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J.B.M.
Journal of Business
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Amy E. Hurley-Hanson, Ph.D.
Cristina M. Giannantonio, Ph.D.
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Contents
Microcredit and Rural Women Entrepreneurship Development in Bangladesh:
A Multivariate Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sharmina Afrin, Nazrul Islam and Shahid Uddin Ahmed
Nazrul Islam
East West University
About 84% of the 140 million people living in Bangladesh reside in rural areas. Half
of this population is women. Men who live in the rural areas are primarily engaged in
agricultural and related activities. Females however, remain idle in their houses due to
a number of social and cultural barriers. They are discouraged from working outside
of their homes. This situation can be attributed to the dominant patriarchal society and
strong religious influence (Purdah) in Bangladesh (Ahmed et al., 1997; Cain &
Khanam & Nahar, 1979). Barriers can also be attributed to the lack of access to funds,
the knowledge of agro-based production technology and the market, as well as the
support from other family members. Research shows that a large number of rural
women in Bangladesh are compelled by macroeconomic factors to enter into the labor
market. Hence, the overwhelming majority of women in Bangladesh are poor and also
caught between two vastly different worlds: the world determined by culture and
tradition that confines their activities inside family homesteads, and the world shaped
by increasing landlessness and poverty that drive them outside into wage employment
(Chowdhury, 1998).
In the last two decades, microcredit programs have been operated by government
(GOs) and nongovernmental organizations (NGOs) in Bangladesh. The prime
objective of these programs is to enhance the income-earning potential of female
borrowers of rural families, and empower them socially and economically. This
program helped rural women working in paddy husking, poultry farming, petty
trading (e.g., grocery), pond aquaculture, animal husbandry, weaving, mini-garments,
handicrafts, dairy farming, and plant nursery activities (which all tend to be home-
based in nature). Microcredit programs substantially contribute to the socioeconomic
development of the rural women in this country. Studies show that the microcredit
programs have created significant positive differences in the socioeconomic lives of the
rural women in Bangladesh (Hashemi, 1998; Schuler, Hashemi & Riley, 1997).
Microcredit programs have also helped the rural women to be involved in home-based
economic activities, which in turn, have created enormous opportunities for them to
be independent and self-sufficient. Studies also show that the involvement of rural
women in home-based economic activities through microcredit programs has a
positive socioeconomic impact on their lives, as well as their families. However, it is
not apparent whether these programs are actually making the rural female borrowers
entrepreneurial or not (Hashemi, 1998).
The positive impact of microcredit programs can be discussed in two ways. Firstly,
microcredit programs create employment opportunity, increased productivity, provide
economic security, give nutritional and health status, and improve the housing
conditions of the rural women. The positive impact on income has increased their
asset position and has created wealth for their families (Hulme & Mosely, 1998).
Secondly, microcredit programs create a significant influence on rural women in the
area of social empowerment, awareness and education, self-esteem, sense of dignity,
organizational and management skills, mobilization of collective strengths, etc. (Pitt &
Khandaker, 1996). This positive socioeconomic change subsequently helps them to be
more independent and more financially solvent in their families and localities.
Microcredit providers assert that the important impact of their programs is the
sustainable development of the socioeconomic lives of rural women. But the reality is
Afrin, Islam and Ahmed 11
that the developments are hardly prolonged. Observation shows that rural women are
unable to be completely self-reliant even if they are involved in microcredit programs
for a long period of time (i.e., 10 to 15 years). This indicates that the credit programs
are making the women more dependent on the credit provider instead of making them
independent. Thus, concerns have been raised by the researchers about the
sustainability of the socioeconomic developments of the rural women. These concerns
are very much relevant to the development of rural women and their entrepreneurship
in Bangladesh.
The development of rural entrepreneurship in Bangladesh primarily depends on
the socioeconomic development of the people. It is necessary to develop rural
entrepreneurship in order to foster the development of the capabilities of the
borrowers. Once the rural women are self-sufficient, they will be able to initiate their
own projects that result in self-independence. In order to encourage rural women’s
entrepreneurship in a developing country like Bangladesh, three types of activities
might be performed. These activities include stimulatory, supporting, and sustaining
(Rahman, 1979, 1999; Katz, 1991a). All three types of activities are partially performed
by the microcredit providers that are helping the borrowers to survive. In addition, the
degree of the differences in sustainability is significant in both governmental and
nongovernmental programs (Amin, 1994b).
For the development of rural female entrepreneurship, stimulatory supports are
essential, as the women tend to be unaware of their capabilities. Interaction with the
borrowers and the microcredit providers, as well as direct observation, education, and
training in selecting products, projects, and other technoeconomic information
motivate rural women to be more enthusiastic and entrepreneurial. The next step is to
support the entrepreneurs and their different qualifications. Once the women are
encouraged to engage in homestead economic activities, they require a different kind
of support to start and run their own business. This support can be related to the
supply of scarce raw materials, access to different facilities, such as fund, technology,
production methods and procedures, the marketing of products, reinvestments, etc.
The question of sustainability comes at the third stage of the entrepreneurial
development process. Once the business is run, rural female entrepreneurs require
support for sustaining their projects in order to foster growth in the future. These
sustaining activities are related to the help in modernization, diversification,
additional financing for full capacity utilization, deferring repayment/interest,
diagnostic industrial extension, product reservation, new adventures for marketing,
quality testing, and improving services. Rural women can benefit from the credit
providers by obtaining support facilities, which are helpful in order for them to
increase the level of sustainability of their economic activities. Therefore, the research
questions of this study are as follows:
(i) Are the rural female borrowers becoming independent by their involvement
in microcredit programs?
(ii) Are they gaining any knowledge from the income-generating projects
initiated by the credit?
12 Journal of Business and Management – Vol. 16, No. 1, 2010
(iii) If not, how can the women borrowers be made entrepreneurial in operating
home-based economic activities?
(iv) Is there any difference in the rural female entrepreneurship development
between governmental and nongovernmental programs?
This study primarily focuses on how to identify the factors related to the development
of entrepreneurship among the rural women borrowers of Bangladesh. The present
research also analyzes the sustainability of the socioeconomic impact on rural women,
which is termed in this study as rural entrepreneurship development. The specific
objectives of the study are as follows:
Over the last two decades, microcredit became an important tool for alleviating
poverty in Bangladesh (Khandkar & Chowdhury, 1996). The overall success of
microcredit programs depends not only on immediate alleviation of poverty, but also
on long-term sustainability. Long-term sustainability then depends on accumulation
assets (Chowdhury, 2004). In Bangladesh, the Grameen Bank started microcredit
programs in 1976 as a pilot project. Now, more than 3000 nongovernmental
organizations (NGOs), national commercial banks, and specialized financial
institutions operate microcredit programs in Bangladesh. Such programs have proven
to be a strong means to alleviate poverty through the social and economic
empowerment of rural and disadvantaged women (Puhazhendhi & Badatya, 2002).
Such a group savings program can help the rural women to bring economic security
into their lives (Secretary General, UN, 1998). The changing role of women shows a
steady upward growth in the economic activities in Bangladesh (Arefin & Chowdhury,
2008). Studies show that female entrepreneurs are doing better in the service sector
than in the manufacturing sector in Bangladesh (Begum, 2002).
Microcredit is a structured program under which microlevel loans are given to
disadvantaged residents, especially to poor rural women, without collateral security.
It is a group-based and intensively supervised loan program. The uniqueness of this
loan program is that there is no requirement of collateral security from the
borrowers. Anyone can apply for this credit and is also eligible to receive credit. It is
a small loan that varies from Tk. 1,000.00 to Tk. 10,000.00 for each borrower. The
purpose of this microcredit program is to give loans for self-employment that
generates income and allows them to care for themselves and their family members
(Sankaran, 2005).
Afrin, Islam and Ahmed 13
There are three C’s to the microcredit program: character, capacity and capital
(Yunus, 2003). Character is defined as the historical record of the borrowers such as
how a borrower has handled his/her past debt obligations, his/her background, and a
borrower’s honesty and ability to repay the loan. Capacity is termed as how much debt
a borrower can actually handle, according to their income, and still be able to pay that
debt off. Capital is all the current available assets that the borrower has that will also
help him/her to repay the loan on time.
Microcredit programs have a significant impact on the income and economic
security of the lives of rural women. These programs increase income and help the
female borrowers to spend more in order to foster the development of their families.
Such programs also help to increase household income which in turn, improves the
consumption patterns and lifestyles of the families (Hossain & Sen, 1992; Navajas et
al., 2000). The access to the microcredit program for rural women improves their
lifestyles through economic solvency and self-sufficiency; the single most important
need of destitute women in Bangladesh (Apte, 1988). Microcredit encourages female
borrowers to save for the future, which is an important source of capital accumulation
for the rural families and for the economy. Increased income indirectly improves the
level of education of the borrowers and the awareness about consumption and
sanitation needs as well. The improvement of education among the rural borrowers
helps to increase consciousness about their health and the future of the next
generation. Credit programs increase productive resources for rural families and their
housing conditions and also result in economic security for the borrowers.
The needs of low-income microcredit clients would be best served by highly
flexible financial services that enable them to conduct frequent transactions both for
small savings and for borrowing at irregular intervals (Sinha, 2003). The main
objective of microcredit providers is to create self-employment opportunities for the
rural unemployed women. These opportunities are largely in nonfarm related
industries. Before joining microcredit programs, many borrowers were employed as
day laborers. Now they are more self-sufficient and can work on their own projects,
whereas previously they had very little chance to participate in economic activities
under the socioeconomic conditions in Bangladesh. Microcredit programs have
created the opportunity to reduce their dependency on others in their families. The
immediate macroeconomic effect of microcredit is the reduction of labor supply and
the raising of the wage rate, given the local demand for labor. Wages remain at the
high level if the credit program induces a large demand for food and other local
products. Hence, the result of microcredit programs is the increase of placement in
rural areas (Ghai, 1984).
Rural wage is a reflection of rural economic conditions. The growth of self-
employment has been achieved at the expense of wage employment (Shahidur, 1998).
The self-employment of borrowers was much higher than the reduction in wage
employment in rural areas. The immediate impact of microcredit is on the labor force
participation rate and the total hours worked. A survey on Grameen Bank shows that
microcredit programs generated new employment for about one third of its members
(Hossain, 1986). Most of the new employment was created for the female borrowers.
It has also reduced the dependency ratio in the village families. Rural development is
14 Journal of Business and Management – Vol. 16, No. 1, 2010
based on the investments that promote economic growth in rural areas. Increased farm
productivity is the main emphasis for this microcredit programs (Jha, 1991). Ability
and efficiency are considered here in order to denote the productivity of rural women
borrowers. Through this variable, an inquiry was made to discover whether the
production of goods was increased by the borrowers after the involvement in credit-
financed projects. In addition, women’s group memberships seriously shifted overall
decision-making patterns from norm-guided behavior and male decision-making to a
more joint and female decision-making approach (Holvoet, 2005). In Vietnam, the
microcredit program has also reduced the poverty rate of the participants (Cuong,
2008). Microcredit programs have increased the agricultural productivity of small and
marginal farm households. The use of high-yielding variety is higher among the
borrowers, which helps them produce more products for the locality (Alam, 1988).
The nonfarming activities of Bangladesh include harvesting livestock, poultry,
fisheries, trading, and shop keeping. The increase in shop keeping activities has
increased the volume of trade in the rural areas. It is reported by the Grameen Bank
that 46% of its total trade loans given to the trade sector went to crop trading in 1985,
while 22% went to livestock and fisheries. Trading and shop keeping activities have a
positive impact on the development of local markets by boosting local production and
creating new market opportunities for selling those products locally (Shahidur et al.,
1998). A housewife or part-time farmer can link this business to the local production
and consumption, as well as outside economic activity. The less fortunate are actually
able to work and increase their working days after joining the rural credit programs
(Hossain, 1988).
The empowerment of women is another main purpose of microcredit programs.
Empowerment is about a change in favor for those who previously exercised little
control over their lives. This change is two-sided. The first side is control over
resources (financial, physical, and human), and the second is control over ideology
(beliefs, values, and attitudes) (Sen, 1997). The next question is for whom are the
empowerment benefits for? Such benefits are undoubtedly for the rural women in
Bangladesh who are governed by the two powerful forces of patriarchy and class
structures (Amin et al., 1994a). The literature on microcredit and female
empowerment provides examples of a number of empowerment measures, including
a borrower’s control over loan (Goetz & Gupta, 1996; Montgomery, 1996), knowledge
of the enterprises accounts (Ackerly, 1995), mobility, intra-household decision making
power, and general attitudes about children’s lives (Amin & Pebley, 1994b; Hashemi et
al., 1996). A woman’s control over resources and incidence of domestic violence is also
a factor (Naved, 1994).
Social empowerment is essential for the development of poor rural women in
Bangladesh. The positive argument is that microcredit programs help rural women to
be more socially empowered (Zaman, 1999; Acharya, 1994). Empowerment is
characterized as the mobility of women, economic security, ability to make purchases,
involvement in major household decisions, political and legal awareness, and
involvement in public protest and political campaigns. Women’s participation in such
programs increases their ability to visit market places for buying products, medical
centers for medication, cinemas for watching movies, other homes in the village, and
Afrin, Islam and Ahmed 15
outside villages for more social relations. Participation also enhances the ability of the
women to make both small and large purchases. Small purchases include small items
used for daily preparation for the family (e.g., kerosene oil, cooking oil, spices), for
oneself (e.g., hair oil, soap, glass, etc), or items like ice cream or sweets for the
children. The large purchases are usually things like pots and pans, children’s clothing,
personal clothing (e.g., Saries), and a family’s daily food.
Microcredit increases the ownership of productive assets for the women. The
microcredit programs also influence legal and political awareness and participation in
public campaigns. Such campaigns are often for the members themselves, the
chairman, the locale, and political leaders. The longer the involvement of a woman in
a credit program, the greater the likelihood will be of that woman being empowered.
She is likely to contribute more to not only her family, but to society as a whole in the
long run. Credit programs enable women to negotiate gender barriers that increase the
control of women over their own lives, improve their freedom in the family, and
increase their persuasive power. As a result, credit programs improve the relative
positions of women in their families, and in society as well.
Another positive result of microcredit programs is the improvement of nutrition
and the health conditions of the rural women and their family members (Srinivasan &
Bardhan, 1990; Hossain, 1986). Microcredit increases awareness about the access to
modern medication facilities. Tube well water is not normally used by the rural people
in Bangladesh. Things such as sanitary latrines and urinals, which to some are
everyday conveniences, are a dream for the villagers. One of the major indicators of
poverty is the nonavailability of such facilities. The rural credit providers usually try
to address this problem in order to improve the quality of life of the rural population.
Studies show that the credit programs have even increased the daily intake of protein
and calories for the rural people (Shahidur, 1996). The children of microcredit
borrowers tend to have better nutritional health compared to the children of
nonborrowers. Rural credit projects help increase the income of the rural women,
which leads to higher food security and a better life overall. The ability to spend more
on sanitation and the health care activities also is increased by the use of credit
programs. Female borrowers can also improve their housing conditions from the
money they earn from the credit-supported projects. This is often considered to be an
insurance against rural poverty in Bangladesh.
Rural credit also increases education and awareness among the rural women. The
involvement of women in income-generation activities changes their attitudes also
(Ahmed et al., 1997). With the help of fellow borrowers and loan providers, women
often feel the need to further their education (an education that will likely benefit their
children, their husbands, and themselves). Credit programs actually increase the
likelihood for female education more than for male education (Pitt & Khandaker, 1996;
Kabeer, 2001). Due to the increase in income, they then are able to send their children
to school also. Microcredit programs create awareness among the rural women through
interactions with the group members and health workers. Because women are likely to
become more educated after enrolling in a microcredit program, the use of contraception
and birth control increases greatly. The exchange of ideas with others, social support for
the legitimization of innovative reproductive behavior, and group interactions encourage
16 Journal of Business and Management – Vol. 16, No. 1, 2010
rural women to use more contraception in their day-to-day lives (Amin et al., 1994a).
Microcredit in turn, decreases the level of desire for additional children in rural families.
Once a woman obtains economic security and is able to contribute to her family, she will
have the freedom of mobility, freedom from domination by only the family, better control
of her body, and birth control options. Mobility in the village, and being able to travel
outside of the village, helps women to seek family planning information, and other types
of educational assistance (Schular et al., 1997). Women earning independently and
contributing to their families are less insecure and less vulnerable to the threat that
abandonment by their husbands can pose. Acquiring their own money and other assets
makes these women less fearful of the repercussions of having more children, should
they choose to do so. Studies show that in almost all cases, the impacts of microcredit
are positive in terms of returns on investments, household income, employment in the
nonagricultural sector, the labor force participation rate, socioeconomic empowerment,
household expenditure and consumption patterns, human capital, and fixed
investments (Hossain, 1988; Rahman, 1996).
Rural entrepreneurship is a key to economic development in many countries across
the globe (OECD, 1998, 2003; UN, 2004). About half of the population of Bangladesh
is women who usually remain idle and unproductive within their homes. They have
no method of participation in the economy and no resources for income-generating
activities except taking care of their family. Thus, these women can become more
productive by getting involved in economic activities. By providing stimulatory and
sustaining supports, these women can be made able to initiate businesses and other
income-generating projects. Hence, both the developed and developing countries are
focusing more on groups such as rural women in order to engage them in income-
generating activities (Chowdhury, 2002). Countries focus on female entrepreneurship
development by demonstrating that financial assistance can lead to reduced fertility
and an increase in the economic growth of the country.
Rural entrepreneurship has been defined by different scholars and has also
changed over time in Bangladesh (Islam & Mamun, 2000). Studies show the
shifting focus of entrepreneurial success factors. Before 1990, the focus was on
personal and psychological factors, while after 1990, the focus was shifted to
managerial and environmental factors. The common aspects found in the
definitions are the entrepreneur, innovation, organization, value creation,
opportunity taking, profit or nonprofit, growth, uniqueness, flexibility, dynamism,
and risk taking propensity. These aspects can be put into overlapping typologies.
There are five different perspectives of entrepreneurship, which include: (1) an
economic function, (2) a form of behavior, (3) a set of characteristics, (4) a small
business, and (5) creation of wealth (Ahmed & McQuaid, 2005; Deshpande &
Joshi, 2002). In almost all definitions of entrepreneurship, there is agreement that
entrepreneurs behaviors include (1) initiative-taking, (2) organizing and
reorganizing of social and economic mechanisms, and (3) the acceptance of risk or
failure.
Entrepreneurship has a wide range of meaning and has been debated among
scholars, educators, researchers and policy makers since the early 1700s when the
term was first coined. The idea of entrepreneurship is an elusive concept (McQuaid,
Afrin, Islam and Ahmed 17
2002). Since the expectations and perspectives of various stakeholders are different,
their views regarding enterprise, entrepreneurship and small business are also
different. Rosa (1992) argued that the vagueness of enterprise definition has been to
the advantage of both government and academics in the 1990s in their attempts in the
UK to change the national culture. Katz (1991b) commented on this debate, saying
that small business is a subset of entrepreneurship, while others argue that small
business commencement is an integral part of entrepreneurship. Kearney (1996)
asserted that enterprise is the capacity and willingness to initiate and manage creative
action in response to opportunities, wherever they appear, in an attempt to achieve
outcomes of added value. These outcomes can be personal, social, and cultural.
Typically, enterprise involves facing degrees of uncertainty as well. The associated risks
are not necessarily financial, but may be physical, intellectual, or emotional.
Innovation
Innovation is an important characteristic for an entrepreneur. Austrian economist
Schumpeter (1949) defined entrepreneurship as focusing on innovation in four
different areas such as new products, new production methods, new markets, and new
forms of organization. Anyone who combines inputs in an innovative manner to
generate value to the society, results in a creation of some kind of wealth. According
to Schumpeter (1949), the use of new combinations defines enterprise and the
individuals whose function it is to carry them out. The Industrial Revolution also
added to this dimension in the entrepreneurial concept. Audretsch (1995) and
Cunningham and Lischeron (1991) emphasized the innovation issue of an
entrepreneur. They identified three levels of the term of entrepreneurship: (1) small
firms and enterprise level, (2) new firm formation, and (3) innovation and a system-
wide coordination of complex production. Innovation and system-wide coordination
is also emphasized in other studies (Malechi, 1997; Casson 1990; Casson, 1999).
Behavioral and social scientists also focused on risk-taking, innovation, and initiative-
taking capabilities in their definitions of entrepreneurship (Weber, 1930; Hoselitz,
1952; Chell, Haworth & Brearley, 1991, Gartner, 1988). These characteristics are
related to the cognitive aspects of entrepreneurship.
Risk-taking
Risk-taking is the prime factor for the success of an entrepreneur. When an
entrepreneur initiates a business venture, that person has to take risk and face
uncertainty. In the 18th century, the French term entrepreneur was first used by
Cantillon to describe a ‘go-between’ or a ‘between-taker’ whereby they bought
goods at certain prices but sold at uncertain prices and when they purchased such
goods at a given price, they could not be sure what price they would be able to sell
them for. So, he/she bore the risk and uncertainty of a venture, but kept the surplus
after the contractual payments had been made (Ahmed & McQuaid, 2005). In 1971,
Peter F. Drucker also supported the view point of Cantillon and said that risk-taking
is an important characteristic of an entrepreneur. Ahmed (1981) found an
entrepreneur to be a risk-taker since he/she invests money and is involved in
making decisions, the success of which brings rewards; and the failure of which
18 Journal of Business and Management – Vol. 16, No. 1, 2010
could lead to the loss of those rewards. An entrepreneur could also face the loss of
their principal (i.e., invested money). Therefore, it is very logical to place risk-
taking as the focal point of entrepreneurship. Hence, the person who takes risks in
order to establish new ventures, or who has the capability of taking moderate risks
can be defined as an entrepreneur (Ahmed, 1982; 1987). A person can also be
defined as entrepreneurial when they have a very strong eagerness to achieve, an
idea which was emphasized by McClelland (1961). McClelland (1961) also found
that achievement motivation is an important characteristic of a successful
entrepreneur. The person who strives to reach the top of the success ladder by
taking moderate risks is achievement and motivation-oriented. An entrepreneur
should not only initiate new business ventures, but also be able to run the business
efficiently. In this regard, Jean-Baptiste Say identified a few dimensions of
entrepreneurship, with the ideas proposed by Cantillon: planning, supervising,
organizing, and even owning the factors of production. These activities are primarily
related to business management.
Opportunity-seeking
Another characteristic of an entrepreneur is opportunity-seeking. Stevenson
(2000) explained that entrepreneurship is an approach to management that can be
defined as the pursuit of opportunity without regard to the currently controlled
resources. He examined five critical dimensions of business practices: strategic
orientation, commitment to opportunity, control of resources, management structure,
and reward philosophy, all of which are related to entrepreneurial development.
Entrepreneurship is the pursuit of a discontinuous opportunity involving the
creation of an organization with the expectation of value-creation for the participants.
The entrepreneur is the individual or team that identifies the opportunity, gathers the
necessary resources, and is ultimately responsible for the performance of the
organization. As a catalyst agent, an entrepreneur creates the forces of change and
utilizes it in accelerating the socioeconomic value-addition of a country through
resource utilization, employment generation, capital accumulation, and
industrialization (Rahman, 1979; 1996). Hence, self-employment is the result of the
development of entrepreneurship. Entrepreneurs create employment for themselves
and for others in order to work with innovative and economic-centered projects.
People who are self-employed and have ownership of the business are called
entrepreneurs (Chowdhury, 2002). They are the owners of the business enterprises as
well. In this regard, women entrepreneurs are defined as conventional entrepreneurs,
radical proprietors, and domestic traders (Begum, 2003).
Therefore, it is evident that some definitions of entrepreneurship are concerned
with business development aspects, while some are concerned more with the
behavioral aspects of the entrepreneur (Ahmed & McQuaid, 2005). Business
development aspects can be defined by opportunity seeking, initiative taking for
establishing new business venture, and creating wealth. While, in contrast, behavioral
aspects are related to achievement motivation, risk-taking propensity, inner urge to do
something valuable for oneself and for the society as a whole. Essentially,
entrepreneurship is the dynamic process of creating incremental wealth, which is
Afrin, Islam and Ahmed 19
created by the individual. This can be achieved by adopting risks in terms of equity,
time, and career commitment. It is the process of creating something new by devoting
the time and effort, assuming the accompanying financial, psychic, and social risks,
and receiving the rewards of monetary, personal satisfaction, and independence.
Hence, entrepreneurship can emerge through the actions of four factors. These are a
support system, socio-sphere system, resource system, and a self-sphere system. First,
a support system includes structure, organizational goals /policies, activities, technical
competence, organizational climate, and style of functioning. A sociosphere system
includes value orientation (which is defined by work) independence, initiative,
innovations, and risk-taking norms. Third, a resource system, includes manpower,
market, raw material, transport communication, other industries and enterprises,
technology, and technical manpower. A self-sphere system includes motivation and skill
where motivation is explained by personal efficiency, coping capability and skill is
defined by a selection of product/process, project development, and by establishing
and managing enterprises.
The emergence of women entrepreneurs in a society depends mainly upon various
economic, social, religious, cultural, and psychological factors (Habib, Roni & Haque,
2005). The motivations for starting a business by rural women are significant and
include earning an attractive source of income, enjoying a better life, the availability
of loans, and general security.
One of the key factors for the development of female entrepreneurship in
Bangladesh is recognition (Saleh, 1995). When activities are performed by family
members or by neighbors, rural women feel encouraged to participate. Therefore,
whatever rural women do, it must first be recognized by their husbands, then by the
family members, then by others. The type of family in the rural areas has an impact on
the development of rural women entrepreneurship. Studies show that rural women
that come from a nuclear family (a family consisting of a father, mother, and their
children living under the same roof) tend to become more entrepreneurial than if they
came from a joint family (Surti & Sarupia, 1983). The level of family liability can also
attribute to this.
The age of the rural women is another factor that affects the development of rural
female entrepreneurship. Studies show that the majority of rural female entrepreneurs
start a business at the age of 20-29 years (Punitha, Sangeeta & Padmavathi, 1999). At
this age, they no longer have many family bindings, and they can work freely in their
business projects. There are many places in Bangladesh where there is no real
economic development, but because of the presence of the rural microcredit programs
in those areas, rural women are becoming more enthusiastic about initiating new
economic projects. Therefore, properly supervised microcredit can help to improve
socioeconomic conditions of these women in Bangladesh (Begum et al., 2005).
However, a lack of family and community support, an ignorance of available
opportunities, the lack of motivation in initiating new projects, shyness and
apprehensiveness to get involved with economic activities, and a preference for
traditional occupations are all factors that inhibit the promotion of grassroots
entrepreneurship development among rural women (Rao, 1991).
20 Journal of Business and Management – Vol. 16, No. 1, 2010
Methodology
About 88% of the borrowers of the BRDB and 98% of ASA are married. The difference
between the educational qualifications of the borrowers of the ASA and BRDB has been
observed. About 33% of the ASA’s borrowers are self-literate. They become literate after
joining microcredit programs to manage financial matters. About 29% of them are
primary educated, followed by illiterate (22.00%), and secondarily educated (16.00%).
About 36% of the borrowers of BRDB are secondarily educated. Those who are
illiterate are also similar (36.40%). The self-literate borrowers in BRDB are 15.20%,
and primary educated borrowers are 12.10% (Table 2). This educational status
indicates that the female borrowers were self-literate after their involvement with
credit programs.
The training status of the rural female borrowers shows that the majority of the
respondents have no training in technology or marketing. More than 75% of the
borrowers in both the groups did not receive any formal training from the credit
providers. Only 18% of the borrowers of ASA and 12% of BRDB have received
technical training from anything other than loan providers. Only 8.20% of ASA’s
borrowers and 12.10% of BRDB’s borrowers obtained nontechnical training from the
credit providers. The nature of this training is only to give ideas about technology and
other aspects of the business (Table 3). This study noted that ASA and BRDB have no
arrangement for organized training in the study area.
and every Union is formed with a group of villages. The reason for selecting the
Khulna district is that the most densely populated district is the Khulna Division.
There are about 2.38 million people living in this district with approximately 375,000
households (BBS, 2005). About 50% of population in this district is female.
Batiaghata Thana was selected as the sampling area which is located adjacent to
Khulna City. This Thana consists of 7 Unions, with 159 villages. The population of this
Thana is 128,184, with 516 persons per sq. km. The land is about 1,468.38 acres. Only
37.70% of the population is literate. There are 23,698 families in this Thana. The total
number of dairy and poultry farms is 12 and 57 respectively. There are 12,088 sanitary
latrines and 1,024 tube wells in the Thana. The numbers of deep tube wells are 896.
Most of the families are involved in agricultural farming followed by petty trading,
fishing, pottering, paddy husking, gold-making business, kamar, and spinning. There
are 26 village hat/bazaars in the Thana.
Borrowers who are already engaged in 3-10 years or more with the credit programs
are used as respondents. Sample respondents were selected by using two sampling
methods: the purposive sampling method and the random sampling method.
n = N/1+N(e)2
where,
The degree of variability in the attributes being measured refers to the distribution
of attributes in the population. The more heterogeneous a population, the larger the
sample size required to obtain a given level of precision. The less varied (more
Afrin, Islam and Ahmed 23
homogeneous) a population is, the smaller the sample size. Note that a proportion of
50% indicates a greater level of variability than either 20% or 80%. This is because 20%
and 80% indicate that a large majority do not or do, respectively, have the attribute of
interest. Because a proportion of .5 indicates the maximum variability in a population,
it is often used in determining a more conservative sample size. The sample size may
be larger than if the true variability of the population attribute were used. The total
number of female borrowers interviewed was 246, 198 of which were from the ASA
and 48 from BRDB.
Data Analysis
Along with descriptive statistics, multivariate analysis techniques including factor
analysis and Structural Equation Modeling (SEM) were used to analyze the
relationships of the variables relating to the development of rural female
entrepreneurship. A principal factor analysis with an orthogonal Varimax rotation,
using the SPSS statistical package, was performed on the survey data and was used to
separate the factors for developing entrepreneurship. The relationship of
entrepreneurial factors with the overall entrepreneurship development is assessed
through the Analysis of Structural Equation Modeling by using Amos version 4.
It was the ultimate intention of this study to test the conceptual model developed
from the theoretical analysis and to estimate the parameters for the structural equation
model. Hence, data were analyzed through the SEM using Analysis of Moment
Structures (AMOS) to perform path analysis. Amos’s method of computing parameter
estimates is called maximum likelihood. Hypothesis testing procedures, confidence
intervals, and claims for efficiency in maximum likelihood or generalized least squares
estimation by Amos depend on certain statistical distribution assumptions. First,
observations must be independent. Second, the observed variables must meet certain
distributional requirements. For instance, it will suffice if the observed variables have
a multivariate normal distribution. Amos implements this general approach to the
24 Journal of Business and Management – Vol. 16, No. 1, 2010
SEM data analysis, also known as analysis of covariance structures, or causal modeling.
SEM is a computer program for estimating the unknown coefficients within a system
of structural equations, and is one of several computer-based covariance structure
models for conducting such analysis. LISERAL or Lineral Structural Relations, is a
special purpose statistical software package that estimates structural equation models
for manifest and latent variables. AMOS, like LISREL, is useful when the researcher
desires to explore the causal relationships among a set of variables. The method is
called covariance structure analysis because the implications of the simultaneous
regressions are studied primarily at the level of correlations or covariances. Typically,
a covariance structure model is specified through a simultaneous set of structural
linear regressions of particular variables on other variables. The field of covariance
structure analysis actually covers a wide range of topics, including confirmatory factor
analysis, path analysis, and simultaneous equation and structural equation modeling.
Much research in the social sciences including business involves the measurement of
latent constructs. The method is useful for analysis of structural equations involving
experimental data. In business applications, theoretical constructs are typically
difficult to operationalize in terms of a single measure, and the measurement error is
often unavoidable. As a result, given an appropriate statistical testing method, the
structural equation models are likely to become indispensable for theory evaluation in
business research. The approach provides a means for examining causal relationships
among multiple variables, the magnitude of hypothesized relationships, and the extent
of measurement error of constructs in application of experimental designs (Bagozzi,
1977). When researchers attempt to measure constructs such as perceptions to
something, they are attempting to gauge unobservable cognitive processes with
measurement devices that can only approximate the latent constructs of interest. This
process is typically fraught with measurement error. Because of their ability to control
or allow for such measurement error when estimating the relationships between
variables, covariance structure models have been gaining in popularity in business
studies (Bagozzi, 1980, 1981). Howard (1977) suggests in this regard that structural
modeling sharply highlights the intimate, powerful, mutually reinforcing relationship
between theory and measurement. In this study, it was perceived that structural
equation modeling would be the best approach to understand the relationships
between the constructs.
In this study, covariance and structural modeling was performed in two distinct
stages. First, observed variables are linked to unobserved variables through a
Confirmatory Factor Analytic (CFA) model. CFA is a means of discovering an
underlying structure in one’s data, given some prior theoretical or empirical
information. The set of connections between the observed and unobserved variables is
often called the measurement model. The measurement model specifies how the latent
variables are measured in terms of observed indicators and explicitly introduces
measurement error. Second, the causal relationships between the resulting latent
variables are examined in a structural equation model. The model component
connecting the unobserved variables to each other is often called the structural model.
The structural equation model specifies the causal relationships among the latent and
unobserved variables.
Afrin, Islam and Ahmed 25
The first factor, financial management skill and group identity, accounts for 18.16%
of the variance in the data. The development of financial skill and the creation of group
identity by the microcredit is the most important factor for the development of rural
women’s entrepreneurship in Bangladesh. The eigenvalue of this factor is 7.26.
Financial management skill and group identity are related to six variables, including
increased family relationships and cohesiveness (0.536), involved rural women-folk
(0.822), development of financial management skills (0.866), realized self and
collective identity (0.880), getting adult education (0.621), and developing awareness
of health and women’s rights (0.696). A relatively higher level of factor loading of
almost all the variables indicates that these variables are very important to constitute
the rural women entrepreneurship development factor. The communality values for
these variables are 0.705, 0.818, 0.835, 0.901, 0.742, and 0.630 respectively. The
higher level of communality of the variables associated with financial management
26 Journal of Business and Management – Vol. 16, No. 1, 2010
skill and group identity indicates that each variable is very much related to the factor.
The next important factor is creative urge and self interest with an eigenvalue of
3.57. The variance of this factor is 9.73%. It indicates that creative urge and self
interest is an important factor for the development of rural female entrepreneurship.
Seven variables constituted this factor. The variables are creative urge (0.843), self-
interest and self dependent (0.815), inadequacy of family supplement income (0.538),
family support is required (0.534), attractive source of income (-0.441), competent to
take and use loan (-0.426), and getting educated (0.416). These variables are highly
important for determining the entrepreneurial status of the rural women borrowers.
The communality of the variables is also higher.
Family funds and female involvement is the third important factor for the rural
female entrepreneurship development with an eigenvalue of 2.76. This factor explains
6.10% of the variance. The women borrowers are concerned with self-independence
(0.852), family peace (0.787), gaining social prestige (0.664), ability to accumulate
family fund (0.525), and alleviation of gender discrepancies (0.488). Another
entrepreneurship factor is employment of family members and the creation of new jobs
with eigenvalue of 2.75 and variance of 6.87%. This factor is constituted by four
variables: can employ others (0.827), new work and work environment (0.761),
training (0.758), and scope to utilize own skills and talents (0.549). Independence and
keeping oneself busy is the fifth factor for the development of rural women
entrepreneurship in Bangladesh. The eigenvalue and the variance of this factor are
2.205 and 6.51% respectively. The variables forming this factor includes doing
something independently (0.920), can keep myself busy (0.825) and career and family
security (-0.447). Family experience and option limitation is the next important factor
for the development of rural women entrepreneurship in Bangladesh. Two variables
constituted this factor such as, experience and competencies (0.835) and no other
option available (0.764).
Other factors like knowledge of business, economic necessity of the family, self
confidence, technical knowledge of business, money earning, unable to find suitable
work or job, and contribute to the economic growth were found not significant to
build the model.
The data of this study were analyzed in two stages. First, the measurement model
was assessed to confirm that the scales were reliable. Second, when the reliability of
the measures had been established, the structural model was tested. This testing
determined the strength of individual relationships, goodness of fit of the model, and
the various hypothesized paths.
The first step of the analysis was a test of the measurement model. Objectives of this
test were: (1) to contain the validity and reliability of measures, and (2) to select the best
subset of observed measures for use in testing the structural model. The data depicted a
normal distribution with acceptable skewness and kurtosis values. Coefficient alpha was
computed for each set of observed measures associated with a given latent variable, and
a Confirmatory Factor Analysis (CFA). Alpha values of each item in each dimension
Afrin, Islam and Ahmed 27
The fit of the structural model was estimated by various indices and the results
demonstrated good fit. For models with good fit, most empirical analyses suggest that the
ratio of chi-square normalized to degree of freedom (chi-square/df) should not exceed
3.0 (Carmines & Mclver, 1981). In addition, the obtained goodness-of-fit (GFI) measure
was 0.809 and the adjusted goodness-of-fit (AGFI) measure was 0.737 respectively,
which are both higher than the suggested values. The other two indices of goodness-of-
fit (GFI), the normalized fit index (NFI), and the comparative fit index (CFI) are
recommended to exceed 0.90. The results also meet these requirements. Finally, the
discrepancies between the proposed model and population covariance matrix, as
measured by the root mean square error of approximation (RMSEA), are in line with the
suggested cutoff of 0.08 for good fit (Byrne, 1998). The complete model of microcredit
program and the development of rural women entrepreneurship is shown in Figure 1.
28 Journal of Business and Management – Vol. 16, No. 1, 2010
Table 6 shows that the relationships of the factors that built the model for the
women entrepreneurship development in Bangladesh through microcredit programs.
After identifying the female entrepreneurial development factors, a hypothesis was
developed for each construct and the important factors that were significantly
associated with the rural female entrepreneurship development.
Other factors
In Hypothesis 2 (H2), we predicted that the relationship between creative urge and
self-interest and the rural female entrepreneurship is positive and significant. But the
results show that the relationship between these constructs are negative and not
significant (β = -0.063, p > 0.38). This indicates that if there is a change in the creative
urge and self-interest factor, it will not lead to the development of rural women
entrepreneurship through microcredit programs in Bangladesh. That means through
microcredit programs, the creative urge and self-interest is not developed among the
rural female borrowers, as it depends on environmental factors which are unfavorable
for the rural women in Bangladesh.
30 Journal of Business and Management – Vol. 16, No. 1, 2010
In Hypothesis 3 (H3), it was predicted that the relationship between family funds
and involvement in business and rural female entrepreneurship is positive and
significant. However, the results show the opposite situation in this regard (β = -0.120,
p > 0.21). This indicates that the change in financial status and female involvement
with money matters will not change in the entrepreneurship development
characteristics among the rural women in Bangladesh. If the rural families are
financially solvent, they will not lean towards doing business in Bangladesh where it
is culturally discouraged.
In Hypothesis 4 (H4), it was perceived that there is a positive and significant
relationship between a new job and the employment of family members with rural female
entrepreneurship development. But the results show that there is no significant
relationship between the two constructs (β = 0.035, p > 0.67). This indicates that
employment of family members and the new job will not develop any entrepreneurial
characteristics among the rural female borrowers through microcredit programs.
family of the borrower and option limitation have a direct positive impact on the
development of rural women entrepreneurship in the rural areas of Bangladesh. This
means that if a rural female has a business orientation from her parent’s family and at
the same time, has some funds at her disposal, she will initiate new business or
economic projects which will help her to earn a profit and obtain social status as well.
The third important finding is that the rural women who are independent by nature
and would like to keep busy with economic activities could be identified by the
borrowers. This section of rural female has the highest potential to be entrepreneurial.
This study supports this observation for the rural women borrowers in Bangladesh.
The main problem of any small business in Bangladesh is the management skills
related to financial affairs of the business. The businessmen or entrepreneurs are
unable to make financial plans and maintain financial accounts of the business
because of their illiteracy. Most of the people in rural areas are illiterate in Bangladesh
and women are in a more disadvantageous position in this regard. Hence, microcredit
providers should give importance to the development of the financial management
skills of the borrowers and create group identity of the borrowers. They also should
identify the rural women who have their family experience and no other options but
to do business or get involved with loan providers. Loan providers should also be
mindful of the fact that the rural women of Bangladesh have an independent mentality
and they would like to take on the challenge of being entrepreneurs. Therefore, to
design and implement a loan program, microcredit providers should keep this
independence in mind. If these aspects are properly addressed by the loan providers,
rural female borrowers will be more entrepreneurial and as a result, the borrowers will
be able to stand on their own feet and rural women entrepreneurship will be developed
in Bangladesh.
References
Acharya, J. (1994). Rural Credit and Women Empowerment: Case Study of the
Janashakthi Program in Hambantota District, Srikant. Unpublished master’s thesis,
Asian Institute of Technology, Bangkok, Thailand.
Ackerly, B. (1995). Testing Tools of Development: Credit Programs, Loan Involvement
and Women’s Empowerment. IDS Bulletin, 26(3): 56-68.
Ahmed, S. M., Adams, A., Chowdhury, A. M. R. & Bhuiya, A. (1997). Income-Earning
Women from Rural Bangladesh: Changes in Attitudes and Knowledge.
Empowerment – A Journal of Women for Women, 4: 1-12.
Ahmed, A. & McQuaid, R. W. (2005). Entrepreneurship, Management, and
Sustainable Development. World Review of Entrepreneurship, Management and
Sustainable Development, 1(1): 6-30.
Ahmed, S. U. (1981). Entrepreneurship and Management Practices among Immigrants
from Bangladesh in the United Kingdom. Unpublished doctoral dissertation, Brunel
University, London.
Ahmed, S. U. (1982). Entrepreneurship and Economic Development. Dhaka
University Studies, Part-C, 3(1): 41-53.
Ahmed, S. U. (1987). Entrepreneurship Development with Some Reference to
32 Journal of Business and Management – Vol. 16, No. 1, 2010
Heterogeneity in Consumer
Sensory Evaluation as a Base
for Identifying Drivers of
Product Choice
Oded Lowengart
Ben Gurion University
verifying the qualities of such products is usually possible only after actually using the
product. Moreover, due to the wide selection of possible alternative products,
consumers cannot be sure they made the right decision even after consuming the
product. This makes wine a typical credence product – products that are difficult to
evaluate before as well as after consumption (Darby & Karni, 1973), as opposed to
search products (that can be evaluated prior to consumption) and experience products
(that can be evaluated after consumption) (Nelson, 1974). It is logical to expect that
consumers cannot solely rely on their own taste test for wine choice, since, in many
purchasing situations, this option is not easily available. As a result, other methods of
reducing uncertainty can be used by consumers. For example, Lynch and Ariely
(2000) found that electronic shopping can reduce search costs and price sensitivity,
while maximizing the transparency of quality information specifically for a
differentiated product such as wine. Nevertheless, a taste test is still the more reliable
selection criteria for choosing such products when possible.
Consumers can use their own sensory evaluation to verify product qualities, when
possible. Shepherd and Towler (1992), for example, argue that experience (and
valuation) of consumers with food products is shaped by sensory attributes and
particularly, by taste. Koivisto and Sjóden (1996) argue that taste is a good explanatory
variable for food choices. As in many aspects of consumer products, there is
heterogeneity among consumers when it comes to the exact combination of marketing
mix variables that fit their needs. Heterogeneity stemming from personal differences
(e.g., gender) geographical, behavioral (e.g., experience with the product) and other
sources can have an effect on the desired product characteristics and preferences for it.
For example, Scarpa, Philippidis and Spalatro (2005) found a variation in choice that
is associated with socioeconomic variables in several food products. Hu et al. (2004)
found gender differences in a latent class model analysis of choice of genetically
modified ingredients of food products. The same type of difference was also found in
wine (Goodman, Lockshin & Cohen, 2008).
The current study explores how the effect of consumer sensory evaluations on the
choice among different products can provide diagnostic information about product
modification, or new product development. In order to demonstrate this approach, we
analyze red wines, where sensory evaluation plays a significant role, as this product is
characterized by a variety of attributes that are evaluated by different sensors (e.g.,
taste, smell). To expand our understanding about the potential difference among
consumer segments with respect to such product modifications, we explore two
different sources of potential heterogeneity in consumers’ evaluation: gender
differences (personal source) and frequency of drinking wine (behavioral source).
To address the objective of this paper, a probabilistic choice model formulation is
used to identify the salient product attributes in choice formation. The results of the
analysis reveal that such attributes can be identified and consumers' heterogeneity in
sensory evaluation that is reflected in the saliency of the wine attributes exist across
different consumer segments. That is, a segment-to-segment difference is revealed. Better
understanding of such a pattern of results can provide a better understanding of sensory-
based evaluation methods and scenarios and, at the same time, provide insight into the
type of product (wine) managers should develop to better cater to their target markets.
Lowengart 39
Problem Conceptualization
Traditionally, winemakers make wines that preserve the qualities of the different
wine varieties and at the same time, attempt to create a wine that will appeal to the
palettes of wine consumers. In a sense, it is an art of blending two aspects of product
creation into the resulting outcome: wine taste. Research aimed at improving grape
quality in the agricultural area is grounded in extensive accumulated knowledge that
can provide wine growers with better agro-technical methods to improve the
cultivation of their vineyards (Weaver, 1976; Seguin, 1986) or improve the technology
of wine making (Pretorius & Bauer, 2002) and bottling (Prescott et al., 2002).
Substantial research has also been conducted on the other domain of importance
to winemakers; consumer preferences. Such research is mainly concerned with taste
tests and the development of information cues that try to assist consumers in
identifying and selecting wines (Johnson et al., 2001). The latter includes the effect of
countries and regions within a country on the evaluation of wine (Orth, Wolf & Dodd,
2005; Skuras, 2002) and branding (Thode & Maskulka, 1998; Walker, 2003). Another
type of research has focused on consumer heterogeneity with respect to wine
preference. This has taken the form of appropriate methodology for heterogeneity
detection (Mueller, Francis & Lockshin, 2009; Cordelle, Lange & Schlich, 2004) or
consumer demographic effects (Scarpa et al., 2005; Hu et al., 2004), among others. As
noted earlier, tasting the wine is probably the best method consumers can use in
selecting a wine, as it is probably more reliable in examining wine qualities. Indeed,
winemakers frequently use taste tests to persuade consumers to test different wine
blends for qualities such as aroma, bouquet, after taste, and other characteristics.
taken place. Wine marketers usually provide sampling procedures to foster such
testing. This procedure provides marketers with primarily two types of information
from consumers: 1) the opportunity to gain insight into the overall preference for a
certain wine, and 2) evaluation of the different wine qualities based on consumers'
sensory evaluation (Lesschaeve, 2007). Relating the information from the second
source to the first (attributes to preference) can reveal more insight about the
formation of consumer preferences. This is particularly important to winemakers, as it
will allow them to lower the number of blends they create to better target the desired
preferred wine. In other words, identifying attributes that drive consumer preferences
can indicate to winemakers what aspects of the wine need to be changed to increase
its preference among consumers. Wine testing and a short follow-up questionnaire
completed by consumers after tasting the wine regarding product attributes that are
evaluated by their taste and smell sensors can indicate what kind of product attributes
create a preferred product.
We frame the consumer decision of whether to buy a certain wine in this study to
the sensory evaluation case. The decision about such a purchase, therefore, depends
on consumer perceptions of these sensory-based product attributes. On regular
purchasing occasions, consumers are faced with more than a single alternative of wine
from which they can choose. The purchasing decision in such real-world scenarios
becomes even more complex to analyze as there are common attributes across
products and one choice decision that, in a sense, captures a competitive scenario
between alternative products. Since this case is probably more important to
winemakers than the single (i.e., monopoly type) case where only one wine is
considered, rather limited work aimed at modeling this purchasing decision process in
wines has been done. More specifically, no complete understanding exists of the
competitive intensity between various wines available to the consumer that is based on
sensory-type attribute evaluations. Furthermore, the effect of the wine attributes on
the purchase decision has not been adequately addressed in the literature. To fill this
void, we propose a probabilistic modeling approach that will address these issues. In
particular, we employ a multinomial Logit choice model to examine the choice
probabilities of different red wines as a function of the wine sensory-based attributes.
Researchers have tried to define wine quality according to objective characteristics
based on chemical and instrumental analyses of wine attributes. Such characteristics
include acidity, color, volatile components, and other aroma-related and measurable
attributes. Wine’s compositional and sensory profiles are widely documented, and
several models have been proposed to identify and classify wine quality and origin,
based on these profiles (Cliff & Dever, 1996; Vanier, Brun & Feinberg, 1999). These
measures, however, are not fully appreciated by consumers, who generally rely on
their own perception of product qualities.
Some characteristics are not easily measurable either. For example, the aroma and
sensory attributes of wine are complex and difficult to measure and describe. Hence,
a sensory evaluation of wine is generally performed by wine experts, who evaluate the
wine and describe its attributes to potential consumers. However, consumers will
frequently rely on their own judgments about these qualities. Since consumers make
the purchasing decision, it would be prudent for winemakers to use a consumer
Lowengart 41
sample to evaluate such wine qualities and preferences to better identify the preferred
wine taste.
Consumer Heterogeneity
As noted above, wine tasting is a common method for selecting a wine in wineries
or wine stores, as it reduces uncertainty about the product qualities. What are the
attributes that most affect consumers in such a choice process? Do these attributes
differ across different consumer segments? In other words, does heterogeneity among
consumers have an effect on the saliency of the wine attributes in a choice context?
From the marketers' perspective, the answer to these questions might indicate a
potential for constructing a marketing strategy based on those important attributes.
Such a strategy might be more effective and efficient than others, because it would
focus on the potential drivers of consumer preferences and choice. That said, a lack of
understanding continues to exist with respect to the salient attributes of red wines
which differ from white wines in their complex characteristics and the variation in
different consumer segments.
The aforementioned discussion about winemaking that is primarily based on the
winemakers’ experience and consumer evaluations primarily based on their sensory
evaluation, yields some inconsistencies regarding the issue of how to develop a wine
with the highest consumer preference. The art of winemaking, as exhibited by the
knowledge of the winemakers, was eventually tested by consumer sensors. Such wine
taste tests evaluate the overall quality of the product and give winemakers an
indication as to whether they are on the right track. This type of test has one
shortcoming since it involves a sequential evaluation of each wine, one at a time, with
an evaluation of that wine on its own. That is, there is no provision for the relative
effect of the one wine characteristic on the relative preference of this wine compared
to other wines in the choice set. This issue becomes even more complex as pooling
consumers evaluation might lean to an “average” wine taste that will not necessarily
fit the desired preference of a certain segment. It is therefore essential to identify
heterogeneity among consumers in terms of preference formation to reveal the drivers
of this preference formation.
Heterogeneity in consumer sensory evaluation is well documented in the literature
(Tomlins et al., 2007). In a study conducted by Weaver (2001), heterogeneity in food
preference based on sensory evaluation was observed, to a certain degree, between
men and women. In addition, preference and frequency of consumption were also
correlated. Differences between consumers based on gender behavior of alcohol
consumption have been widely documented (Ricciardelli et al., 2001). Since heavy
alcohol drinkers may be more experienced in wine styles, segmenting the market
based on the frequency of drinking wine might be valuable in gaining more insight
into different consumer needs.
Figure 1 summarizes the proposed framework of analysis of this study.
In short, this study is aimed at filling the void in the literature on gaining
additional insight into sensory-based attributes and their effect on consumer choice
in a heterogeneous consumer group. Winemaking is considered by many as a
combination of art and science, so we worked to increase knowledge of the exact
42 Journal of Business and Management – Vol. 16, No. 1, 2010
wine attributes that drive consumer choice and, therefore, provide managers with
more “knowledge to improve art,” while capturing the competitive intensity that
prevails in such product category.
Methodology
Overall, 135 participants took part in the wine tasting procedure and answered the
questions pertaining to this test. The sample was formed by 88 males and 47 females.
The participants were mostly young adults, 41 of which were between the ages of 18
and 24 (since the legal drinking age is 18 in the area where the study was performed),
89 between 25 and 40, and 5 over 40. It is acknowledged that this sample might be
skewed toward younger male customers. Further exploration of other demographic
variables can be carried out in future research. With respect to income level, 81 of the
participants earned less than the average salary, 46 at about the average, and 14 above
the average income. The level of employment ranged from full-time, 64, to part-time,
8, and full-time students (unemployed), 62. Subjects were asked to taste the wine and
to rate each of the following wine attributes described earlier: color intensity, aroma,
bouquet, taste, tannic, harmony, and aftertaste. Respondents were asked to rate their
responses on an interval scale of 1 (very low level) to 10 (very high level). For
instance, a respondent would be asked: “On a scale of 1 to 10, where 1 is very light
and 10 is very dark, how would you rate the color intensity of this brand?”
Descriptions for the scales used for the other attributes are also given in Table 1.
Choice Model
The main objectives of this study, as noted above, are twofold: 1) estimating the
probability that a consumer would choose a specific wine from a set of alternative
wines, and 2) identifying the red wine attributes that most affect customers in their
purchasing decision. The latter will assist managers and winemakers in deciding which
wine attribute they need to modify to improve the choice probability of their wine.
We employed a probabilistic multinomial Logit choice model (McFadden, 1974) to
44 Journal of Business and Management – Vol. 16, No. 1, 2010
analyze the data. The MNL model is a simultaneous compensatory attribute choice
model that incorporates the concepts of thresholds, diminishing returns to scale and
saturation levels (McFadden, 1974). Furthermore, the MNL is based on the
assumption that the overall preference of a consumer for a choice alternative (i.e., the
preferred wine) is a function of the perceived relative utility that the alternative (wine)
holds for the consumer.
Let Uij be the utility of alternative product j for customer i, and m the number of
alternative products. The utility function can be separated into a deterministic
component Vij (measured in terms of perceived value associated with the
characteristics of the products), and an unobserved random component, eij, which is
assumed to be drawn from independent and identically distributed such that:
Utility Specification
The deterministic component of the utility function is a product of the weighted
sum of the product attributes identified earlier and has the following form:
where,
COLORij – consumer i' perceptions of the color intensity of wine alternative j
AROMAij – consumer i' perceptions of the aroma of wine alternative j
BOUQUETij – consumer i' perceptions of the bouquet of wine alternative j
TASTEij – consumer i' perceptions of the bouquet of wine alternative j
TANNICij – consumer i' perceptions of the tannic of wine alternative j
HARMONYij – consumer i' perceptions of the harmony of wine alternative j
AFTERTASTEij – consumer i' perceptions of the aftertaste of wine alternative j
for j=1,2,3,4.
a1a2a3a4a5a6a7 – parameters to estimate.
The estimated parameters a1,…, a7 for all subjects tasting red wine are presented
in Table 2. The data indicate that four wine attributes are salient in the choice process
– namely, taste and harmony and to a lesser degree, bouquet and aftertaste. Thus, wine
Lowengart 45
producers and marketers should focus on these wine attributes, while targeting wine
consumers similar to those in our study.
Table 4: Multinomial Logit Coefficients - Low and High Drinking Frequency Segment
All of these tests are significant at least at the 0.05 level, thus indicating that our
segmentation schemes are meaningful and such consumer groups do behave
differently in their choice decisions.
The purpose of this study was aimed at exploring the effect of sensory-based
product attributes on consumer choice, and in a heterogeneous consumer market in
particular. It therefore, presented a general approach for obtaining diagnostic
information about the saliency of product attributes in a choice context. In order to
demonstrate this framework, the paper focused on seven sensory based wine attributes
that were identified as part of consumer considerations. We employed a probabilistic
choice model to address this issue and were able to identify those wine attributes. In
addition, we estimated the effect of a change in these attributes on the probability of
choosing a wine. This methodological approach enabled us to gain insight into
consumer preferences that are driven by attributes that can be managed scientifically,
as well as practically, by winemakers. That is, the proposed method added science into
art in the sense that part of the winemaking decision can be based on consumer
research preferences and perceptions, and not just on expert opinion or trend
guessing. However, this is not to say that the other methods supporting product design
decisions are not important in consumers decision of wine purchase. This is also not
to say that other product attributes (i.e., price, image, etc.) are of less importance. For
example, mapping techniques that combine consumer perceptions and preferences
can provide insight into the desired (ideal) product and the proximity of alternative
products in the category to this ideal point (Ghose & Lowengart, 2001). There are
other quantitative methods that utilize consumers’ sensory evaluation to examine
product preference that can be found in the literature (Saguy & Moskowitz, 1999;
Lesschaeve, 2007). The approach proposed in this study provides a different tool to get
better accuracy in understanding consumer needs and wants through choice process
formation and relevant diagnostic information.
When constructing a marketing strategy for a red wine and utilizing the results of
this study, marketers can increase the choice probability of their wines by improving
the taste and emphasizing the wine’s harmony. This can be done either by
technological improvements or by blends with other varieties of grapes. Naturally, it is
48 Journal of Business and Management – Vol. 16, No. 1, 2010
not easy to delineate what is the exact taste and harmony for a preferred wine; rather,
this study can indicate which sensory wine attributes are those that influence the
choice process. Wine marketers, therefore, need to construct further sensory
evaluations tests to identify the most preferred tastes and flavors for their wines.
Namely, we can indicate “what” should be improved and the question "how much" can
be answered in another study.
Our results also indicated variation in the saliency of the wine attributes across
different consumer segments that can be incorporated into a better understanding of
customer preferences. This market-to-market variation in the male segment, for example,
can be translated into offering a wine that is a bit more complex in that it will include
indications of its harmony and aftertaste. A different approach, one that offers a wine that
indicates the bouquet of the wine, can be targeted for the female segment. Such diagnostic
information can aid wine marketers in constructing more effective marketing strategies
to increase their market share. This can be done by introducing two different wines with
different marketing communication strategies that will fit each segment. Such marketing
responses will be more effective than marketing the same wine to both male and female
segments. Similarly, the consumer segment that purchases wines at low frequency can be
educated about the bouquet of the wine with appropriate communication schemes to
increase the choice probability of purchasing specific red wine.
It should be noted that the proposed framework provides diagnostic information
about which attribute is salient in the choice process that allows managers to design
marketing strategies for product modifications, or new product development. It does
not, however, provide insight about the exact level of such (salient) an attribute and
the exact tactic to obtain it. This can be obtained in different research that can examine
the different levels of this attribute.
Overall, this study presented a choice model-based approach for gaining
knowledge about current product modifications, as well as developing new products
in categories that are characterized by the high importance of consumer sensory
evaluation in forming preferences toward brands. This is particularly valid in
categories where product design decisions are based on experience and art. Identifying
the salient product attributes for the aggregate and disaggregate markets provide
managers and winemakers with information about the exact product attributes that
need to be modified. Improving the relevant product attributes will increase consumer
choice probabilities for the specific product (wine) alternative.
The current study introduced a framework for future studies that can focus on the
effect of other consumer characteristics, demographics and others, on wine selection,
as well as the manufacturer’s (i.e., winery) effect on the choice of such a product. That
is, exploring whether consumer heterogeneity in responsiveness to various wine
attributes might aid marketers in tailoring marketing strategies that are more targeted
and therefore more efficient.
Many different factors can affect the choice decision of a product in a product
category. These include tangible (e.g., price, quality, packaging, taste, etc.) and
nontangible aspects (e.g., reputation, image). For complex products, those that have
many different types of product characteristics, or that have experience or credence in
nature, the choice task of consumers is even more difficult.
Lowengart 49
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50 Journal of Business and Management – Vol. 16, No. 1, 2010
Steven M. Sommer
Pepperdine University, Irvine Graduate Campus
Separate research streams have examined (1) teamwork and (2) turnover.
We examined the interaction of group beliefs on team member turnover
behavior. We hypothesized that groups with more pessimistic attributional
styles would experience greater turnover than optimistic attributional style
groups. This effect would be independent of influences of group potency and
social identity. A study of fifty intact work teams in a manufacturing facility
was conducted, with special attention devoted to recommendations for
enhancing the validity of multilevel research. The results supported the
hypotheses. Implications for attributional processes, shared team mental
models, and social capital are discussed.
sense of membership and shared beliefs” (Bar-Tal, 1990, p. 41). Those beliefs, in turn,
guide group behaviors that relate to collective issues. Only recently has attention
specifically focused on the formation process of group beliefs (Eby et al., 1999;
Gibson, 1999; Guzzo et al., 1993) and their implications for organizational outcomes
(Kirkman & Shapiro, 2001).
Group beliefs are neither absolutely an aggregation of individual characteristics nor
a set of wholly group-level characteristics (Crocker & Luhtanen, 1990; Guzzo et al.,
1993; Sayles, 1958). Rather, as members interact, they develop a collective sense of
their role requirements, behavior patterns, and the connectedness of their actions
(Weick & Roberts, 1993). Thus, individual attributes and the group’s contextual
characteristics meld together to create a team mental model (Eby et al., 1999; Klimoski
& Mohammed, 1994) of shared expectations and rules (Hackman, 1990) that guide
future action. It is important to note these “shared cognitions” need not be identical
among group members. However, there must be a significant overlap of understanding
among members (Earley & Mosakowski, 2000; Waller et al., 2001) so that they “hold
compatible models that lead to common expectations” (Klimoski & Mohammed,
1994, p. 421). In particular, while there is much debate about the nature of shared
mental models (Klimoski & Mohammed, 1994), there is consensus that they are
“shared understandings of task demands, environmental contingencies, and
appropriate behavior” (Eby et al., p. 367). Thus, they are cognitive frameworks with
motivational potential.
While studies of group processes have examined a variety of topics (e.g., teamwork
expectations, group efficacy, social identity, communication), we propose that one area
of shared cognition thus far overlooked that impacts subsequent behavior is
attributional style—the manner in which groups collectively interpret good and bad
events relevant to the group. Numerous studies in the behavioral sciences have
examined the possibility that certain individuals favor some explanations over others
for different events (Peterson, Buchanan & Seligman, 1995). That is, rather than
independently evaluating the cause of each experience, over time they develop a
consistent cognitive orientation and interpretive framework. Furthermore, an
individual’s future expectations (e.g., self-efficacy) and behavior (e.g., expended effort)
are significantly influenced by their perceptions and explanation of past events
(Luthans, 2002a; Stajkovic & Sommer, 2000; Weiner, 1986). Although the major
interest in attributional style has been at the individual level of analysis (Martinko,
1995), some work has been done to extend attribution theory to group settings,
especially in sports (Zaccaro et al., 1987; Rettew & Reivich, 1995). This stream
suggests that when individuals work in groups, they also generate shared
understandings of the relationship between group attributes and group outcomes
(Hewstone, Jaspair & Lalljee, 1982).
It should be noted that attributional style is specifically a cognitive process
(Seligman & Csikszentmihalya, 2000) rather than an affective disposition like positive
and negative affectivity (George, 1990; Judge, Locke & Durham, 1997). Dispositions
may become more state-like upon accumulation of experience (Chen, Gully & Eden,
2001), but do not always influence actual behavior (Fishbein & Ajzen, 1975). For
example, team member negative affectivity does not influence teamwork expectations
Riolli and Sommer 53
Attributional Style
Attribution theory is concerned with how individuals perceive causes of events and
the consequences of those perceptions. There is no single theory of “attribution”
(Kelley & Michella, 1980; Martinko, 1995). However, research performed by Heider
(1958) on how people explain their own actions and those of others’ is widely
considered the birth of attribution theory. Subsequent research shows beliefs about
causation affects mood, expectations, and subsequent behavior (Stajkovic & Sommer,
2000; Weiner, 1986). Weiner’s (1986) theory of achievement motivation deals with
how individuals explain their successes and failures and how this impacts subsequent
mood and behavior (self perspective). Kelley (1967) and Green and Mitchell’s (1979)
models are concerned primarily with how observers assign responsibility for the
outcomes of others. The application of attribution theory to group settings would
suggest members of the group also generate a naive theory of the relationship between
group characteristics and group outcomes. The key to understanding the group
explanation of good and bad events is to be found in the ongoing interaction process
among the group members. While these group level effects have been postulated
(Brown, 1984), they have rarely been empirically examined.
One specific stream within the attribution literature—“explanatory style”—
examines “one’s tendency to offer similar sorts of explanations for different events”
54 Journal of Business and Management – Vol. 16, No. 1, 2010
(Peterson, Buchanan & Seligman 1995, p. 4) or, simply put, the habitual way in which
people explain the favorable and unfavorable events that happen to them (Peterson &
Seligman, 1984). For example, an individual who habitually explains bad events as “I
caused it,” “It’s an ongoing thing and everything else will go wrong” (i.e., internal,
stable, and global), is labeled as having a “pessimistic” explanatory or attributional
style. In contrast, one who attributes failure to external, unstable, and specific causes
is labeled as having an “optimistic” explanatory style. Research on learned
helplessness shows an individual with a “pessimistic” style is more likely to exhibit
helplessness deficits when confronted with bad events than individuals with an
optimistic style (Seligman et al., 1979; Peterson, 2000; Seligman & Schulman, 1986),
which will likely lead to dysfunctional consequences in terms of future behavior and
performance (Luthans, 2002a). At this point, we should mention that what has been
called “explanatory style” in the psychology research has been referred to as
“attributional style” in the sparse management literature (Furnham, Sadka & Brewin,
1992; Martinko, 1995) on the topic. From here on, we will use the latter term.
There is a prolific body of literature showing that an individual’s attributional style
has significant effects on their mental and physical well-being, task persistence, and
performance success (Peterson, 2000), and helped to launch the growth of the
research stream called ‘positive psychology’ (Seligman & Csikszentmihalya, 2000). To
date, attributional style has been related to such diverse outcomes as physical illnesses
(Peterson, Seligman & Vaillant, 1988), anxiety (Seligman et al., 1979), academic
performance (Peterson & Barret, 1987), burnout (Wade, Cooley & Savicki, 1986),
work exhaustion (Moore, 2000), low self-esteem (Kao, Nagata & Peterson, 1997),
hardiness (Hull, Van Treuren & Propson, 1988), and workplace aggression (Douglas
& Martinko, 2001). Indeed, a meta-analysis of over 100 studies supported the
proposition that depression is positively related to internal, stable, and global
attributions for failure and external, unstable, and specific attributions for success
(Sweeney, Anderson & Bailey, 1986). Findings from two decades of research have
shown that an individual’s conclusions that outcomes were uncontrollable were
associated with cognitive, motivational, and emotional deficits (Abramson, Seligman
& Teasdale, 1978; Seligman & Csikszentmihalya, 2000). The motivational deficits are
a result of the expectation that responses are in vain (Peterson, 2000). The cognitive
deficit is comprised of difficulties in learning, given that one’s responses are not seen
as producing outcomes (Hjelle, Busch & Warren, 1996). Finally, the depressed affect
(e.g., frustration or sadness) is a consequence of believing outcomes are independent
of responses (Garber, Miller & Abramson, 1980).
Attribution theory has long received significant attention in both the clinical and
organizational research (Knowlton & Ilgen, 1980; Liden & Mitchell, 1985; Heneman,
Greeberger & Anonyou, 1989; Ployhart & Ryan, 1997). Attributional style, however,
has only recently garnered the level of attention in organizational behavior that
approaches the interest shown in the clinical and social arenas (Furnham et al., 1992;
Judge & Martocchio, 1996; Moss & Martinko, 1998; Wunderley, Reddy & Dember,
1998). A few relevant studies have examined productivity and turnover among
insurance sales staff. For example, Seligman and Schulman (1986), using a sample of
94 experienced life insurance sales agents, found that individuals who interpreted
Riolli and Sommer 55
failure as internal, stable, and global were less persistent, produced less, initiated fewer
sales attempts, and quit more frequently. Corr and Gray (1996) replicated these
findings in a study of an insurance sales staff in the U.K.
The focus of attributional style research has thus far examined individual processes
and implications. We reiterate the importance of the work team and repeated calls for
research to examine group-level influences on theories traditionally examined at the
individual level of analysis (Eby et al., 1999; Pelled & Xin, 1999; Yammarino &
Dubinsky, 1990). Prior research has demonstrated the ease with which an individual
identifies with a group. For example, a nominal cue like wearing similar clothing can
cue a significant in-group categorization effect (Dovidlio et al., 1995). Once perceiving
himself or herself as a member, the individual is prone to adopt similar attitudes
(George, 1990; Salancik & Pfeffer, 1978) and personalize the group’s success and
failures (Ashforth & Mael, 1989). Given the importance of the individual being in
sync with the group on key coordination and perception issues, if the group is to be
effective (Waller et al., 2001), it seems reasonable to determine if psychological
withdrawal (e.g., being in a bad mood) effects found for individuals (Judge &
Martocchio, 1996; Pelled & Xin, 1999) would also occur at the group level.
While some attribution work has looked at athletic performance in sports teams
(Rettew & Reivich, 1995), attributional style research at the group level is scant. This
study seeks to determine if a construct of group attributional style exists. We define
group attributional style (GAS) as the group’s habitual and collective manner of
explaining the causes of bad and good events happening to them. As discussed, groups
create shared cognitions and collective mental models through their interactions
(Earley & Mosakowski, 2000). We again propose that one set of beliefs involves the
collective sense, making governing the explanation of good and bad events happening
to the group. Extrapolating from the existing research, members engaged in
pessimistic attributional style discussions may share feelings of helplessness. This
group will experience and collectively amplify/reinforce debilitating deficits that will
hinder efforts to correct or improve their activities. Consequently, members of
pessimistic groups will be more inclined to withdrawal, express thoughts of quitting,
and intentions to search for alternative employment. When one member quits to take
a job elsewhere, others may reevaluate their job status (Dess & Shaw, 2001; Mowday,
1981) and likely quit as well. Studies (Lee et al., 1999; Mollica & DeWitt, 2000;
Sheehan, 1995) empirically show this shock may lead to potential turnover even if the
individual is satisfied with their current position. We propose this effect will be more
pronounced in teams given the more active discussions and higher sense of collective
expectations. Therefore:
Hypothesis 1: A pessimistic group attributional style will lead to higher turnover than
turnover in groups characterized by an optimistic attributional style.
Group attributional style (GAS) will not occur in a vacuum (Klein & Kozlowski,
2000). In particular, we expect the role of GAS to operate in conjunction with other
56 Journal of Business and Management – Vol. 16, No. 1, 2010
group beliefs that have been demonstrated to influence shared mental models (Eby et
al., 1999). In particular, research has demonstrated that group potency and social
identity produce significant impacts on group dynamics. For example, while
attributional style will result in the collective assessment of an event’s causality, future
behavior will also be influenced by the confidence the group has that they can
successfully mobilize the necessary subsequent resources and tactics. So, whereas,
atributional style concerns “Why did it happen?” and “Do we want to do something
about it?” we present group potency as the “Can we do something about it?” dynamic.
Furthermore, the extent to which the individual is emotionally attached to the
particular group will also add to the desire to remain or turnover. This we consider the
“do I care?” or social identity dynamic.
Group Potency
The efficacy literature has extensively focused on individual self-regulating
behaviors (Bandura, 1997). However, since the early 1980’s, attention has also been
given to team-and-group performance beliefs. This trend started with the concept of
team-potency, which was defined as “a shared conception of group ability across
situations” by Guzzo et al. (1993, p. 87). This definition shares elements of and in fact,
is often cited as a precursor to the term shared mental models (Eby et al., 1999). There
is empirical evidence of the relation of potency to performance related criteria
(Gibson, 1999). This research stream demonstrates that in different settings, group
beliefs have a significant effect on different group outcomes. Subsequent work on
group potency more often uses the term “group efficacy,” defined as the collective
belief of a group that it can successfully perform a specific task (Gibson et al., 2000;
Lindsley, Brass & Thomas, 1995).
Similar to discussions of shared mental models described above, this belief is not
the simple sum of group members’ efficacy beliefs but an “emergent” expectation
generated through collective sense making (Bandura, 1997). By emergent, we mean
the process of member interactions and accumulated experiences that lead to a
framework of shared cognition. The empirical evidence shows this collective (often
called the group discussion) approach best predicts group outcomes (Gibson et al.,
2000; Little & Madigan, 1997). By suggesting that collective efficacy is deeply
grounded in self-efficacy, Bandura (1997) was among the first researchers to see the
connection between performance beliefs across the two levels of analysis. In an
attempt to discriminate between efficacy at the individual and collective levels,
Bandura stated:
Consistent with past research (Silver, Mitchell & Gist, 1995), we expect turnover
behavior to be further influenced by the group’s collective feeling of potency. Teams
Riolli and Sommer 57
that have a strong sense of potency are less likely to experience the sense of
helplessness that would lead to turnover. Teams with low potency are likely to create
an environment that amplifies feelings of helplessness, especially related to assembling
the skills necessary to succeed. As a result, the effect of potency can potentially mask
attributional dynamics such as members relieving their dissonance by leaving the
organization (Abraham, 1999).
Hypothesis 2: High potency groups will experience a lower rate of turnover than low
potency groups.
Social Identity
Another important group characteristic that may detract from the effect of group
attributional style is the level of member identification with the group. Individuals
define themselves and others not simply in interpersonal terms, but also in terms of
their various category memberships (Hewstone et al., 1982) and group or
organizational affiliations (Tajfel & Turner, 1979). As defined by Tajfel (1982), social
identity is “that part of an individual’s self-concept that derives from their knowledge
of their membership in a social group (or groups) together with the value and
emotional significance attached to that membership” (1982, p. 2). Turner (1982)
stressed that cohesiveness is the concept of belonging based on affection, whereas
social identity is related to the member’s cognition regarding criteria describing the
group’s characteristics. Social groups possess specific behavioral expectations, and this
shared understanding of group characteristics and expectations is again relevant to the
definition of shared mental models.
Individuals with strong identification tend to exert more effort towards group
objectives and engage in more prosocial behavior (Mael & Ashforth, 1992; Kirkman
& Shapiro, 2001). Indeed, one can extrapolate from the social capital literature that
individuals with strong referent identity tend to build more supportive networks,
cooperative work relationships, and higher levels of trust, all of which would reduce
one’s motivation to leave the organization (Nahapiet & Ghoshal, 1998).
Contemporary work on diversity has emphasized the need to focus on cognitions of
salient work-related characteristics rather than or in addition to emotional reactions to
demographic attributes. Other work on social identity theory (Ashforth & Mael, 1989;
Tajfel & Turner, 1986) describes the process by which members will seek to
distinguish the group, and by which members’ strength of identification with and ego-
enhancement from the group influence intentions to remain.
Thus, in spite of a pessimistic interpretation of group experiences, a high
identification with the group itself may counter turnover. That is, the group itself
provides a source of support that outweighs experience generated image concerns.
Hypothesis 3: Groups with strong social identity will experience lower turnover than
low identity groups.
Hypothesis 1: A pessimistic group attributional style will lead to higher turnover than
turnover in groups characterized by an optimistic attributional style, independent of the
effects of group potency and social identity.
Methods
Sample
The sample consisted of teams drawn from a major division of a large
manufacturing operation located in the Midwest. This division was responsible for
mail inserting for large financial institutions. The teams worked around mail inserting
machines and had to collectively coordinate several activities in order to minimize
performance defects; for example, loading and unloading of different materials (e.g.,
envelopes, ink, paper statements), synchronization with machine speed, maintenance
and repair, general work area cleanliness while maintaining or repairing the machines.
Each team had 3 or 4 members, a size determined by industrial engineering to be most
effective for the technology. No difference due to group size was observed for any of
the study variables. These were permanent groups that spent a considerable amount of
time working in close proximity and socializing with each other during breaks and
lunch. Pooling of effort from the group members was an important factor for the team
performance. Thus, the sample meets the proximity, similarity, interdependence, and
interaction criteria to be considered a team.
Data were retained only for employees where a team’s complete membership
completed surveys. This resulted in 180 employees comprising 50 wholly intact teams
used in the actual analyses. Age was measured categorically. The median and most
frequent response was “3” representing the individual as being in the 26-30 year old
age range. Average organizational tenure was 22.7 months, and 50% of the
respondents were female. A comparison of the demographic composition of the whole
company and the demographics of the investigated division showed the sample that
completed the questionnaires was representative of the plant population. Therefore,
we are confident there was no sampling bias.
This organization was selected for several expected contributions to validity. For
one, performance was dependent on both human and technological inputs. The
measure of performance was the number of envelopes zip-sorted in a month. Counters
attached to the employee machines tabulated completed envelopes. Managers
recorded group membership and attendance. While a Within-and-Between Analysis
(WABA) analysis determined that performance was more variable across groups than
within (E = 2.06, significant at 150 [a < .01]), the variance in performance was quite
restricted (3%). Indeed, an ANOVA showed no difference across teams, and a
regression of the study variables on performance was also not significant. This adds
to the power of the design as group beliefs and subsequent behavior will be more a
function of differences in collective interaction and perceptions than a product of
actual productivity differences.
Finally, the group size provided reasonable opportunity to satisfy Bar-Tal’s (1990)
four requirements for effectively measuring group beliefs. The ability to survey the
Riolli and Sommer 59
entire group membership addressed the first two requirements that the constructs
reflect the group as a whole, and that members agree with regard to the construct
(typically addressed by scale construction). The use of WABA techniques would help
address the other two requirements concerning group differentiation and within-group
processes. Finally, group beliefs are more predictive of group outcomes when based on
group interaction processes (Gibson, 1999; Gibson et al., 2000); in this case group
discussions of many topics were promoted by the fact that the groups worked together
around the machines.
Procedure
Respondents were invited to participate in the study as part of an ongoing project
within the context of reducing turnover at the organization level. The survey
instrument was directly distributed and collected by the senior author. Completion of
the survey required approximately 30 minutes and was done on company time.
Respondents were given the choice of completing the survey at the start or end of their
shift. All participants were provided with explanations of the general purpose and
nature of the study prior to responding. Confidentiality of individual responses was
emphasized in the instructions, and it was stated that only the summaries of the
research would be provided to management.
Measures
Independent Variables
Group Attributional Style. Several instruments have been developed to assess
attributional style at the individual level: the Organizational Attribution Scale
Questionnaire (OASQ) developed by Kent and Martinko (1995), the Attribution Style
Questionnaire (ASQ) adapted by Peterson et al. (1988), and the Occupational
Attributional Style Questionnaire developed by Furnham et al. (1992). Each is
worded specific to a certain population or application. The Group Attributional Style
measure (GASQ) used here was based on the Kent and Martinko measure, as it has
shown strong psychometric properties and is specifically worded to tap work-related
events. The items were modified to reference group-level opinions in order to follow
recommendations for considering issues related to research crossing multiple levels
of analysis (Eby et al., 1999; House, Rousseau & Hunt, 1995; Klein, Dansereau &
Hall, 1994). In particular, shifting the item referent from the individual to the group
tends to enhance the level of within group agreement and between group variance
required to alleviate construct validity threats due to level of analysis (Klein &
Kozlowski, 2000).
The measure was presented to the respondents with the following directions:
Read each of the situations and imagine a time it happened to you and to your
group. Even if it is unlikely that the situation will actually occur, still imagine
it is happening and respond to the questions. Based on what you know about
yourself, your group, and the organization in which you are employed, write
down what you think is the one major cause of the event in the space provided
60 Journal of Business and Management – Vol. 16, No. 1, 2010
(e.g., bad luck). Respond to each of the items that follow the event by circling
the number on the scale which best describes the cause you identified.
Following the instructions were the 12 modified events from the Kent and
Martinko instrument: 6 good and 6 bad outcomes. A sample reworded negative event
was “Members of your group have great difficulty in getting along with each other.” A
sample reworded positive event was “All the feedback your group has received from
your supervisor lately concerning the group’s performance has been positive.”
Consistent with recommendations for usage, following each event was a space to
provide their narrative cause then parallel questions along the three dimensions of
internality, stability, and globality. Response anchors used a 7-point Likert format (e.g.,
1 = completely external to the group; 7 = completely internal to the group).
Given the high intercorrelations among the three attributional dimensions in past
research, Reivich (1995) recommends the use of composite scores for determining
attributional style (Corr & Gray, 1996; Seligman & Schulman, 1986). Again following
Kent and Martinko’s recommendations, the composite negative and the composite
positive attributional style scores were calculated first. These scores represent the
combined mean responses across the three dimensions for the 6 events in each
category. Next, the total score (CPCN) is obtained by calculating the composite
positive minus the composite negative scores. Higher scores reflect a more optimistic
attributional style. Past research (Peterson & Seligman, 1984; Seligman & Schulman,
1986; Reivich, 1995; Corr & Gray, 1996) indicates the CPCN is the most valid
empirical predictor of attributional style at the individual level of analysis. Thus, we
expect the Group-CPCN to be a valid extrapolation to the group level of analysis.The
Cronbach alpha for the measure was .76.
Group Potency. We assessed collective self-efficacy with the eight-item scale
developed by Guzzo et al. (1993). Other researchers have used different methods to
measure group-efficacy. For example, Gibson (1999) employed a method called
“group discussion procedure,” where a group is presented with a rating scale to use in
forming a single consensus response to a question about its sense of efficacy with
regard to a given task. Limitations of this method include the inability to calculate
statistical indicators of agreement (Gibson, 1999), and that group interaction during
the process of arriving at an efficacy estimate may change a group’s efficacy to the point
that it is unrealistic (Bandura, 1997). Even so, Gibson et al. (2000) has shown potency
measures like Guzzo’s to be unidimensional and sound and furthermore, that the two
measures are equally sound. While the potency measure was shown to have lower
predictive validity (Gibson et al., 2000), we propose the nature of the workplace
mentioned above might exploit both approaches. These individuals work side-by-side
and discuss several topics (including work), so it is highly probable that each
individual’s response reflected the group’s attitude, thus providing the “referent shift
consensus” necessary for crossing levels of analysis (Chan, 1998).
Scale items included “My group has confidence in itself,” “My group expects to
have power around here,” and “My group believes it can become unusually good at
producing high-quality work.” Group members completed the eight items using a ten-
point format (1 = To no extent, 3 = To a limited extent, 5 = To some extent, 7 = To a
Riolli and Sommer 61
considerable extent, and 10 = To a great extent). The Cronbach alpha was .91.
Social identity was measured using a modified version of the Mael and Ashforth
(1992) six-item organizational identification scale. Items included “If someone were
to criticize this group, it would feel like a personal insult,” “When I talk about this
group, I say ‘we’ rather than ‘they,’” and “If someone were to praise this group, it would
feel like a personal compliment.” Participants were asked to indicate their agreement
with each statement on a five-point scale (5 = To a very great extent; 1 = To no extent).
Mael and Ashforth (1992) reported a reliability of .79 and the reliability for this study
was an acceptable .70.
Dependent Variable
Turnover Behavior. Organizational records were examined for the 6-month period
following the study to identify study participants who terminated their employment.
Unfortunately, we did not obtain sufficient information on date of turnover and thus,
could not perform a stronger test using survival analysis.
Significant discussion has recently focused on methods for measuring turnover, as
well as potential flaws in past data collection efforts. For example, turnover is one
form of role transition (Ashforth, 2001) and some transitions can mask withdrawal
behaviors. Transferring jobs or geographic relocation within an organization is a more
acceptable way to leave an unsatisfactory position than quitting, especially if
opportunities in other organizations are limited. Similarly, turnover is defined as “the
entire cycle in organizations of entries and leaving” (Bluedorn, 1982, p. 78-79) and
again includes transfers, promotions, and relocations. Given this, and that the
constructs examined here classify as “shared team properties” that are influenced by
the members (Klein & Kozlowski, 2000, p. 215), we utilized a more elaborate
operationalization of turnover.
Exit interview data listed the reason for turnover. For example, some left to return
to school, some were fired, some had immigration problems, and some were
transferred or requested transfers to other departments. Seven categories, including
one for still employed, were created. Consistent with the literature on voluntary
turnover (Lee et al., 1999), these causes were coded into three categories: (1) still
employed, (2) voluntary turnover or school, requested transfer, and (3) involuntary
turnover—fired, immigration. As described later, since the dependent variable is
categorical, logit regression techniques were used to analyze the data. One analysis was
conducted to examine those who turned over (coded as 0) versus those who stayed
(coded as 1), while a second analysis was performed to examine those who left
voluntarily (coded as 0) versus those who left involuntarily (coded as 1).
Results
leaving is a significant predictor that the individual may also leave (Krackhardt &
Porter, 1985) since closeness (e.g., social identity) is a form of friendship.
In order to justify the group level of analysis, it is important to demonstrate
homogeneity within the group and further, that two people within the same group are
more similar than two people who are members of different groups (Bar-Tal, 1990;
Florin et al., 1990). WABA was conducted in order to verify the existence of group
level effects. This technique uses the within-group correlation and the between-group
correlation (called “eta”) to determine if there is more variance among members
within a group than variance accounted for by differences across groups. The squared
eta’s (η2’s, similar to R2) are tested relative to one another with F-tests of statistical
significance and an E-test of practical significance, making it a more robust measure
of group level effects (Klein & Kozlowski, 2000). The cutoff value to conclude
construct validity at the group level is E larger than 1.3 for the 15° angle test,
comparable to a = .01 (Dansereau, Alutto & Yammarino, 1984). Values less than .77
indicate individual differences are greater than group effects, and that individual-level
data cannot be aggregated. Cutoff scores for the F-tests are obtained from critical value
tables and determined by the degrees of freedom (n – J and J – 1). WABA is a useful
and one of the more rigorous tools for determining appropriate levels of analysis in
multilevel research (Klein & Kozlowski, 2000). However, George (1990) points out
one should not expect to find extremely large differences across groups when all
members of a group belong to the same organization and are performing the same task.
Even so, the results of the WABA indicated group level effects for these data. The
E scores for the three independent variables (1.42 to 1.60) all surpassed the 15° value
for practical significance. Furthermore, the F (df = 130, 49) scores (2.05 to 2.09)
surpassed the bracketed critical values of 1.84 (df = 100, 48) and 1.76 (df = 200,50) listed in
Appendix A for a = .01 (Dansereau et al., 1984). Thus, variation between groups was
significantly greater than the variations within groups for the variables of interest, so
one can conclude that there is an effect of group membership on the measures.
Therefore, we can conclude the existence of collectively shared mental models within
these groups. Given this, the remaining analyses and testing of hypotheses were
performed using data aggregated to the group-level. Finally, examination of the data
suggested no violations of normality.
Descriptive Statistics
Inspection of the correlation matrix reveals this organization experiences a
moderately high rate of turnover (annualized 60%) that varies across the groups. Older
employees had lower education levels, and higher levels of turnover which is likely a
result of the physical demands of the job. While there was great variance in the
attributional style across the manufacturing teams, the mean was modestly optimistic.
Additionally, the groups reported relatively strong levels of potency and identity. Given
none of the demographic measures were related to the dependent variable, they were
excluded from further analyses. Thus, Hypothesis 1 could be initially tested by examining
the correlation between attributional style and turnover behavior. Given the coding
scheme (lower CPCN = more pessimistic; turned over = 0), the positive correlation shows
that pessimistic groups were likely to produce higher individual turnover.
Riolli and Sommer 63
Hypothesis Testing
Moderated regression is typically used to study the unique and relative effects of
independent variables on a dependent variable when controlling for each other
(Pedhazur, 1982). However, when analyzing a categorical dependent variable with
categorical and continuous independent variables, logistic regression analysis is
recommended (Goodman & Blum, 1996; Tansey et al., 1996).
Hypothesis 1 predicting group explanatory style would relate to group member
turnover was supported. Groups with a more pessimistic explanatory style led to
higher turnover among members than groups with an optimistic explanatory style (b
= .23, t < .01), even after accounting for cross-level effects and holding constant the
effects of group potency and social identity (see Table 2). In addition, group members
who left for voluntary reasons were likely to have left more pessimistic groups (b = .21,
t < .05) than individuals who turned over for involuntary reasons (see Table 3).
Discussion
This study proposed and tested the idea that the attributional style construct
existed at the group level of analysis. WABA analysis of responses from 50 work teams
illustrated the attributional style measures (in fact all the measures of interest) did
display group level characteristics in accordance with existing recommendations for
Riolli and Sommer 65
conducting multilevel research (House et al., 1995; Klein et al., 1994; Klein &
Kozlowski, 2000). It was further proposed that this group level phenomenon would
influence turnover behavior. This proposition was also supported. This impact was
established while simultaneously accounting for the influences of group potency and
social identity firmly established in shared group cognition research. The following
discussion will outline theoretical and practical implications.
Consistent with expectations, group attributional style had a significant impact on
individual turnover. This finding adds to the rich body of previous research on factors
that contribute to employee withdrawal behavior. Previous related research examined
the increasing effect on individual turnover of communication networks (Krackhard
& Porter, 1985), the centrality of network position (Eisenberg, Monge & Miller,
1983), and social influence (Kincaid, 1993). More recent studies have shown that
others can indirectly influence an individual’s turnover behavior—a friend’s turnover
will increase the chance of an individual’s departure (Mollica & DeWitt, 2000; Shah,
2000). Findings from this study showed that a group member’s decision to stay at or
to leave a particular job is a function of the quality and pattern of interaction with
other group members (Feeley & Barnet, 1997). For example, Krackhardt and Porter
(1985) argued that the ‘closer’ the friends who leave the organization are to the person
who stays, the stronger the effect will be on the latter’s turnover considerations. Again,
recent research on voluntary turnover shows ‘such a shock’ may induce an individual
to leave a job, even if they are not personally dissatisfied (Dess & Shaw, 2001; Lee et
al., 1999).
As shown here, and consistent with prior work of shared team mental models, team
member interactions likely developed a group level schema regarding the nature and
causes of their experiences. In particular, the negative attributional style likely
reflected interactions among group members that created collectively agreed upon,
ego-protecting explanations for perceived failure. Furthermore, a normative belief in
the immutability of the situation collectively indicated such experiences were not
necessarily indicative of personal failure on any one member’s part. Consequently, this
process created mutual social support for leaving. This effect was compounded by the
degree to which the group collectively felt incapable of mobilizing an effective
improvement response (potency).
The significant finding for social identity speaks to the issue of who group
members may see as “friends” in making cognitions. Similarity across group members
may enhance social integration (i.e., the degree to which an individual is
psychologically linked to others in the group) and in turn lead to a lower likelihood
of leaving (O’Reilly, Caldwell & Barnett, 1989). Historically, research has shown that
demographically similar people create a supportive identity group that can reduce
pressures to leave. Prior research has found higher turnover rates in demographically
diverse work groups (Jackson et al., 1993), and O’Reilly et al. (1989) discovered that
disagreement within heterogeneous groups accelerates the departure of members. The
traditional perspective holds that the presence of demographically or socially
“different” members of an otherwise homogeneous group may make the other
members of the group uncomfortable.
Our findings were to the contrary. The teams in this study were ethnically diverse
66 Journal of Business and Management – Vol. 16, No. 1, 2010
practice of occasionally collapsing remnants of former groups into a new group. Thus,
it would be interesting to look at the antecedents and the formation process of
optimistic and pessimistic group norms in newly-created groups versus groups where
members are carried over from prior (optimistic or pessimistic) groups. Indeed, such
an approach would be extremely valuable given the rotation practice commonly used
in professional services firms.
The results of this research suggest that organizations should pay close attention to
the habitual explanations of work groups. The findings of this study indicated group
attributional styles (optimistic or pessimistic) did impact turnover. Companies that
require persistence and initiative due to frequent frustration, rejection, and even defeat
should focus on more training that might instill optimism in their employees
(Luthans, 2002b). More importantly, these effects were found even though
performance was not highly variable. Thus, turnover behavior here was almost
exclusively due to differences in collective sense making than to differences in actual
outcomes. Therefore, efforts to help frame experiences optimistically might benefit
the organization even when no actual change in objective circumstances may be
needed (Luthans, 2002a).
Furthermore, our findings relate to work on social networks and social capital. A
person’s position in a social network can greatly influence their impact on an
organization (Sparrowe et al., 2001), including being a key player that instigates a
cohort to turnover (Dess & Shaw, 2001). Professionals commonly demonstrate greater
loyalty to their network than the organization (Cappelli, 2000) and thus, a snowball
of turnover is common (Dess & Shaw, 2001). However, we, like Krackhardt and Porter
(1985), found similar behavior among low-level production employees and this, in
and of itself, deserves recognition beyond the implication it suggests for less
organizationally committed cohorts. It takes considerable time for an organization to
develop the unique knowledge, memory, and interpersonal connections that result in
increased efficiency (Nahapiet & Ghoshal, 1998). Yet, collective turnover of a social
cohort can impede the development of or even eliminate valuable human and social
capital. While recent recommendations emphasize investing in developing people
(Pfeffer, 1998), organizations would be foolhardy to do so, knowing they will leave
before any return is realized (Guthrie, 2001).
Seligman (1991) explains “learned optimism gets people over the wall—and not
just as individuals but the whole team” (p.256). Workshops for optimism training
could teach members of the group how to cope with adversity. How to utilize work-
related team attitudes instead of individual differences related to demographics could
be the source of social support that makes the difference between renewed
commitments to the organization versus pessimistic abandonment through leaving.
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Riolli and Sommer 73
Michael Campbell
Montana State University-Billings
This study uses data from Chinese publicly listed companies for the period
of September 2000-September 2008 to test the accuracy of Altman’s Z-score
model in predicting failure of Chinese companies. Prediction accuracy was
tested for three Z-score variations: Altman’s original model, a reestimated
model for which the coefficients in Altman’s model were recalculated, and a
revised model which used different variables. All three models were found to
have significant predictive ability. The reestimated model has higher
prediction accuracy for predicting nonfailed firms, but Altman’s model has
higher prediction accuracy for predicting failed firms. The revised Z-score
model has a higher prediction accuracy compared with both the reestimated
model and Altman’s original model. This study indicates that the Z-score
model is a helpful tool in predicting failure of a publicly listed firm in China.
Developing countries are attracting more foreign investment than ever before. Since
2000, foreign direct investment inflows have rocketed from $165.5 billion to an
estimated $470.8 billion in 2007. According to the World Bank, China draws the most
foreign investments, attracting $84 billion of investment in 2007 and representing 18%
of the total. Although China is an attractive place for investment, publicly listed
Chinese companies suffer credibility issues. All three stock exchange markets –
Shanghai, Shenzhen, and Hong Kong – are to varying degrees, known for government
intervention and a club type atmosphere. Investors need guidelines to distinguish low-
risk investments from higher-risk ones. The objective of this study is to determine if the
76 Journal of Business and Management – Vol. 16, No. 1, 2010
Previous Studies
Z=1.2X1+1.4X2+3.3X3+0.6X4+0.999X5
where,
Firms with Z-scores less than 2.675 are predicted to be bankrupt, and firms with
Z-scores greater than 2.675 are predicted to not be bankrupt.
Boritz et al. (2007) reestimated the model using Canadian company data and
obtained the following:
Z=2.149X1-0.624X2+1.354X3-0.018X4+0.463X5
Wang and Campbell 77
Z=3.20+12.18X1+2.50X2-10.68X3+0.029X4
where,
Sandin and Porporato (2007) use data from a developing country, Argentina, and
retain 2 out of 13 ratios after stepwise selection and come up with the final model:
As=15.06R5+16.11S3-4.14
where,
Methodology
that are derived from information published after bankruptcy has occurred. In this study,
all information is from reports published at least three months before a company was
delisted. Agarwal and Taffler (2007) emphasize the importance of testing the predictive
ability of models against an entire population instead of using only a relatively small
sample. The authors plan to address this issue in a subsequent study. The current
research plan is to test the predictive ability of three Z-score based models using the
matched pair technique. Two of the models are actually developed in this study.
Data Collection
For every delisted and matching nondelisted firm, the financial data were
manually collected for up to two years prior to delisting from www.sina.com.cn.
According to Altman (1968), the bankruptcy prediction model is an accurate
forecaster of failure for up to two years prior to bankruptcy. Accuracy diminishes
substantially as the lead time is increased. A total of 42 delisted firms (16
manufacturing companies) were collected along with 42 (16 manufacturing
companies) matching nondelisted firms. We then randomly selected 12 out of the 42
delisted firms along with their matching nondelisted firms as the prediction or hold
out sample to test the validity of our Z-score model. The final sample was divided into
two subsamples: the estimation sample which includes 30 delisted firms and 30
matching nondelisted firms, and the prediction sample which includes 12 delisted
firms and 12 matching nondelisted firms.
Results
Descriptive statistics
The average time between the actual delisting date and submission of the last
financial report prior to the delisting for the 30 failed firms was eight months, ranging
from three months to 23 months. The average asset size for the delisted firms was
466,629,673 Chinese dollars versus 747,952,379 for the nondelisted firms for the first
year prior to failure. The respective numbers are 882,387,177 and 693,322,301 for the
second year prior to delisting. There was a sharp decrease of mean total asset size of
the delisted firms between the two financial reporting periods prior to delisting, while
the total assets of the nondelisted firms increased.
The sizes of the firms vary. The total assets of the delisted companies range from
RMB 21,514,900 to RMB 1,211,942,318 the first year before delisting. The sales of the
delisted firms range from 0 to RMB 433,961,140 in the first year before delisting. The
total assets of the nondelisted firms range from RMB 208,295,652 to RMB
2,394,944,689 for the corresponding year. The sales of the nondelisted firms range
from RMB 5,918,570 to RMB 986,715,195 for the corresponding year.
The means of the financial ratios using the financial reports one and two years
prior to delisting are summarized in Tables 1 and 2, respectively. The results are
consistent between the estimation and prediction groups for both years. A comparison
of the delisted and nondelisted variable means indicates that working capital/total
assets (X1), retained earnings/total assets (X2), earnings before interest and taxes/total
assets (X3), market value of equity/book value of total debt (X4) and sales/total assets
(X5) are lower in the delisted than in the nondelisted group. The p-values for the test
of mean differences between delisted and nondelisted companies are significant for
each of these variables. The results are similar to those reported by Altman (1968) for
his estimation sample except for the sales/total assets variable (X5), which is not
significantly different between his bankrupt and non-bankrupt groups. The results
reported by Grice and Ingram (2001) do not find significant differences between the
distressed and nondistressed groups for variables X4 and X5.
80 Journal of Business and Management – Vol. 16, No. 1, 2010
Firms with Z-scores less than 2.2373 are predicted to be delisted and Z-scores
greater than 2.2373 are predicted to be nondelisted.
Wang and Campbell 83
The model correctly predicted 90% of firms (54 out of 60), with both type I and
type II error at 10%. This is higher than 76.67% overall accuracy for the estimation
sample using Altman’s (1968) model. However, the Type I error is lower using Altman’s
(1968) model (3.33%) compared with our model. Altman’s (1968) model misclassified
13 out of 30 nondelisted firms into delisted group while it only misclassified 1 out of
30 delisted firms into nondelisted group. The model this study derives misclassified 3
out of 30 nondelisted firms into the delisted group and 3 out of 30 delisted firms into
the nondelisted group.
Cross-validation
It is important to cross-validate the result using hold out data. Using data one year
prior to delisting, 21 out of 24 of the prediction group firms (87.5%) are correctly
classified using the derived Z-score model, with a Type I error of 16.67% and a Type II
error of 8.33%. The model misclassified 2 out of the 12 delisted firms and 1 out of the
12 nondelisted firms. Altman’s (1968) model has an overall accuracy of 83.33%. It
correctly classified all the delisted firms and misclassified 4 out of the 8 nondelisted
firms.
Using two years prior to delisting data, our model arrives at exactly the same
results as using one year prior to delisting data. Altman’s (1968) model has an overall
84 Journal of Business and Management – Vol. 16, No. 1, 2010
accuracy of 87.5% and it misclassified 1 out of the 12 delisted firms and 2 out of the
12 nondelisted firms.
Analysis
During the process of data collection, we noticed that the delisted firms’ total assets
decreased over the two year period, while the nondelisted firms’ total assets increased.
Although no previous research has taken this into consideration, we believe it worth
further exploration. We thus added another variable into the discriminant function.
The sixth variable is defined as follows: (Total assets one year prior to delisting – Total
assets two years prior to delisting)/Total assets two years prior to delisting. We then
applied a backward elimination procedure. Three variables remained after the
procedure with a significance level of p<0.05. The specific p values are shown in Table
5. The three variables are: X4, X5 and X6. Using these three variables, we created
another Z-score model, the revised Z-score model.
Z=0.2086X4+4.3465X5+4.9601X6
Firms with a Z-score smaller than 1.5408 are predicted to be delisted, while firms
with a Z-score larger than 1.5408 are predicted to be nondelisted. The prediction results
using the revised Z-score model are reported in Table 6. The revised model correctly
classified 95% of the firms in the estimation sample. It misclassified 3 out of the 30
delisted firms and correctly classified all the nondelisted firms. The estimation sample
overall accuracy rates of the revised model are 95% and 91.67% respectively for one
year and two years prior to delisting. These rates were comparatively more accurate
than those of Altman’s model at 76.67% and 85% and the re-estimated model at 90%
and 86.67%. The cross validation results are also reported in Table 6. Using the
prediction sample, the revised model yields superior results one year prior to delisting,
and all 3 models yield the same overall accuracy for two years prior to delisting.
Relatively few studies of this type have been done in emerging countries. Sandin
and Porporato (2007) did a study for Argentine companies. New Z-score variables
specific to Argentine companies were developed. Then, both the new model and
Altman’s original Z-score model were tested. Both models were found to have
predictive ability, with the new model enjoying enhanced predictive power. Thus,
both the current study on Chinese companies and Sandin and Porporato (2007)
support the contention that the Z-score model is an effective predictor of company
Wang and Campbell 85
failure in emerging countries, especially when the model is revised based on data
from the specific country being studied.
Because of the relatively small number of failed firms during the period under
study, all failed firms were included regardless of their industry. As mentioned earlier,
of the 84 firms used in this study, only 32 (16 failed and 16 healthy) were
manufacturing firms. It is interesting to note that even though Altman’s original Z-
score model was developed based only on manufacturing firms, it performed well on
this cross section of Chinese firms.
Our study shows that the revised model with three variables has a comparatively
more accurate prediction than both the Altman’s model and the reestimated model
using one year prior to delisting data for both the estimation and the prediction
sample. The revised model also has comparatively more accurate prediction than
both the Altman’s model and the reestimated model using two years prior to delisting
data for the estimation sample. The three models perform the same using two years
prior to delisting data for the prediction sample. Table 7 summarizes the results.
Table 8 shows the results in separate charts to facilitate a comparison.
Conclusion
Our study supports the effectiveness of the Z-score methodology for predicting
company failure in China. Overall, the re-estimated model with recalculated
coefficients but the same five financial ratios as Altman’s model has a higher prediction
accuracy for the nondelisted group, while Altman’s (1968) model has higher
prediction accuracy for the delisted group. Our revised model with three financial
ratios has higher overall prediction accuracy than both the re-estimated model and
Altman’s model. The revised model includes a financial ratio that is not considered in
the other two models. It is defined as follows: X6 = (Total assets one year prior to
Wang and Campbell 87
delisting – Total assets two years prior to delisting)/Total assets two years prior to
delisting. This variable indicates the extent of asset decrease from two years to one year
prior to delisting.
Our models use companies from various industries. The models developed
should apply to a wide variety of firms. Due to the limitations of data access and the
matched sample method when estimating Z-score model, this study uses a relatively
small sample. One of the criticisms of failure prediction models in general, is that
they have not been tested on an entire underlying population (Agarwal & Taffler,
2007). Future research is planned to test the 3 models in this paper against the entire
population of Chinese listed companies for a longer period. Future research also is
planned to employ Ohlson’s (1980) logit model with a large sample or whole
population. It then may be possible to compare the efficacy of MDA versus logit for
Chinese listed companies.
References
Agarwal, V. & Taffler, R.J. (2007). Twenty-five Years of the Taffler Z-score Model: Does
It Really Have Predictive Ability? Accounting and Business Research, 37(4): 285-300.
Altman, E.I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of
Corporation Bankruptcy. The Journal of Finance, 23: 589-609.
Altman, E.I. (1984). The Success of Business Failure Prediction Models: An
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Taffler, R.J. (1983). The Assessment of Company Solvency and Performance Using a
88 Journal of Business and Management – Vol. 16, No. 1, 2010
Executive Compensation as a
Moderator of the Innovation –
Performance Relationship1
Kathleen K. Wheatley
University of Tennessee at Chattanooga
D. Harold Doty
University of Texas at Tyler
Little research has been done to try and connect type of compensation with
the use of a specific competitive strategy. We propose that compensation
(percentage of base, bonus, options-granted, and stock for the top
management team) will moderate the innovation strategy to performance
relationship based on risk and time horizon. Analyses of panel data from
1994 to 1998 for 380 firms show that the innovation strategy to performance
relationship is moderated by bonus and options-granted compensation.
These findings suggest that implementing an innovation strategy and using
a high percentage of bonus compensation will lead to greater performance.
Alternately, implementing an innovation strategy and using a low percentage
of options granted will create the best outcome. Our findings help shed light
on the firm-specific mechanisms that enable strategy implementation.
Recent global and economic conditions have reduced the slack available to
organizations and have also heightened the need for effective strategy implementation.
Given global economic realities, it is critical that firms focus on all aspects of the
organization necessary to implement their chosen strategy. Previous research has
demonstrated that a variety of organizational attributes are critical to implementation
efforts. These include supply chain coordination, organizational design, workforce
configuration, and human resource management policies (Shaw, Gupta & Delery,
1 This study has been partially funded by the Snyder Innovation Research Center at Whitman School of
Management, Syracuse University.
90 Journal of Business and Management – Vol. 16, No. 1, 2010
2001; Slater & Olson, 2001). Firms that establish a better fit between organizational
attributes and their strategy are better able to implement the strategy and have
performance advantages as well (Allen & Helms, 2002; Gomez-Mejia, 1992; Lerner &
Wulf, 2007; Slater & Olson, 2001; Yanadori & Marler; 2006; Xue, 2007).
A second area of popular concern, particularly after highly visible corporate
collapses, bankruptcies, and accounting scandals, is the role of executive
compensation in firm performance. Much of the current compensation research has
been framed using agency theory (Fama & Jensen, 1983; Jensen & Meckling, 1976)
and has provided inconsistent findings (Barkema & Gomez-Mejia, 1998). As a result
of these divergent findings, some researchers have suggested looking outside of the
agency framework (Garen, 1994; Jensen & Murphy, 1990). We agree that limiting our
viewpoint to agency theory and considering only the direct relationship between
compensation and performance is too restrictive. This restriction is not only
responsible for some of the divergent compensation results, but has also delayed the
integration of compensation research in the area of strategy implementation.
An issue at the intersection of the implementation and compensation research is
the role of executive compensation in strategy implementation. As noted by Barkema
and Gomez-Mejia:
An unresolved issue that remains to be explored is the extent to which the design
of a CEO compensation package supports the implementation of a given strategy
or instead, helps determine a firm’s strategic choices (1998, p. 139).
The major thrust of our argument is that the appropriate executive compensation
policy will facilitate the implementation of an innovation strategy. Thus, we expect
executive compensation to moderate the relationship between innovation strategy and
firm performance. To develop our argument, we begin by briefly discussing innovation
and then exploring four elements of executive compensation as a function of time
horizon and risk.
Innovation Strategy
One way in which firms try to compete within (and buffer against) the competitive
landscape and environmental uncertainty is through the increased use of innovation,
either for preemptive reasons or in response to internal or external environmental
change (Damanpour, 1991; Hage, 1980; Thompson, 1967). A defining component of
an innovation strategy is the firm’s spending on R&D. The operationalization of
innovation as R&D spending is well-suited for the purposes of this study for three
reasons. First, R&D decisions are directly related to the implementation of an
innovation strategy. Second, R&D spending is under the direct control of the CEO and
top management team (TMT). Thus, executive compensation policies are likely to
have a greater effect on the firm’s R&D spending. Third, decisions about R&D
spending incorporate (either explicitly or implicitly) statements about risk preferences
and organizational time horizons. Each of these two constructs is used below to
characterize important elements of executive compensation.
Executive Compensation
Many of the important differences between the various forms of compensation can
be represented by two interdependent constructs: risk and time-horizon (Table 1). We
suggest that risk is a crucial factor in the compensation-performance relationship.
Risk reduction is dependent on the type of compensation provided. If executives are
not in fear of losing compensation based on performance, they may be more likely to
take on the additional strategy risk. If their compensation is tied directly to firm
performance and a loss of compensation is possible, the need to reduce their risk
would be more likely, resulting in the desire to implement a less risky strategy.
Base compensation. Quadrant 1 (Table 1) shows slow risk and short-term and is
defined as basic cash compensation that an employer provides in exchange for work
performed. Because of this low compensation risk, executives would feel more at
liberty to attempt implementation of a higher-risk strategy (i.e. base would be
92 Journal of Business and Management – Vol. 16, No. 1, 2010
considered over bonus because of the lower risk). Innovation strategy is defined as
high risk/high return (Hansen & Hill, 1991; Hitt, Hoskisson & Ireland, 1990).
Therefore, if executive compensation is not contingent upon implementation success,
as in base compensation, the strategic leadership would enjoy more freedom to
attempt to implement a higher risk strategy. Firm executives would be motivated to
implement an innovation strategy because of the transparent potential for payout.
As the proportion of base pay increases, the strategic leaderships’ comfort with risk
taking would also increase (especially when compared to bonus). An alternate
perspective on base compensation is that if no compensation risk were involved,
executives would be less likely to implement a more risky strategy due to their desire
to follow the status quo. However, as defined, innovation strategy is high risk/high
return. Anticipation of high return may be one factor that drives risk-taking and
enables the implementation of an innovation strategy.
Therefore we hypothesize,
Stock. The final quadrant, Quadrant 4 (Table 1), is stock compensation (high-risk
and long-term). As compensation risk increases, so does the strategic leaderships’ risk
aversion, making it less likely that they will attempt to implement a risky endeavor
such as an innovation strategy (Beatty & Zajac, 1994; Gomez-Mejia, 1994; Gray &
Cannella, 1997; Hill & Phan, 1991; Wiseman & Gomez-Mejia, 1988). Stock
compensation is considered pay for performance and the strategic leadership does not
have discretionary control over this type of compensation. Restricted and common
stock is awarded to executives without their making the decision to exercise (unlike
options compensation). Similar to bonus type compensation, a specified level of
performance is defined, and if the strategic leadership meets or exceeds this target,
they are rewarded (i.e. bonus is also high-risk on the short-term continuum). Because
of this lack of exercise choice and long-term characteristic, stock carries the most risk
for executives. Stock compensation is used to align the interests of the TMT with the
shareholders by providing rewards for increasing shareholder value (Jensen &
Murphy, 1990). The TMT's fear of adversely affecting present shareholder value would
deter the TMT from taking what they perceive to be high-risk actions. In the case of
high innovation strategy (high-risk), a low-risk compensation type would be preferred
(i.e. base or options). Thus,
Methods
Analysis
We employed a panel data methodology using LSDV because of our use of cross-
sectional (380 firms) as well as time series data (5-years). Two of the key problems
with panel data methodology are heteroscedasticity and auto-correlation (Hannan &
Young, 1977). In this case, ordinary least squares (OLS) are ineffective in determining
the regression estimates.
96 Journal of Business and Management – Vol. 16, No. 1, 2010
To interpret the direction of the moderating term, a graphing procedure was used
whereby the independent variable (innovation strategy) was categorized as high or
low, as was the moderator variable (i.e. high percent base compensation and low
percent base compensation) (Cohen & Cohen, 1983; Dwyer & Fox, 2000; Hitt et al.,
2001; McFarlin & Sweeney, 1992; Welsh & Dehler, 1988). This information was then
graphed, resulting in two representative lines plotted against the independent variable
(x-axis) and the dependent variable (y-axis). For example if the moderator of interest
was percent base compensation the resulting lines would be high percent base
compensation and low percent base compensation. The lines were then interpreted for
the direction of slope, as well as interception of the two lines.
Results
The correlations, means, and standard deviations of all the study variables are
presented in Table 2. Innovation strategy (measured by R&D/Sales) is positively and
significantly correlated with percent base compensation and percent options
compensation. Alternatively, innovation strategy is negatively and significantly
correlated with percent bonus compensation and percent stock compensation.
Financial performance is significantly correlated with all independent and
moderator variables.
Table 3 presents the results of hypothesis testing. The results are presented in
hierarchical fashion to better represent the effect of the interaction between
innovation strategy and compensation. Model 1 includes dummy variables for
company, year, and industry (coefficients not shown), innovation strategy, and
compensation. Model 2 expands on Model 1 by adding the interaction between
innovation strategy and compensation.
Wheatley and Doty 97
The options compensation graph (Figure 2) has the most interesting interpretation
because the high and low compensation lines intersect. This suggests that for high
innovation strategy (measured as R&D/Sales), the use of low-percent options granted
compensation is most beneficial. Alternatively, for low innovation strategy, the use of
high-percent options granted appears to provide improved financial performance.
Figure 2: Interaction Between R&D/Sales and TMT Percent Options Granted Compensation
their top management team. Companies pursing an innovation strategy should design
their compensation packages in such a way as to be heavy on bonus and light on
option type pay. For companies not focused on innovation, compensation packages
should still be heavy on bonus type pay, but also heavy on option pay.
We drew on agency theory as well as the risk and time horizon relationship in
order to frame our ideas and explain this relationship. Analyses of data from 380 firms
over 5 years support some of our assertions. Results indicated that compensation does
moderate the innovation strategy to the firm performance relationship when
considering bonus and options compensation. More specifically, we found that short-
and long-term compensation have different driving mechanisms in organization
decision-making when regarding strategy implementation.
We used a two-by-two matrix to model our arguments and show the distinction
between types of compensation. These arguments were also framed using risk to try
and understand what is driving managers’ decision-making. Our results suggest that
all strategies, whether they be low- or high-risk require short-term compensation.
This provides additional support for the focus of compensation being placed on the
time component of compensation, as opposed to the risk component. Our findings
defined this difference by showing that high-percent bonus compensation is related
to greater performance levels, no matter the strategy risk involved. We believe these
findings emphasize the pay-for-performance relationship (one that is especially
prevalent in today’s organizations) and highlight the positive benefits of bonus
compensation. Bonus compensation has the added benefit of being a clearer, more
predictable form of compensation since bonus pay occurs in the short-term. It is
easier for managers to forecast and predict short-term effects of strategy
implementation than long-term effects.
Alternatively, long-term compensation and level of risk provide different findings.
Our findings suggest that if low-risk strategies are being implemented, compensation
can be tied directly to performance in the form of long-term compensation without
any reduction in firm performance. In contrast, when high-risk strategies are being
implemented, long-term compensation must not be tied directly to performance in
order to foster better firm results. This result is an important finding and should be
considered when determining compensation packages.
limited richness. The main limitation for this study arises when measuring innovation
strategy. We were looking to capture the broadest possible conceptualization of
innovation strategy. However, using archival sources limited our measuring capability.
Although we set out to cast a broad net, the R&D measure used is skewed toward
product innovation.
Sample selection was also a problem. In the original design of the study, we
attempted to sample from 6 industries (2 low R&D intensity, 2 medium R&D
intensity, 2 high R&D intensity) providing a "balanced" sample. In addition, we
hoped to stratify the sample by size to focus on business level decisions, as opposed
to corporate level ones. The available data did not allow for this split. Of the 380
companies in the final sample, 348 fell in the greater-than $100,000,000 sales
category. Our final sample selection consisted of 10 industries. This change in the
design was necessary due to limited compensation data. The final sample was also
somewhat unbalanced. A single industry, Chemical and Allied Products (SIC 28),
considered high R&D intensity had 86 companies. At the next level of R&D intensity,
4 industries were represented with 202 companies. At the low R&D intensity end, 5
industries were represented with 92 companies.
This study moved research a step closer to understanding the intricacies of strategy
implementation. Although this study did not open the “black box” of implementation,
it did shed some light on mechanisms that enable implementation. Future studies
might look to broaden the sample with additional industries and a more balanced
design to enhance the generalizability. Investigating other strategies and the role of the
enabling mechanism holds many possibilities as well.
There are also additional opportunities in considering other enabling mechanisms.
For instance, options research is becoming much more popular and useful in
examining the incentive relationship. We merely scratched the surface looking at
options granted as representative of long-term compensation in this study. A much
more in-depth investigation of options may help to shed more light on this “special”
compensation type, especially as ethical and legal issues surround this form of
compensation. Options have many more components to consider such as type of
options granted, time period for vesting, and awards schedule, all of which may prove
to be a driving factor for the interaction between strategy and compensation.
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Wheatley and Doty 103
104 Journal of Business and Management – Vol. 16, No. 1, 2010
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