate and gross domestic product in the European Union. Poland: Polish Journal of
Management Studies.
7. Kerovec, N. (1999). How to measure unemployment. Zagreb: Revija za socijalnu
politiku.
8. O‘Sullivan, A., Sheffrin, S. M. (2003). Economics: Principles and tools. USA: Pren-
tice Hall PTR
9. Stat Portrait of Croatia (2013). Eurostat, European Commission.
10. Unemployment statistics (2014). Eurostat, European Comission.
11. Vedriš, M. (2013). The Republic of Croatia before its entry into the EU: expectation
and limits. Opatija: Interdisciplinary Management Research. Pristup (10-02-2014)
12. 2014: Još jedna teška godina (2014). HUB, Klub glavnih ekonomista hrvatskih
banaka.
13. Simon Kuznets (1962). How To Judge Quality. USA: The New Republic.
THE HAWALA SYSTEM 413

THE HAWALA SYSTEM
Éva Ladányi, Ph.D.,1 István Kobolka, Ph.D.2
1
Chief Advisor at Ministry of Human Resources, Hungary, eva.ladanyi@nefmi.gov.hu
2
Head of Department for the Institute of National Security in the National University of
Public Service, Hungary, kobolka.istvan@feek.pte.hu

Abstract
The authors in their article review a well-known money transfer system in Mid-
dle-East and Asia. There is an alternative remittance channel that exists outside of
traditional banking systems. The main focus of the article is why and how does
the systems work in practice? Hawala or hundi is a method of transferring money
without any real movement. Transactions between hawaladars or hawala operators
are done without promissory notes because the system is heavily based on trust.
One definition from Interpol is that Hawala is “money transfer without money
movement.” Hawala originated in Asia during ancient times, and is used in many
regions in the world today, especially in the Islamic community.
JEL Classification: E26, N15
Keyword: Hawala, padala, hundi, hawaladar, informal funds transfer (IFT),
Sh’aria,

What is hawala?
Informal funds transfer (IFT) systems are in use in many regions for transferring
funds, both domestically and internationally. The hawala system is one of the IFT
systems that exist under different names in various regions of the world. Hawala is
a traditional and alternative Asian Remittance System in the Middle East, North
Africa, South Asia and the Horn of Africa. Known as hawala in India, hundi in

1
Canon lawyer and state building expert, She is working in the Ministry of Human Resources as a
chief advisor in the international department
414 Éva Ladányi • István Kobolka

Pakistan, fei qian in China2, padala in Philippines, hui kuan in Hong Kong, and
phei kwan in Thailand.
The FATF3( Financial Action Task Force) uses the following definition:
„Alternative remittance systems cover any system used for transferring money
from one location to another and generally operating outside the banking channels.
The services encompassed by this broad definition range from those managed by
large multinational companies to small local networks. They can be of a legal or il-
legal nature and make use of a variety of methods and tools to transfer the money”.4

Origins of the word of hawala and hundi
The words hawala and hundi are both used, interchangeably and correctly.
There is only one system, the usage “the hawala and hundi system“is incorrect. The
correct usage is “hawala or hundi system”.
The word comes from the Arabic root h-w-l, which has the basic meaning
“change” and “transform”. The word of hawala is defined as a bill of exchange or a
promissory note. When the word came into Hindi5 and Urdu6 languages it retained
the meanings, but it also gained the additional meanings “trust” and “reference”,
which reflect the manner in which the system operates. The hawala operator is the
hawaladar or hawala operator7.
The word hundi comes from the Sanskriti8 root meaning “collect”. In addi-
tion to this, it also has the same meanings as hawala. The hundi operator is the
hundiwala.
Both terms are used.

2
In China has another well-known system:” the „chop” or „chit” or flying money”, and also used
around the world.
3
The Financial Action Task Force is an inter-governmental body whose purpose is the development
and promotion of national and international policies to combat money laundering and terrorist fi-
nancing. The FATF is therefore a ‘policy-making body’ that works to generate the necessary political
will to bring about legislative and regulatory reforms in these areas.
4
http://www.fatf-gafi.org/dataoecd/16/8/35003256.pdf
5
Hindi is one of the national language of India.
6
Urdu is the national language of Pakistan.
7
The term of „Hawala dealers „are used, too.
8
The liturgical language of Hinduism and the Persian of the Mughals, the Islamic rulers of India.
THE HAWALA SYSTEM 415

The history of hawala
Hawala is an ancient system originating in South Asia. Its origins in the classical
Islamic law (Sh’aria) and is mentioned in texts of Islamic jurisprudence in early 8th
century. Hawala itself later influenced the development of the operation in civil
law.
Hawala is believed to have arisen in the financing of long-distance trade around
the emerging capital trade centres in the early medieval period.
In early 20th century the hawala appears to have developed into a fully-fledged
money market instrument, which was only gradually replaced by the instruments
of the formal  banking system. Today, hawala and “traditional” banking exist as
parallel, but intertwined economic systems in India and Pakistan.

How does the system work?
Hawala systems involve the transfer of the value of currency without physically
moving it. In fact “money transfer without money movement” is a definition of
hawala that was used, successfully, in a hawala money laundering case.
An effective way to understand hawala is by examining a single hawala transfer:
“An initial transaction can be a remittance from a customer (CA) from country
A, or a payment arising from some prior obligation, to another customer (CB) in
country B. A hawaladar from country A (HA) receives funds in one currency from
CA and, in return, gives CA a code for authentication purposes. He then instructs
his country B correspondent (HB) to deliver an equivalent amount in the local cur-
rency to a designated beneficiary (CB), who needs to disclose the code to receive
the funds. HA can be remunerated by charging a fee or through an exchange rate
spread. After the remittance, HA has a liability to HB, and the settlement of their
positions is made by various means, either financial or goods and services. Their
positions can also be transferred to other intermediaries, who can assume and con-
solidate the initial positions and settle at wholesale or multilateral levels.
The settlement of the liability position of HA vis-à-vis HB that was created by
the initial transaction can be done through imports of goods or “reverse hawala.” A
reverse hawala transaction is often used for investment purposes or to cover travel,
medical, or education expenses from a developing country. In a country subject to
foreign exchange and capital controls, a customer (XB) interested in transferring
funds abroad for, in this case, university tuition fees, provides local currency to HB
416 Éva Ladányi • István Kobolka

and requests that the equivalent amount be made available to the customer’s son
(XA) in another country (A).
Customers are not aware if the transaction they initiate is a hawala or a reverse
hawala transaction. HB may use HA directly if funds are needed by XB in country
A or indirectly by asking him to use another correspondent in another country,
where funds are expected to be delivered.
A reverse hawala transaction does not necessarily imply that the settlement trans-
action has to involve the same hawaladars; it could involve other hawaladars and be
tied to a different transaction. Therefore, it can be simple or complex. Furthermore,
the settlement can also take place through import transactions. For instance, HA
would settle his debt by financing exports to country B, where HB could be the
importer or an intermediary”.9

Fig.1. The Hawala system 10

9
El-Qorchi, Mohammed: Hawala
10
http://www.imf.org/external/pubs/ft/fandd/2002/12/elqorchi.htm
THE HAWALA SYSTEM 417

Why does hawala work?
Hawala „works” because of its cost effectiveness. The secondary consideration is
that there is often related or even integral to existing business dealings.
On reason for hawala’s cost effectiveness is low overhead. The second reason
is exchange rate speculation. In addition, since many hawaladars are involved in
businesses where money transfers are necessary, providing remittance services fits
well into these businesses’ existing activities. Monies from remittances and business
transfers are processed through the same bank accounts, and few, if any, additional
operational costs are incurred by a business that offers hawala remittance services.
Finally, one of the most important movement is trust. Hawala dealers are almost
always honest in their dealings with clients and fellow hawaladars. Breaches of
confidence are very rare. It can be note that one of the most important meanings
attached to this word hawala is “trust”.
Everybody knows that Hawala hurts the national economies of developing
countries desperate for foreign exchange deposits, but every individual in the chain
has the incentive of earning a commission.
” ‘People know that salaries cannot buy the goo things says one of thousands
of operatives in an underground banking world that stretches from New York to
Tokyo. ‘You need a little extra’. Even at a cost of enabling crime and terrorism”11

There is an array of advantages for users:12
- The system is cost effective. Hawala brokers take a small commission and usu-
ally practice more advantageous exchange rates than the official rates. Hawala
operators low overheads, and generate profit through small commissions and
exchange rate speculations.
- The system is safe. In countries plagued by political insecurity such as Af-
ghanistan, it is one of the most convenient, safe, reliable and inexpensive ways
to move funds within the country.
- The system is efficient. A Hawala remittance transaction takes place within
one or two days.

11
http://content.time.com/time/world/article/0,8599,178227,00.html; A Banking System Built for
Terrorism
12
www.U4.no
418 Éva Ladányi • István Kobolka

- The system is reliable. The system is based on trust and there are no reported
instances of customers being cheated in the literature. A breach of trust would
keep the customers away.
- The system is flexible and not bureaucratic. The informal nature of the trans-
actions makes them very attractive to users with tax, immigration or other
legal concerns. For example, illegal migrants do not have adequate identifica-
tion and couldn’t use the formal banking system to send money home.
- The system is anonymous. It facilitates transfer of money without records or
documentation.
- The system doesn’t leave a paper trail. As it is rare that Hawala brokers keep
records after the transaction is completed, it is unlikely that the transaction
will be identified or detected.
- The system is culture friendly. For migrant workers, ethnic or kinship ties with
the Hawala brokers make this system particularly convenient and easy to use.

Is hawala legal?
All authors consulted agree on the advantages of using hawala both for legal
and illegal purposes. Hawala is attractive to customers as it provides a fast, safe
and convenient way to transfer funds, usually with a far lower commission than
that charged by the banks. In countries where there are strict regulations govern-
ing domestic and international money