Professional Documents
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Jal Basis Info Und Analysis
Contents
The Effects of Extreme Political Acts and Political Risk on International Banking Systems 3
John L Simpson
Improvement of Insurance Company’s Service Management: An Application of Activity 19
Based on Costing/Management
Zhilin Qiao & Lin Chen
International Convergence of Chinese Accounting Based on the Concept of Scientific Development 24
Wenjun Chen & Yuanyuan Huang
A Study on the Effect and Strategy of Enterprise Annuity Preferential Tax Policy in China 27
Xiaoyun Wang, Ruiyang Zhang, Lina Liu
The Impact of Internal and External Monitoring Measures on Firm’s Dividend Payout: 31
Evidence from Selected Malaysian Public Listed Companies
Chang Aik Leng
Based on CVaR Measuring the Liquidity Risk of Open-end Funds 46
Wei Cheng, Langfen Lang,Jinyu Wang
The Study of the Optimal Mean-VaR Portfolio Selection 53
Jinwen Wu
A Graphic Model for Evaluating & Developing Employee Performance and its Empirical Study 59
Jing Du
A study on the Process Partaking of Safe Assurance for Reliability in Aviation Project 67
Qi Liang & Yukan Hou
The Research on Inventory and Its Countermeasure Analysis Method for Domestic 69
Manufacture Enterprises
Yeqing Jia & Xiaoxiao Jia
Improve the Level of Quality Management from The Actuality of Chinese Enterprise 76
Jinghua Dong
A Study on the Strategies of the Sustainable Development of China’s Ecotourism 79
Wei Chen & Wenpu Wang
Making Cents: The Role of Consumers’ Emotion in Property Valuation 84
Catheryn Khoo, Maree Thyne, Phil Harris
How to Protect the Employees’Benefits in the SOE Auction in China 90
Hai Wang & Jingjing Wang
A Study on the Development of Real Estate Investment Trusts (REITs) in China and the 97
Experiences from United States
Yifei Ma
Finance Management Based on Value Chain Management 101
Jianping Yang & Wenjing Shang
The Strategies of Japan Airlines in Europe 104
Jing Wang
Researches on Knowledge-Enabled Customer Relationship Management in Electric Power Enterprises 116
Yingchun Guo & Dongxiao Niu
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International Journal of Business and Management October, 2007
to be made with the added terrorist risk. Bram (2003) finds that the “9/11” attacks created sizeable job and income
losses in New York, but that New York’s downturn, post “9/11”, stems largely from other factors, such as the state of
the national economy and the financial markets.
Other studies examine the impact of terrorism on specific industries. Blair (2002) investigated the economics of post
“9/11” aid to airlines in the USA. Specifically Blair considered the merits of the Air Transportation Safety and
System Stabilisation Acts passed by congress immediately after “9/11”. Blair finds that the lack of profitability of
the industry was due to structural problems within the industry as well as fear of further attacks. The overall
weakness in the USA economy was also a factor. The symbolic role of government in providing a promise of
financial support to the airline industry thrust the US government into a questionable role of setting industrial policy
at a micro-level.
Ito and Lee (2003) assessed the effects of “9/11” on US airline demand. They find a negative transitory shock as
well as a negative demand shock. The latter had yet to dissipate and could not be explained by economic, seasonal
or other factors. Liu et al (2003) examined and compared the reaction of financial markets to the real estate market
post “9/11”. They find that the subsequent week of share market closure gave market participants time to reconcile
the complex impact of “9/11” on market prices. After “9/11” New York properties under-performed significantly
compared to other US properties of a similar type.
De Mey (2003) finds both direct and indirect adverse effects on the insurance industry post “9/11” due to the
substantial direct and indirect economic losses suffered by the City of New York. Brown at al (2004) examined the
role of the US government in the market for terrorism reinsurance and investigated the negative stock market
responses of affected industries prior to the enactment of the Terrorism Risk Insurance Act of 2002. Poteshman
(2003) finds, in an investigation of options market activity in the US in the days leading up to “9/11” that call option
volume ratios and call volume indicators were at typical levels but that put option volume indicators seemed
unusually high.
Maillet and Michel (2005) investigated the impact of “9/11” on USA and French share markets. Using a
methodology having a measure relying on an analogy with geophysics they find that the crisis triggered by “9/11” in
the share markets was the worst since 1987 and the ninth worst compared to major historical crises Hon et al (2005)
modelled conditional heteroskedasticity to find that international stock markets, particularly those in Europe,
responded closely to USA stock market shocks in the three to six months after the crisis of “9/11” than before. Their
evidence suggests that the benefits of international diversification in times of crisis are significantly lessened.
International spillover effects of crises in USA stock markets and currency markets have been previously examined
(For example, King & Wadhwani, 1990; Hamao et al, 1990; Susmel & Engle, 1994; Kaminsky & Reinhart, 2000). A
comprehensive literature on financial market crisis and contagion is covered in De Bandt and Hartman (2000).
Straetmans et al (2003), in their main objections to spillover literature, say that correlation measures are non-robust
to changing the underlying distribution assumptions of the return processes. They used extreme value analysis to
assess whether or not downside risk measures such as value at risk and external sector linkages were significantly
altered after “9/11”. Their evidence indicates that the potential for domestic portfolio diversification during crisis
periods decreased. In addition they find little support for a structural change in downside risk before and after
“9/11”.
Whilst the methodology of extreme value analysis is compelling, the study in this paper is unique, as it seeks to
bring political risk factors into basic international banking market models(Note 1). The developing and developed
countries selected for this study of their banking systems possess robust trade and investment relationships with the
USA. The developing country samples have demonstrated susceptibility to past currency crises and spillover effects
(For example, the South East Asian currency crisis of mid 1997).
3. Country/sovereign risk ratings compared to political risk ratings
Country/sovereign credit rating history is published by world credit risk rating agencies, such as Standard and Poor’s,
Moody’s and Fitch-IBCA. The ratings scales and assessments are comparable. The scales extend from extremely
strong ability to repay through to default. The agencies also report credit watches (short-term potential direction) and
ratings outlooks (long-term potential directions). According to various authors (For example, Simpson, 2002) the
manifestation of country risk is the inability or unwillingness of a country to service external debt. This implies that
country risk, when considered as a total risk concept, has an economic/financial component (that is, a systematic
component based on historical balance of payment data) and a human component (that is, an unsystematic or
country specific component based on opinions on political outcomes that are also influenced by social and cultural
factors).
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International Journal of Business and Management October, 2007
The economic and financial component is objectively assessed as it is based on fact. It is not avoidable as it is the
same for all. The unsystematic component is largely subjectively assessed and thus difficult to measure. However,
this component of total country risk is avoidable through diversification. Political risk is the slowing down in the
meeting of external commitments due to political factors such as riots, strikes and civil unrest. This is related to
other factors such as, the degree of corruption in government, the history of law and order, the quality of the
bureaucracy etc. These factors have much to do with the social customs and cultural history of most countries.
Simpson (2002) examined a cross sectional sample of 1995 country and international banking risk ratings and
economic and financial data and finds the following: First, the risk ratings from the leading ratings agencies are
highly positively correlated. Second, country risk ratings may be largely replicated using primarily trade
performance and debt serviceability data. Third, country risk ratings are also highly positively correlated with
international banking risk ratings, thus reflecting the importance of banks as key economic agents. Fourth, pure
political risk factors have a very small role in the ratings replication process. Finally, from a cross sectional analysis
of risk ratings alone it is not possible to tell whether or not the ratings leads or lag either financial or economic
crises.
In light of the problems within cross sectional studies, it is proposed in this study that pure political risk time series
data be combined with country-banking returns data. Pure political risk scores are available through the International
Country Risk Guide (ICRG). The basis of this scoring system is described in the section describing political risk
scores. There is a conceptual distinction to be made between country/sovereign risk and pure political risk.
4. The Literature on stock market returns and country risk
Most authors have not properly differentiated between country/sovereign risk and pure political risk. They have
analysed country/sovereign risk ratings (which have stronger economic and financial components) rather than pure
political risk (which incorporate subjectively quantified opinions on political outcomes). Despite this flaw, the
questions asked over recent years by researchers, banking regulators and investors relate to the importance of the
impact of country/sovereign risk factors on stock market returns in both developed and emerging markets. Another
question is whether or not risk ratings lead or lag financial or other crises. In other words, do the risk scores add new
information to stock markets?
Studies such as, Holthausen and Leftwich (1986), Hand, Holthausen and Leftwich (1992), Maltosky and Lianto
(1995) argued that rating downgrades are informative to equity markets, but find that upgrades do not supply
markets with new information. Cantor and Packer (1996) examined a sample of developed and emerging markets
over the period 1987 to 1994 and find that risk ratings have a significant impact on bond yield spreads. Erb et al
(1996) discussed the importance of an understanding of country risk for investors. They find that country risk
measures are correlated with future equity returns but, financial risk measures reflect greater information. They also
find that country risk measures are also highly correlated with country equity valuation measures and that country
equity value oriented strategies generate higher returns.
Diamonte et al (1996) used analyst’s estimates of country risk. They find that country risk represents a more
important determinant of stock returns in emerging rather than in developed markets. They also find that over the
past 10 years country risk had decreased in emerging markets and increased in developed markets. They speculate
that if that trend continues, the differential impacts of country risks in each of those markets will narrow.
Hill (1998) finds that in times of crisis many investors may be determined to minimise exposure to politically risky
securities until they have more information. However, after a period of calm the spreads being offered appear to be
too high relative to the risks. After more investors return to the market the spreads get less and when there is another
crisis the cycle recommences. Specifically in regard to the Asian currency crisis, Radelet and Sachs (1998)
suggested that ratings agencies are too slow to react and when they did react their ratings intensified and prolonged
the crisis.
Ferri et al (1999) argued that the agencies behave in a procyclical manner by upgrading risk ratings during boom
times and downgrading them during crises. Reisen and von Maltzan (1999) argued that risk ratings agencies
exacerbate boom-bust cycles in financial markets and put emerging markets at greater risk. Hooper and Heaney
(2001) studied regionalism, political risk and capital market segmentation in international asset pricing. They
conclude that multi index models should incorporate a regional index, an economic development attribute,
commodity factors and a political risk variable in order to more effectively price securities.
Brooks et al (2004) argued that equity market reactions to ratings changes reveal significant responses following
downgrades. Hooper, Hume and Kim (2004) find that risk ratings agencies provide stock markets and foreign
exchange markets in the United States with new tradable information, where ratings upgrade increase stock markets
returns and decrease volatility significantly. They also discover significant asymmetric effects of ratings
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announcements where the market responses are greater in the case of ratings downgrades.
Busse and Hefeker (2005) explored the connection between political risk, institutions and foreign direct investment
flows (some of which is channeled into stock markets). They find that government stability, the absence of internal
conflicts and ethnic tensions, basic democratic rights and the ensuring of law and order are highly significant
determinants of foreign investment flows.
The evidence overall supports a “9/11 spillover effect” in economies, industries, and share markets. The evidence is
mixed but, mostly points to country/sovereign risk having a significant relationship with stock market returns. Some
of the above arguments imply that financial crises, as reflected in reduced stock market returns, are the drivers of
sovereign risk ratings. If this is the case, risk ratings agencies do not contribute new information to financial and
banking markets.
5. What is pure political risk?
Economic and financial risk has nothing overtly to do with pure political risk, although it is arguable that under the
surface, the unwillingness to service external debt may be influenced by acute shortages of foreign exchange
(Bourke & Shanmugam, 1990). Pure political risk according to ICRG relates to political stability as evidenced by
expert opinions collected, collated and categorised on areas as follows: Government stability, socio economic
conditions, investment profile, internal conflict, external conflict (where the ratings ascribed are out of 12),
corruption, military in politics, religious tensions, law and order, ethnic tensions, democratic accountability (where
the ratings are out of 6), and the quality of bureaucracy (where the ratings are out of 4). According to ICRG, in each
category, the numerically higher the score or rating the lower the risk. The descriptions of the various components of
pure political risk are included in Appendix 4.
6. The data
Daily banking stock market price index data for the world-banking system, the USA-banking system and sampled
country-banking systems are converted to returns series. The USA and the country-banking returns data are
combined with political risk scores. The returns data are extracted from Datastream for the period 31st December
1999 to 17th September 2004. Political risk ratings are collected from the ICRG database over the same period.
For the purposes of this paper, the composite political risk scores (combining all of the pure political risk
components and subcomponents as referred to in Appendix 4) ascribed by ICRG out of 100 for each country, are
reversed to reflect that low numerical risk scores equate to low levels of risk and high numerical risk scores equate
to high levels of risk. That is, composite political risk ratings out of 100 are extracted for each country in the sample
and deducted from 100.
The resultant numbers are then multiplied by daily banking stock market index returns to arrive a country-political
risk value associated with that country’s banking returns. Low values of the country-banking system variable are
associated with lower political risk for a given level of return. The data are analysed using the EViews (2001)
statistical package. Note that during the analysis and findings reference occasionally is made to country-banking
systems/variables, a world banking system/variable and the USA-banking system/variable. These variables, except
for the world banking system variable, are country-banking system returns that are political risk-adjusted. The world
banking system/variable is a world banking stock index returns variable.
7. The Model and Methodology
The first step is the specification of a basic systemic international banking market model of unlagged
country-banking variables(Note 2) regressed against the world-banking stock price index returns and the
USA-banking variable.
PolRit = α i t + β i t ( Rw ) + γ it ( PolRUSAt ) + ei t
(1)
Where;
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International Journal of Business and Management October, 2007
αi t
is the regression intercept and βi t
and γit
are the regression coefficients.
PolRUSAt is political risk adjusted banking returns in the USA banking system.
By implication, all variables in the multivariate model described in Equation 2 are optimally lagged. Equations 1
and 2 are tested over the full period of the study and in a “before and after window” on the “9/11” event.
8. Preliminary analysis
Prior to testing the models, analysis is undertaken to demonstrate the basic facts and assumptions relating to the
global influence of the USA-banking system. In this part of the analysis only prices rather than risk-adjusted returns
are examined. The level series of prices are found to be non-stationary and the errors of associated regressions reveal
serial correlation and heteroskedasticity according to Augmented Dickey Fuller (ADF) unit root tests (Dickey &
Fuller, 1981), Durbin Watson (DW) tests (Durbin & Watson, 1971) and White tests. In the presence of serial
correlation, the level series regressions are regarded as spurious.
The preliminary analysis moves to first differences. Each banking system in first differenced price index values is
regressed on the world-banking system in first differenced price index values. All data are found to be stationary
processes. The errors of the regressions are found to be stationary. The errors of the regressions are not serially
correlated according to DW tests. However, heteroskedasticity is found to be persistent according to White tests.
On that basis weighted least squares replace ordinary least squares (OLS) (Note 3) regression analysis.
Table 1 shows the results of the preliminary analysis. The ranking of global influence in banking is shown in
Column 2. The USA model has the greatest explanatory power. The results demonstrate that, in an overall
comparison of the selected country-banking systems, the developed country system regressions (particularly those
for the USA and the UK) have higher adjusted R square values, higher regression coefficients, higher t statistics and
lower standard errors than the developing country systems. The analysis of prices is a useful initial indicator of the
importance of the USA-banking system in a global context.
9. Main findings
The first step following preliminary investigation is to undertake regression analysis of unlagged data testing the
specified models that incorporate political risk ratings. Weighted least squares regression analysis (See Equation 1)
of unlagged data is examined initially for the full period of the study by regressing each country-banking system
variable on the world-banking system and the USA-banking system variables.
9.1 Regression analysis of unlagged data
9.1.1 Full period
Table 2 shows the results of the analysis, testing the full period of the study from 31st December 1999 to 17th
September 2004. These results demonstrate that there are statistically significant interrelationships between each
country-banking system, the world-banking system and the USA-banking system over the full period of the study.
The sizes of the adjusted R square values, coefficients and t statistics indicate that the developed country-banking
system regressions of the UK and Australia exhibit greater explanatory power than the developing country-banking
systems. The signs of the coefficients and t statistics show that there is a positive relationship between
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country-banking system variables and the world-banking system returns variable. That is, higher levels of
world-banking returns are associated with higher levels of country-political risk-adjusted banking returns. This is
consistent with theory in the risk return tradeoff and confirms greater financial integration of the developed
country-banking systems with the USA system.
A negative relationship exists with the country-banking system variable and the USA-banking system variable. That
is, higher levels of political risk-adjusted banking returns in the USA-banking system are associated with lower
levels of political risk-adjusted banking returns in the country-banking systems. The stronger interaction is also with
the developed banking systems of the UK and Australia. As political risk in the USA-banking system increases, it is
evident that perceived political risk in other sampled country-banking systems in the UK, Australia and in South
East Asia reduces for a given level of banking returns. The study is then expanded to the before and after window of
“9/11” to demonstrate the spillover effect.
9.1.2 Structural breaks tests for “9/11”
Each regression is tested at the 5% level of significance using Chow forecast and breakpoint tests including “9/11”
as the date for testing. The values of the F statistics and log likelihood ratios and their significance provide
confirmation of structural breaks in the data for each country-banking system regression except for that of the
Philippines.
9.1. 3 Periods before and after “9/11”
Table 3 shows the results of the regression analysis before and after the “9/11” attacks and compares the results to
those from Table 2. The interest lies in the periods before the terrorist attacks from 31st December 1999 to 10th
September 2001 and after the terrorist attacks from the 12th September 2001 to 17th September 2004. In each case,
for both developed and developing country-banking systems, the explanatory power of the regressions is greater in
the period after “9/11”. This again is indicated in the values of the adjusted R square values, coefficients and t
statistics. Note that the results for the Philippines and the Malaysian banking systems interacting with the
world-banking system and the USA-banking system are not significant in the period before “9/11” but, are
significant in the period after “9/11”. The interaction of the developed country-banking systems of the UK and
Australia is greater than that for the developing country-banking systems in the periods before and after “9/11” and
during the full period of the study.
It is evident that the “9/11” attacks induced structural changes in banking returns and political risk data, because
after “9/11” the interrelationships in political risk and banking returns between country, world and USA banking
systems are stronger. Spillover effects are also demonstrated. After the attacks there is a stronger positive
relationship between world-banking returns and the country-banking system variables. This effect remains stronger
in the developed country-banking systems of the UK and Australia. After “9/11”, there is a stronger negative
relationship between USA-political risk associated with USA-banking returns and political risks associated with
country-banking returns.
9.2 VAR: Causality Analysis of Lagged Data
Equation 2 is analysed in VAR based Johansen cointegration and Granger causality tests to confirm exogeneity and
to verify the regression specification in Equation 1. The VAR stability condition checks in each case shows that no
roots lie outside the unit circles and that each of the VARs satisfy the stability condition check. Lag order selection is
undertaken by examination of the maximum value of Schwartz information criteria (Note 4) . Unit root tests (ADF
and PP) show that the study is dealing with integrated non-stationary processes. Evidence of a long-term
cointegrating relationship is found in each country-banking model. However, the more important objective of this
study is to examine exogeneity. Tests indicate an optimal lag order of 1-2. Using this VAR lag order, VAR based
pairwise Granger causality/block exogeneity Wald tests are undertaken over the full period of the study, and then for
the periods before and after “9/11”, to confirm exogeneity. Significance levels were set at 5% for the sizes of the
respective Chi Square values (See Appendices 1 to 3).
9.2.1 Full period
Granger causality results are summarised in Appendix 1. It is noted that, in each country-banking system VAR, the
USA-banking system Granger causes the world-banking returns system. In addition, the world-banking system does
not significantly Granger cause the country-banking systems except in the cases of those for Thailand (at the 5%
significance level) and the Philippines (at the 1% significance level). In the case of the UK banking system VAR, the
USA-banking system is exogenous (significant at the 1% level). In the case of the Australian banking system VAR,
the USA-banking system is exogenous (at a significance level of 1%). In the cases of the Thai and Philippines
banking system VARs there is no significant evidence of exogeneity of the USA-banking system. In the case of the
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International Journal of Business and Management October, 2007
Malaysian banking system VAR, the USA-banking system is exogenous, but the evidence is not highly significant at
the 10% level.
9.2.2 Period before “9/11”
Granger causality results are summarised for the period before “9/11” in Appendix 2. Over the period from 31st
December 1999 to 10th September 2001, the USA-banking variable is exogenous in the UK, the Australian and the
Philippines banking systems (in the latter two cases the significance level is less, at 5%). There is no significant
Granger causality running from the USA-banking system to the Thai or Malaysian systems. The USA-banking
system and the world-banking system are exogenous when considered together interacting with each
country-banking system (at significance levels of 1%). In each country-banking system VAR, the USA-banking
system Granger causes the world-banking system at a significance level of 1%. In the cases of the Philippines and
the Malaysian banking systems Granger causality lies with the world-banking system at significance levels of 1%
and 10% respectively.
9.2.3 Period after “9/11”
Appendix 3 summarises the results of Granger causality tests for the period after “9/11”. In each country-banking
system VAR, Granger causality runs from the USA-banking system to the world-banking system (at significance
levels of 1%). In addition, the USA-banking system is exogenous (significant at the 1% level), when considered
separately to the world-banking system, in each country-banking system except that of the Philippines. In the case of
the Thai banking system, the significance level of the exogeneity of the USA-banking system is less, at 5%. In the
cases of the Philippines and Malaysian VARs, the world-banking system is exogenous with significance at the 1%
level. In each country-banking system VAR, exogeneity lies with the world-banking system and the USA-banking
system when these variables were considered together (with significance levels at 1% in each case). These
relationships are stronger than before “9/11”.
10. Conclusion
The “9/11” terrorist attacks were tragic examples of extreme political acts. The evidence of studies finding adverse
macro-economic and micro-economic, industrial and spillover effects are generally supported in this paper. For
example, macro and micro-economic effects (Blomberg et al, 2004; Anderton & Carter, 2004; Krug & Reinmoeller,
2003; Bram, 2003); industrial effects in the airlines industry (Blair, 2002; Ito & Lee, 2003); in real estate (Liu et al,
2003); in insurance (de May, 2003); in reinsurance and stock markets (Brown, 2004); in options markets
(Poteshman, 2003); in stock markets (Mailler & Michel, 2005; Hon et al, 2005) and in spillover affects. Banks are
key economic agents. Banking system returns are also domestic and international economic indicators. This study
differs from other studies in that an international banking market model has been adapted to incorporate pure
political risk ratings (reflecting political, cultural and social factors) rather than country/sovereign risk ratings
(largely reflecting finance and economic factors). For example, country/sovereign risk indicators were used by
Holthausen and Leftwich, 1986; Hand, Holt and Leftwich, 1992; Cantor and Packer, 1996; Erb, Harvey and
Viskanta, 1996. Fewer studies have more appropriately examined pure political risk effects in investment flows
(For example, Busse & Hefeker, 2005). The study expands on the use of single period regression models by also
specifying bivariate models of optimally lagged data in order to test for cointegration and exogeneity.
When pure political risk-adjusted country-banking returns are incorporated into basic banking market models it is
shown that the USA banking system is a powerful exogenous force in global banking. It is demonstrated that
spillover effects of an extreme terrorist act in the USA are felt in related banking systems and economies. The
models possess greater explanatory power after ‘9/11” than before. In addition, it is shown that the spillover effects
are greater in developed banking systems than in the developing country-banking systems studied over the full
period of the study as well as in the periods before and after “9/11”. The spillover effects of “9/11” had not
dissipated up to late 2004. Pure political risk-adjusted banking returns of the USA included in country-political risk
adjusted returns models, considered with world banking stock returns, are exogenous. Therefore, new information is
added by these variables which, should be of use to risk managers making portfolio diversification decisions and for
banking regulators as they calculate economic and regulatory capital benchmarks of banking system safety.
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Notes
Note 1. The basic international banking market models in this paper have been derived from the work in the area of
portfolio theory by Markowitz (1959) and from the work in Capital Asset Pricing Models by Sharpe (1964), Roll
(1977) and Ross (1976).
Note 2. Banking System Returns = Rt = ( Pt − Pt −1 ) . Where P represents the banking share price index values at times
Pt −1
t and t-1.
Note 3. Deemed more suitable in the presence of heteroskedasticity of an unknown form.
Note 4. Patterson (2000) suggests that Swartz information criteria may be used in preference to other criteria such as
Akaike to simultaneously estimate lag order and cointegrating rank. Alternatively an information criterion such as
Akaike or Swartz can be used to determine the lag order and then the Johansen procedure (Johansen, 1988) can be
used to estimate the cointegrating rank. This paper uses both the Swartz criterion and the Johansen test to estimate
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Note: All t statistics are significant at the 1% level except those marked ** where significance is at the 5% level. The
ranking is according to explanatory power in the adjusted R square and the t statistic values.
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Note: All values are significant at the 5% level. * Denotes not significant.
Appendix 1. VAR Pairwise Granger Causality/Block Exogeneity Wald TestsFull period of study
Sample: 12/31/1999 9/17/2004
Included observations: 1229
Dependent variable: PRUK
Exclude Chi-sq df Prob.
WORLDR 3.039567 2 0.2188
PRUSA 50.74506 2 0.0000
All 110.3187 4 0.0000
Dependent variable: WORLDR
PRUK 1.316913 2 0.5176
PRUSA 26.49546 2 0.0000
All 33.28181 4 0.0000
Dependent variable: PRAUST
WORLDR 3.986414 2 0.1363
PRUSA 20.49746 2 0.0000
All 109.4474 4 0.0000
Dependent variable: WORLDR
PRAUST 1.671727 2 0.4335
PRUSA 32.14301 2 0.0000
All 33.64589 4 0.0000
Dependent variable: PRTHAI
WORLDR 8.462437 2 0.0145 *
PRUSA 3.895643 2 0.1426
All 33.62192 4 0.0000
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Note: All results are significant at the 1% level except for * denoting significant at the 5% level and ** denoting
significance at 10% level.
Appendix 2. VAR Pairwise Granger Causality/Block Exogeneity Wald Tests
Period before “9/11”
Sample: 12/31/1999 9/10/2001
Included observations: 440
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Note: Significance levels are at 1%. * denotes significance at the 5% level. ** denotes significance at the 10%
level. *** denotes not significant.
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Appendix 4. Definitions of Components of Pure Political Risk Scores (Sourced form ICRG, 1995)
Government stability ratings by ICRG are an assessment of a government’s ability to remain in office by carrying
out declared policy plans. The subcomponents of this factor are government unity, legislative strength and popular
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support. Socio-economic conditions relate to pressures that conspire to constrain government action or to fuel social
dissatisfaction. The subcomponents in this category are the level of unemployment, the degree of consumer
confidence and the level of poverty.
The investment profile factor affects the risk to investment not covered by other political, economic and financial
components and is made up of contract viability and expropriation, profit repatriation, and payment delays.
Internal conflict is an assessment of political violence in a country and its impact on governance. The highest rating
means that there is no armed or civil opposition to the government and the government does not engage in arbitrary
violence (either direct or indirect) against its own people. Under this rationale the lowest scores would apply to
those countries where there is ongoing civil war. The subcomponents of this risk factor are thus, civil war or coups
threat, terrorism or political violence, and civil disorder.
External conflict measures are an assessment of the risk to the incumbent government from foreign action, which
includes non-violent external pressure (for example, diplomatic pressure, withholding of aid, trade restrictions,
territorial disputes, and sanctions) to violent external pressure (such as, cross-border disputes and all-out war). The
subcomponents of this category of pure political risk are cross-border conflict, and foreign pressures.
Corruption is an internal assessment of the political system. Corruption distorts the economic and financial
environment and reduces the efficiency of government and business in the way the foreign direct investment is
handled. Corrupt practices enable people to assume positions of power through patronage rather than ability. By so
doing, an inherent instability is introduced into the political process. Examples of corruption include special
financial payments and bribes, which ultimately may force the withdrawal of or withholding of a foreign investment.
However, excessive patronage, nepotism, job reservations, “favour for favours”, secret party funding, and
suspiciously close ties between government and business have a lot to do with corruption. A black market can be
encouraged with these forms of corruption. The potential downside is that popular backlash may lead to the
rendering of the country ungovernable.
Military in politics is a problem because the military are not democratically elected. Their involvement in politics is
thus a diminution of accountability. Other substantial ramifications are that the military becomes involved in
government because of an actual or created internal or external threat. Government policy is then distorted (for
example, defence budgets are increased at the expense of other pressing budgetary needs). Inappropriate policy
changes may be a result of military blackmail. A full-scale military regime poses the greatest risk. Business risks
may be reduced in the short-term but in the longer-term the risk will rise because the system of governance is
susceptible to corruption and because armed opposition in the future is likely. In some cases, military participation
will represent a symptom rather than a cause of higher political risk. Religious tensions emanate from the
domination of society and or governance by a single religious group that seeks to replace civil law and order by
religious law. Other religions are excluded from the political and social process. The risk involved in such scenarios
involves inexperienced people dictating inappropriate policies through civil dissent to outright civil war.
The law and order components are assessments of the strength and impartiality of the legal system and popular
observance of the law respectively.
Ethnic tensions relate to racial, nationality or language divisions where opposing groups are intolerant and unwilling
to compromise.
The democratic accountability component is a measure of how responsive government is to its people. The less
responsive it is the greater the chance that the government will fall. This fall will be peaceful in a democratic
country but possible violent in a non-democratic country. The ratings by ICRG differentiate between alternating
democracies(Note 5), ranging through denominated democracies, de facto one party states, de jure one party states,
to autarchy(Note 6). In these ratings the lowest risk applies to alternating democracies and the highest risk applies to
autarchies.
The institutional strength and the quality of the bureaucracy is a measure that reflects the revisions of policy when
governments change. Low risk in this area applies to countries where the bureaucracy has the strength and expertise
to govern without major changes in policy or interruptions in government services. That is, bureaucracies have a
degree of autonomy from political pressure with an established independent mechanism for recruitment and training.
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future situation.
(3) Costs are calculated according to insurance varieties. Unlike manufacturing enterprise, insurance company does
not compute the cost of single policy. It only concerns the cost of single variety. Insurance cost includes risk cost
and risk operating cost. So policy cost also includes the policy’s risk cost and risk operating cost. But risk cost of per
policy is very difficult to calculate because of its uncertainty. Even if we get the risk operating cost, we still cannot
get the whole cost of a policy. So we only compute cost of variety, not cost of policy.
Other characteristics of cost calculation in insurance company include the objectivity of risk cost, cost’s dependence
on volume, cost controllable variance, etc.
3. Activity based analysis in insurance company
Activity-based costing/management is an activity-focused costing and management system which provides
relatively accurate information on product cost and increases the scientific nature, effectiveness of decision-making
and planning through identification, accounting of activity cost and choice of cost drivers. At the same time, the
following up of product-related activities provides valuable information for the elimination of “non-value-added
activity”, improvement of “value-added activity”, optimization of “activity chains” and “value chains”, and increase
“customer value ”. As a result, loss and waste are minimized, and the management of a business is improved (Wang,
Jin & Ke, 2000, pp.121-155).
The aim of activity based costing is to calculate the resources consumed by all kinds of activities and make their
prices (Robert & Anthony, 1999). Its basic principle is that products consume activities and activities consume
resources. Different from conventional methods, the focus of ABC is on activity. It first pools resource cost to
activities based on resource consumption. Then it allocates activity cost to output based on activity drivers. In
practice, there are five steps to follow (Wang, 2001):
(1) Set up each activity and judge what important activities are, which need to be further subdivided and which not,
which can be combined into other activities.
(2) Collect resource cost, and pay attention to the resources associated with product variety and those having low
relevance to traditional assignment benchmark.
(3) Combine sub-activities, set up activity centers to develop homogeneous cost pools.
(4) Select representative activities for centers to determine the allocation rates of cost pools.
(5) Allocate cost to products to obtain product cost.
When calculating costs of single insurance variety, we must compute activity costs and sum them up. So first it is
necessary to understand all the activities in insurance operation. Then analyze cost drivers that will influence each
activity, and compute its costs.
Insurance operation is a special activity with the character of economic indemnification. It bases on the law of large
numbers and plays the role of compensation and payment. Insurance companies have developed a lot of insurance
varieties. In General, the main process of insurance operation includes product design, business development,
insurance acceptance, disaster prevention, and claim settlement. Figure 1 shows the details:
We can identify the activities in insurance operation in light of the course and study cost drivers, as shown in table 1.
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These activities are important ones in insurance operation. In practice, there will be hundreds or even thousands of
activities in an insurance company. If establishing corresponding cost pools and choosing cost drivers respectively,
the results will be more accurate, but the cost of implementing ABC will also increase. So in terms of cost-benefit
rule, we pool some drivers under reasonable precision in calculation.
Table 1. Materials of activity centers in insurance operation
Activity centers Cost pools Cost drivers
product design design outlays labor hour
printing expenses book volume
marketing
overhead expenses labor hour
business
direct preparing expenses labor hour
development channel
agent agent costs amount of policy
construction
broking commission amount of policy
shaping the course overhead expenses variety of insurance
insurance
information collection costs of collection beneficial variety
acceptance
management overhead expenses labor hour
marketing, consultation related expenditure beneficial variety
disaster prevention activities activity costs beneficial variety
prevention amount of the
safety inspection inspection costs
inspected
case acceptance outlays for acceptance case volume
spot investigation outlays for investigation Times of investigation
responsibility
claim overhead expenses labor hour
distinguishing
settlement
loss estimation overhead expenses labor hour
indemnity calculation overhead expenses labor hour
end the case overhead expenses labor hour
including charges for use of
other operating costs labor hour
assets
Pooling cost drivers means that the activities with similar characters are combined to form a homogeneous activity,
with their costs into homogeneous cost pools. This method can greatly reduce the costs of implementing the ABC
system (Wang, 2001). According to this theory, we pool the cost drivers of homogeneous activities in table 2.
Table 2. Activity and its driver before and after combination
Course of insurance Activity and drivers before Activity and drivers after
operation combination combination
direct (labor hour) direct (labor hour)
business development agent (amount of policy)
indirect (amount of policy)
broking (amount of policy)
shaping the course (variety of
insurance)
preparation(beneficial variety)
insurance acceptance information collection (beneficial
variety)
management (labor hour) management (labor hour)
marketing, consultation (beneficial
disaster prevention marketing(beneficial variety)
variety)
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implementing TQC (Total Quality Control) will reduce checking cost effectively and improve activity based
management of insurance company.
Concerning these non-value-added activities, companies should make a full consideration of quality and cost when
designing the product. Both new products and derivative ones should be redesigned to reduce or eliminate the
non-value-added activities.
5. Conclusion
The purpose of cost management in insurance company is to control the variety of expenditures, reduce costs
(especially risk operating costs), and well manage all kinds of financial relationship. The paper examined the
business process of insurance company with the theory of activity based costing/management. It analyzed whether
the activity should be taken into the course of operation or not. Then it made a judgment on activity’s increment and
validity. Non-value-added activities in insurance operation were also discussed, such as activities of information
collection, safety inspection, and policy check. Some suggestions of service management were put forward at the
end.
References
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Niu, X., Miao, J. & Yin, G. (1998). The application of activity management. Enterprise Management. 3, 23-24.
Robert, K. & Anthony, A. (1999). Advanced Management Accounting. Dalian: Dongbei University of Finance &
Economics Press.
Sun, L., Zhu, W. & Wan, D. (2000). Study of the Organization Incentive Implement Model to R&D Force. Systems
Engineering. 5, 32-36.
Wang, P. (2001). Research on Theory and Application of Activity-Based Costing. Dalian: Dongbei University of
Finance & Economics Press.
Wang, P., Jin, Q. & Ke, D. (1999). Activity-based costing, activity management and possibility of its application in
China. Accounting Research. 8, 37-40.
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Accounting and Finance Review. 2, 121-155.
Wang, X. (2001). Conspectus of Insuracne. Beijing: Central Radio and TV University Press.
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complete and mature economic management and accounting system, and the accounting techniques have long been
adopted. Thus, they already have reached a high professional level and showed perfect ability in professional
judgment, while the developing countries are just on the opposite.
2. Ways of convergence
2.1 Britain
International Accounting Standard Committee (IASC) and International Accounting Standard Bureau (IASB)
headquarters are located in London, and their first presidents are British. England always supports international
accounting standard. Now, as a member of EU and IASB, it is much more in favor of the convergence of its own
accounting standard to the international one. British Accounting Standard Bureau has cooperated with IASB to
develop several standards. At present, it proclaims that it will only issue some related guides about the application of
the international standard in England, but will no longer develop or issue new standard.
2.2 America
In view of the influence of and pressure from American economy, in 1995, IASC and the International Organized
Securities Committee (IOSCO) reached an agreement on the core standard leaning to the US’s benefit, which turns
the American hostility to cooperation with IASC. In October, 2002, IASB signed an official agreement with the US’s
Financial Accounting Standard Bureau (FASB) clearly confirming respective duties when implementing qualified
and comparable accounting standard, which means that international accounting standard fully represents the US’s
will, thus encouraging the big economic power, the US, to advance the convergence in order to maintain its benefit.
2.3 The European Union
European Union is a politically and economically Supra-National alliance. With the successful practice of unified
market, money and economic policy, the EU is planning to establish a united financial market, which requires a
unified accounting standard, for the appliance of international standard will be most economical and effective. In
June, 2000, the EU made a stratagem, including establishing a unified accounting standard, to eliminate barriers in
securities dealing. Soon after the core standard developed by IASC passed evaluation in May, 2000, the EU took an
active attitude in adopting the international standard in June, requiring its 7000-odd listed companies to organize the
financial report according to the standard from 2005, and recommending implementing it in all firms which are
going to be listed in Europe before 2007.
3. Trend of Developing
The concept of scientific development is about the total and basic ideas about the essence, goal, connotation and
requirement of development. As a guiding ideology, the concept of scientific development determines the route of
development and instructs China’s modernization. Its core is: comprehensiveness, harmony and sustainable
developing. From the point of the development of national economy and society, comprehensiveness involves the
development of economy, society, politics, culture and ecology altogether; harmony suggests that development in all
aspects should link up, promote each other and interact in phase; sustainable developing asks us to take into account
not only this generation’s but also our offspring’s need and development.
The concept of scientific development is the guiding ideology not only of the national economy and social
development, but also of accounting. To introduce the concept of scientific development to the convergence of
accounting means to park comprehensive, harmonious and sustainable development of accounting in a big
concordant system of international environment, economy and society, to examine all the manners of convergence,
to enable the convergence to show consideration for the benefit of all sides, at present and in the long run, and
finally to establish a sustainable and stable mechanism.
3.1 Convergence of international environment
Things’ intrinsic changing mechanism should comply with the change of external environment. Accounting is a
product of the economic environment, and accounting standard should have a stronger applicability in the
environment.The international accounting standard holds with mature market economy,
clearly-established ownership, normative market competition and government service, and qualified personnel etc.
Based on this background, we should try to understand the current environment, adapt to the changeable
environment, and make full use of the changed environment. Take the XBRL developed by US for example. It
converts other financial reports to new ones in the light of the international or its own accounting standard, creating
a good environment for the convergence. Meanwhile, the Chinese Securities Supervisory Association also requested
share B to be listed according to Chinese or international accounting standard, which has greatly shortened its
distance to the international standard.
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tax because the tax deducted from the income can avoid the taxation with upper tax rate, so the preferential tax of
enterprise annuity will offer the conveniences to tax avoidance for the high earners. At present, the enterprises and
groups which have requirements or potential requirements to the enterprise annuity can be divided into four kinds.
The first kind is those large-sized state enterprises represented by the electric power, telecom, petrifaction and bank.
The second kind is those stock share enterprises, especially, the listed enterprises. The third kind is those
transnational enterprises and three-capital enterprise influenced by the foreign corporations. The fourth kind is those
mature large and middle-sized enterprises. The enterprise annuity plans usually are adopted by those large-sized
enterprises as the measure of human resource management, because the preferential tax policy of enterprise annuity
can make the large-sized enterprises obtain the national economic supports. And because the extent and depth that
the small-sized enterprises take part in the enterprise annuity plan are much smaller than the large-sized enterprises,
it makes the employees of small-sized enterprises and large-sized enterprises enjoy unfair treatments in the process
of income distribution. At the same time, in the condition of relative invariable financial expenditure, because of the
taxation decrease of personnel and industries with high income, it must aggravate the low earners’ taxation burdens.
It is obvious that in a way, the preferential tax of enterprise annuity makes “wealthier richer, pauper poorer”, and
increase the odds of rich and poor.
2.3 Enterprise effect
The capital resources of enterprise annuity are mainly from the employers’ payments, so the enterprise annuity is an
enterprise income distribution project in itself. To enterprises, the annuity when it is established in the beginning
stage may increase the engaging cost of the enterprise. But from another view, to the modern enterprises, the
developments of knowledge economy and information economy pursue talents as if a thirsty man pursues water. So
the enterprise annuity has the natural advantages to attract talents and stabilize employees. The enterprise annuity
plan corresponds to a “contractual bargain” between the enterprise and employees, and becomes a policy tool to
invest human capital and performs important functions in the aspect of human capital management. In such a
situation, the preferential tax policy definitely becomes the main power to improve the development of annuity.
2.4 Individual welfare effect
To the individual employee, the enterprise annuity plan can not only make employees enjoy the benefits of annuity
increment, but also its measure of preferential tax brings economic income. As a remuneration arrangement, the
enterprise annuity can increase the employees’ individual welfare level. In the system arrangement of compulsory
annuity, to the annuity paid by the employer and employees, the employees’ payments can obtain a part of payments
suited by the employer, but the one key point is the national preferential tax policies which can make employees
decrease the payout of income tax. In addition, the preferential tax policy can encourage the social members reduce
their shortsighted actions, reasonably distribute incomes in their individual life-cycles, lighten their financial
pressures in their old ages and consequently enhance their individual welfares.
3. Improvement of enterprise annuity preferential tax system in China
3.1 Keeping the fairness of preferential tax policy
The fairness of preferential tax policy is mainly embodied in two aspects. On one side, it should keep the coherence
of the enterprise annuity taxation policy and the taxation policy of basic endowment assurance. Both the basic
endowment assurance and the enterprise annuity belong to the national endowment security system, so they have no
big differences in the constitution of taxation policy. The enterprise annuity should comply with the harmony to the
basic endowment assurance system, deduce the pressures of financial payout assumed by the country in the
problems of population aging, offer the preferential tax to enterprise annuity, and in the same time, could not
seriously lose the incomes of financial taxation and cause the nation provide complete taxation “shelter” to
enterprise. On the other hand, it should do justice to the different areas, different enterprises and employees with
high and low salaries in the interior of the enterprise. The practice of enterprise annuity preferential tax can easily
induce the problems of unfair distribution and differences increase in the social income distribution. Base on the
actuality that the employees with high wage have great requirements for the preferential tax pension plan it should
make a definite limitation to the proportion of preferential tax when the enterprises enjoy a definite preferential tax,
so it can ensure the social fairness and implement the distribution object of financial income.
3.2 Mode choice of enterprise annuity preferential tax
When the government of one country plans to impose the enterprise annuity, it mainly comes down to three taxation
stages which include payment stage, investment stage and drawing stage. If we combine these three taxation stages
in the plan of enterprise annuity, we can get eight kinds of taxation combinations (seen in Table 1), where T
represents the tax and E represents the exemption.
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International Journal of Business and Management October, 2007
In Table 1, the TTT mode is the strictest mode which imposes every stage. In this mode, the employees have the
lowest annuity level. The EEE mode completely exempts three stages from the taxation, and the increase rate of net
worth of enterprise annuity is definitely most, but the national taxation loss is the most too and can not implement
the fairness in the taxation. The mutual characteristic of four kinds of preferential tax mode including TEE, EET,
TTE and ETT is that they all have no repeat taxation. The TEE and EET only impose the principle of the enterprise
annuity and don’t impose the yield, and the former impose the tax in the stage of payment and the latter impose the
tax in the stage of annuity withdrawing. The ETE mode doesn’t impose the payment of enterprise annuity and
treatment, which only imposes the yield, and the preferential degree of taxation is only inferior to the EEE mode. On
the contrary, though the TET mode exempts the tax to the yield, but because it repeatedly imposes the enterprise
annuity, so the employees’ increment rate is very low. In the experiences of developed countries, most countries
adopt the EET mode which allows the enterprise and employees deduct the payment from the pretax income and
derate the earnings of fund operation and yield of enterprise annuity, and only imposes the personal income tax
when the annuity is withdrew. The EET mode will decrease a part of present taxation income of the government and
induce the pressures to the governmental finance, but it is propitious to enhance the enthusiasm that the employer
and employees establish the enterprise annuity plan, implement the “engine” function of the preferential tax to a
certain extent, and can effectively promote the development of the enterprise annuity plan. In the 15 countries of
European Union, 11 countries adopt the EET mode, and the rapid developments of enterprise annuity market in
these countries are closely relative with the taxation system arrangement of the enterprise annuity. Therefore, China
should implement the EET mode to the enterprise additional annuity plan and regulate the limitation of preferential
tax on the payment of enterprise annuity.
3.2.1 Aptly increasing the proportion of preferential tax in the payment stage of enterprise annuity
The definition of the proportion should consider two factors. The first one is the payment rate that the enterprise
annuity plan needs when it achieves the perfect annuity substitution rate. The second one is the payment rate that the
finance can endure.
The substitution rate is the ratio between the annuity incomes and the wage income, and it represents the substitution
level of annuity incomes to the employees’ wage income. At present, the object substitution rate of basic endowment
assurance is positioned at 60% and the object substitution rate of enterprise annuity is positioned at 20%. According
to the researches of Labor & Social Security Research Institute, 14% should be the biggest deducted proportion of
the pretax enterprise payment, and the proportion should be about 10% according to the two situations of retiring
age of 55 and 60 (seen in Table 2 and Table 3).
Secondly, the payment rate that the finance can endure should be also considered. If it only considers the influence
of pretax deduction of enterprise payment to the enterprise income tax and doesn’t consider the financial income
effect of the yield exemption to the fund of enterprise annuity, the influencing degree of the exemption policy of the
enterprise payment to the enterprise income tax can be computed by the following formula.
The deduction of enterprise income tax = employees’ wage amount of selected industry × the biggest pretax
deduction proportion of enterprise payment × rate of enterprise income tax.
In 2002, the total revenue income of China was 1763.645 billion Yuan, where the enterprise income tax was 308.279
billion Yuan, and total amount of employees in China was 105.58 million, so the personnel average wage in China
was 12.422 thousand Yuan. If the preferential tax policy comes on, on the assumption that the 20% of the employees
take part in the enterprise annuity plan and their wage level is the double than the average wage level, the pretax
deduction proportion of the enterprise payment is 10%, so we can get:
The deduction of enterprise income tax = 10588 × 20% × 12422× 2× 10%× 33% = 17.312 (billion Yuan).
That is to say the income deduction of the enterprise income tax corresponds to the 0.98% of the total revenue
income in that year, and the deduction amount of revenue is still in the range of the acceptability of the finance.
3.2.2 Conditionally exempting the tax from the yield of enterprise annuity and imposing the withdrawing stage of
enterprise annuity
It conditionally exempts the tax to the yield of the enterprise annuity, which means we can set up the biggest degree
of the tax-free to prevent the function that the employees with high salary can enjoy because of the tax-exemption
and prevent the extending of income differences among employees. At the same time, the enterprise annuity is the
supplement of the basic endowment assurance and it impose the tax in the withdrawing stage of enterprise annuity to
avoid the tax avoidance or tax dodging and implement the tax-burden fairness.
References
Heping. (2002). System and Management Regulations of China Enterprise Annuity. China Labor & Social Security
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Vol. 2, No. 5 International Journal of Business and Management
Publishing House.
Linyi. (2002). American Personal Pension System. Beijing: Beijing University Press.
Wang, Yanzhong. (2005). System design and policy selection of China enterprise annuity. Social Security System.
No.4.
Table 2. Substitution rate of combination in the condition of retiring age of 60 and different payment proportions
Deducting proportion Expectant yield Substitution
Wage Increasing rate (%) Retiring age
before tax (%) rate (%) rate (%)
4 4 8 60 10
4 8 8 60 19
4 10 8 60 24
Table 3. Substitution rate of combination in the condition of retiring age of 55 and different payment proportions
Deducting proportion Expectant yield Substitution
Wage Increasing rate (%) Retiring age
before tax (%) rate (%) rate (%)
4 8 8 55 11
4 10 8 55 14
4 14 8 55 20
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International Journal of Business and Management October, 2007
There has been very little factual research published on Malaysia’s current position on corporate governance
(Thillainathan, 1998). The East Asian crisis, which began with the devaluation of the Thai Baht on 2 July 1997 has
opened many debates concerning standards of corporate governance in East Asia (Jomo, 1998). There are certain
fundamental weaknesses such as the under-developed capital market and the high concentration of corporate
ownership in the hands of a few wealthy families (ADB, 2000). The corporate ownership structure in Malaysia,
characterized by significant family control and interlocking shareholdings among affiliated firms, may have left
insiders with excessive power to pursue their own interests at the expense of minority shareholders, creditors and
other stakeholders. The high concentration of ownership reduces the effectiveness of some important mechanisms
of shareholder protection, such as the system of the board of directors, shareholder participation through voting
during shareholder meetings and issues of transparency and disclosures. It may also have been one of the major
sources of resistance to any reform initiatives in these areas.
The economic ‘Tigers’ in East Asia, with the exception of Hong Kong, all pursued policies similar to those of Japan
and much of continental Europe (Walters, 1998). Industry was subject to government guidance, credit to state
allocation, and the spoils of success were evident in the wealth of politicians and their party cronies. These were
all attributes of a third world country: what made them exceptional was the growth until 1997 (Yamazawa, 1998).
The ongoing crisis has revealed the serious flaws in the structure of these economies – the fragility of the banking
system, the need for transparency, the over-concentration of power in a few hands, the weakness of corporate
financing, the reliance on loan or bond finance rather than equities, manipulation of markets, and the misdirection of
investment by politicized decisions (Walters, 1998).
A system of implicit guarantees led to incentives to choose the highest return investment regardless of risk, and
crony capitalism and supportive bad policies led to poor credit decisions in the banking system and misallocation of
resources. The well established long-term relations between companies and banks turned debt into quasi-equity.
This relationship suggests lax credit allocation processes, possibly supporting projects of politically connected
individuals and organizations, without reference to project viability (Krugman, 1998). The key foundations that
ensure the success of capital markets - transparency, corporate accountability and governance, and proper risk
pricing via the transmission of market signals - were lacking and were therefore underlying deficiencies of the
performance of corporations in Asia (Sycip, 1998; Jomo, 2001).
In Malaysia, dispersed shareholding and management-control are uncommon and ownership concentration is the
order of the day (Thillainathan, 1998). The three largest shareholders in Malaysia owned some 54 per cent of the
shares of the ten largest non-financial private firms and 46 per cent of the shares of the ten largest firms. This
situation is not very different from that in the other Asian countries (La Porta, deSilanes, Shleifer and Vishny, 1996).
Serious problems are generated by widespread practice of pyramiding and cross-holdings. In this situation, the
incentive is for insiders to maximise their private benefits of control and not necessarily the shareholder value.
There is a higher probability that minority shareholders will be expropriated or squandered. In locally controlled
companies, the majority shareholders, through a pyramid shareholding structure, do make decisions that are
sub-optimal (Thillainathan, 1998).
Banks in Malaysia play a dominant role in lending (Thillainathan, 1998). However, Malaysian banks do not play a
role in governance because they do not control or vote significant block of shares or sit on boards of directors. As
a rule, they vote the equity of other investors, namely of their clients, but only under their express instruction.
Where the bank is a significant minority shareholder, and exercises control over a company by voting these shares
and the shares of others for which it acts as a proxy, its main interest is in enhancing its own income from its lending
and other related activities, and not in enhancing shareholder value (Thillainathan, 1999).
Another weakness in the current framework is the inavailability of timely, relevant and accurate data. So is
corporate accountability by Malaysian companies. Corporate governance concerns are still cited as a pertinent
factor in many investors’ minds in making their investment decisions. Also, there is little active participation by
major institutional investors (SC, 2001).
2. Literature Review and Hypothesis Formulation
This is divided into two parts: the first part is on internal monitoring measures and the second part deals with
external monitoring measures.
2.1 Internal Monitoring Measures
2.1.1The Governance Role of Independent Directors
Byrd and Hickman (1992) report that tenders offered to bidders with majority-independent boards earn roughly zero
stock price returns on average. However bidders without such boards suffer statistically significant losses of 1.8%
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International Journal of Business and Management October, 2007
on average. You, Caves, Smith and Henry (1986) also report a significant negative correlation between proportion
of inside directors and bidder stock price returns. These results suggest that companies with relatively more
independent directors tend to be more profitable than those with less independent directors. This may be due to
independent directors acting to restrain the tendency of CEOs to build large unsustainable financial empires. Denis
and Sarin (1997) report that firms that substantially increase the proportion of independent directors have
above-average stock price returns in the previous year. In a study to assess investor reaction to the appointment of
additional directors, Rosenstein and Wyatt (1990) found that stock prices increase by about 0.2% on average, when
companies appoint additional outside directors. This increase was statistically significant, but economically small.
Conversely, several studies suggest that firms with more independent directors perform worse than those with
relatively fewer independent directors. For example, Agrawal and Knoeber (1996) report a negative correlation
between proportion of outside directors and Tobin’s Q index (which is a measure of growth prospect of assets
defined by the future profitability of the asset in relation to its replacement cost). This is consistent with evidence
established by Bhagat and Black (1997) that a high proportion of independent directors is strongly correlated with
slower past growth across a number of accounting variables, but not with future performance. Evidence found by
Bhagat and Black (1997) and Klein (1997) show that a high proportion of independent directors correlates with
lower past profitability.
Greater outside representation on the board is associated with greater firm profitability and the passage of the
legislation reforming company and securities laws in 1994 was associated with increased representation of outside
members on the board, implying improved corporate governance structures (Prevost, Rao and Hussain, 2000). In
another study on the value relevance of board composition within corporate governance structures, Wright,
Matolcsy and Stokes (2000) found evidence in Australia that suggests a higher proportion of outside directors on the
board of high growth option firms is value increasing to those firms, while it is not value relevant for low growth
option firms. Additionally, they also found that it is only those non-executive directors with no ties to the firm that
are value increasing to the high growth option firms, rather than all non-executive directors. A study by Phan &
Mak (1998) reveals evidence to support the argument that board independence is related to performance.
2.1.2 The CEO Duality Structure
A dual role exists if the CEO is both the Chief Executive Officer and the Chairman of the Board of Directors.
Rechner and Dalton (1989) examine the effect of the dual role of a CEO on risk-adjusted shareholder returns using
stock market data. They found that the dual role of CEO does not have any significant impact on returns. Rechner
and Dalton (1991) examine the relationship between the dual role of CEO and organizational performance. Their
results indicate that companies which have CEOs performing dual roles have lower shareholder returns. Donaldson
and Davis (1991) also examine the effect of the dual role of a CEO on shareholder returns. Their results are in direct
contrast to those found by Rechner and Dalton (1991). Boyd (1995) concludes that duality role of CEO can have a
positive effect on performance under certain industry conditions (i.e. resource scarcity or high complexity), but a
negative effect under other conditions. However, Baliga, Moyer and Rao (1996) find that the market is indifferent
to changes in a firm’s leadership structure; they reveal no evidence of operating performance changes surrounding
changes in duality status of CEO. A study by Brickley, Coles and Jarrell (1997) finds no evidence that a unitary
leadership structure is associated with inferior accounting and market-based performance. In addition, they find
that changes in leadership structure have no systematic effects on stock prices, and that firms with separate
leadership structures are associated with systematically lower cash flows and value, contrary to what has been
suggested in recent corporate governance investigations in the UK and the USA (Cadbury Report, 1992; Bacon
Report, 1992).
2.1.3 The Concentrated Ownership Structure
As regards the relationship between ownership concentration and firm performance, empirical results in the United
States are inconclusive. Demsetz and Lehn (1985) found no significant correlation between ownership
concentration and profit rates for 511 large corporations. Morck, Schleifer and Vishny (1988) report a piecewise
linear relationship of Tobin’s Q with board member ownership for 371 Fortune 500 firms, and also found evidence
of an inverted “U”-shaped relationship between the degree of ownership concentration and profitability. Stulz (1988)
demonstrates that higher managerial ownership can insulate managers from external takeovers, and by allowing
managers to block takeover bids, can lower firm value. Morck et al. (1988), McConnell and Servaes (1990, 1995),
Hermalin and Weisbach (1991), and Holderness, Kroszner and Sheehan (1999) all establish that the value of a firm
rises from a base of low level of managerial ownership and to fall with higher level of managerial ownership. Some
empirical research on the impact of large owners on managerial compensation has provided evidence to support the
notion that managerial opportunism persists in the absence of owners large enough to enforce their own interests.
For example, firms with large owners as compared with firms without large owners, restrict the residual loss of
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companies arising from excessively high managerial compensation (Dyl, 1988), compensate their chief executives
more for performance than for compensation scale based on years on the job (Gomez-Mejia, Tosi and Hinkin, 1987);
engage in increased CEO compensation monitoring and incentive alignment activities (Dyl, 1988; Tosi and
Gomez-Mejia, 1989), and following major acquisitions, reward CEOs more for performance than for years on the
job (Kroll, Simmons and Wright, 1990). In a study of 127 Chinese companies listed on the Shanghai Stock
Exchange and the Shenzhen Stock Exchange for the period 1993 to 1995, Xu and Wang (1999) found a positive
correlation between ownership concentration and a firm’s performance. They suggest that large legal person
shareholders have the incentive and the power to monitor and control the behavior of the management and play
significant role in corporate governance. Some studies suggest a partial market for control, and point to a little
relation between ownership concentration by institutions and holding companies, and disciplining (Renneboog, 2000;
Agrawal & Knoeber, 1996). Ruhani and Sanda (2001) found that ownership is significantly related with
performance, tending to rise at early levels of insider ownership and to fall at levels of ownership beyond 36.7% of
firm’s equity. Their results are in agreement with those of Mat-Nor, Said and Redzuan (1999) and Wong and Yek
(1991). Previous research has established this 5% figure as the conventional demarcation of large owner control,
without which managerial opportunism continues unabated (e.g. Gomej-Mejia et al., 1987, O’Reilly, Main and
Crystal, 1988; Tosi & Gomej-Meija, 1989; Davis & Stout, 1992). Similarly, Faizah (2002), who investigates whether
ownership structure has significant effects on the performance of plantation companies listed on the KLSE, reports a
positive correlation between ownership concentration and firm performance as indicated by market-to-book value
ratio. Coffee (1998), in his study of Investment Privatization Funds (IPF) in the Czech Republic, found evidence that
an IPF that acquires 30% of a company, will have a greater incentive to monitor management. It is therefore
hypothesized that concentrated ownership would positively contribute to firm performance.
2.1.4 The Governance Role of Audit Committees
Several empirical studies in accounting have focused on the voluntary formation of audit committees to identify
factors affecting an entity’s decision to create an audit committee directly responsible for overseeing the financial
reporting process (Pincus, Rusbarsky and Wong, 1989). Collectively, these studies suggest that larger companies,
which are audited by very large auditing companies and which have bigger boards with greater representation of
outside directors, are among the companies more likely to voluntarily form an audit committee. Several studies
document that the presence of an audit committee is associated with fewer incidences of financial reporting
problems. For example, McMullen (1996) finds that entities with more reliable financial reporting, such as those
with absence of material errors, irregularities and illegal acts, are significantly more likely to have audit committees.
De Chow, Sloan and Sweeney (1996) show that firms subject to the enforcement actions of a government regulator
are less likely to have standing audit committees. Carcello and Neal (1999) find that the likelihood a company in
financial distress will receive a going concern modified auditor’s report is lower when the percentage of inside or
grey directors on the audit committee is higher. These findings suggest that the independence of the audit
committee may affect the objectivity and independence of the external auditor.
A Malaysian study by Zulkarnain, Shamsher, Hamid and Nasir (2001) suugests that chairmans of the audit
committee rated their own effectiveness attributes relatively higher than the internal auditors. This implies that
chairmans perceive the audit committee as fairly competent in reviewing, analyzing and evaluating matters
concerning audit, non-finance matters and the accounts of the company. Secondly, they also found that the audit
committee has doubts concerning the committee members’ technical skills. Thirdly, the internal auditors in these
companies believe that the audit committee lacks the experience and technical skills to effectively perform internal
accounting and control functions. Another Malaysian study by Mohamad, Shamsher and Annuar (1999) suggests
that the internal audit profession is sceptical about the benefits that the audit committee can generate for the
company due to their infancy stage of development and the need to prove their effectiveness to the business and
financial community. Similarly, Shamsher and Zulkarnain (2001) while investigating the wealth effects of
announcements of audit committee formation by main board firms, found that significant negative abnormal returns
were recorded during the period surrounding the announcement, indicating that investors perceive the mandatory
requirement of audit committee as negative news.
2.2 External Monitoring Measures
2.2.1The Role of Lenders in Corporate Governance
The role of lenders as a force in corporate governance has not yet been extensively analyzed (Prigge, 1998). Lenders
are interested in the repayment of a credit in accordance with the credit contract. Since management’s actions are
one of the factors determining repayment, lenders may be motivated to carry out monitoring. Billimoria (1997)
found evidence to indicate that the Chief Executive Officer (CEO) of highly-leveraged firms were paid less
long-term emoluments. Using three criteria (total voting power at the general meeting, chairmanship on the
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International Journal of Business and Management October, 2007
supervisory board, and liabilities owed to banks (data from 1990-1992), Perlitz and Seger (1994) classify a sample
of 110 listed industry companies into two groups: (1) those companies which banks exert great potential influence
on (58 companies) and (2) those which banks only have a small potential influence (52 companies). They find that
the former group of companies have significantly lower profitability and growth than the latter group of companies.
Similarly, Cable (1985) and Nibler (1995) discover a positive relationship between apparent bank influence on
companies and profitability and growth of companies. However, Chirinko and Elston (1996) do not find significant
relationship between bank influence and company’s earnings. However, there are some studies that have found a
negative relationship between leverage and firm performance (Chee & Hooy, 2003; Demsetz & Villalonga, 2001;
Taridi, 1999; Wiwattanakantang, 2001). In contrast, Johnson and Mitton (2003) and Fauziah, Chee and Ignatius
(2004) found no significant relationship between leverage and firm performance for Malaysian firms. On the other
hand, Mansor and Kam (2001) found that leverage has a positive impact on financial performance, especially on the
profitability measures of the company, that is, they found evidence of some degree of bank influence in Malaysia.
It is expected that large external creditors would exert a significant influence on directors’ ability to expropriate
company assets or indulge in accumulating private benefits (Bilimoria, 1997). It is therefore hypothesized that
debt ratio would have a positive impact on earnings.
2.2.2 The Governance Role Of Institutional Investors
Large outside (institutional) shareholders are regarded as an effective monitoring mechanism for a number of
reasons. For example, they may have a vested interest in minimizing any asymmetric information, which may exist
and will therefore vote in accordance with their own interests (Jarrell and Poulson, 1987). In addition to the
monitoring role, Schleifer and Vishny (1986) also argue that large outside shareholders assist the market for
corporate control simply by being willing to sell their shares should an appropriate bid be made. They, therefore
have an incentive to monitor the behavior of managers which should solve the free-rider problem identified by
Grossman and Hart (1980). The investments made by institutional shareholders are so large that they have less
ability than individual shareholders to move quickly in and out of funds without affecting share price (Pound, 1988).
As a result, these institutional investors have a strong interest not only in the financial performance of the firms in
which they invest, but also in the strategies, activities, and other stakeholders of those firms (Fortune, 1993; Gilson
and Kraakman, 1991; Holderness and Sheehan, 1988; Pound, 1992; Smith, 1996). In a research on a sample of 201
firms facing control contests, Brickley, Lease and Smith (1988) found that the average institutional investor was
more likely to vote and get involved in firms’ decisions than the average non-institutional shareholder because of the
former’s high equity in the firms. Patman Staff Report (1968) and Bhagat & Black (1998) reported evidence that
outside blockholders play a monitoring role, and that 5% blockholders’ ownership is significant. These studies
seem to suggest that: (1) there is a positive correlation between shareholdings of large investors and a firm’s
performance, and (2) institutional investors appear to be more effective in monitoring a firm’s performance than
individual shareholders (Xu & Wang, 1999).
Therefore, it is hypothesized that institutional stockholdings could positively affect firm performance.
2.2.3 Firm Size as Control Variable Affecting Firm’s Performance
This is defined as the total sales of the firm as stated in the KLSE handbook. It has been demonstrated that
common size metrics (e.g. sales, number of employees) are highly associated and proportional – essentially
interchangeable (Agarwal, 1979). Similarly, Dalton & Kesner (1987) rely on the amount of annual sales – the
manner by which the Fortune 500 is derived - as the indicator of corporate size. Studies have shown a positive
relationship between firm performance and size of company (Isa & Kam, 2001; Faizah, 2002; Taridi, 1999). On
the contrary, Chee and Hooy (2003) found a negative relationship. Other studies found no significant relationship
between performance and firm size (Boardman et al., 1997; Johnson & Mitton (2003) and Fauziah et al., 2004). It
is therefore hypothesized that firm size could positively affect firm performance. This variable is included in the
model as a control variable in order to improve model specification.
3. Methods and Procedures
3.1Monitoring Measures
Six measures of monitoring were used in this study. These are divided into two types: internal and external
monitoring measures. The first internal monitoring measure is the ratio of the number of outside (non-executive)
directors to total directors (i.e. inside and outside directors), a measure commonly used by researchers to measure
corporate control (e.g. Morck et al., 1988; Weisbach, 1988; Beatty & Zajac, 1994). The second internal monitoring
measure is the dichotomous CEO/chairman variable, indicating whether the CEO position is separated from the
chairman of the board. The third internal monitoring measure is the presence of an independent audit committee
who can be expected to monitor firm performance and give advice. The fourth monitoring measure is the presence
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of concentrated ownership who by virtue of their large shareholdings will increase their monitoring as their
proportion of share capital increases.
The first external monitoring measure is the presence of large creditors, that is, bank debt. Banks are expected to
use their influence as lenders to monitor management to ensure repayment of their principal and interest in the future.
The second external monitoring measure is the presence of a shareholder with large equity holdings (greater than 5%)
who is not on the board (that is, a blockholder or institutional investors).
3.2 Hypotheses
H1: Ceteris paribus, a firm’s financial performance will be positively related to sound
internal corporate governance structures, i.e. internal monitoring measures.
H2: Ceteris paribus, a firm’s financial performance will be positively related to
monitoring by external stakeholders, i.e. external monitoring measures.
The prediction for each measure will be described under the section on independent variables. The internal
monitoring measures are non-executive directors (NED), the CEO who is also the chairman of the board
(CEOCHAR), chairman of audit committee (CHAIRAC) and concentrated shareholdings (CONCEN) while the
external monitoring measures are bank gearing (GEAR) and institutional investors (INST). The remaining
independent variable (SIZE) is a control variable. The control variable is included as it is expected to affect firm
performance. Without its inclusion, there is a possibility that the model to be formulated would not be complete
and may lead to specification errors.
3.3Data and Data Sources
Data were obtained from 120 randomly selected publicly listed companies in Malaysia over the period 1996 to 1999.
The sample firms were public companies fully quoted either on the main board or the second board of the Kuala
Lumpur Stock Exchange (KLSE). A large majority of the companies selected (87%) came from the main board. The
sample firms covered all sectors of the economy. These firms were drawn from 20 volumes of KLSE Annual
Companies handbook on a random basis. The optimal sample size of 120 was derived based on statistical theory (De
Vaus, 1996). Nevertheless, 43 out of the 120 firms did not have complete information concerning the variables
needed for the study and were deleted from the analysis. The sample size is not much different from those used in
other studies. For example, Mat-Nor et al (1999) used 79 Malaysian firms; Ruhani and Sanda (2001) used 112
KLSE listed firms covering the period 1992-1997, and Yap (2001) studied 69 KLSE companies covering the period
1995-1999. Another comparable study by Phan and Mak (1998) studied a sample of 165 companies on the main and
second board of the Singapore Stock Exchange for the period 1991 to 1995.
Corporate governance data were gathered from the annual editions of the KLSE handbook. The handbook provided
information on board composition, names of executive and non-executive directors, directors’ shareholdings,
institutional and concentrated shareholdings, audit committee membership, returns on company’s equity, dividend
payout, gearing/borrowing ratios, existence of exports, size of firms and industry performance. The data were
analysed based on regression analysis using Time Series Processor (TSP) software Version 4.5 (Hall and Cummins,
1999).
3.4 Method of Analysis of Data
Multiple linear regression analysis is extensively used in the literature to test the value of a firm and ownership
(Weir, 1997). Multiple regression procedure was used to analyse the data in this study. The dependent variable used
for the regression analysis was dividend payout. Dividend payout (DIVPAY) was the percentage of dividend
declared and paid to shareholders for the year. The dividend payouts were also obtained from KLSE handbook.
3.5 Dividend Payout as Proxy for Performance
The dividend payout ratio is a reliable proxy to measure firm performance. This is because company management
would take into consideration current and future profits before making a decision on the amount of payouts.
Dividend payout is part of shareholders’ returns which are received in addition to capital gains when stock prices
rise. Stock prices are reflective of company performance, both current and future, and dividend payouts do affect
stock prices (William and Scott, 2005). Accounting profits, as the other alternative to measure performance, are
grossly manipulated and usually much exaggerated (Griffiths, 1986). Dividend payout does not suffer from such
flaws as it depends on availability of cash flows. The firm will not pay dividends unnecessarily to boost its share
price if there is no cash to give. Also, the law forbids dividends to be paid if there are no retained earnings available.
To ensure a company’s survival during periods of declining profits or sustained losses, dividends are cut to conserve
cash flows. This gives an indication that firm performance is currently bad and that the company’s future is expected
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International Journal of Business and Management October, 2007
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Vol. 2, No. 5 International Journal of Business and Management
Table 2 provides a summary of the results of the estimation of regressions based on the fixed effects model for the
dependent variable, LDIVPAY. The Hausman specification test confirmed the superiority of the fixed effect model
over the random effect model. Hence, for further interpretative discussion, only the results of the fixed effects model,
is used.
The strength of the model reported in Table 2 is high as measured by R2 and adjusted R2 indicating the substantial
impact of the independent variables on the dependent variables. Using the favoured model, the statistically
significant variables influencing LDIVPAY are NED, SIZE, SIZESQ and GEAR. The statistically insignificant
variables are CONCEN, CEOCHAR and CHAIRAC. The size of the firm is shown to impact dividend payout in a
quadratic form. Dividend payout increases with increasing size (in terms of turuover) and then after a certain point
negative returns are shown. This result shows that diminishing returns to size exist with excessive firm size pushing
returns down. The optimal firm size derived from differentiating the estimated equation with respect to size is
determined to be 11,321 million Malaysian ringgitt (RM). The negative statistically significant parameter estimate
for NED indicates that increasing proportions of non-executive directors in companies lead to a decrease in dividend
payout. This result rejects the hypothesis that the higher the proportion of non-executive directors, the greater the
greater the degree of independence of the board in making decisions, which then leads to higher probability of
increased dividend payout due to better firm performance. The results on gearing ratio (GEAR) indicate that
companies which are highly geared or have relatively high debts with respect to shareholder capital funds have
statistically significant lower dividend payout. Finally, the dummy 1998 variable capture the time effects in the
regression. This variable is highly significant and indicates that over the four-year period of analysis, only the year
1998 showed a marked drop in financial performance in the companies examined. The performance of companies
for the remaining years does not differ significantly from one year to another.
4.1Results of Data Analysis
Table 1provides a summary of the statistical analysis of the companies examined.
Table 1. Summary of the results of the simple statistical analysis of the 120 companies.
ROE NED CHAIRAC MAJAC CEOCHAR INST GEAR CONCEN SIZE
Mean -0.057382 65.45636 0.812968 0.865337 0.376559 10.66491 0.20419 39.51122 739.8359
Median 0.06 67 1 1 0 7 0.13 39 225
Maximum 14.21 91 1 1 1 83 2.91 96 13294
Minimum -79 14 0 0 0 0 -0.38 4 0.88
401 401 401 401 401 401 401 401 401
Observations
The mean return on equity (ROE) for the period under study was –0.057 or negative 5.7% of the shareholder’s fund.
The median value was 0.06 or 6%. The result was not surprising considering that this was a difficult period as a
result of the currency and economic crisis that started with the devaluation of the Thai ‘baht’ on 2 July 1997 (Jomo,
2001). The mean percentage of non-executive directors (NED) on the board was 65%, showing that the majority
of the board of directors (BOD) in these companies are non-executive, i.e. they did not hold managerial positions.
The mean score of 0.81 of the chairman of the audit committee being a non-executive director (CHAIRAC)
suggested that in 81% of the companies examined, the chairman was a non-executive director. About 87% of the
companies had a majority of non-executive directors on their audit committees (MAJAC). On the existence of a
dominant personality (CEOCHAR) in the company, the mean score was 0.37, indicating that 37% of the companies
examined had a CEO who held a dual role as chairman of the board. The mean shareholding of institutional
investors (INST) was 10.66%. According to the literature, these shareholders would play an important monitoring
role in corporate governance in Malaysia (Schleifer & Vishny, 1986; Jarrell & Poulson, 1987). The mean gearing
ratio (GEAR) of the companies examined was 0.20, indicating that 20% of their capital is in the form of long-term
borrowings. It could be inferred that bank loans formed a sizeable portion of the companies’ capital in Malaysia.
The mean percentage of concentrated ownership (CONCEN) was 39.5%. The concentration of share ownership in
these companies appears to be large enough to exert substantial control. The mean size of the companies examined
(SIZE) in terms of turnover was RM739.8 million. The maximum turnover was RM13,294 million, while the
minimum was 0.88 million.
Table 2. Results from the estimation of fixed effect regression model of natural logarithm of dividend payout
(ldivpay; dependent variable) as a function of several independent variables using the generalized least squares
method based on data from 1996 to 1999.
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International Journal of Business and Management October, 2007
R2 0.741***
2
Adjusted R 0.646***
Probability level of significance of the Langrange Multiplier (LM) heteroscedasticity
test based on the null hypothesis of no significant heteroscedasticity 0.090
Malaysia, banks do not perform such a value-enhancing role in the companies that borrowed money from them. This
finding is similar ot those found by Perlitz and Seger (1994), Chee and Hooy (2003) and Mansor and Kam (2001).
Finally, the size of the company is shown to be positively identified with dividend payout as initially hypothesised.
However this study establishes a curvilinear function of size against dividend payout with the optimal size of
companies derived as a turnover of about RM11, 321 million. The study thus proves that even though size matters
when it comes to dividend payout, there is a limit, and a corporation which has become too large becomes more
prone to financial performance weaknesses. This can be explained in terms of managers favoring empire building at
the expense of the productivity of the company. It can also indicate the CEO’s inability to exert control and lack the
technical expertise to run large enterprises. The current corporate trend in the USA and Europe is for a firm to focus
on its core business and get rid of unrelated businesses for which top managers know little. The study provides
evidence that Malaysian companies may have to follow such an example. With regards to the 1997/98 East Asia
financial crisis, this study suggests that firms that overextend themselves by growing too rapidly into excessively big
companies simply suffer from declining rate of returns. During the 1997/98 East Asia financial crisis, many
companies that downsized or went bankrupt were those that rapidly expanded in previous years before the crisis.
It was also determined that most monitoring variables did not have any significant impact on dividend payout of
corporations. The first independent variable found to be not significant is the role of institutional investors. The
reason why institutional investors do not play a value-enhancing role is that in Malaysia, most of these investors are
known to be in the market for the short-term and will therefore not be involved in shareholder activism
(Thillainathan, 1998). The short-term objectives of these investors could have been aggravated by concerns about
corporate practices in these companies. It is also known that this group of investors do not actively seek board
positions and do not try to influence company policies (Coffee, 1998).
The second independent variable which is not statistically significant is concentrated ownership. The results show
that large block shareholders who are in control of the company do not significantly contribute to higher dividend
payout. The results indicate either a lack of necessary expertise, an over-consumption of ‘perks’ or an
expropriation of company assets by the controlling shareholders. The study provides evidence that minority
interest in these companies is not well-protected. This finding is similar to those found by Ruhani and Sanda (2001),
Mat-Nor et al. (1999) and Faizah (2002).
The third independent variable found to be not significant is the CEO duality structure. The existence of a powerful
CEO who is also the chairman of the board has no bearing on the level of dividend payout, suggesting that these
CEOs lacked the necessary skills to enhance company profits or are reluctant to declare more dividends due to
greater on the job consumption. This finding is similar to those found by Rechner and Dalton (1989), Baliga et al.
(1996) and Brickley et al. (1997).
The fourth independent variable found to be not significant is the role of chairman of audit committee. This can be
explained in terms of the committee’s lack of independence and skill required to perform a value-enhancing role.
This finding is similar to those found by Zulkarnain et al. (2001). Shamsher and Zulkarnain (2001) and Mohamad et
al. (1999).
5.1Limitations of the Study
The reliability of this study depends very much on the disclosures given on the company’s audited accounts and
information supplied by the company to the KLSE. If the company did not disclose fair and accurate information
pertaining to the accounts of the company, and the auditors did not detect these inaccuracies, then the information
used in this research will not be accurate as well. An exceptionally difficult task in this survey was to determine the
beneficial shareholdings of nominees listed in the companies’ handbook. This has made the task of determining the
concentrated holdings or the institutional shareholdings of a company extremely difficult. The practice of using
nominees in Malaysia was to circumvent the requirements of the affirmative New Economic Policy of the
government, and this has created much confusion and poor standards of disclosure. Also, the widespread practice in
Malaysia of cross shareholdings and indirect holdings through a pyramid structure further clouded the true share
ownership in the affected companies.
The only sampling selection criterion used in this study is that a firm must have complete data and not all companies
in the KLSE were selected. The non-inclusion of all companies means that the ability to generalize the findings may
be affected by the selection criteria. Also, the implications from this study may be limited due to the possibility that
relevant agency cost and other monitoring mechanism variables may have been omitted from the analysis. Like most
prior studies, this research also adopts a single mechanism focus in that it investigates the efficiency of governance
structures without considering other alternative means by which a firm can monitor management.
A number of assumptions that simplify actual practice are made in this study. Firstly, the analysis assumes that
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International Journal of Business and Management October, 2007
institutional ownership is homogenous in terms of its ability to influence the performance of the firm they have
invested in. The history and dynamics of any institutional investor would tell us that such an assumption is a
simplification of practice. However, the present assumption is the only practical means of quantitative analysis.
Secondly, the analysis also assumes that independent directors have the capacity and ability to influence the
performance of the firm. Again, the dynamics of any corporate board would tell us that such an assumption is also a
simplification of practice. Thirdly, the measure of board composition on which this study relied was the proportion
of outside directors. This is a coarse measure that may only poorly capture the multiple aspects of board
independence. Although there is a growing literature linking corporate governance to company performance there is,
equally, a growing diversity of results. The diversity of results can be partly explained by differences in the
theoretical perspectives applied, selected research methodologies, measurement of performance and conflicting
views on board involvement in decision making and, in part, by the contextual nature of the individual firm
(Korac-Kakabadse, Kakabadse and Kouznin, 2001).Even studies based on the integrative models of board
involvement, incorporating different theoretical perspectives and various board attributes, provide inconclusive
results, suggesting that corporate governance has, at least, an indirect effect on company performance (Zahra &
Pearce, 1989; Jonnergard & Svensson, 1995; Maassen, 1999).
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only the reserved cash proportion that is set down after balancing the relation which is between the investment
income and the liquidity risk. There are some discussion (Cheng Wei, 2005, p.100 - 103.) above about the reserved
proportion question and the forecast shares of redemption question. Moreover, there has been the massive
disadvantage factors to the fund supervisor’s decision-making in Chinese market, for instance, the massive
short-term behavior, the investors do not regard the investment funds as a kind of long-term investment, but receive
as long as seeing the advantage. So the fund- administer has to sell some prospect good properties to deal with huge
amounts of redemptions. This will affect the investment ability and the income of fund, and enlarge the liquidity
risk.
In the references, Extreme Value theory, a method of predicting huge sum of accrued payments, is given. (Cheng
Wei, 2005, p.190-193). Using this theory, we can predict the occurring probability of huge amount of accrued
payments, so that the fund-administers can keep away the liquidity risk of the open-end funds. Based on the extreme
value distribution, (Zhu Guoqin, 2001, p.72-76.), the risk estimates that the funds faced are given when the reserved
cash is insufficient to repay the huge amount of redemptions.
2. The application of the suit between the extreme values distributions and huge amounts of redemption
distribution
2.1Extreme values distributions
Generally speaking, the extreme value is scarce and significant. Namely, the events appear or occur little in the
scope of human’s experiences, which is rare in the normal system (scope) in natural environment, like the flood,
earthquake and drought that never occur in one hundred years. In the social environment, it appears the exceptional
change that the stock market price is disproportionate with the continuously smooth undulation in the economical
and financial field, which is easy to create the stock market to fall and rise suddenly and sharply and so on. Starting
from the 1930's, many scholars had researched the Extreme value theory. (Fisher R A, 1928, p.180-190and Shi Daoji,
1995, p.644-649.).
The findings indicated that, the extreme value distribution may describe well about the maximum (minimum) value
distribution. Namely, researching by using Frechet and Gumbel distribution. Jenkinson applied this theory to the
extreme value risk research, obtained the extreme value distribution type in broad sense, and further consummated
the one-dimensional extreme value distribution model. Pickands has proven the classical limit theorem. In addition,
in the 80's, many scholars has studied the unsteady sequence extreme value behavior (characteristic) and the
phenomenon depending on each other. In the middle of 80's, the statistical inference of the multi- variables extreme
value theory made a further development, and moreover became the hot topic of the present extreme value theory
research. Here,we discuss mainly discuss the application of the one-dimensional extreme value theory in the
Open-end Funds redemption.
Supposing x , i = 1, 2...n is a sample taken from the distribution function F ( x) , array according to the size. The
i
x (n)
), x =min ( x … x ) is separately called the sample maximum value and the sample minimum value,
(n) (1) (n)
which is the sample extreme value. Their distribution is called the extreme value distribution. The extreme value
distribution is divided into extreme value I, II and III.
The Extreme Value theory is often used to analyze some extreme matters. Here, we mainly use the one-dimensional
Extreme Value theory to study the amount of accrued payments. A distribution model for extreme value in broad
sense is given by Jenkinson in 1955.The distribution function is expressed as follows:
xi − u −1
G ( xi ) = exp{−[1 + ζ ( )] ζ
} (1)
σ
We use this function to draw up the actual distribution. In this function, 1 + ζ ( xi − u ) / σ > 0 ,
xi is the maximum of everyday accrued payments; ζ is the shape parameter; u ,the position parameter, is equal to
the average value of the samples; σ >0 ,the dimension parameter, is the standard deviation of the samples.
i = 1, 2...n .
In actual application, this model is applied to draw up the caudal characteristics of the sequence distribution of the
sample data. The distribution model of one-dimensional Extreme value estimates this three parameters
ζ , u , σ ,mainly according to the already known data. In this way, we can make sure which type of extreme
value-distribution this model match. Here, MLE (Maximum Likelihood Estimate) is used to estimate these
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parameters.
2.2 The fitting superior test of the distributions
χ 2 test procedure is a non-parameter fitting superior test procedure, which is based on calculating the frequency
after grouping the value scope, and reviews the difference between the actual frequency and the theory frequency
in each sector before making a judgment. It uses the following statistic.
l
( mi − npi ) 2
χ2 = ∑ (2)
i =1 npi
n is the sample capacity; l is the grouping number; mi is the frequency that the sample observation value falls
into the group i ; pi is the obtained probability that the sample falls into the group i according to the distribution
assigned by the original supposition. Statistics research indicates that when the sample capacity n is big enough
and the original supposition is true, the χ 2 statistic approximately obeys χ 2 distribution whose freedom degree
is l − k − 1 , k is the number of the parameter that needs estimating in the distribution. Through using a group of data
to simulate, it is drawn up that the conclusion accepts the original supposition. Namely, it is thought to be reasonable
that the extreme value distribution obtained from above fits the statistical distribution of the huge amounts of
redemptions.
About explanation of ζ value:
Through analyzing three kinds of situations ζ > 0, ζ < 0 and ζ -> 0, it is discovered that ζ > 0 and the smaller
situation comparatively tally with facts. Because G ( x) is a distribution function, whose graph should be a curve
which increases gradually. Moreover only when the maximum value is smaller than 1, G ( x) conforms to the
character of the distribution function.
Through research, it is discovered when ζ changes near 0, the probability value doesn’t change comparatively with
the change of ζ .Simultaneously the probability value does not change comparatively in the graph. Moreover when
ζ takes to after comma, the obtained probability value holds the line. Therefore, when the estimated value
of ζ draws close to 0, this distribution model belongs to extreme value distribution I.
3. Based on VaR measuring the liquidity risk of open-end funds
Before using CVaR to measure the liquidity risk of the open-end funds, it is necessary to introduce VaR first. Based
on VaR, CVaR can be obtained.
3.1 General description of VaR
The risk value approach is a statistical measuring method which is used to measure the potential loss of the
investment combination. After adopted at Basel committee of world bank in 1995, VaR risk control model ,which
was brought up by 30.J.P.Morgan06, was widely applied in risk management by those foreign financial institutions.
Currently, VaR, as a basic measuring tool for financial risk, is used in risk management extensively by those main
banks, non-bank financial institutions and other financial supervision organizations all over the world. Its
importance in global risk management is more and more prominent. VaR can be employed to manage the working
capital and make investment strategies. Through evaluating and measuring the risk value of the holding assets, VaR
can help to adjust investment combination in order to spread and evade risk and improve the operating quality and
efficiency of the assets (Shyam Venkat, 1998, p.83-86 and Morgan JP, 1996,p.1-58.).
VaR is used to measure, at a given confidence level, the probability of suffering maximum loss for a certain financial
assets or combination at a given deadline .VaR combines the anticipant future loss and the probability of the loss,
and describes in specific data the core of financial risk-the potential loss clearly. (Thomas J. Linsmeier, 2000,
p.47-63.). It can be indicated as follows:
P ( ∆P > VaR ) = 1 − c (3)
In equation (3), ∆P is the loss of the security combination in holding term ∆t ; VaR is the value in risk at confidence
level c. For example, the risk control record of a financial assets management company shows that at the confidence
level 99%, on a certain trading day in holding term, the VaR of a certain investment combination, which includes
fixed income bones, stocks, derivative financial products and cash assets, is one million. It means that under normal
market condition, on a certain trading day in holding term, the loss of the investment combination is no more than
one million with 99% probability. In other words, under normal market condition, the probability of the loss of the
investment combination being more than one million is only 1% on a certain trading day in holding term.
3.2 VaR model for the amount of accrued payments of open-end funds
When huge amount of accrued payments of the open-end funds takes place, the application volume is always small.
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International Journal of Business and Management October, 2007
So, supposing that the application volume can be ignored. In this instance, the reserved cash of the fund is too small
to pay back the investors and it’s also necessary to redeem some properties which have good mobility such as stocks
in order to obtain cash. This can cause losses for the investment of those fund administers. The loss can be measured
by the following equation:
∆P = ( p1 − p2 ) x (4)
In equation(4), ∆P is the loss of the assets which have good mobility in the securities combination, resulting from
instant selling off; p1 is the prospective price of the assets with good mobility in the securities combination; p2 is the
price of the assets when encashed immediately; x is the amount of the assets sold off.
Put equation(4)into equation (3), the following equation can be obtained:
P{( p1 − p2 ) x > VaR} = 1 − c (5)
In equation (5), p 2 x is the cash got from assets sold off. This cash together with the cash the fund-administer
reserves can be used to pay back the investors. Just as following:
p2 x + k J = p3 y (6)
k is the cash proportion reserved by the fund-administer to compensate the investors; J is the total assets of the
funds. kJ is the cash reserved by the fund-administer; p3 is the price when the investors redeem the funds; y is
the amount of the funds redeemed by investors. p 3 y is the total cash got through redemption by investors.
yp3 − kJ
From equation (6), the equation x =
p2
can be got. Putting it into equation (5), we can obtain
yp3 − kJ
P{( p1 − p2 ) > VaR} = 1 − c . (7)
p2
yp3 − kJ
Through transforming ( p1 − p2 ) > VaR , we can obtain
p2
VaR ⋅ p2 + kJ ( p1 − p2 )
y> (8)
p3 ( p1 − p2 )
Formula (8) is equal to formula (5), so formula (5) can be shown as
VaR ⋅ p2 + kJ ( p1 − p2 )
P{ y > } = 1− c (9)
p3 ( p1 − p2 )
Random variable y stands for the amount of the accrued payments of the funds. Russ W. has proved that y
matches the extreme value distribution. When the sample observations of y are given, the estimates of those
parameters can be got through the maximum likelihood estimation technique. In this way, we can also obtain the
distribution function of random variable y . Observe from (1). Under the given confidence level c , we can use the
distribution function of y to obtain the up-side fractile G −1 (1 − c) of 1- c . Putting it into formula (9) can result in the
following equation:
VaR ⋅ p2 + kJ ( p1 − p2 )
G −1 (1 − c ) = (10)
p3 ( p1 − p2 )
When p1 , p2 , p3 , k , J are given, the value of VaR can be obtained. Under the given confidence level c , VaR is the
loss resulting from the redemption of the assets which have good mobility in order to compensate the huge amount
of accrued payments.
3.3 General description of CVaR
VaR not only indicates the exposure degree of risk, but also gives the probability of loss. However, VaR also has its
shortages. For example, VaR isn’t a consistent risk measuring tool. As to the extreme condition of the caudal risk,
VaR is not as good as CVaR. CVaR was put forward by Artzner and other people in 1999, which makes up the
shortage of VaR. CVaR is the conditional prospective value when the loss excees VaR. It is a derived risk measuring
tool based on VaR. VaR must be known before CVaR is precisely measured. CVaR is defined as following (Zhu
Shuzhen, 2002,p.190-193, He Yan, 2003,p.243-247 and Ho L-C, 2000, p.249-275.) :
CVaR = E [ ∆ P ∆ P > VaR ] (11)
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Vol. 2, No. 5 International Journal of Business and Management
Under the given confidence level c , the up-side fractile G −1 (1 − c) of 1- c can be obtained by using the distribution
Under the given confidence level c , the up-side fractile G −1 (1 − c) of 1- c can be obtained by using the distribution
function of y . Putting it into equation (15), we can obtain formula: :
VaR ⋅ p2 + kJ ( p1 − p2 )
G −1 (1 − c) = .
p3 ( p1 − p2 )
When the values of p1 , p2 , p3 , k , J are given, the value of VaR can be obtained. In formula (14), 1500 y can be
obtained from 1500 Gs (G is the probability generating randomly from uniform distribution between 0 and 1.
Putting the values of y (bigger than G −1 (1 − c) ) into formula (15), we can obtain the value of CVaR.
Now, suppose that a certain stock must be encashed in order to pay back the cash which investors claim. The
prospective value of the stock is 15 Yuan. The price of the stock is only 10 Yuan if it is encashed immediately. The
price of the fund which will be redeemed is 1 Yuan. The total assets of the funds are 1.5 billion. The proportion of
the reserved cash is 1%.
That is p1 = 15, p2 = 10, p3 = 1, k = 1%, J = 1.5 × 109 . For example, if
1 − c = 0.0071 ,
then
G −1 (0.0071) = 2 ×108 .
Putting them into equation (10), the formula VaR = 9.25 ×107 can be obtained.
At the same time, we can also obtain the formula
CVaR = 1.0900 ×108 .
In other words, if the amount of accrued payments is more than 2 ×108 shares, the probability of the corresponding
loss over 9.25 × 107 is 0.0071. The average of the loss over 9.25 ×107 is 1.0900 ×108 . The following form shows the
probability and the values of VaR and CVaR resulting from huge amount of accrued payments through this method.
This procedure can be realized though the software Matlab (Wang Moran,2001, p.301-303.). At the same time, Fig.
1 can also show their relationship.
Table 1. The probability and the value of VaR when funds are redeemed
The shares of the
funds redeemed 0.15 billion 0.2 billion 0.25 billion
Probability 0.0682 0.0071 0.0008
0.4
0.35
0.3
0.25
0.2
probability
0 15
CVaR
0.1
VaR
0.05
0
0.4 0.6 0.8 1 1.2 1.4 1.6
x 108
Figure 1. The shares of the redeemed open-end fund and the corresponding VaR and CvaR at certain probability
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Vol. 2, No. 5 International Journal of Business and Management
5. Conclusion
This paper is on which one of the main reasons for the liquidity risk of Open-end funds that the amount of accrued
payables will probably be so big and snap. The extreme value theory is introduced in measuring the liquidity risk
and the Type I extreme value distribution.
is found fit for predicting the probability of the amount of accrued payables to redeem open-end funds. Furthermore,
there are some conclusions:
(1) In this paper, CVaR, as a measures tool for financial risk, is used in measuring the liquidity risk of open-end
funds. By studying the amount of accrued payments of the funds, we know that it matches the extreme distribution.
What CVaR measure is just the extreme condition of caudal risk. So I think the measuring tool is chosen correctly.
(2) In this paper, the model is built on the relationship between the huge amount of accrued payments and the
corresponding loss of the fund assets at certain probability. The result shows obviously that CVaR is much bigger
than VaR. CVaR can better reflect the average condition of the loss.
(3) Using this method to measure the liquidity risk of open-end funds, fund-administers can predict risk in advance
and adjust the investment combination in order to avoid too much loss and protect the benefits of themselves and
investors.
6. References
Chen, Xuehua & Yang, Huiyao. (2004). Dynamic Measurement and Analysis of VaR and ES of the Stock Market
Risk. Journal of Systems Engineering. 22(1), 84-90.
Chen, Yunxian. (2001). Analysis of Risk-Gains Decision. Xin Hua Publisher. 35-39.
Cheng, Wei, Mu, Jie, Wang, Jinyu & Pan, Dehui. (2005). An Approach to Predict the Amount of Accrued Payments
of Open-end Funds Using the Extreme Value Theory. The Northeast University Journal (the Nature Science Version).
26 (2), 190-193.
Cheng, Wei,Wang, Jinyu & Pan, Dehui. (2005). The confirmation method of reserving the cash proportion When
huge amount of accrued payments of the open-end funds takes place. Mathematical statistic and managemen. 3,
100-103.
Dale F ooper, Chapman C B. (1987). Risk analysis for large projects:model methods and cases. USA, John
Wiley&Sons..
Daniel K, Mark G, Sheridan T, et al. (1997). Measuring mutual fund performance with characteristic-based
benchmarks. The Journal of Finance. 52 (3), 1035-1058.
Fisher R A, Tippett L H C. (1928). Limiting forms of the frequency distributions of the largest of smallest member
of a sample. Proc.Camb.Phil.Soc. 24,180-190.
Goldstein M, Kavajecz K. (2000). Eighths, sixteenths, and market depth: changes in tick size and liquidity provision
on the NYSE. Journal of Financial Economics. 56(1), 125-149.
He, Yan, Zhang, Shiying and Meng, Lifeng. (2003). Dynamic Consistency Risk Measurement. The Application of
System Engineering Theory Method. 12(9), 243-247.
Ho L-C, Burridge P, Codle J. (2000).Value-at-Risk: applying the extreme Value approach t Asian markets in the
recent financial turmoil. Pacific-Basin Finance Journal. 8,249-275.
Liu, Hailong, Zhong, Liming and Wu, Chongfeng. (2003). Optimal control of liquidity risk of the open-end
fund .Control andDecision. 18(2), 217-220.
Morgan JP. (1996). Risk Metrics-technical document. New York: Morgan Guaranty Trust Company. 1-58.
Russ W. (2000). Mutual fund performance: An empirical decomposition into stock-picking talent, style, transactions
costs, and expenses. The Journal of Finance. 55(4), 1655-1703.
Singh K. (1981). On the asymptotic accuracy of Efron’s Bootstrap. Ann.Statist. 9(6), 1187-1195.
Shi Daoji. (1995). Fisher information for a multivariate extreme value distribution .Biometrika.82(3),644-649.
Shyam, Venkat & Satyan, Malhotra. (1998). Establishing a ValueatRISKframework .Mortgage. Banking. 8, 83-86.
Thomas J. Linsmeier, Neil D. Pearson. (2000).Value at Risk . Financial Analysts Journal. March/April, 47-63.
Wang, Chunfeng. (2001). Risk Management of Financial Market. TianJin University Publisher. 76.
Wang Moran. (2001). MATLAB6.0 and science computation. electronics industry publishing house. 301-303.
Zhu, Guoqin, Zhang, Wei and Zhang, Xiaowei. (2001). A review on the process of applications research of the
extreme value theory . Ournal of Systems Engineering. 16(1), 72-76.
Zhu, Shuzhen. (2002). Financial Innovation and Financial Risk. FuDan University Publisher. 190-193.
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International Journal of Business and Management October, 2007
⎪
⎩
s.t. ∑x
i =1
i =1
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Vol. 2, No. 5 International Journal of Business and Management
anticipated return ratio and return ratio of investment portfolio respectively. σ p is called standard error of return
ratio, denotes the extent of return ratio of investment portfolio r p departs E (rp ) , is used by Markowitz for the
investment portfolio risk measurement.
When investment portfolio risk is regarded as the lowest return ratio that surpasses the certain probability, we can
call the method as VaR risk measurement. The lowest return ratio is called investment portfolio’s VaR. Denote it in
mathematical formula:
VaR = −[ E (r p ) − Φ −1 (α )σ p ] (2.2)
Thereinto Φ (•) is the distribution function of normal distribution, substitute the risk function in
Markowitz’s model with (2.2), we can get the optimal mean-variance VaR model :
⎪
⎩
s.t. ∑x
i =1
i =1
It is the dual goal programming problem, if we know R p = E (rp ) , and the model ( II ) becomes:
⎧min VaR = −[ E (rp ) − Φ −1 (α )σ p ]
⎪
⎪ E ( rp ) = X T R
( II ' ) ⎨
⎪s.t. n
⎪
⎩
∑
i =1
xi = 1
It is similar to Baumol model. Baumol solves the similar model with Lagrange multipliers. But if the risk what the
investors bear is known, and model ( II ) becomes:
⎧max E (rp ) = X T R
⎪
⎪ VaR = −[ E (rp ) − Φ −1 (α )σ p ]
( II ' ' ) ⎨
⎪s.t. n
⎪
⎩
∑
i =1
xi = 1
However, nobody can solve these kinds of problems. In this paper, we use geometry method to establish critical line
equation to solve model (II ' ) and its inverse problem model (II ' ' ) .
Firstly, we transform the formula (2.2) as:
1 (2.3)
σ 2p = ( R p2 + 2VaRR p + VaR 2 )
(Φ −1 (α )) 2
1 (2.4)
X T ΣX = [VaR2 + 2VaRX T R + ( X T R) 2 ]
(Φ −1 (α )) 2
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International Journal of Business and Management October, 2007
In the weighting space ( x1 , x 2 , L x n −1 ) , (2.6) denotes equal-VaR hyper ellipsoid, for the different VaR, we can get a
group of hyper ellipsoid.
In the weighting space ( x1 , x 2 , L x n −1 ) , (2.5) denotes equal-anticipated return ratio hyperplane, for the different Rp ,
If order
⎡1 0 L 0 0⎤ ⎡ x1 ⎤
P1 = [1,0,0, L ,0,0, − 1] ⎢0 1 L 0 0⎥ ⎢x ⎥
P2 = [ 0,1,0, L ,0,0, − 1] ⎢ ⎥ ⎢ 2 ⎥
Q = ⎢M M O M M⎥ W = ⎢M ⎥
LLLLLL ⎢ L ⎥ ⎢ ⎥
⎢0 0 1 0⎥ ⎢ xn −1 ⎥
Pn −1 = [ 0,0,0, L ,0,1, − 1]
⎢⎣ − 1 −1 L −1 1 ⎥⎦ ⎢⎣1 ⎥⎦
( R1 − R n , L , R n −1 − R n , VaR + R n )
T =
( Φ −1 (α )) 2
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Thereinto,
σ ij + σ nn − σ in − σ jn σ j,n−1 + σ nn − σ jn − σ n−1,n
aij = −
Ri − Rn Rn−1 − Rn
σ in − σ nn σ n − 1 , n − σ nn
bi = − +
Ri − Rn R n −1 − R n
(i = 1, 2 , L , n − 2 , j = 1, 2 , L , n − 1 )
Therewith, for the different anticipated return ratio Rp of investors, simultaneous (2.5) and (2.6), can get the
optimal weighting of investment portfolio on the critical lines, make VaR (namely risk) minimum. We can finish it
by linear systems of equation elimination. because the rank of linear equation systems (2.8) is n-2, so it has one
basic result system, namely x1 , x2 ,L xn − 2 can be denoted by xn−1 . So for the risk that investors can bear (VaR),
combine (2.6) with (2.8) and get the optimal weighting of investment portfolio, making the anticipated return ration
of portfolio max.
3 Example
In order to explain the application of mean-VaR model in asset allocation, we consider three assets in the U.S market:
common stock, T-bonds and treasury. These three securities are used frequently bu portfolio managers and
large-scale investors, or considered as all the assets, or as their important parts, and the rest part can be enlarged.
These assets can be regarded as the representatives of the real effects of asset allocation and be explained the
application process clearly.
Table 4-1 represents the annual return ration of the three assets during 1926~1993 and standard error of them, their
dependences ([12]).
Table 4-1. risk-return ration data of the three assets (1926~1993)
Mean ofStan. Error of
Asset type Dependence
ratio(%) ratio(%)
Com. stock 12.3 20.5 1.0 0.114 -0.5
T-bonds 5.4 8.7 0.114 1.0 0.24
Treasury 3.7 3.3 -0.5 0.24 1.0
By Table4-1, we know: R = [12.3 5.4 3.7] , T
σ11 = σ12 = 20.52 = 420.25 σ 22 = σ22 = 8.72 = 75.69 σ33 = σ32 = 3.32 = 10.89
σ12 = σ21 = σ1σ2 ρ12 = 20.3319 σ13 = σ31 = σ1σ3ρ13 = −33.825 σ 23 = σ32 = σ 2σ3ρ23 = 6.8904
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International Journal of Business and Management October, 2007
under the binding of VaR, which is similar to Markowitz’s mean-variance selection optimal investment portfolio
theory. At the same time, we support the algorithm tool of this kind of investment portfolio. These work has the
significant meaning in the development and specific practice of investment portfolio.
References
Harry Markowitz. (1952). Portfolio Selection. Journal of Finance. March. 77-91.
Baumol. W. J. (1963). An Expected Gain-Confidence Limit Criterion for Portfolio Selection. Management Science.
10: 174-182.
Tu, xinshu & Wang, jian.(2000). The Geometric Way in Solving the Optimal Portfolio Choice Weights. Chinese
Journal of Management Science. (8), No.3, 20-25.
Ibbotson, Roger. G., and Rex A. Sinquefeld, Stocks, Bonds, Bills, and Inflation: The Past (1926-1976) and The
Future (1977-2000), Financial Analysts Research Foundation, Charlottesville, VA, 1977.
Chow, G. (1995). Portfolio selection based on return, risk and relative performance. Financial Analysis Journal. 2,
54-60.
James, Farrell & Walter, Reinhart. (1997). Portfolio Management: Theory and Application. 2nd Edition.New York:
McGraw-Hill Companies. Inc.
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International Journal of Business and Management October, 2007
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Vol. 2, No. 5 International Journal of Business and Management
A scientific definition for employee performance includes three characteristics (Du, 2007). (1) It is a concept
focused on man but not job. (2) It should connect closely with and can directly guide the three core processes
(allocation, motivation, and learning) of human resource management (3) The performance is a multi-dimensional
concept and its multiple dimension can reflect the process of human combining with jobs. With this base, the author
has proposed the “process view of performance” or “process performance theory” (Du & Zhao, 2006, p40-43).
Thinking that performance is a systematic process in which “employee competence” combines with jobs under the
influences of “motivation” and “environment”, and constantly produces “outputs”. To study employee performance,
we have to make a general analysis on performance from “employee competence”, “employee motivation”, “job
fitness”, and “job output”. The process view of performance scientifically divides the structure of performance
system, providing the dimensions of performance conceptual space, which can support the performance graph.
1.3.2 System view for performance
Human society is a complex system. It is an extremely complicated huge system composed of mutual affected
factors and it has strong chain reaction (Tao, 2005). Because the organization is a collection of employees, it has two
features similar to the social system in nature (Xu, 2000). (1) Integrity. A system is composed of many independent
parts. The organic connection of each part constitutes a synthetic integration. A system is not a simple
summarization of parts. (2) Relevance. The mutual connected parts in a system form a collection of parts. In this
collection, the personalities and behaviors of each part are mutually restricted and influenced. This relevance
determines the nature and state of system. All these features of system indicate that to analyze employee
performance, we have to take the mutual relationships and influences between employees, between employees and
organizations. The performance graph is a way to analyze these relationships from a macro aspect.
1.3.3 The statistics base
Before an evaluation, the performance of certain employee is unpredictable. Because the whole employee
performance can be regarded as in accord with a normal distribution, we can not know there a specific sample is.
But if we take a large sample of employee performance into consideration and analyze the law reflected by general
employee performance, we can grasp the performance structure and characteristic variables. Mastering the
performance data in certain aspect of one specific employee, we can predict his performance in other aspects. That is
the stability of statistics. Based on the stability of statistics, the performance graph is to make a general and
combined analysis on amounts of employees’ performance, hoping to predict employee performance by means of
the basic law of statistics.
Here we should notice that because we adopt the factor analysis method in evaluation, samples must be five times of
variables at least and 10 times above are ideal (Zhang, 2006).But due to the limits of researching methods in this
paper, the samples in empirical study do not reach the predetermined requirement. Therefore, the conclusion may
not direct practice.
1.4 The procedures of performance graph analysis
The performance graph analysis follows these procedures. (1) Index analysis. Define the index database by multiple
analysis techniques and divide the indexes into four groups, namely “competence”, “motivation”, “job fitness”, and
“job output”. (2) Evaluate by factors. Get the performance of employees in the four index groups and score the
performance with 0-9 by different check methods and quantitative analysis. (3) Performance vector analysis. Firstly,
put the performance scores in “competence”, “motivation”, and “job fitness” in a three-dimensional vector space
and establish the position and direction of employee performance vector point. Secondly, use the system clustering
to divide employees into eight clusters. (4) Performance-facet analysis. Analyze the surface constituted by employee
performance vector points, and their projections respectively. (5) Reports of performance features. Put forward
explanations and suggestions for improvement based on above analysis.
2. Empirical study
This paper takes a limited company A in Dongguan, Guangdong province as a sample to perform empirical study on
performance graph analysis. Company A was founded in 1996. It is in an industrial district in Dongguan,
Guangdong province. And it is a Taiwan-funded company. This paper tends to analyze the performance features of
20 employees in the human resource department (HR, for short next) in company A by performance graph theory.
2.1 Index analysis
According to company A’ s strategy, this paper constitutes an index system as follow for the HR department by goal
analysis (Du, 2007), job analysis(Yang, Bai & Zheng, 2002), competence analysis (Jon, 2005), and motivation
analysis (Bai, 1996, p27-31). See to table 1.
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International Journal of Business and Management October, 2007
According to the analysis above, the macro performance of employees in this HR department has the following
characteristics. (1) Employee competence is stable and high, and seldom affected by other factors. The integrated
competence of employees in this department is evenness and stable, and seldom affected by job nature, content,
motivation, and emotion. (2) The motivation is greatly affected by competence, showing a positive correlation. The
higher the competence is, the higher the motivation is. It indicates that the motivation in this department is
competence-oriented. (3) Job fitness is greatly affected by competence, showing a stronger positive correlation. The
higher the competence is, the higher the job fitness is. It indicates that the job arrangement in this department is
competence-oriented. (4) Motivation is greatly affected by job fitness, showing a complex correlation. Some
employees have higher motivation because of job arrangement. And some have lower motivation because of job
arrangement. It indicates that there is certain problem in this department that has already affected the work passion
of some employees.
Therefore, this department should change the competence-oriented job arrangement and motivation. Because the
competence-oriented job arrangement will hurt some low-competence employees’ motivation, and the motivation of
low-competence employees is already at a lower level, the constant positive feedback will lead to continuous
decrease of motivation. Moreover, because competence has stronger positive effects on motivation and job fitness,
we can improve the performance of employees by means of learning.
3. Research application and prospect
Performance graph analysis provides a unique angle of considering employee performance that helps a
decision-maker to analyze and evaluate the integrated performance characteristics from a higher angle. Especially
for large enterprises, by transforming the amounts of data into simple graph, we can know the integrated
performance of employees by means of human thinking.
In further researches, the factor of time is expected to be taken into consideration. Connect the performance graphs
at different time and form a dynamic “performance flash” that can help to know the changes of employee
performance at certain time immediately. In the quantitative analysis aspect, it is expected to adopt the
frequency-domain analyzing method to decompose the random wave of employee performance, finding out the
inner cause that affects changes of performance.
References
Ilgen D R & Pulakos E D. (2004). The Changing Nature of Performance Implications for Staffing, Motivation, and
Development. Beijing: China Light Industry Press.
Du, Jing. (2007). A study on an evaluation system for employees’ performance. Master thesis of Tianjin University.
Du, Jing & Zhao, Liming. (2006). A vector analysis model on employee performance. Journal of Dalian University
of Technology (Social Sciences). No.4. p40-43.
Tao, Zaipu. (2005). System Dynamics --- Strike the Fifth Refining Secret. Beijing: China Taxation Press. Mar.
Xu, Guozhi. (2000). System Science. Shanghai: Shanghai Scientific & Technological Education Publishing House.
Sep.
Zhang, Wentong. (2006). A High Course Book for SPSS Statistical Analysis. Beijing: High Education Press. Apr.
Yang, Jian. Bai, Yun & Zheng, Beili. (2002). Goal-Oriented Performance Evaluation. Beijing: China Textile &
Apparel Press.
Jon, Warner. (2005). The Janus Performance Management System. Beijing: Publishing House of Electronics
Industry. Jan.
Bai, Ligang. (1996). A brief introduction and comment on Holland's Vocational Interest Theory. Journal of
Developments in Psychology. No.2. p27-31.
Table 1. Index system.
First-class
Goal Second-class structure Index
structure
CPI
performance
Employee
Result R R1-R15
KPI
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International Journal of Business and Management October, 2007
C Process/improvement-oriented
Employee/empowerment-oriented
Risk/value creation-oriented
Pursue to be competent
Pursue salaries
Motivation
Pursue appraisals of others M1-M21
M
Pursue self-determination
Self-evaluation
Employee number 1 2 3 4 5 6 7 8 9 10
Competence 5.7 4.9 6.3 6.4 1.5 7.2 7.3 5.5 7.9 6.3
Motivation 4.9 2 5.7 4.4 2.2 7.4 7.3 8.9 7.4 4.3
Job fitness 3.3 3.9 3.4 6.1 1.7 6.5 7.2 4.1 7.5 6.1
Job output 6.7 5.3 6.4 5.6 1.8 7 7.1 5.4 7.7 5.8
Employee number 11 12 13 14 15 16 17 18 19 20
Competence 5.9 7.6 4.9 5.7 5.4 7.5 6.2 7.1 5.7 8.5
Motivation 6.4 7.9 4.3 5.5 3.6 6.5 8.1 6.6 4.6 8.2
Job fitness 4.1 7.7 4.8 6.5 5.7 7.6 7 7.2 6.1 8.4
Star 20 None
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International Journal of Business and Management October, 2007
Notice: (1) X refers to employee competence, Y motivation, Z job fitness. (2) The points in each side are projected
ones.
Figure 1. The distribution of employees in the performance vector space.
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International Journal of Business and Management October, 2007
direct decision stage to aircraft dependable. It is the dependable to realize whole processes from the raw material
into the factory to arrive to make into the finished product. The manufacturing process can guarantee the aviation the
dependable.
First, the craft document of the high quantity need the establishment. The craft document must strictly carry out in
the production. In order not to the person's factor influence, craft discipline must seriously carry out. Advance
examine means need to be adopted. The quantity control system demand to establish. For guaranteeing to make the
quantity of the process, we also want practice to identify to control the right production supplies.
The second, process supervises and controls to be practiced to quantity of special work. Their external appearance is
very inside quantity of difficult detection problem in batch produce special, for example, the material craft process
of the heat handle and weld. We must supervise and control these crafts the process, for insuring to guarantee the
quantity safety.
The third, improving the quality, Producing with civility. It has the strict request to environment is in the aviation
product production. It is a high request than general machine spare parts in the material and assembles etc. There are
contain high request in the assemble production. Sometimes, any link or surplus thing would affect the aircraft
safety.
From these, we can know the completely quantity management included two processes of the design and make. It is
a chaperonage of the guaranteeing dependable in whole process aviation. It depend on the ground to guarantee the
air, and the work guarantee the product, spare parts to guarantee whole machine, and attain the assurance aviation
project.
References
Sung Bowie. (2000). System the dependable design and analyze. The publishing house of northwest industry
university. 8.
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First, we compute the maximal latent root λ max of each matrix, then compute and test according to the
formula CI λ max − n . If CR = CI < 0.1, so the result will accord with the test (Jiang, 2003).
=
n −1 RI
From the above steps, we know the decision-making system has only three layers, the first layer has only one factor,
the second and the third layer respectively has 4 and 5 factors, the weight vector of the third layer to the second
layer is w k ( 3 ) = ( w1 ( 3 ) ,..., w 4 ( 3 ) ) T , k = 1, 2 ... 5 . Taking w k ( 3 ) as the column vectors we establish the matrix. And
the weight vector of the second layer to the first layer is w ( 2 ) = ( w1 ( 2 ) ,..., w 5 ( 2 ) ) T .
So the final weight vector (that is the weight vector of the third layer to the first layer) is W = w * w . And the
( 3) ( 2)
comparison layer of the rule layer is seen in Table 2, where, λmax = 4 and CI= 0. So the corresponding weights
respectively are 1/4, 5/12, 1/12 and1/4.
Implementing the above steps, we can obtain the compositor of the significance of the reason factors is the
unreasonable stock, misplay of the market forecast, low using rate of the facility, lacking in the communication
among departments, and the layout of the depository work.
It is obvious that the key factor of the problem of the enterprise inventory is the unreasonable stock and the misplay
of the market forecast, which accords with the actuality of the general domestic enterprises. And we put forward the
corresponding strategies from two aspects.
3. Schemes to resolve the problem
3.1 Strategies aiming at the unreasonable stock
The flexibility and smartness of enterprise production decide that the rhythm of the stock demand is fluctuant, and
the price fluctuation is one of the important reasons inducing that change. We put forward the corresponding
strategies from two aspects.
3.1.1 Strategies of stock forecast based on the method of Monte Carlo
Because the demand of raw material has some certain randomicity, so we can implement the statistics method to
compute in and out depository of the raw material in recent 3-5 years and inventory surplus of each month and each
year, and get the corresponding probability distribution (if the distribution is not obvious, we can consider the equal
distribution of the maximal value and the minimal value), establish the probability model combining with once stock
cost, storage cost of single goods and the cost of absent goods, then educe the minimal value of the cost using the
random simulation method of Monte Carlo. And we will give the simple example as the following.
Hypothesis of the model:
First, in and out depository and the inventory surplus submit to the corresponding equal distribution of the maximal
value and the minimal value.
Second, the order times of each year are fixed.
Third, the cost of one piece of absent goods can be computed by means of statistics according to the past years’ data.
Parameters:
C1: order charge of every time.
C2: storage charge of every piece of goods.
C3: loss of single absent goods.
qmax: maximal value of out depository in the statistical accounting interval.
qmin: minimal value of out depository in the statistical accounting interval.
pmax: maximal value of in depository in the statistical accounting interval.
pmin: minimal value of in depository in the statistical accounting interval.
q: out depository of goods.
p: in depository of goods.
M: times of order.
⎧1 absence of goods
x=⎨
⎩0 no absence of goods
Variables:
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will be close to π j .
Key Factors
Y
> Original value
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it is the foundation of flowing management. But ISO9000 not emphasizes the optimization of flowing and lacks the
closed connected mechanism which links with enterprise's achievements. Moreover, it usually evaluates by exterior
organization and lacks mechanism to control, and the most of it is that ISO9000 can not form an organization
internal behavior criterion, the study and the progressive improvement culture. Therefore, the enterprise needs one
more advanced and formidable management system to promote the enterprise operation ability unceasingly. The six
sigma quality process has provided a method that can improve the direction, the step and the system in enterprise
further after ISO9000. It promotes enterprise reform and guarantees the improvement continually in each plane of
enterprise. If an enterprise has not obtained the ISO9000 authentication, then it can not establish an own quality
control foundation platform, in other word, staff's quality consciousness and the statistical knowledge lacks
inevitably. Obviously, the ISO9000 series standard is an effective method in process standardization management; it
takes a very good maintenance function in the operation of management and provides a solid management
foundation and the maintenance system for inducting six sigma quality process of the enterprise.
Therefore, for enterprise, ISO9000 manages with six sigma quality process is complements one another,
supplements mutually, the conformity utilization will be able to appear the effect of 1+1>2.
2. Raising the quality control level embarks from the present situation of our country enterprise and proceeds
in an orderly way
Above all, obviously, we can get an extremely good effect if conform with ISO9000 and six sigma quality process
together, and so does it. Many enterprise increase the efficiency of quality control greatly by conform them together,
such as Motorola, GE, Sony, Toshiba and some major industries of our country. They enhanced the qualified rate
from 99% to 99.99966%.Howerer, whether we have enough conditions to come the conformity utilization
implementation management regarding the present situation for most of enterprises of our country? There will be a
lot of waste in manpower, physical resource, and financial resource inevitably if enterprises uses the unpractical
manage methods that not consider the condition of their own and the product’s special details. Therefore, the
enterprises must aim at the existing situation and condition of their own, use ISO9000 and six sigma quality
processes together, and then the quality control level will be increased gradually practical.
2.1 The major and medium enterprises could develop the six sigma quality process control method at the foundation
of ISO9000, conform with the two methods and then make the level of quality controlling best.
We can not be the only simple “bring the principle” for the application of “six sigma quality process” and we should
make it to be localization and use it different in different environment. Firstly, the high-level leaders of the
enterprises must strengthen the support dynamics to the enterprise in implementing the six sigma quality process,
approve and involve directly, just because of that, the enterprise could construct a proper internal mechanism,
establish a capable sigma team and choose the appropriate project carefully. Secondly, the brand-new management
pattern which “import” comes from the west will pour the new-gene into the organization, therefore, the enterprise
have to found a kind of suitable culture to let its growth germinate.
At present, many enterprises of our country had already utilized the six sigma quality process control laws to
manage the enterprise at the foundation of ISO9000. There is no doubt that we have to meet many different
questions and difficulties during implementing, such as weak of the management foundation (specially foundation
of date), the thought and the behavior custom conflict, unifies not tightened, difference in understanding, each kind
of factor and form in resisting, execution formalism and so on. In that case, enterprises have to aim at the existing
actual problem utilized nimble to achieve the best effect.
2.2The enterprise which has established the ISO9000 system has the conditions of implementing the six sigma
quality process incompletely needs a hard work in quality culture. They have to establish a solid quality control
system for the development of the future quality control.
It is very hard to make the spirit of “governed by law” of ISO9000 merge into the daily management of Chinese
enterprise which is apt to “rule by people”. In fact, it is possible to initiate a revolution in the idea of management.
The “six sigma quality process” request much more than ISO9000, it will can not be finished at once. There is not
realistic that the enterprise carries out the six sigma quality process control method if they do not have the quality
policy on focus of the customers, or this kind of policy is only carried on paper surface or orally, but not in the mind
of staff and daily management. It is impossible to get a great accomplishment without working diligently and
corresponding cost.
It is not means that the system of quality is perfect even the enterprise has certificated the ISO9000 quality
authentication. Many enterprises do not obey the eight principles proposed by ISO9000 and operate the procedure
management at it has been stipulated. The purpose of them is get the inspection and authentication and the intrinsic
core of ISO9000 is neglected. This kind of ISO9000 could not conform to the six sigma quality process at all.
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Moreover, the enterprise must prepare fully to implementing the six sigma quality process, each working procedure
and the service flowing must be carried on the surveillance and the analysis, and the knowledge and the physical
conditions is necessary, It is hard for collection, reorganization, record, computation, transmission, analysis,
processing and preservation of the date, never to say the expensive cost for training” the black belt” and “the
greenbelt”. It is impossible if the enterprise do not invest enough manpower, the physical resource and the financial
resource. However, the most difficult is not the investment of earlier period but the insistence in each aspect, In fact,
many enterprises show their enthusiasm at the beginning of the new management methods produced such as the “six
sigma quality process”, but many of them are dropped in later, It is difficult for a long-term insistence if the “six
sigma quality process” can not create benefit, make the staff feel the4ir important roles and apply in daily
supervisory work mastery. Investigation and decision-making prudently is better than gives up in halfway.
Above all, completed a ISO9000 management system solidly is the most important measure for implementing the
six sigma quality process. Obviously, if the enterprise has got a higher level in Total Quality Management and the
conditions which the “six sigma quality process manages” are needed, they can carry out six sigma quality process
in certain departments such as the production control which is the most advanced. This measure can improve the
level of quality control management and reduce the impact in implementing the six sigma quality process
comprehensively. More, It is not suitable to carry out the six sigma quality process in the small and medium-sized
enterprise which is weak in quality control relatively, but they can utilize the tools which provided by the six sigma
quality process to analysis the problem, establish the Total Quality Management system gradually and accumulate
each kinds of managerial experience. The enterprises could carry out the six sigma quality process in part of domain
in management after they prepared well.
2.3 It is not suitable for the small and medium-size as well as the low- level quality enterprises to conform ISO9000
to the six sigma quality process together, they must know themselves.
If the enterprise had not achieved the ISO9000 standard and authenticates, the level of quality control must have a
large disparity with the advanced enterprise’s, at this moment, the key to the enterprise is raising the quality control
level solidly, the six sigma quality process is not suitable for them. Obviously, There is no doubt that it takes a great
improvement to confirm ISO9000 with six sigma quality, but what’s the income of them is depend on the special
details of the enterprise. In fact, not all of products need the qualified rate of 99.99966%, there will not be great
losses to customer and the enterprise even certain products are bad qualified. From the perspective of economics, it
is not the most superior to control stricter and gets a higher qualified rate. The stricter the quality control is, the
higher expense of the enterprise must be spent. It will spend much more in developing when the qualified rate has
achieved a certain level. It is not necessary and takes into account.
References
American, Cooke. (2003). From quality to remarkable management: A systematic management.Chinese Standard
Publishing.
Chai, Bangheng. (2006).The ISO9000 Quality control System. Mechanical industry publishing.
Li, Fang. (2006). Several Suggestions in implementing the six sigma quality process Strategies of Chinese
Enterprise. Enterprise and economical management. 11.
Li, Zhengquan. (2005).The Bring Principle of six sigma quality process control method. quality engineering
supervision of china.10
Shang, Pengfei. (2006). How to implement the six sigma quality process management in our country enterprise. The
bloc economy studied.5 (Part 1).
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International Journal of Business and Management October, 2007
rest on the elementary level of tourist exploitation mode in developing nations at the present stage, and people are
short of scientific understanding to the relation of tourist and environment. The development of ecotourism still rest
on the elementary stage and many problems exist in the process of the sustainable development of ecotourism.
2.1 Lacking in the right comprehension to the sustainable development of ecotourism
Decision-makers, layout designers and managers of ecotourism always don’t pay enough attention to the integrative
consideration and serious thinking of ecology and environment protection. Many tourists are short of the
understandings to ecological and environmental knowledge, the good consciousnesses of environment protection in
the process of ecotourism, which take ecotourism be equal to traditional tour or natural tour. In fact, the real
ecotourism is to take ecological protection as precondition, take the popularization of environmental education and
natural knowledge as core contents, and make more people further aroused their nice feelings of loving nature,
enhance their consciousnesses of environment protection when they enjoy and experience glory and graceful natural
scenes and taste returning to nature (Chen, 2006, p.84). Just because of the inapplicable concepts and inadequate
cognitions, the meanings and functions of the sustainable development of ecotourism has not fully been embodied.
2.2 Blindly developing and utilizing resources and lacking in the uniform programming
When many local governments develop ecotourism resources, they always lack in deep investigations and full-scale
scientific demonstrations, assessments and layouts, or though they establish the tour layouts, but the layouts are not
performed well in the practice. And to blindly develop, to be eager for quick success and instant benefit, to
emphasize development and to despise protection in the exploitation all induce damages and wastes of many
irreproducible and precious tour resources (Zhao, 2006). In addition, some layouts in some areas are established by
investors who always start from the authorized rights or the benefits of their own departments or enterprises and
don’t organically combine the environmental, social and economic profits to perform the layout.
2.3 Tourists are seriously superfluous and overstep the ecological enduring capability of the landscape
The idea of emphasizing development but despising protection always makes the development businessmen
establish the economical targets and restrict the amounts of the tourist without thinking about the ecological
enduring capability. It induces the direct threats to the ecological environment of landscape. These threats include
seriously superfluous tourists in nature reserve and landscape and famous scenery etc. in the midseason of tour, and
solid wastes, water pollution, air influences and noise brought by tourists. This not only influences the tour quality,
but also seriously destroys the brittle ecological environment of precious reserve. When a great deal tourists swarm
into the reserve, the excessive tramples and leaving around various garbage such as plastic bottles, plastic bags and
pop cans etc., and the living sewages let by the tourist industry, all induce the interferences and damages to the
environment of tour zone and wildlife.
2.4 Legal system is unsound and the management is not normative
There is still not a special law about ecotourism in China, though in practice, it can refer to some items in the
relative laws but which always are short of pertinence and veracity, and strict bylaws and effective supervising
mechanism in the microcosmic management. The managing level of many ecotourism areas is very low, the
relations among rights, responsibility and benefit are not treated well in many charging departments, and the
phenomenon of multi-ply management is serious. At the same time, in the managing group of ecotourism, many
personnel without systematic trainings of professional knowledge only depend on the method of general
administration management to manage ecotourism. When this tour resource is developed in many areas, many wild
animals suffer abuse catch and killing because of unsound management and weak law enforcement. Adding the
drive of economic benefits, this managing mechanism make the uniform layout and management become difficult
and can not ensure the sustainable development of ecotourism from the system.
2.5 Serious pollution and damage of environment in tour areas
According to the investigation, the water quality, air, soil and vegetation of vast majority of tour landscapes in China
have been polluted and damaged to some different extent, noise and soot have also exceed the stated standards, and
over standard of harmful substance and acid rain in the atmosphere are prevalent at present. At the same time, some
tourists’ bad living habits work the tremendous increase of living sewage, garbage, waste residue and rubbish in the
landscape (Liang, 2006, pp.72-74). These reasons all induce the decline of environmental quality and tour value in
the tour areas.
To pursue unilateral economic benefits, some tour areas build many artificial houses and architectures in the interior
of the landscape and damage the integrated and harmonious characteristics of the landscape. At last, the flooding of
artificial landscape and establishment and the sameness of landscape become very serious. Simultaneously, the
environmental pollution and the invading of exotic species also threaten the diversity of the biology in the ecological
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area and induce the local rare species are in severe danger. And the commercial development and exterior people
and cultures will all bring large impacts to the special culture and traditional custom in the tour areas.
3. The main strategies of the sustainable development of China’s ecotourism
3.1 Essential premise: perfecting the relative legal system of ecotourism
The actual China laws including “Regulations for Nature Reserves”, “Environmental Protection Law of the People’s
Republic of China”, “Forest Law of the People’s Republic of China” etc. can not fulfilled the requirements of rapid
development in ecotourism industry (Song, 2003, pp.55-59). To realize the sustainable development of ecotourism,
it must establish the law system and standards of ecotourism. It should combine the domestic actuality, take foreign
experiences as references, and quicken to establish relative laws such as “Law of Ecotourism” and its relative
detailed rules about implementing, “Quality Grade Standard of Ecotourism Area” and its implementing detailed
rules, “General Rules of Layout in Ecotourism Area”, “Byelaw of Resources management” and “Behavior Criterion
and Standard of Ecotourism” etc. At the same time, it should synthetically consider the ownership, management
right, development using right of ecotourism resources, establish the system of using with compensation,
synthetically using, constitute special tour enforcement organization and enforcement contingent which charge in
the drumbeating of legal system and enforcement check to ecotourism, and thereby make the decision-making,
layout, design, development, using and tour behavior in ecotourism have laws to go by and have regulations to abide
by.
3.2 Important guarantee: establishing the management system of ecotourism
The healthy management system of ecotourism is the important guarantee to the sustainable development of
ecotourism. Therefore, it firstly should adjust the present management system, tidy up relations among
administration management, industry management and ecology management and setup harmony organization and
comprehensive management organization of ecotourism sustainable development in term of the principles of
reasonable setting and scientific management. Secondly, it should constitute supervising management mechanism,
definitely delimit the responsibility and purview of resources managing department, environmental protection
department and tour administration department, in particular, it should strengthen the relations and cooperation
among different departments (Luo, 2002, pp.78). At last, the governing department should seriously perform the
functions of order management to ecotourism and resources protection, strictly examine and approve the
construction of ecotourism item in the nature reserves and special culture and society areas, quicken the structure
adjustment and reasonable development of tourist industry, and try to ensure the capital sources of the sustainable
development of ecotourism through multiform financing methods such as domestic and foreign loans, foreign
investment, project financing, international donation and personal investment and so on.
3.3 Necessary foundation: establishing scientific building layout of ecotourism
The scientific building layout of ecotourism can avoid the blind exploitation and unrestricted development, and it is
the necessary foundation for the sustainable development of ecotourism. Therefore, firstly, when we workout the
general layout of tour area, we must seriously investigate various resources which come down to the environmental
quality such as geological resources and biological resources (Zhao, 2006), scientifically measure the ecological and
environmental bearing capability of tour area, develop tourist industry in the permissive frame of ecological bearing
capability (Zhou and Wang, 2007, pp.51), and confirm the boundary of ecotourism area and the limiting range of the
ecotourism activities. Secondly, according to the layout, we should confirm the object and scale of development,
development position, space conformation, basic establishment, tour lines, consumer flow and capability and time
and fashion of tourism etc. At last, to ensure the high quality of ecotourism environment, the relative construction in
tour area must develop moderately, orderly and from different layer, and every project must evaluate its
environmental influences, and strictly control the scale, amount, material, sculpt and style of the service
establishment from the view of ecology.
3.4 Objective requirement: strengthen the ecological consciousness and ecological protection education
At present, the sustainable development of ecotourism has not completely been cogitated and understood by peoples.
Therefore, firstly, we should perform drumbeating and education to tour developers and managers, and make them
realize the essence of ecotourism in deed and establish the concepts of ecotourism. Secondly, the ecological
education and ecological moral education should be brought into the national education plan (Liang, 2006,
pp.72-74). Some ecological education should be often developed in the whole society through the methods such as
press drumbeating and subject lecture. In tour area, it can propagandize natural scientific knowledge through such
activities as launching hobbledehoy green camp, providing garbage bags and organizing citizens foster viewing trees
to enhance the tourists’ consciousnesses of environmental protection (Tu, Hou and Zhao, 2002, pp.40), and finally
make maintaining the sustainable development of ecology become people’s conscious behaviors and ethics. Thirdly,
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it should actively foster and introduce a great deal of professionals in the ecotourism aspect, strengthen the
researches about the ecotourism theory and layout, for offering talents guarantee to realize the sustainable
development of tourism. At last, the ecotourism area should enrich the cicerones’ ecological knowledge and make
them become the active propagandists of ecological protection who can perform vivid and vigorous environmental
educations to tourists in the process of tour.
3.5 Persistent impetus: ensuring the reasonable economic benefits of relative principle parts
When protecting natural environment, the sustainable development of ecotourism must attach importance to the
reasonable economic benefits and promoting the economic development in the local communities, especially
enhancing the local income level and increasing protection capitals (Luo, 2002, pp.78), which is the persistent
impetus to realize the sustainable development of ecotourism. Therefore, every project of ecotourism must perform
investment analysis of feasibility, which includes not only the propulsive and negative influences to natural
environment and social cultures, but also the development cost and marketable foreground of the ecotourism project,
and measure the economical, social and environmental benefits possibly brought by the project of ecotourism. At the
same time, it must establish reasonable distribution mechanism of benefits to make the enterprises which develop
ecotourism obtain corresponding returns, think much of the benefits distribution of local communities and the
increase of the protection capitals, especially bring along the development of local economy and increase the
denizens’ income through developing ecotourism, consequently offer persistent impetus for the sustainable
development of ecotourism.
3.6 Eternal pledge: establishing the sustainable development culture of ecotourism
Ecological consciousness is the comprehensive reflection of the values and moral outlook in the period of ecological
civilization. The sustainable development of ecotourism should depend on the tourists and managers to transit their
traditional tour concepts, establish brand-new values, world outlook, philosophy and scientific tour outlook, which
all has relate to some cultural backgrounds. Only under the supports of proper culture and philosophy backgrounds,
the sustainable development can become people’s self-conscious behavior fashion. To implement the sustainable
development strategies of ecotourism, the all-important thing is to change traditional culture and establish the idea
of the sustainable development to offer theoretic support and practice for the sustainable development of ecotourism,
and make ecological conscience, ecological justice and ecological obligation become people’s self-conscious
behaviors and ethics, effectively depress the destroying actions to zoology and ensure the sustainable exploitation
and development of ecotourism.
3.7 Important measure: enhancing the scientific content of sustainable development of ecotourism
Now the scientific foundation of ecotourism is instable in China, in the mass which is still in the development mode
with high speed but low quality. To implement the sustainable development, firstly, it must possess the concepts of
scientific innovation, carry out the strategies of scientific innovation to various layers of the development of
ecotourism in deed, and increase the investment of science and technology to ecotourism. Secondly, it should spread
mature advanced technologies such as the technology of electronic information, the technology of cleanness, the
technology of repair and the technology of assessment etc., and strengthen the cooperation with domestic and
foreign units of science and technology to perform theoretic and applicable researches aiming at some important
problems such as the sustainable using and development to the present ecotourism resources. At last, it should
establish the assistant system with expert layout and instruction of ecotourism, strengthen the associations between
ecotourism area and research organization of ecotourism and between management department of ecotourism and
research organization, and promote the technological and management innovation of ecotourism.
4. Conclusions
Nowadays, the sustainable development has become the important strategy to harmonize the relations among
population, resources, environment and economy for every country in the world. The sustainable development of
ecotourism is the outcome of this idea, which core is to harmonize the relations among ecological environment of
tour area, community and denizens of tour area and tourists, realize the stabilization, harmoniousness, sustainable
development for tourist industry and unisonous development of environment and human-beings.
Based on the actual situation and international direction, China selects and implements the sustainable development
strategy of ecotourism. At present, we should adequately recognize the situation, positively discover problems and
adopt accurate replying measures. Through a series of effective measures such as highly noticing, positively
participating, perfecting system, reasonable layout and strengthening management etc. in the whole society, the
sustainable development of ecotourism must be realized in deed.
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References
Chen, Lingling. (2006). A Study on Status Quo and Strategy of China’s Ecoturism. Jiangsu Business Forum. No.158
(9). p.84.
Liang, Xinwu. (2006). On Sustainable Development of China’s Ecotourism. Policy-making Consultancy Reportage.
No.73 (3). pp.72-74.
Luo, Mingyi. (2002). Sustainable Development of Ecotourism: Commentary on Asia-Pacific Conference at
Ministerial Level. Tourism Tribune. No.17 (3). p.78.
Lu, Yunting and Wang, Jianjun. (2001). Ecotourism. Beijing: Tour Education Press. p.213.
Song, Weiliang. (2003). Ecotourism: the Main Orientation of Sustainable Development of China’s Tourism. Journal
of Zhongnan University of Economics and Law. No.139 (4). pp.55-59.
Tu, Xiangbo, Hou, Lichen and Zhao, Li. (2002). Analysis of Countermeasures on the Sustainable Development of
Ecotourism. Environmental Protection Science. No.113 (28). p.40.
Zhao, Chunyu. (2006). Analysis of Sustained Growth of Ecological Tourism. Journal of Harbin University of
Commerce. No. 90 (5). p.87.
Zhao, Zongbiao. (2006). Probing into the Problems of Sustainable Development of China’s Ecotourism. Economist.
No.208 (6). p.149.
Zhou, Xianghong & Wang, Lei. (2007). Revelations of Sustainable Development Practices on Ecotourism in Canada.
China Environmental Protection Industry. No.177 (1). p.51.
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The International Valuation Standards (IVS, 2003) has defined value as “the price most likely to be concluded by the
buyers and sellers of a good or service that is available for purchase. Value establishes the hypothetical or notional
price that buyers and sellers are most likely to conclude for the good or service. Value is not a fact, but an estimate
of the likely price to be paid for a good or service at a given time in accordance with a particular definition of
value.” (page 465) This definition has not explicitly limited property valuation to physical attributes like location
and external factors like interest rates yet extant valuation literature and practices advocate exactly these.
Furthermore, we find that this definition is surprisingly fluid and could have accommodated the definition of
hedonic and instrumental value from consumer behaviour although in valuation, this is not yet in practice.
Further definition for the concept of value in the same document highlight the calculative and financial aspects of
valuation. According to the document, “the economic concept of value reflects a market’s view of the benefits that
accrue to one who owns the goods or receives the services as of the effective date of the valuation.” (page 36) This
definition is clearly grounded in the economic theory of supply and demand where decisions are made based on a
problem-based, trade-off approach. However, what we find interesting is “a market’s view of the benefits” could
easily be interpreted in many ways. For one consumer, a house may bring psychological benefits such as a sense of
achievement. For another, it may be a hedonic benefit of stylish luxury and yet for some, it could mean an
economic benefit of capital gains or convenience of location. Thus, we argue that residential property valuation
should take into account non-economic benefits from the consumer’s perception.
Another definition that stresses the systematic, economic approach of valuation can be found in the same document
on non-market based valuation. It states that non-market valuation is when “an investor may apply a rate of return
that in non-market and particular only to that investor. In applying an income capitalisation approach to determine
the price that investor is willing to pay for particular investment based on the investor’s anticipated rate of return, a
Valuer arrives at an estimate of Investment Value or Worth rather than market Value.” (page 46) Under this
definition, we argue that the home buyer is inappropriately classified as an “investor” when not all buyers are
necessarily investors in the economic sense - many people buy houses for homes, for security and for family
continuity (Dupuis & Thorns, 1996). Furthermore, applying income capitalisation to determine property price
presumes that market participants will demonstrate rational behaviour although it has already been long established
in marketing that this is impossible - that consumers can be irrational and impulsive. Despite their income and
affordability levels, consumers can act inconsistently and influencing factors can be attributed to emotions and
moods, personality, lifestyles, attitudes, reference groups, household decision-making and this list is not yet
exhaustive.
2.1 The Problem with “Value” in Property Research
As demonstrated, valuation studies in real estate have taken on the assumption that housing choices and hence prices
are always based on economic theory of utility and preceded by lengthy rational decision making. There is a long
held belief among academics and practicing valuers that ceteris paribus, property prices should be determined by
“sequential and analytic processing of information based on appraisal of the environment” (Chaudhuri, 2006, page
3). In property valuation, it is assumed that people value property for its extrinsic monetary rewards such as return
of investment based on size, location and potential of rental income. This view is in line with the definition of
utilitarian or functional value outlined in consumer behaviour. Utilitarian has been described as ergic, task-related
and rational (Batra & Ahtola, 1991; Engel, Blackwell, & Miniard, 1990; Sheth, Newman, & Gross, 1991) and a
utilitarian-based purchase is said to be one made in a careful, deliberant manner (Babin, Darden, & Griffin, 1994).
This is understandably so taking into account the historical advancement of the discipline of valuation and consumer
behaviour from the utility theory of economics, commonly known in terms of “rational economic man.” This value
is validated to the ability of a house to perform its functional, utilitarian or physical purposes. However, French &
Wiseman (2003) have already warned of the inadequacy of valuation models which have too long relied on
comparison of price as a tool of analysis and ignored the viewpoint of the valuation user. We are in accord with their
reflection and in support that the purpose of any method of valuation is to model the thought process of the players
in the market. We extend this thought further by drawing upon consumer behaviour.
2.2Value in Consumer Research
Like valuation, the notion of value in consumer behaviour has a long history in economics and therefore its
utilitarian value is acknowledged in consumer behaviour. However, researchers in consumer behaviour have also
noted emotional value - the less tangible value of certain products because of their facility to arouse emotion. A
house is the best example, considering the large financial undertaking, the infrequency of the purchase, the
responsibility and commitment associated with the purchase and the attached symbolic meanings to the purchase
(Despres, 1991; Dupuis & Thorns, 1996; Marcus, 1995). When people attach their own meanings to a home, they
naturally attach feelings and emotions to it. The home as a product class then becomes important due to its
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intrinsic needs and values. While the property valuation literature emphasizes utilitarian value, our take from the
perspective of consumer behaviour offers additional insights by suggesting that property valuation should not be all
that objective because consumers do place value on products based on emotions and “how-do-I-feel-about-it?”
heuristics (Pham, 1998). Value’s subjective nature should be recognised and equated with the overall assessment of
worth considering all relevant evaluative criteria (Babin, Darden, & Griffin, 1994; Hirschman & Holbrook, 1982;
Holbrook & Hirschman, 1982). In Table 1, we illustrate the clear distinction between utilitarian and non-utilitarian
value in the two disciplines of property valuation and consumer behaviour. From this table, it is apparent that the
much needed conceptual bridge between the cold aspects of residential property valuation and the hot aspects of
consumer behaviour is the idea of emotion. After all, “a valuation of property based on solely physical attributes
may fail to capture the value buyer places on the ability of the property to satisfy non-financial and non-physical
needs” (Gibler & Nelson, 2003) such as family security, family continuity (Dupuis & Thorns, 1996) and
expression of individuality.
In the section that follows, we outline antecedents of emotion and emotional value with applications to real estate
valuation.
3. Beyond Reason: Emotion
Emotion and the role it plays in marketing management has only recently become a subject for consumer behaviour
researchers (O'Shaughnessy, 2002; Richins, 1997; Bagozzi, 1999). Marketers recognize that unlocking the secrets to
why consumers behave the way they do is a potential goldmine in today’s competitive markets. Although the writers
and philosophers of the eighteenth century recognized man had emotions and feelings, it was regarded by most that
these were secondary to his rational and logical nature. Early economic theory incorporated the idea of man as a
rational being seeking to satisfy his/her needs. Thus, as marketing theory and valuation theory emerged (both from
the economic paradigm), they too incorporated the model of the ‘rational consumer’. It had long been noticed
however that people did not always react logically or rationally as economic theory would predict – marketing has
begun to accept this in the 1980s but the same has not yet been observed in property valuation.
3.1What is Emotion?
This section will present a framework for considering emotions in property valuation; to expound the influence of
emotion in consumer decision-making and to review how emotion in consumer behaviour can contribute towards
more accurate property valuation. It is appropriate that we begin with a definition of emotion but a review of the
emotion literature proves this to be too difficult as there is little consistency in the definitions of emotion. Instead,
we will specify the characteristics of emotion with regards to its relevance and application to property valuation.
One of the most widely agreed characteristics of emotion is that it is a mental state of readiness that arises in
response to negative or positive appraisals of events or thoughts that are relevant (Bagozzi, Gopinath, & Nyer, 1999;
Chaudhuri, 2005; O'Shaughnessy & O'Shaughnessy, 2002). Bagozzi, Gopinath & Nyer (1999) defined appraisals as
“evaluative judgment and interpretation” and relevance as having “personal meaning” (page 185). Appraisals in
valuation are generally accepted to be thought-generated and cognitive but it is established in the emotion literature
that what concerns us is subconsciously processed in the mind and this results in a reflex, impulsive emotion
(Damasio, 2000; Evans, 2001; Fiedler & Forgas, 1988; Zajonc & Markus, 1982). When buying a house as our own
home for example, there is an immediate appraisal (whether or not the house is in a good location) that
automatically gives rise to emotion (whether we or not we like this house). This process is of consumer perception
leading to emotional experience with no conscious cognition between them.
Secondly, emotion has an object so we speak of being proud of our house or falling in love with the view. The object
of the emotion need not be tangible because consumers can get emotional about things they imagine to be true
(O'Shaughnessy & O'Shaughnessy, 2002). This is common in home purchase as we often hear remarks like “We
just fell in love with it!” or “When we walked into the house, it just felt right!” used to refer to their home choices.
This in consumer behaviour, is known as emotional value, defined as monetary worth of feelings when consumers
experience a product positively (Sheth, Newman, & Gross, 1991).
Finally, emotion provokes a tendency to action (Bagozzi, Gopinath, & Nyer, 1999; O'Shaughnessy &
O'Shaughnessy, 2002; Zhu, 2002). The feelings of anger and frustration at being outbid at a home auction may
provoke the tendency to aggressive counter bidding, long past the maximum bid limit.
In exploring the housing choice and property valuation literature, we have been struck by the apparent lack of
consideration of the fact that home choice may not necessarily implicate complex decision making processes. This
despite the fact that mainstream literature and the business press have published extensive examples that suggest this
phenomenon and point to the role of emotions as a significant influencing factor in consumer home choice (De Roos
& Somers, 2000; Fahy, 2006; Hamilton, 2006; Newland, 2002). Bond (2002) who studied the effect of lake views on
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International Journal of Business and Management October, 2007
home value has assumed lake views to be another home attribute and data for the research was collected in a
quantitative, mathematical formula. Emotion was not mentioned when clearly for most consumers, positive emotion
is evoked with the presence of water and homes with lakefront views have emotional value. In addition, water views
may also suggest the idea of outdoor living and entertainment and the home now has what consumer behaviour
believes to be social value. If this is right, then one of the most significant implications is that many of the theories
applied in housing valuation models would now be less applicable than has been assumed.
Thus, the implications of emotion and its values are important and should be considered by researchers in valuation.
In the next section, we highlight this along with some suggestions for future research.
4. Some After-Thoughts and Future Research
An understanding of emotion and consumer behaviour is particularly useful to policy makers. The purpose of this
paper is to illustrate the two sources of value (rational and emotional) that consumers can have with their property.
Most of the literature on property valuation has an economic and finance emphasis. We think emotion has been
excluded from property valuation on the general assumption that they are irrational as the concept of emotion is
commonly associated with being out of control, inaction and irresponsibility. This assumption is however invalid as
many studies on emotion have proven otherwise. For example, on study concluded that emotion is a necessary tool
for decision-making because it supplements our limited computational abilities (Hanoch, 2002). This is proven when
patients with brain damage in some specific spots in the prefrontal cortex areas experience a decrease in emotional
feelings thus leading to severe impairment in decision-making even though they continue to have intellectual
abilities and general knowledge (Damasio, 2000). Further evidence suggests that the role emotions play in
decision-making is much more significant than has previously been acknowledged as emotions can help to prevent
our decision calculations from becoming so complex that decisions would be impossible (Zhu, 2002).
In this paper, we have stressed for the impact of human and emotional factors to be considered in residential real
estate valuation. In doing so, we mean neither to negate established market practices nor to minimize their
importance - we are only saying that in themselves, they do not always tell the whole story. Hence, we suggest that a
significant connection exists between emotion and property prices – the most valued property may not always have
the most number of bedrooms, generate the most rent nor centrally located in the city. We are aware that it may be
too complex to put figures and numbers to subjective emotions but using simplified postulations to ignore these
complexities is no way to progress knowledge in this area. Researchers in psychology and consumer behaviour have
already designed instruments for measuring emotions, some more developed than others. We thus make our first
suggestion - that real estate and valuation researchers should embrace the study of consumer behaviour to better
understand the reasons behind consumer home choices and property valuation. This could lead to new valuation
models that will more accurately reflect house prices.
4.1Emotional Value
In respect of this, we would also propose the incorporation of e-value-ation – residential property valuation that
takes emotional value into account. We believe consideration for e-value-ation will lead to a more realistic
representation of property prices, a much better indicator of true home values and enhanced valuation accuracy.
Feelings toward a purchase should be perceived as more relevant when the purchase is evaluated for consummatory
reasons than when it is evaluated for instrumental reasons (Pham, 1998). Can the measurement of emotion
developed in psychology and consumer behaviour be incorporated into property valuation? The answers to this, we
believe, will move research in property valuation forward.
The New Zealand Real Estate Consumer Survey in 2003 reported that the percentage of unconditional contracts has
increased (Crews & Dyhrberg, 2004). This could be an indication for the increased number of sales in the year but if
buyers are rationally considering economic and utilitarian value, should they not make contracts conditional to
protect them from potential threats of loss? A study investigating into the correlation between emotion and
unconditional contracts should be on the agenda for future research as it would provide more insights on the
influence of emotion in the decision-making process of home buyers.
An appreciation of how and what home buyers come to view as valuable is advantageous to practitioners in
predicting accurate property value. This understanding will lead to better explanations and predictions in real estate
valuation and, as subsequently, greater success in real estate markets. Our own current ongoing research project
deals with the influence of emotions in residential consumer’s home choice, this we aim to research and report back
on in more depth in subsequent work.
5. Conclusion
Given the common belief that emotions serve as primary motivators of home purchasing behaviour, the absence of
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emotion in property valuation research and the scarcity of it in real estate literature does raise concern. The
discipline of property valuation has evolved from early economic theory, which incorporated the view of the
consumer as a model of rationality and logic. Hence, when valuation theory began to emerge, it had no place for
emotions in its reasoning. We have attempted to address this issue by initiating an investigation into consumer
behaviour and emphasizing the need for outcome measures capturing the basic value distinction in property
valuation.
Marketers are aware that what resonates with the consumer at an emotional level will play a major role in any
purchasing decisions the consumer makes. Consumer behaviour research has shown that effective marketing uses a
combination of approaches that satisfy the rational side of the consumer as well as appealing to their emotions and
those feelings which influence their buying decisions. We believe it to be crucial for property valuation practitioners
and researchers to understand that the functional attributes of a product no longer solely drive consumer purchasing
behaviour. Finally, we wish to emphasize that we are not promoting for emotions to be the sole measure in property
valuation. Rather, our assertion is that emotions should not be ignored and would be very useful when applied in
combination with reason.
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Damasio, A. R. (2000). Descartes'error: emotion, reason, and the human brain: Quill.
De Roos, D., & Somers, J. (2000). The New Zealand Investor's Guide to Making Money in Residential Real Estate
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development. Journal of Architectural and Planning Research, 8(2), 96-115.
Dupuis, A., & Thorns, D. C. (1996). Meaning of Home for Home Owners. Housing Studies, 11(4), 485–501.
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Evans, D. (2001). Emotion: A Very Short Introduction. New York: Oxford University Press.
Fahy, B. (2006, 21-22 October 2006). Climbing the Property Ladder. Otago Daily Times, pp. 53-54.
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CJ Hogrefe.
Gibler, K. M., & Nelson, S. L. (2003). Consumer Behaviour Applications to Real Estate Education. Journal of Real
Estate Practice and Education, 6(1), 63-83.
Hamilton, D. (2006). Real Estate Marketing and Sales Essentials: Steps for Success. Australia: Thomson.
Hirschman, E. C., & Holbrook, M. B. (1982). Hedonic Consumption: Emerging Concepts, Methods and
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Holbrook, M. B., & Hirschman, E. C. (1982). The Experiential Aspects of Consumption: Consumer Fantasies,
Feelings, and Fun. The Journal of Consumer Research, 9(2), 132-140.
Marcus, C. C. (1995). House as a Mirror of Self: Exploring the Deeper Meaning of Home: Conari Press.
Newland, O. (2002). The Rascal's Guide to real Estate. Auckland: Empower Leaders Publishing
O'Shaughnessy, J., & O'Shaughnessy, N. J. (2002). The Marketing Power of Emotion: Oxford University Press,
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USA.
Parker, D. (2006). Towards a Coherent Theory of Valuation. Pacific Rim Property Research Journal, 12(4), 426-445.
Pham, M. T. (1998). Representativeness, Relevance, and the Use of Feelings in Decision Making. The Journal of
Consumer Research, 25(2), 144-159.
Sheth, J., Newman, B., & Gross, B. (1991). Consumption Values and Market Choices. Cincinati, Ohio:
South-Western Publishing Co.
Zajonc, R. B., & Markus, H. (1982). Affective and Cognitive Factors in Preferences. The Journal of Consumer
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Zhu, J. (2002). Emotion and action. Philosophical Psychology. 15(1), 19-36.
Table 1. The constructs of “value” in consumer behaviour and property valuation.
consumer behaviour property valuation
Emotional Rational
Heuristic Systematic
It-feels-right/It-fits-like-a-glove Informative
Peripheral Central
Feeling-focussed Problem-focussed
Affective Cognitive
Subjective Calculative
Feeling Thinking
Holistic and synthetic integration of sensory data Sequential and analytic processing of information
from the external and internal bodily environments based on appraisal of the environment
Is an immediate and direct subjective experience Results from the interpretation of sensory data and
involves judgements about phenomena.
Extracted from Petty & Cacioppo (1986),Batra & Ahtola (1991), Babin, Darden & Griffin (1994); Dhar &
Wertenbroch (2000), Voss, Spangenberg & Grohmann (2003), Chaudhuri (2005).
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The multi objectives of the government in the SOE auction make the selling mechanism more like a
multi-dimensional bidding: potential investors compete not only in the selling price of the SOEs, but also in the
quantity of employment the new enterprise can accommodate, the rearrangement of former managers, and the
expected profit margin of the new enterprise etc. The government will employ a scoring rule in the bidding, giving
corresponding weights to different competing items, and then convert investors’ bids into scores. Based on the
ranking, it rewards the enterprise. Now the research on multi-dimensional bidding is quite limited (Milgrom, 2004).
Che (1993) and Rezende (2002) prove that in order to increase the auction revenue, the seller should deviate the
scoring rule towards the weaker bidders to strengthen their competing ability, which can force the stronger bidders
to bid more aggressively. Rezende also find when announcing the scoring rule to the buyers, the seller could obtain
the largest revenue. Nonetheless, Cripps and Ireland (1994) point out that it is unfeasible to introduce
multi-dimensional competition in practice. In the procurement, they say, although the purchasing contract includes
the competition of price and quality of the goods, it is difficult to make a comparison on different qualities because
there are various measurements of quality, and the buyer himself could not describe his preference function about it
fully. As a result, it is impossible to set a particular quality specification to monitor the seller to ensure enforcement
of the contract. Consequently, a more reasonable route they suggest is to decide a minimum quality standard to
choose among the sellers, and those whose quality exceeds the threshold will be invited to compete over price. They
argue that this mechanism is revenue equivalence to the one in which bidders bid in both price and quality
simultaneously, like in the scoring auction, and in both mechanisms the minimum quality could be obtained equally.
To sum up, the existing studies mainly resolve how the government could implement an optimal SOE auction when
facing the trade-off between revenue maximization and efficiency, but how to balance between revenue
maximization and political factors is still unsolved. Although some research investigates the influence of political
factors on auction revenue, the bidding mechanism discussed is quite different from Chinese practice. Therefore,
this paper which is based on the work of Cripps and Ireland (1994) and Frutos and Pechlivanos (2005) aims to
analyze a widely used SOE auction mechanism in China, that is, the first-price bidding with employment constraint.
In this mechanism, the government predetermines the minimum quantity (threshold) of positions the winning
investor has to offer to the former SOE employees in the new enterprise. Then the investors compete only over price,
and the one who bids highest wins the SOE, but he must accommodate the employees according to the government’s
requirement. Obviously, by choosing the threshold the government can affect the investors’ bidding strategies to
achieve its dual-objectives: maximizing the auction revenue and minimizing the induced unemployment. As
investors differ in their costs of accommodating excess employees, and this dispersion will ultimately be reflected in
their estimate value and bids on the SOE, the first-price bidding with employment constraint is in fact a
dual-dimensional bidding, in which potential buyers will compete in both the price and the quantity of employment.
According to Cripps and Ireland (1994) this mechanism is to some extent equivalent to the scoring auction of
simultaneously bidding on the same two items, therefore it has extensive applicability.
2. The Model
There are two objectives for the government in the SOE auction: maximizing the auction revenue and minimizing
the induced unemployment. The government’s preferences are summarized in the following utility function:
U G = aR + (1 − a)l (1)
where R represents the revenue the government can obtain in the auction, a ∈ [0,1] denotes the relative weight of
revenue to the government’s utility, and l is the minimum quantity of employment the government requires the new
enterprise to accommodate. In fact if we assume that the allocation of labor in the new enterprise is efficient, then l
can be seen as the excess labor the government forces the new enterprise to accept. When there is no such
requirement, it will not offer any positions, i.e, l=0. Under this condition, the investors will not calculate the
accommodating costs before the auction and the first-price bidding with employment constraint will go back to the
ordinary single-dimension competition of price. Clearly, the government will maximize its expected utility by
choosing the best minimum required quantity of employment
Further, we suppose that there are two risk-neutral investors, indexed by i (i=1, 2), interested in acquiring the SOE.
Let gi represent the expected profit i can realize when the SOE is under his management, and it is assumed that g1
and g2 are independently and uniformly distributed on [0, g ] according to an identical cumulative distribution
Next, we suppose that the unit cost of investor i to accommodate one additional excess labor is ci , where ci is the
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independent private information of each investor, uniformly and identically distributed on [0, c] . Denote Fc and fc
the cumulative distribution function and density function of ci respectively. Besides, gi and ci are assumed to be
independent for any investor i.
Finally, investor i’s estimate value to the selling enterprise is vi, determined by the difference of the expected profit
he could earn and the accommodating cost he has to pay for, i.e., vi=gi-ci·l. Then the utility function of investor i can
be written as follows:
Ui = gi − ci l − bi = vi − bi (2)
where bi is the bidding strategy investor i uses in the SOE auction and his objective is to choose the best bi to
maximize his expected utility. The timing of the game is in the figure below:
Time
⎪
⎪⎪ cl v
Fv ( v ) = ⎨ + , 0 ≤ v < g − cl
⎪ 2 g g
⎪ 1
⎪1 − ( v − g ) 2 , g − cl ≤ v ≤ g
⎪⎩ 2 g cl
where Fv(v) is increasing in v.
If investor i’s estimate value to the selling SOE is less than zero, he will not participate in the auction and the
probability is Fv (0). Therefore, we only consider the nonnegative vi on the support [0, g ] . Suppose b (v) is
equilibrium bidding strategy. Then it is clear when investor j bids bj=b (vj) in the auction, investor i’s best response
will be:
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International Journal of Business and Management October, 2007
⎧ cl b −1 ( bi )
⎪ + , 0 ≤ v j < g − cl
where ⎪ 2g g
Pr( bi > b ( v j )) = Pr( b −1 ( bi ) > v j ) = Pr( v j < b −1 ( bi )) = ⎨
⎪1 − 1 ( b −1 ( b ) − g ) 2 , g − cl ≤ v < g
⎪⎩ 2 g cl i j
⎧ 1 −1 1 ∂ (b −1 (bi ))
⎪ − ( N + b (bi )) + ( vi − bi ) = 0, v j ∈ [0, g − cl ]
(4)
⎪ g g ∂bi
⎨ −1
⎪ −[1 − T (b −1 (b ) − g ) 2 ] + ( v − b )( − 2T )(b −1 (b ) − g ) ∂ (b (bi )) = 0, v ∈ [ g − cl , g ]
⎪⎩ i i i i
∂bi
j
Due to the symmetry between two investors, investor i in the equilibrium will also choose the strategy bi=b (vi), i.e.
b-1(bi)=vi. Thus we can rewrite group (4) as follows:
⎧ 1 1 ∂ (vi )
⎪ − ( N + g vi ) + (vi − b (vi )) g ∂b (v ) = 0, v j ∈ [0, g − cl ] (5)
⎪ i
⎨
⎪ −[1 − T (v − g ) 2 ] + (v − b (v ))( −2T )(v − g ) ∂ (vi ) = 0, v ∈ [ g − cl , g ]
⎪⎩ i i i i
∂b (vi )
j
⎪3 T (v − g ) − 1
2
⎩
where b(v) is continuous and increasing in v.
3.2 The Expected Utility of the Government
The expected auction revenue the government could obtain in the bidding is:
g 1 1 3 1 2 1 2 1 3 3 (6)
ER = 2 ∫ b ( v ) f v ( v ) Fv ( v ) dv = ( g − g cl + g c l 2 −
2
c l )
0
g 3 2 4 30
Remember with probability Fv(0) a fraction of the prospective investors will not find it profitable to participate in
the auction, which is translated as if both li=0 and bi=0. Then the probability that there is at least one investor is
1-(Fv(0))2. Therefore, the expected employees that can be settled down is equal to El= [1-(Fv(0))2]·l. At this point,
the government’s expected utility is readily available:
EU G ( l ) = aER + (1 − a ) El = a ⋅
1 1 3 1 2 1 2
( g − g cl + g c l 2 −
1 3 3
c l ) + (1 − a ) ⋅ [1 − (
cl 2
) ]l
(7)
2
g 3 2 4 30 2 g
Differentiating EUG(l) with respect to l we can get:
∂ [ E U G ( l )] 1 2 2 3 2 2 2 2 (8)
= [(4 5 a c − 4 5 c − 6 a c ) l 2 + (3 0 a g c ) l + (6 0 g − 60 a g − 30 a g c )] = 0
∂l 60 g
2
(1) a=0
a=0 represents that the government only cares about whether the original SOE employees can be accommodated in
the new enterprise. Here the best minimum required quantity of employment is l ∗ = 2 3 ⋅ g . Obviously, we can get
3 c
∗
∂(l ) , which means the larger the difference of expected profit potential investors can realize after winning, the
>0
∂g
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more quantity of employment the government can help to secure. Hence the government should introduce more
∗
strategic investors with considerable heterogeneity to participate in the auction. On the other hand, ∂(l ) < 0 shows
∂c
that the smaller the unit cost dispersion of accommodating an additional excess labor, the more original employees
the government can settle down. Therefore, the government should attempt to reduce or eliminate the
accommodating cost dispersion of different investors, like by specifying an explicit compensation standard for the
induced lay-offs according to the local economic development level. No matter who wins the SOE in the end, he is
supposed to compensate the employees losing their jobs in this property exchange based on this standard.
Besides, it can be found that when a=0, the auction revenue the government can earn is ER (l ∗ ) =
g
(90 − 49 3) > 0
,
135
which indicates the advantage of selling the SOE by an auction mechanism compared with negotiation (or
bargaining), another selling mechanism used in Chinese SOE privatization. That is, even if the government regards
the revenue maximization objective on no account in the first-price bidding with employment constraint, it still can
obtain a positive revenue by introducing an auction, which never happens in negotiation.
(2) a=1
When a=1, the government only cares about the revenue maximization objective. Thus no matter how many
employees the government requires the investors to accommodate, it is implausible for them and they will offer no
position for the excess labor in the new enterprise. At this point, each investor’s valuation towards the selling SOE
will be solely determined by the expected profit he could earn when operating the firm, i.e. vi=gi. Due to the change
of valuation basis, the first-price bidding with employment constraint will return to the ordinary single-dimension
competition of price. Therefore, when a=1, l∗ equals to zero. In fact it can be proved that there exists an a1 ∈ [0,1] ,
when a>a1, l∗=0. That is to say the optimal quantity of employees the government can secure has declined to zero
even before it does not care about the employment problem at all, i.e. a=1. Therefore if the government wants to
achieve the objective of minimizing the induced unemployment in selling the SOE, it should appear strong against
the settlement of excess labor and signal out this attitude to potential investors, even if it genuinely prefers to the
auction revenue. Otherwise the government will fail to secure any original SOE employees, even though there exists
an employment constraint in the bidding. Nonetheless, such policy needs strong commitment ability of the
government. Besides, when a=1 and l∗=0, the expected auction revenue the government can raise is g , far larger
3
than g
(90 − 49 3) when a=0.
135
(3) 0<a<1
Proposition 2. When a ∈ (0,1) , for any c ≥ 0 , there exists an a = (11 − 61)c + 60 ∈ (0,1) when 0<a<a1, the optimal
1 2
c + 22c + 60
quantity of employees the government can rearrange in the SOE auction is 5ac + ∆ g , where
l∗ = ⋅
15 − 15a + 2ac c
2 ∗
∆= (5c +110c +300)a2 −(110c +600)a+300 ≥ 0; when a1<a<1, l =0 and the first-price bidding with employment constraint will
2 2 2
Then calculate δ = B2 − 4AC = 36c g [(5c +110c + 300)a2 − (110c + 600)a + 300] .
2
Denote s(a) = (5c +110c + 300)a2 − (110c + 600)a + 300 = A1a2 + B1a + 300 . Resolving s ( a ) = 0 we can get: a = (11 − 61)c + 60 .
1 2
c + 22c + 60
optimal quantity of employees the investors have to settle down will lead to the decrease in the auction revenue.
Proof: When 0 < a ≤ a1 , ∂ l ∗ ( a ) = 5 g (1 5 ∆ + 3 7 a c + 2 8 5 a − 2 8 5 ) .
∂a 2
(1 5 − 1 5 a + 2 a c ) ∆
∗ 2
It is easy to verify ∂l∗(a) =150 3 −285< 0
, ∂l (a) =
−(37 61−122)c −(915+285 61)c , and ∂ 2l ∗ (a) is monotonic on
≤0
∂a a = 0 ∂a a =a1 2
c +22c+60 ∂a 2
∗
(0, a1 ) . Therefore we can get ∂l (a ) < 0 .
∂a
3 2
From ∂[ER(l )] = − 1 ⋅ c ⋅[(l − 5 ⋅ g )2 − 5 ⋅ g ] and 0 ≤ l ≤ 2 3 ⋅ g , ∂[ ER (l )] < 0 is proved
∗
(Q.E.D)
∗
∂l 10 g 2
2 c 4 c 2
3 c ∂l
While the government’s dual-objective trade-off between maximizing the auction revenue and minimizing the
induced unemployment is verified in Proposition 3, the intuition behind it is the following: increase in the quantity
of employees the investors are required to settle down in the new enterprise lowers the ex post expected profit of all
prospective investors equally. The more employees the new enterprise is required to accommodate, the lager cost it
would spend and the less valuation the investor would give to the selling SOE and ultimately the less bidding in the
auction. More importantly, when government adds the employment constraint into the SOE auction, it increases the
advantage of those investors whose accommodating costs are relatively low. Compared with single price
competition, the dual-dimensional bidding enables bidders to arrange the bids according to their comparative
advantages on different competing items under the condition of winning. As a result, the bidder with lower
accommodating cost will stress his advantage by employing more original SOE workers and bidding less in
purchasing price, which will lead to the reduction of the auction revenue.
Here, from ∂ (l ∗ )
<0
, ∂ (l ∗ ) > 0 and ∂(l ∗ )
<0
, it can be summarized that the more the government emphasizes the
∂a ∂g ∂c
benefits of the SOE employees, expressed in terms of a less value of a, or the larger the dispersion of expected profit
potential investors can earn from operating the SOE, i.e. a larger g , or the smaller their accommodating cost
differences, a smaller c , the more employees the government can secure in the SOE auction. Therefore, the
government should appear strong against the constraint of accommodating excess labor, collect more strategic
investors with considerable heterogeneity to participate in the auction and attempt to eliminate the accommodating
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cost dispersion of different investors by setting a definite compensation standard for induced lay-offs. In this way, its
dual objective can be well balanced.
4. Conclusion
In the privatization of the SOE, the benefits of its stakeholders are going to be readjusted, therefore the government
that carries out this property right reform has to consider all parties’ interest in order that the transaction could go
smoothly. The government’s dual-objective: maximizing the auction revenue and minimizing the induced
unemployment is often cited. How to trade off between one another? To answer this question, this paper analyzes the
first-price bidding with employment constraint, a widely used SOE selling mechanism in China. By adding the
constraint that the new owner of the selling enterprise is required to accommodate a certain quantity of original SOE
employees or equally compensate the induced lay-offs, the mechanism brings on the competition among prospective
investors in both the price and the quantity of employment, which can help the government balance the different
objectives effectively. It shows that increase in the quantity of employees the investors are required to settle down in
the new enterprise will lead to the decrease in the auction revenue. One important reason is that it strengthens the
advantage of those investors whose accommodating costs are comparatively low, and this will consequently restrain
their high bids in the competition of price dimension. Anyway, if the government wants to protect the benefits of
SOE employees and raise a high SOE auction revenue simultaneously, it should appear strong against the constraint
of securing excess labor and signal out this attitude to the prospective buyers, although it demands strong
commitment ability of the government; otherwise the constraint will not work as it is expected. Meanwhile, the
government should introduce more strategic investors with considerable heterogeneity to participate in the auction
as well as significantly reduce or eliminate the accommodating cost dispersion of different investors, like by setting
an explicit compensation standard for the induced lay-offs in the SOE auction.
Admittedly, when the former managers of the SOEs participate in the auction, the assumption of symmetry amongst
the prospective investors would fail to hold, because the managers have the information advantage over the other
outside buyers. At this point, what the equilibrium strategies of both sides would be and how the government can
realize its objectives etc, will be addressed in the future research.
R e f e re n c e s
Branco F. (1997). The Design of Multidimensional Auction. Rand Journal of Economic. 28(1), 63-81.
Che Y K. (1993). Design Competition through Multidimensional Auctions. Rand Journal of Economics. 24(4),
668-680.
Cornelli F. and Li D. (1997). Large Shareholders, Private Benefits of Control, and Optimal Schemes of Privatization.
Rand Journal of Economics. 28(4), 585-604.
Cripps M., and Ireland N. (1994). The Design of Auctions and Tenders with Quality Thresholds: The Symmetric
Case. Economic Journal.104, March, 316-326.
Frutos M., and Phchlivanos L. (2005). Auction off with a Split Mind: Privatization under Political Constraints.
Universidad Carlos III de Madrid Spain Athens University of Economics & Business DIEES Greece. 1-19.
Jehiel P., Moldovanu B., and Stacchetti E. (1999). Multidimensional Mechanism Design for Auction with
Externalities. Journal of Economic Theory. 85, 258-293.
Laffont J. and Tirole J. (1987). Auctioning Incentive Contracts. Journal of Political Economy. 95(5), 921-937.
Maskin E. (1992). Auctions and Privatization. In: H.Siebert (Ed.) Privatization. Kiel: Institut fur Weltwirtschaften
der Universitat Kiel. 115-136.
McAfee P., and McMillian J. (1988). Multidimensional Incentive Compatibility and Mechanism Design. Journal of
Economic Theory. 46, 335-354.
Milrgom P. (2004). Putting Auction Theory to Work. Cambridge: Cambridge University Press.
Milrgom P., and Weber R. (1982). A Theory of Auctions and Competitive Bidding. Econometrica. 50(5), 1089-1122.
Rezende L. (2004). Biased Procurement Auctions. Working Paper, Department of Economics, University of Illinois.
1-29.
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part in the real estate investment even though they have no amounts of money. Sixthly, REITs can confront inflation.
As the inflation rate (consumer price index) increases, the values of common fixed-return security face pressures of
decreasing. As there is inflation, rents, parking fee, and other REITs-related return will increase due to the rise of
price level. Their changes toward same direction indicate that REITs is capable of confronting inflation. Seventhly,
trading REITs in stock exchange has lower information asymmetry than directly investing real estate industry,
because its operation is supervised directly by independent directors, analyzers, auditors, commercial and financial
agencies.
2. The present development of Real Estate Investment Trust Funds (REITS) in China
The financial service is vital for national economy. But China is in short of financial products at present. Finance is
always an important investment field in China. Strong productivity creates huge social wealth, including enormous
capability of consumption, purchase, and investment. Because the financial products are in a great shortage,
abundant of wealth are kept by banks as deposits. That is why the bank deposit balance is high for years. On the
other hand, the financial reform in China is extremely complex and rough. The immense deposit-loan balance, the
non-performing loans, the capital adequacy, the credit-loan supervising system, the reform of exchange rate and
interest rate, the governance structure reform, the property system reform, and the openness of finance, each of them
may affect the whole.
China has issued the real estate trust product since 2002, which took the real estate project as an object in financing.
At present, the terms of the real estate products traded in the market are different, from one year to three years. Till
Nov. 2003, among the 24 real estate investment trust products, 15 of them have higher expected return than 10%,
and the lowest is 3%, higher than the interest rate on deposits of bank and the return of national debts at the same
period. The real estate trust products have gained success in investors.
As a gradually mature financial product, REITs shows its vigorous vitality and influencing effects. When the
development of REITs has reached certain degree, its needs for expansion and return can not be satisfied in the
national market with matured REITs. It has to expand outward. Five years ago REITs entered Asia and recently it
began to enter China. The common procedures include: the institutional investor purchases the property at a lower
price. Once the return increases, the investor will sell the property in the oversea REITs market and invest in new
property. This trend has become popular since this year that aroused intense attention in China. The GZI Real Estate
Investment Trust, the first real estate investment trust (REITs) in mainland, was listed in Hong Kong Exchanges on
21st, Dec. 2005, raising 1,700,000,000 HK$. Later, REITs prevails over China. Besides the Yuexiu Group, some
companies in mainland, including Wanda Group, and Tianjin Huayin, are making relevant researches and
preparations for issuing REITs. And it was said that China Resources and Shenzhen International Trust &
Investment were preparing for issuing REITs.
3. The meanings of developing REITs in China
Considering the present situation of real estate market in mainland, the development of REITs can help to regulate
its market and investment, supporting the health development of real estate market. From an angle of government,
the house speculators with amounts of civil capital threat the development of real estate industry in China. Therefore,
it becomes an important issue for government how to guide the individual investors. However, because the
investment of individual investors is not composite, they are usually incapable of resisting risks. Once the market is
in a vale, these investors will face enormous risks. Moreover, these investors may escape from regulation and
taxation. They may bring about chances for some canonical agencies. Developing REITs can provide medium- and
small-investors with chances in real estate investment that usually is the privilege of huge syndicate. At the same
time, it can ensure the property project that can not be accomplished by medium- and small-investors with sufficient
capital and ensure its accomplishment. Besides, the introduction of real estate investment trusts can help to circulate
property capital. The real estate investment trusts possess the function of values-maintenance. The return of real
estate investment is relatively stable. The inherited nature of real estate determines its values-maintenance capability.
It can weaken the influences of many non-systematic factors. Presently the trend of urbanization in China is strong
and houses become the first choice of people. Under the background of constantly increasing per capita income, the
proportion of housing consumption to the total consumption of needs will keep on rising. And the need for other real
estate will increase continuously. It determines that the expected long-term return of real estate investment must be
higher with the precondition that the whole real estate investment does not enlarge blindly. In other words, the
introduction of real estate investment trust funds can help the real estate market escape from the direct impact of
relevant banking policies under the sole financial system, reducing the impact of certain purposeful policy on the
whole market. It can also provide investors who tend to join in the real estate industry with chances of investment,
helping to resolve the conflicts existing in China financial system.
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corporate taxes, avoiding double taxation. However, in China there are no clear regulations on the income tax of
trusts. Besides, foreign countries usually have constituted strict policies on the information disclosure of the
open-issued real estate investment trusts. In this aspect, the Trust Law and the Law of Investment Funds in China are
far from sufficient. In order to construct a perfect legal system, we have to improve and standardize the work of laws
constitution and constitute related laws. According to the “Rules for Managing Capital Trust” in China, the capital
trust plans are limited under 200 investors. However, the common investors usually can invest a capital from
200,000 Yuan to 400,000 Yuan and a real estate project usually needs a capital of 100,000,000 Yuan or 200,000,000
Yuan. The limit of “200 investors” indicates a huge per investment capital, causing an enormous difficulty for
financing. Therefore, it is an urgent task to perfect the legal system and meet the international requirements for
developing the trusts industry. Firstly, we should perfect the Law of Corporation further or constitute special laws,
such as the Public Law of Investment, and the Law of Investment Consultation, for investment funds development.
Secondly, we can constitute some special rules for managing the real estate investment trusts, such as restrictions on
investment channels or investment proportions. All these works can help to achieve a normative development of real
estate investment trusts in China. Moreover, we should modify the present tax laws, avoiding the double taxation
issue and creating a taxation-friendly environment for its development.
Cultivate the construction of REITs organizational structure. Speed up the cultivation of more institutional investors.
The real estate investment trusts must have strict organizational structure, including management commission,
supervising institution, and specific operation institutions. For the real estate investment trusts in United States, a
large part of capital is from institutional investors, including insurance funds, and pension funds, which have more
capital, latest information, and high technology, and can provide with stable capital for real estate investment trusts.
But in fact, there are no real institutional investors in China at present, what will harm the development of the
equity-type, limited-term, and self-solvent REITs. Therefore, it is a must to speed up the cultivation of institutional
investors. Only when the market is occupied by institutional, there is a stable need in the market, ensuring that the
financial product REITs can be traded quickly.
Enhance the cultivation of talents for the real estate investment trusts. It is necessary to build up a professional
management team in which the members are specialized in funds operations, real estate market, and business
operations. At the same time, drive the construction of talents for providing with services in the funds business, such
as lawyers, accountants, auditors, and asset appraisers. From the development of foreign funds market, we notice
that the more public the information and the more developed the funds market, the more we research on the theories
of real estate investment trusts, pushing the marketization of policy. The present situation in China is similar to
Japan in late 80s in 20th century. Amounts of capitals have flown from banks toward real estates and lots of them
have become bad assets, causing great risks for banks. Therefore, we should try our best to provide people who have
information needs with sorts of real estate information, national policy information, and financial security
information timely and exactly, helping them engage in real estate investment trusts operation under the condition of
information disclosure, driving the development of real estate investment trusts in China.
References
Liao, Lihuang. Yu, Hui & Su, Yang. (2003). A way for savings turning into construction capital in middle and small
counties - the development and clue of real estate investment trusts (REITs) in United States. International
Economic Review. No. 7-8.
Ma, Yaming. (2004). A discussion on the development of real estate investment funds under present policy
environment. Trust Investment Research. No.3.
Mao, Zhirong. (2004). A research on real estate investment trust funds. A Report from the Research Center of
Shenzhen Stock Exchange. 16th, Jan.
Wang, Shiyu. (2006). REITS (Real estate investment trusts) and the capital market in China. 21st Century Business
Herald. No.1.
Wu, Chanjun & Yu, Xiaofen. (2003). Experiences of developing real estate investment trust fund in the United
States and its lessons. Southern Real Estate. No.8.
Zhang, Hong & Chen, Jie. (2002). An analysis on the profits of real estate investment trusts and its influencing
factors. Real Estate Finance in China. No.7.
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know which part can bring about maximum value and it can input its super resources in the core part which may be
personnel, finance, materials, or information resource. Therefore, the finance management based on value chain will
penetrate into the enterprise along with the development of value chain management. As a result, the focus of
finance management is changed from traditional finance accounting and finance relationship management toward
the value chain
3. Construct finance management based on value chain
As we apply the theory of value chain management to the construction of finance management mode, we should
begin with three aspects, including concept innovation, process optimization, and dynamic strategic adjustment
model design.
3.1 Concept innovation
In order to construct an integrated finance mode, we should perform concept innovation based on theory of value
chain management. In the aspect of external environment of enterprises, in order to construct a value chain focused
on the core enterprise, we have to rely on information flow to coordinate the business management between
upstream enterprises, downstream enterprises, and the core enterprise, and achieve the value increment of whole
value chain. In the aspect of internal enterprise, we have to optimize the process between operation department and
finance department and construct a finance business process to achieve the value increment of enterprise’s inner
value chain. Based on information flow, we can coordinate the operation and finance and achieve the value
increment of inner value chain.
3.2 Optimize process
In the aspect of internal enterprise, traditional finance management mode separates finance process from business
process. Especially, traditional finance management depends too much on finance accounting information in
collecting information process, which causes a failure in transmitting immediate information for business process.
The function of prediction and decision fails to work. The theory of value chain management provides us rightly a
brand-new idea in research. According to the theory of value chain management, the interior and exterior activities
of an enterprise are not a collection of independent activities but a mutually dependent organic system. Processes of
each department should be coordinated with each other and stay a dynamic course. Therefore, under the guidance of
theory of value chain management, in order to construct the finance management mode, we have to optimize the
process and achieve immediate information transmission and share between operational department and finance
department by means of network information technology, reducing repetitive data process.
3.3 Construct a dynamic trace management mode
In the commercial activities accompanied with fierce competition, the environment in which enterprises try to
survive is changeable, from the prices of materials, changes of suppliers, to national industry adjustment. Therefore,
as we adjust the finance strategy, we have to consider the changes of macro and micro environment.
4. Several issues in value chain management
In same industry, same products from different enterprises may have different value chain. Each enterprise has its
own characteristics and unique advantages. They usually have different ways to achieve value increment. Finance
management workers should analyze an enterprise’s value chain carefully based on some analysis methods in
finance accounting. By means of income-cost comparison, performance evaluation in inner enterprise, and effects of
supply on benefits, analyze each process in production and decrease costs and improve quality. Identify the
enterprise’s core value chain. Modify the disadvantage part in the value chain. Stop ineffective activities. In general,
a finance management worker should pay more attention on these aspects as follow.
4.1 Reduce ineffective value chain
By analyzing the whole production process in an enterprise, we can divide the enterprise operation process into
many procedures. The enterprise hopes that each procedure can bring about value increment. But there are always
several procedures in an enterprise that conflict with value increment in the value chain, such as enterprise stock. No
matter what it is materials or final products, stock can not increase values (except abnormal fluctuation in stock
values) or decrease costs, or even improve product quality. Unreasonably occupying capital can do nothing but
increase enterprise costs. There are also other things that can not be judged whether they are effective or not merely
by the value chain, such as enterprise’s fixed assets. The vital elements are usually some key fixed assets but not all
fixed assets. All this kind of things should be reduced based on careful analysis on enterprise situation. But the
finance management of value chain should not neglect enterprise’s essential operations. From a view of value chain,
certain operation may be the core of enterprise value chain. But the value chain is an integrated process. From the
research and development to after-sale service, each step should be guaranteed. Without any step, the whole value
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chain will be ruined. Therefore, as we grasp the essential value chain in an enterprise, we should not neglect other
procedures at the same time.
4.2 Establish finance strategy according to the core value chain
In establishing the finance strategy, finance management workers should take the characteristics of an enterprise into
consideration to analyze the profitability mode. Enterprises usually have different profitability modes. Some rely on
the supply chain, some on technology, some on channel, some on product, some on brand, and some on organization
management. An enterprise should make industrial and branch analysis, and identify its core value chain according
to its resources and characteristics. In order to achieve further development, an enterprise does not necessarily do
every work perfectly. But it must perform better in its core value increment business. By inputting the limited super
resources, including finance resource and personnel resource in the enterprise’s core value increment business, an
enterprise can achieve perfect development. Doing better in the core value chain field, an enterprise can get twice
the result with half the effort.
4.3 Avoid the “scale trap”
As an enterprise has developed into certain scale, the extension of products and increase of personnel would cause
low efficiency and high operation costs. An increase of enterprise income does not mean a same increase of profit.
In other words, the growth of enterprise does not bring about an increase in its profitability but even a decrease. That
is the “scale trap”. It is a main symptom of “large enterprise”. The chief reason is that the enterprise merely grows in
scale but not in quality and the scale of an enterprise can not be enlarged unlimitedly. The theory of value chain can
help the enterprise analyze its advantages and disadvantages exactly. By this way, the enterprise can take action in
reducing or excluding some non-strategy steps by virtual business and outsourcing. As a result, the enterprise can
input its super resources into the construction and consolidation of core capability. More important, the value chain
can help to exert the effect of strategic alliance in strategy. As a result, the enterprise can achieve a horizontal
integration of industrial value chain and indirectly realize the diversification, pursuing new benefit growth point and
avoiding the diversification trap effectively.
5. Conclusion
The finance management based on value chain emerged in new economic situation is a new management idea for
finance management in an enterprise. In the decision-making of finance strategy, the finance management based on
value chain takes the effect of objective environment on enterprise behavior and benefit, and the enterprise’s
resources into consideration, sustaining an enterprise’s first-mover advantages. At the same time, in order to keep
the enterprise’s advantage, the finance management based on value chain can help to establish the finance strategy
based on an enterprise’s core capability. More important, it can create and construct new competitive advantages for
an enterprise. That is the core of enterprise’s strategic decision. Therefore, the finance management based on value
chain is the source of an enterprise obtaining sustainable competitive advantages.
References
Chopra, Sunil & Meindl, Peter. (2001). Supply Chain Management: Strategy, Planning, and Operation. Prentice-Hal,
Inc.
David J. Collis. (2005). Corporate Strategy. Beijing: China Renmin University Press.
Michael E.Porter. (1997). Competitive Advantage. Beijing: Huaxia Publishing House.
Robert M. Grant. (2005). Contemporary Strategy Analysis: Concepts, Techniques, Application. Beijing: Bright Daily
Press.
Yu, Laiwen, Du, Yueping & An, Liren. (2006). An analysis on enterprise strategic innovation under dynamic
environment. Enterpriser World. No.4.
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theoretical foundation for the core competence analysis of JAL in the second part of the paper. An interview is also
involved to obtain more detailed information about the actual perspectives of Japanese business people in the airline
industry towards the EU airline market. The interview questions are created based on the theoretical frameworks.
Follow-up discussion by email is performed to clarify the research notes taken during the interview.
1.2 Theoretical Framework
Since the topic involves the airline industry analysis and JAL’s competitive strategy identification, the framework
applied to explore JAL’s competitiveness in Europe is based on Porter’s five forces model and the resource-based
approach. The essence of strategy formulation of a company is environmental market analysis. According to Porter’s
theory (1979, cited in Montgomery and Porter, 1991), industry structure has strong influence in determining the
strategies available to the company. The five forces- threat of entry, threat of substitutes, power of suppliers, power
of buyers, and degree of rivalry among current competitors jointly determine the intensity of industry competition
and profitability.
However, the airline industry is dynamic. The five forces analysis has its limitation to formulate the competitive
strategy. It does not show how companies should compete in the industry. In fact, there have been criticisms for
Porter’s five forces of competition. For example, Grant (2002) points out that the five forces model is limited by its
static nature. The industry structure is regarded as stable and externally determined. ‘Competition is a dynamic
process where strategy also transforms industry structure’ (Grant, 2002, p.89). The key to competitive success lies in
identifying and developing differential capabilities of a company. Some people also state that the five forces model
does not show how companies should compete in the industry. They argue that the companies should build
capabilities and resources. The flexibility gained by superior capabilities can be used to consistently change the rules
of the competition game.
The resource-based view emphasizes that a company should build capabilities and resources to create a competitive
advantage that ultimately results in superior value creation. Drawing on the resource-based view, customer and
producer matrices are used to analyze JAL’s competitive strategy in Europe. The value of the customer and producer
matrices is that it provides ‘an initial snapshot of the company’s products and customers and the connection between
the two at a given time’ (Boardmand & Vining, 1996).
2. Literature Review
2.1 Background of Airline Industry
The airline industry has many of the features that can be found in other nationalized industries. It has ‘strategic
importance, large externalities, high fixed costs and contains elements of national pride’ (LSE, no author given,
2003). Airline service is traditionally regarded as a public utility, so there is high level of governmental intervention.
People view the airline industry as natural monopoly because of the existence of governmental economic regulation
and state ownership. However, O’Connor (1995) points out that it is still controversial to say that the airline industry
is natural monopoly. Governments choose to regulate or own airlines due to the externalities, the national image and
the strategic factors involved. ‘The national airline can be perceived as a prestige symbol in the sense of improving
the esteem in which the country is held or perhaps in impressing the world with the country’s technological
progress’ (O’Connor, 1995, p.68). It can be seen that much of the rationale for governmental regulation is based on
non-economic factors.
Like any other business, the airline service also has some economic characteristics-cost control, elasticity of demand,
financing and shareholders’ interest. In addition, according to O’ Connor (1995), it is an undifferentiated product. To
many passengers, the service of one airline is rather difficult to differentiate from that of another. Generally speaking,
the aircraft size, speed, and safety aspects of a journey are likely to be much the same. Flight scheduling and
comfort, particularly in the long distance journey might be the only thing that can determine people’s favouring one
airline over another. Moreover, it is relatively easy to enter the airline business or for an existing airline to expand
into a new market. Here the market means a pair of cities. The economic barriers are small compared with the
manufacturing industry. There are no factories to be built. An airline needs to own only planes, which can be leased
or bought on credit. It is relatively easy for people to start the business. However, expansion to the international
markets can be difficult. Entry into the international markets is determined through a series of bilateral agreements
between governments. Simply because JAL sees large profits available in the Osaka to Paris Prague, for example,
does not mean that it can simply open up a new service.
In the last thirty years, the European airline market has experienced deregulation process and liberalization. The first
liberal ‘open market’ bilateral agreement was between the UK and the Netherlands in 1984. Under a third
liberalization package achieved by EU in 1992, the EU airlines can operate with full traffic rights on almost all
international routes within the EU.
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By the mid-1990s, the deregulation process and the liberalization became worldwide. In many parts of the world,
governments influenced by a trend of the liberalization allowed the new international airlines to compete directly
with their national airlines. In Japan, All Nippon Airways (ANA), which used to be a domestic airline, was allowed
to operate and compete with JAL on international routes for the first time in 1986.
As airlines are being exposed to the pressures of market place due to the deregulation and the liberalization process,
the increasingly intensified competition and crisis have forced airlines to undertake restructuring to improve
efficiency and reduce costs.
Although the liberalization helps remove regulatory constraints, non-economic barriers still exist in the European
market. Entry to the international markets is still restricted by the bilateral air treaties between pairs of countries. To
get around the regulatory constraints, airlines tie together and establish worldwide networks. Outside Europe, the
system of bilaterally negotiated freedoms can be overtaken through strategic alliances and mergers. For example,
British Airways would gain access to any Japanese destination by a tie up with ANA without the need for complex
governmental level negotiations (LSE, no author given, 2003). According to Oum et al. (2000), an alliance is the
most important emerging form of industrial organization via which firms expand market reach, share risks and
scarce resources, improve product quality and customer service, and thereby, improve profitability.
In the second half of the 1990s, the airline industry was characterized by a frenzy of alliances. The most significant
alliances in terms of network expansion are those with a global scope. Many airlines are ambitious to become global
firms through such alliances. For network expansion, global alliances are the ideal means, which can achieve
marketing benefits of scope and cost economies from any synergies ‘through linking two or more large airlines
operating geographically distinct markets’ (Doganis, 2001). The global alliances normally involve code-sharing on
a number of routes including co-ordination, joint sales offices and ground handling, combined frequent flyer
programs (FFP), joint maintenance activities and new market expansion.
2.2 Important Economic Concepts and Terms
There are three important economic concepts applied to the airline business: economies of scale, economies of scope
and economies of density. According to O’Connor (1995), an airline that expands its total operations may realize
economies of scale. But whether every airline is likely to realize economies of scope by simply getting bigger is a
matter of controversy. In the airline business, the efficiencies are supported by economies of scope. The economies
of scope occur when the cost of supplying two products jointly is cheaper than producing them separately. These
economies are usually associated with the size of an airline’s flight network. For example, large networks give
opportunities for economies of scope in areas such as frequent flyer programs (FFP) to generate customer loyalty
and computer reservations systems (CRS). As an international carrier with high operation cost, JAL has been forced
to radically expand economies of scope in an effort to provide revenue-enhancing value, but now it has realized that
economies of scope simply cannot survive with the current costs (Kanenari, speech at Royal Holloway, 2004).
Economies of density do not come from adding a new route, but from getting better utilization of the existing
services. Besanko et al. (2000) explains that economies of density occur because of spreading flight specific costs
such as costs of the flight and cabin crew and because of the economies of aircraft size. For example, an airline,
which carries 300 passengers in a single plane to a destination as opposed to carrying 500 passengers in two aircrafts
to that same destination, is making use of economies of density.
Since deregulation, many airlines have been increasingly emphasizing the development of hub-and-spoke systems.
In JAL’s medium business plan (2003-2005), it also mentions the goal of strengthening hubs in Europe. Meyer and
Oster (1987, cited in O’Connor, 1995) describe such the hub-and-spoke systems as follows:
The basic notion of a hub and spoke system is that flights from many different cities converge on a single airport-the
hub-at approximately the same time, and after giving the passenger sufficient time to make connections, all then
leave the hub airport bound for different cities. Such a convergence of flights on a hub is often called a ‘connecting
complex’ or ‘connecting bank’. (p.23)
The main reason for an airline to develop a hub-spoke-system is to increase the average number of passengers on its
flights. By developing traffic along a set of spokes, the airline increases its traffic along its longer hauls. In addition,
it ‘controls the flow of the spoke traffic onto its long-haul flights since it controls the arrival times of the feeder
flights at the hub airport’ (O’Connor, 1995, p.23). The airline with a strong hub system protects its traffic from being
diverted to another airline en route. This is why JAL is eager to strengthen the hubs in Europe.
Another term often mentioned is code sharing. Doganis (2001) explains that ‘it is a commercial agreement between
two airlines under which an airline operating a service allows another airline to offer that service to the traveling
public under its own flight designator code, even although it does not operate the service.’ (p.117)
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Finally, loyalty schemes form part of airlines’ overall marketing strategies. According to Hanlon (2002), there are
two reasons to promote the loyalty schemes. One is to increase airlines’ share of passenger demand. The other is to
make that demand less price elastic. Airlines benefit both from increases in passengers and from a higher fare per
passenger. Like advertising, the loyalty schemes attempt to hold passengers ‘by raising passengers’ switching costs,
making it relatively expensive, in terms of lost rewards, to transfer their patronage from one airline to another’
(Hanlon, 2002, p.52). Airlines tend to focus the loyalty schemes on passengers whose demand is already less price
elastic and on who are willing to pay premium fare for first, business and fully flexible economy class travel. To
these passengers, quality service such as frequency, seat access, and in-flight comfort is far more important than
price. Hanlon also suggests that there are essentially three kinds of loyalty schemes: frequent flyer programs (FFP),
corporate discounts and travel agency commission overrides. This dissertation discusses FFP only. FFP is a purchase
incentive plan that rewards the passenger for repeat patronage of the services of a particular airline. Passengers
accumulate mileage points according to distance travelled and the type of tickets bought. Passengers receive points
at multiples of the basic rate. Passengers can exchange the mileage points earned for rewards in the form of free or
discounted tickets, special concessions on hotel accommodation or other benefits. Business travellers are heavily
influenced by their FFP membership in choosing the flights of a particular airline.
2.3 The Five Forces Analysis of The Airline Industr
Internal Rivalry
The five forces analysis is useful in understanding how industry structure drives competition, which in turn,
determines industry profitability. In the airline industry, competition is intense, factors such price competition,
competition for airport landing/departing slots, frequencies, in-flight service, points served, and passenger demand
are the elements of internal rivalry.
Entry
The entry barriers are low in the deregulated airline markets and these markets are contestable. There are two main
reasons for the contestability of the markets. As discussed before, the airline service is not a natural monopoly
because of the cost implications. Sunk costs are not significant. Aircrafts and advertising expenditure are two main
sources of sunk costs. Aircrafts are not regarded as fixed assets due to their nature. Aircrafts can be leased or
purchased and put into the second hand market once they no longer serve the airline. However, sunk costs may
become obvious as long as the advertising expenditure necessary to launch a new service.
Threat of substitutes
Travel by sea or land can be the substitutes, but they are not convenient and usually time consuming. Currently,
large number of passengers flies for holidays. With the increased threat of terrorist attacks and heightened political
unrest, people may spend leisure money on alternatives or domestic holidays.
Buyer Power
Customers of this industry are not the main driving force because they have limited individual influence. However,
they will be viewed as a competitive threat when they have higher demand for quality and services. Since the
deregulation, the airline industry has become more competitive. Competition focuses on the products that different
airlines offer to their customers. Opportunities for product differentiation widen and airlines have more choices open
to them. Airlines must to know what products to offer in the market they have entered to realize the ultimate
objective of maximizing revenue and profits in the long run.
Supplier Power
According to Porter (1985), suppliers can be regarded as a threat if their products have limited substitutes and they
are important to the company. Fuel is one of the main operating costs and there is no substitute for it. Therefore fuel
suppliers have more control in the efficiency of airline operations. Aircraft manufacturers are other important
suppliers in the industry. Airlines benefit from prices and favourable contract terms due to the intense competition
between two major suppliers in the world, Boeing and Airbus aircraft producers.
2.4 Resource-Based Approach
According to Grant (cited in Segal-Horn ed., 2003), there is a key difference between resources and capabilities.
Resources are the firm-specific assets useful for creating a cost or differentiation advantage, which few competitors
can acquire easily. A company’s resources include financial resources, physical resources, human resource,
technological resources, reputation and organizational resource. Capabilities refer to a company’s ability to utilize its
resources effectively. Such capabilities are rooted in the routines of the organization and are difficult for competitors
to replicate.
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Using resources and capabilities to achieve either a lower cost structure or a differentiated product creates
competitive advantage. A company positions itself in its industry through its choice of low cost or differentiation.
This decision is a central component of the firm’s competitive advantage.
Faulkner (2004) suggests that a company creates value by performing a series of activities in the value chain. To
obtain competitive advantage, it should create value for both customers and the company itself. The value of
competitive advantage to the customers reflects in the ability to position a product better than competitors and the
ability to persuade the customers to recognize, purchase and value the difference. The value of competitive
advantage to the firm reflects in the ability to create and sustain capabilities which underpin the positioning at
manageable cost premium and the ability to run the business efficiently at best practice levels.
Some literature views capabilities and core competences as the same thing. However, Hamel and Prahalad (cited in
Grant, 2002) argue that competences are different from capabilities. They define core competences as those that
‘have access to a wide variety of markets, make significant contributions to perceived user value (PUV) and are
difficult to imitate’ (Faulkner’s lecture, 2004). Core competencies enable innovation, efficiency, quality and
customer responsiveness, all of which can be leveraged to create a cost advantage or a differentiation advantage. To
exploit a company’s key success factors, the traditional SWOT analysis is useful. The strengths, weakness,
opportunities and threats model let a company understand better what its advantage is in the market, identify where
it should improve, and exploit how to make best use of opportunities and how to deal with challenges.
Grant (cited in Segal-Horn, 2003) further states that the return to a company’s resources and capabilities depends on
two factors: the sustainability of the competitive advantage and the ability of the firm to appreciate the rents from its
resources and capabilities. There are four factors determining the sustainability of the competitive advantage- value,
rareness, inimitability and non-approachability (VRIN). Barney (cited in Wit & Meyer, 2000) suggests that not all
company resources have the potential of sustained competitive advantage. Resources are valuable when they enable
a firm to implement strategies that improve efficiency and effectiveness. Valuable resources possessed by large
number of competing companies cannot be sources of competitive advantage. A company holds a competitive
advantage when it is implementing a value-creating strategy not implemented by large number of other companies.
Valuable and rare resources can only be sources of competitive advantage if those companies that do not possess
these resources cannot obtain them. Company resources are inimitable when they are physically unique and when
they enjoy first mover advantage. The last condition for the company resources to be sources of competitive
advantage is that they are not approachable. A company can enjoy a competitive advantage when rival companies
cannot acquire its resources (such resources may be valuable substitute resources) required for imitating the
competitive advantage. The VRIN framework is critical to identify JAL’s unique and valuable resources.
However, Grant (2002) points out that resources can become obsolete or depreciate, so a company should constantly
exploit resources by investing resources in core competences, upgrading resources to add new resources, and
leveraging resources into new markets. In a competitive world, constantly developing a company’s resources and
capabilities is important in eliminating existing weakness, and building the new resources and capabilities to adapt
to external change and sustain competitive advantage. According to Grant, there are several approaches to develop
resources and capabilities. In this part, two approaches relating to the airlines industry are discussed. First,
developing the individual competencies requires developing organizational capabilities. Developing human
resources competencies can be effective in maintaining and developing existing competences. Further, acquiring
capabilities through strategic alliances can be more cost effective to acquire another company’s capability through a
collaborative relationship. In the airline industry, strategic alliances have become vitally important for airlines to
strengthen their capabilities through networks.
3. JAL
Since its establishment in 1953, JAL was granted to operate international air services as a national flag carrier. Until
the deregulation of Japanese airline industry in 1985, JAL was the only domestic airline that was authorized to serve
the international routes. Japanese government was its largest stockholder. High level of governmental control
fostered the company’s managerial dependence and created excessive complexity. This led to a bureaucratic and
inefficient organizational structure. According to Chatfield et al. (1997), the company was not customer-oriented in
the 1980s. The company viewed itself as a provider of air transport route- ‘a market product focus’, rather than a
provider of customer service-‘a customer service process focus’. In 1987, JAL was privatized through the sale of
stock held by the Japanese government. Privatization pushed it to head for market competition.
In 1961, JAL started its independent service on polar routes to Europe (JAL official website, 2006). Currently, JAL’s
daily operations have reached 192 international routes and 387 flights in total on passenger traffic, among which 23
routes and 40 flights operate daily on the European routes, accounting for 12% and 6% respectively of the total daily
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operations, second to the number of the routes operating in Asia Pacific region.
Now JAL is owned by Japan Airlines System Corporation, a holding company founded in 2002 after the integration
of JAL and JAS. Since the merger, JAL has unveiled a new brand identity and aircraft livery themed around ‘the arc
of the sun’ (Mason, 2002, p.10). It hopes that the identity will help it build a stronger global brand and position a
JAL flight as a means of acclimatizing to Japanese culture, attempting to attract more international business people
flying to Japan to choose JAL over other international carriers.
3.1 Competitive Advantage of JAL in the European Market
3.1.1 The Five Forces Analysis of JAL
In this part, the five forces model is applied to JAL’s case to evaluate the market environment.
Internal Rivalry
JAL has been perceived as a mega carrier with premium prices due to the high input to launch its quality services.
On the European routes, JAL has different groups of competitors. Generally speaking, ANA and other European
national carriers such as British Airways, Air France and Lufthansa are its major competitors. ANA started its
international route in 1986 after the deregulation in Japan. It is a new comer in the European market, but its profile
in Europe has been strengthened after it became a member of the Star Alliance network in 1999. British Airways, Air
France and Lufthansa have many years of experience providing flight services between Europe and Asia,
particularly on the Europe- Japan route. To some extent, they can compete with JAL more or less on an equal foot.
For the economic class, competitors also include airlines such as Northwest from U.S; Singapore airlines, Cathay
Pacific airlines from Asia; KLM from Europe. For the first class and business class, ANA, Lufthansa, and Air France
are the main competitors.
Furthermore, landing and departure slot is vitally important because it significantly influences service and airfare.
Therefore competition for prevailing slot allocation is keen. As a non- EU carrier, JAL has a relatively disadvantage
to obtain the desired slot allocation. For example, JAL’s slot availability at London Heathrow Airport is very limited.
Threat of Entry
The airline market is highly competitive with low entry barriers. In the European market, the LCCs have been
expanding rapidly. However, currently, there are no such carriers operating between Europe and Japan probably
because it is very difficult to maintain the low operating cost of the LCCs model in the long haul business.
Threat of Substitutes
Geographically, going by sea between Europe and Asia is not the first choice for travellers. The threat of this
substitute can be considered at minimum level. However, the consequences of crisis such as London Bombings on 7
July 2005 are disastrous.
Threat of Customers
The bargaining power of customers is relatively weak. However, customers will have higher requirements for
service as the competition in the industry intensifies. Usually, airlines adopt the loyalty schemes such as the FFP to
attract customers. JAL’s FFP program is one of its marketing penetration strategies in the European airline market.
Currently, JAL has the largest FFP with 13 million members. Holders of JAL Mileage Bank (JMB) can earn mileage
to exchange for a JMB reward every time they fly with the JAL Group airlines or one of the JMB partner airlines
such as British Airways, and Air France for the European routes. For example, if a passenger buys one return flight
ticket between London and Tokyo, JAL Executive Class Seasons, he or she can mileage points for 15550 miles. The
points can be exchanged for a trip flying from Germany to London by taking any of the partner airlines. The
programme is flexible and attractive in that passengers can choose their favourite airlines to fly while earning
rewards.
Threat of Suppliers
JAL’s operating cost is greatly influenced by the fluctuation of fuel price. JAL has gained more bargaining power
from the manufacturers. It is the biggest buyer of giant companies Boeing and Airbus in Japan.
3.1.2 Core Competence Analysis
In addition to the five forces analysis, understanding JAL’s competitive advantage requires further study of its core
competence. Based on the resource-based view, the customer and the producer matrices related to the competence
analysis are applied in this part.
The Customer Matrix
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To survive and prosper in an industry, a company should consider who its customers are, what they want to buy, and
what their needs and preference are.
In the European airline market, JAL’s main market segments are business travelers, Japanese residents in Europe
traveling to Japan to visit family, tourist groups to Japan, transit travel via Japan to Oceania, China and other Asian
countries. All market segments are important, but the higher yield business passengers are the most valuable in
terms of revenue (JAL official source, 2006). Statistics shows that JAL’s current mix of passengers is 20% business
and 80% leisure for the European routes. Attracting more business travelers is JAL’s key objective on the European
routes.
In the airline industry, there are five product features. Doganis (1998) classify them into fare and fare conditions,
schedule-based features, comfort-based features, convenience features, and airline image. In the long haul business,
safety and quality services are vitally important. The segment of business travelers has higher requirements for
safety and services. They are not too price sensitive and are willing to pay more for the perceived use value. JAL has
established a reputation of a reliable, safe and dependable airline. Safety and departure on-time records are the
foundation of JAL’s business. They generate higher perceived use value to customers. Statistic (IATA, cited in JAL’s
official website, 2006) shows that JAL’s scheduled landing and departure accuracy reaches 99%. Therefore, JAL’s
competitive position can be shown in the customer matrix below:
N
H ig h
Perceived Use Value
NW JA L
x
E
L ow H ig h
P e r c e iv e d P r ic e
It is not appropriate for JAL to position in the NW direction because it is difficult to maintain low price while
providing highly perceived user value to customers. In the E direction, JAL may risk of low customer satisfaction,
resulting in low passenger traffic and revenue loss. N is the ideal direction that JAL aims for because it will bring
sustainable business in the long run. However, for the time being, it is hard for JAL to achieve it due to the high unit
cost, and domestic recession, which have greatly influenced the outbound passenger traffic from Japan to Europe.
The Producer Matrix
As Japan’s No.1 airline, JAL’s ability to provide higher value added products to customers and to differentiate itself
from competitors stems from five areas-information technology; product innovation; human resource management,
customer satisfaction and complementary core capabilities of the value chain firms.
To begin with, as the deregulation intensifies the competition, JAL, like other large airlines, invests heavily in
information technology. The computer reservation systems are seen as devices for saving time and labor in handling
large amounts of flight reservations data. In 1995, it created its homepage to start e-business. The e-business not
only allows JAL to target passengers more effectively and to reduce the commission amount payable to traditional
travel agents, but also lets JAL differentiate itself from its competitors.
Further, in the long haul business, airline product development has concentrated on comfort-based product. JAL is
the leader of product innovation. In the international market, JAL’s marketing objective is to increase the percentage
of high yield passengers. To differentiate itself, it constantly launches value-added products. For example, launched
in February 2004, JAL’s unique SHELL FLAT seats for business class on the Paris-Tokyo route have made a hit in
the market.
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Moreover, JAL’s unique strength also lies in its well-trained, loyal employees. In the Japanese society, the status of
employees is closely linked to the social status of their firm. As a prestigious carrier, JAL attracts high-quality
graduates and offers them very high job security and continuous training. In return, JAL demands loyalty, service
and specialized knowledge from them. This is one of the reasons why JAL’s operation cost tends to be higher than
that of its competitors. Recently, for the international routes, JAL is recruiting foreign staff to reduce labor cost, but
the employees at management level still enjoy the Japanese pension system.
In addition, customer satisfaction is a source of value added products. Landing and departure on time is one of the
important indicators for passengers to choose an airline. Punctuality is JAL’s key to differentiate itself from the
competitors. What is more, safety is the foundation of JAL’s business. Its risk management measures guarantee safe
and dependable flights.
Finally, after the integration with JAS, JAL has acquired wider networks, which are critical sources in the value
chain. In the competitive airline industry, quick response and just in time services assure customer satisfaction. From
ground handling, in-flight meal services, aircraft maintenance, to fuel services, sound coordination in the value
chain firms enables JAL to provide quality services to customers.
However, JAL has been criticized to be an expensive carrier because of its high input prices and low efficiency. In
the airline industry, high fixed costs including labor, equipment and facilities account for a large part of the overall
costs. JAL has been fighting for the cost reduction through restructuring since the 1990s. ICAO’s financial data
(2004, cited in JAL’s Business Plan) shows that JAL’s unit cost in US currency base still remains higher than that of
its competitors such as British Airways, Lufthansa, and Air France except ANA on the European routes.
On the basis of the above information, JAL’s competitiveness in terms of cost and effectiveness is shown in the
following matrix.
Hi
A B(JAL)
Effectiveness
Av
C D
Lo
Lo Av Hi
Unit Cost
In this matrix, JAL positions at point B. The reason lies in that JAL has significantly reduced its operation cost in
recent years, but the unit cost still maintains high. This may be due to the nature of long haul business and its
product differentiation strategies. The segment of business travelers has become the growth area on the European
routes. However, it only accounts for 20% of the mix rate of passenger traffic. The percentage would be expected to
rise if more routes and hubs are opened in the EU and if there is no economic downturn in the following years. Then
the average unit cost would be lower. However, cost reduction is like a two-edged sword for the service industry,
particularly the airline industry. Excessive cost reduction may risk of lower customer satisfaction, thus bringing loss
in revenue.
3.3 Discussion
JAL’s Core Competence
In the deregulated and competitive airline industry, sustainable competitive advantage stems from the effectiveness
and quality in products and services; the flexibility in response to changing market conditions and product
innovation. JAL’s competitive advantage roots in its quality service, product innovation, information technology
support, well coordinated relationships with networks in the value chain.
In the long haul business, comfort-based feature products provide highly perceived use value to customers. JAL’s
quality in products and services reflects in the comfort seating and in-flight services.
Challenges
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While it enjoys the above-mentioned differentiating factors, JAL is facing several challenges.
First, the competition in the European market is intense. On the long haul routes, competition will be increasingly
intensified between alliances and their hubs rather than between individual airlines (Daganis, 1998). JAL had not
been a member of any of the global alliances until 1 April 2007. Instead, it had maintained extensive co-operation
agreements with other carriers on route-specific terms (See the chart below).
One possible reason for JAL’s absence of any global alliances is that it intended to maintain its exclusivity in the
international market. After the merger in 2002, the JAL Group accounts for 4% of RPK share (IATA 2003, cited in
JAL’s Business Plan) in the international airline market. However, it may be argued that the non-membership of any
global alliances had been JAL’s strategic mistake. JAL had missed market benefits of scope and cost economies, and
had been constrained to expand hubs in Europe. On the contrary, ANA, JAL’s competitor, shows a good example of
how the global alliance can increase market power in the European market. ANA had a weak European network due
to the late start of flying international routes. Since 1999 when it joined Star Alliance, it has strengthened its
presence in the European market in very short time. Fortunately, from 1 April 2007, JAL has become a full member
of ONEWORLD Alliance. As a part of ONEWORLD, JAL will have substantial opportunities to provide
value-added services which can generate more profit in return.
Second, although JAL has been managing to reduce cost by cutting employees or employing foreign staff, and by
e-business to reduce distribution expenses, compared to other airlines, JAL still maintains high unit cost, which
significantly influences the operating effectiveness.
Third, JAL is focusing on attracting high yield business travellers. There is one risk by doing so. When there is a
cyclical down turn, the operation will result in low load factor and high cost input. In fact, in recent years, the
decreased outbound passenger volume from Japan to Europe due to the domestic economic recession in Japan has
influenced JAL’s operating revenue.
Opportunities
Currently, JAL serves more than 23 European routes through independent operation or partnerships with other
European carriers. The service covers most of the European major cities such as London, Paris, Rome, Berlin,
Frankfurt, Barcelona, and Zurich and so on. JAL has established many hubs in the European major airports such as
London Heathrow Airport and Paris Charles De Gaulle Airport. As the deregulation deepens, JAL will have more
opportunities to develop hubs through partnerships with different European airlines.
In addition, the enlargement of the European Union in 2006 is supposed to make the European airline market more
appealing to JAL. Over the past years, many Japanese manufacturers have shifted their operations from Western
Europe to the lower cost central and eastern European countries, and new factories are also being built. The
implication from this is that the shift in business to these countries is producing some new market opportunities for
JAL.
4. Conclusion
Since deregulation, there has been dynamic change in the airline industry in Europe. Competition has intensified as
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the deregulation process deepens and technology improves. The rapid growth of the low cost carriers has brought
profound impact to many conventional carriers in the EU. They are forced to put more effort on restructuring and
cost reduction. To get around the regulatory constraints and to expand new markets, airlines have developed
worldwide networks through strategic alliances. The global alliances help airlines realize market expansion and
produce marketing benefits through scope and cost economies.
By applying the five forces model and the resource-based approach, this paper performs the airline industry analysis
and identifies the competitive advantage of JAL. It finds that JAL’s competitiveness in the European market stems
from a good reputation for high level of service, information technology support and well coordination of networks
in the value chain. The quality services such as landing and departure on time records, comfort seating, in-flight
services, provide added value to customers. Further, the application of information technology to the computer
reservation system and e-business has created substantial value. Although it is difficult to quantify how many
Japanese airlines are benefiting from the global alliances, this paper shows that JAL’s absence of any global alliance
had been a weakness in expanding new markets in Europe. However ONEWORLD Alliance would provide huge
opportunities for JAL since it became a member of the alliance on 1 April 2007. In addition, the analysis of the
customer and producer matrices indicated that JAL’s operating cost continues to stay high. The labor cost is another
major reason for the high unit cost. Cost reduction should be a long-term task for JAL. Moreover, the EU
enlargement by 2006 is producing more market opportunities for JAL It is targeting to attract more business
travellers for high yield on the European routes. The potential risk of this strategy is that when the cyclical downturn
comes, low load factor and high cost will result. Therefore, proper strategy should be developed to reduce the risk.
Considering JAL’s business environment in Europe and the ultimate goal of increasing profitability, this paper
suggests that cost reduction should be a long-term objective. Continuously exploiting the potential of e-business and
increasing the portion of hiring temporary employees from both domestic and abroad could achieve this. The first
reason lies in that e-business can further reduce distribution expenses and enhance the customer satisfaction by
quick response and just-in-time service, though it may increase customers’ bargaining power. The second reason lies
in that hiring temporary staff can lower the level of labor cost. However, one concern is that hiring temporary staff
may not achieve the desired quality of customer service due to the staff’s lack of commitment or cultural difference
in the management style. Therefore, strengthening organizational culture and efficient communication are vitally
important.
Further, it recommends that the mix of the passenger traffic should be maintained in a balanced way. As discussed
before, when in cyclical downturn, low load factor and high cost could put the Japanese airlines into an awkward
position. Hence, opportunities to attract more travelers for economy class should not be ignored while increasing the
percentage of high yield business passengers in first or executive class. One way to balance the mix of passenger
traffic is to promote different cultural tours. For example, for inbound travelers from Europe to Japan, promotions
related to Japanese culture should be strengthened.
References
Boardman, A.E & Veining, A.R. (1996). Defining Your Business Using Product-Customer Matrices. Long Range
Planning. Vol.29, No 1, 38-48.
Chatfield, A., Akemi, T. Bjorn-Anderson, N. (1997). The Impact of IOS-Enabled Business Process Change on
Business Outcomes: Transformation of the Value Chain of Japan Airlines. Journal of Management Information
Systems, Summer 1997, Vol.14, Issue 1, p13, 28p. [Online] Available: http://search.epnet.com (November 25, 2006).
Dog anis, R. (1998). Flying off Course: The Economics of International Airlines. London: Rutledge.
Dog anis, R. (2001). The Airline Business in the 21st Century. London: Rutledge.
Faulkner, D. (2004). International Business Strategy. Lecture. Royal Holloway, University of London
Grant, R.M. (2002). Contemporary Strategy Analysis: Concepts, Techniques, Applications. (4th ed.). Oxford:
Blackwell Publishers Ltd.
Hanlon, P. (1999). Global Airlines: Competition in a Transnational Industry. Oxford: Butterworth Heinemann.
Hanson. (2002). Global Airlines. Oxford: Butterworth Heinemann.
JAL official website, no author given. History of Japan Airlines. [Online] Available: http://www.jal.jp.co (May14
2007).
LSE (2003). Chapter 11: The Airline Industry. [Online] Available:
http://www.lse.ac.uk/Depts/intel/ibis/PEGB/index.html (November27, 2006).
Mason, T. (2002). JAL airline redesigns image and livery. Marketing UK, 10/3/2002, p10, 1/8p, 1c. [Online]
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Entry
Low entry barriers, contestable
markets
Threat of Substitutes
Sea or land: time consuming
Domestic holiday alternatives
due to the threats of terrorism
and political unrest
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Threat of Entry
LCCs expanding rapidly
However, in the long haul
business difficult to maintain low
operating cost
Threat of Substitutes
Sea or land : time consuming
Domestic holiday alternatives
due to the threats of terrorism
and political unrest
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be obtained directly from customer’s registered information, not being changed or modified frequently.
(2) Customer operation knowledge. It includes customer’s habits, hobbies, needs, individual location information,
and purchase information. Customer operation knowledge can be obtained from data of customer’s former
operations by means of synthetic analysis and data mining technology (such as decision tree, statistics, and neural
network, etc.).
(3) Customer implicit knowledge. It is based on customer information knowledge and customer operation
knowledge to conclude and predict customer’s knowledge valuable for enterprises by knowledge mining technology.
The important difference between customer operation knowledge and customer implicit knowledge is that the
former is used to describe the usual or present features of customer and the later is used to describe the future
features of customer, such as the future needs purchase trend.
Most of useful customer knowledge is implicit. We have to mine this knowledge, such as customer’s purchase habits
and customer values. In order to apply CRM, we have to construct a knowledge management system, which can
help us to collect, mine, and integrate knowledge. By this way, we can use knowledge effectively and find what we
need quickly.
2.2 Knowledge mining technology
Customer data and information can be stored in structured form, such as sales, customers, and transactions, or
unstructured form, such as malfunction information, disposal information of malfunction, disposal result data of
malfunction, customer feedback information, and so on. Presently, the main object in data mining (DM) is the
structured data collected in database. Main process of data mining: Choose a template of rules and select, clean out,
and transform data according to features of corresponding data. Perform data mining by induction learning, decision
tree, rough set method, most proximity method, artificial neural network, and genetic algorithm based on needs. The
results of data mining can be transformed into knowledge. After purposeful selection, they can be stored in
knowledge base for the sake of supporting decision.
Because the objectives of data mining, types of problems, and data type and size are different, we have to adopt
different mining technology to achieve the preciseness of knowledge mining. There are four analysis methods in
knowledge mining in general, namely association analysis, time sequence analysis, classification analysis, and
clustering analysis. Knowledge mining usually adopts the four methods synthetically.
2.3 The process of customer knowledge mining
Knowledge mining is a continuous learning and perfecting process rising spirally. Figure 1 describes the process of
knowledge mining.
3. Customer knowledge management
Customer knowledge management is to obtain, develop, and sustain knowledge and experiences effectively that
benefit customer combination. Its specific contents include: How an enterprise construct an effective set of
closed-cycle system that helps to obtain and use customer knowledge. How they concentrate on obtaining correct
customers and extending customer knowledge and how to generate customer knowledge by the most proper way.
Finally how they classify the customer knowledge systematically and use them properly. Figure 2 shows us a
general customer knowledge management process as follow.
Customer knowledge management mainly includes collection of customer information, and obtainment, share, and
application of customer knowledge.
(1) Collection of customer information. Customer information refers to basic information of customers, such as their
hobbies, needs, contact ways, and transactions. Although every enterprise is collecting customer information, it is
hard for them to properly use the customer information in marketing decision and sales. Similar to raw materials,
customer information needs to be managed and analyzed by certain special organization.
(2) Obtainment of customer knowledge. It refers to forming useful knowledge and storing them in customer
knowledge base by analyzing the customer information statistically and making predictions.
(3) Share of customer knowledge. It refers to disseminating and sharing knowledge by integrating customer
knowledge, setting up a knowledge portal, and constructing a knowledge map.
(4) Application of customer knowledge. It refers to applying customer knowledge to all departments, supporting the
production- and operation-decision in an enterprise, realizing values of customer services.
The perfection of customer knowledge management can not accomplished in one day. It is a cycled process. An
enterprise’s “customer”, “knowledge”, and “management” are in a closed-cycle system. Based on continuous
perfection of customer information’s collection, obtainment, and application, the enterprise can win maximum profit
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by using constantly-updated customer knowledge and developing customer relationship.
4. Knowledge mining and knowledge management in CRM system in electric power enterprises
Along with enhancing competition in electric power market, the business idea in electric power enterprises is
changing from the traditional production-centered type toward the customer-centered one. In essence, applying
knowledge mining and knowledge management to CRM system in electric power enterprises is in accord with
business principles and development. Therefore, constructing a database and mining information from customers’
basic data, transaction information (data of purchasing products from certain enterprise and its competitors), and
market data are becoming a necessary ability and development trend in electric power enterprises. However, because
of shortage of knowledge management methods and effective analysis tools, it is hard for enterprises to abstract
potential effective information from amounts of data. The CRM system for electric power enterprises based on
knowledge can effectively use knowledge mining tool and knowledge management idea to help enterprises identify
potential knowledge from amounts of data, providing effective support for decision.
The CRM system based on knowledge in electric power enterprises is to use network technology, database
technology, and knowledge mining technology to provide a reliable and favorable integrated platform for enterprises
realizing CRM knowledge management system. By integrating knowledge management tactics into the CRM
system and making it gain support from practical knowledge and information, the CRM system is not just a
management idea or computer software but a powerful tool for enterprises deciding and managing all operations. By
this way, the CRM system can exert its supposed effects on enterprises.
The CRM system based on knowledge in electric power enterprises is cycle process between enterprises and
customers, transforming customer information into employees’ customer knowledge and applying it into customer
services by obtaining customer information and learning from information actively. It objective is to provide right
products or services for right customers at right prices by right channels at right time in order to meet customer’s
needs and wants.
The knowledge mining and knowledge management in CRM system in electric power enterprises include chiefly
following aspects.
(1) Customer analysis. The CRM system based on knowledge in electric power enterprises is customer-oriented. It is
important and necessary to analyze customer data. Firstly, analyze customer data by classification analysis and
clustering analysis to get customers’ characteristics in consuming habits, life style, and social association, and form
customer needs information. Secondly, form employees’ knowledge concerned with customers by means of
information share, which can help to identify customer needs, constitute enterprise strategy, and apply relevant
tactics. Electric power customer analysis chiefly includes customer classification and position analysis, customer
credit rating analysis, customer development potential analysis, and customer loyalty analysis.
(2) Customer satisfaction analysis
By means of knowledge mining on the nature and trend of customer complaint calls, integrate the separated
customer data. Observe the mutual connection between consumers and supplying enterprises thoroughly and
understand customers. Identify customers’ potential needs and their requirements for power services. Arrange
communication with customers holding complaints or possible complaints. Provide problem-solving schemes
according to customers’ needs. Construct an index-supervising system for customer satisfaction by data mining,
which can help to analyze the weakness in the power net. Therefore, enterprises can perfect their power net structure
and optimize its operation. Modify the operation of customer service system constantly and improve customer
satisfaction further, improving the economic and social effects of power supplying enterprises.
(3) Competitor analysis. The competition in electric power market leads to information communication between
different energy enterprises, different power operation spots, and customers. By means of mining the data between
customers and competitors, the enterprise can understand competitors’ operation and customer service tactics, which
can help to constitute effective countermeasures in market.
(4) Electric stealing and charge owing analysis. The most severe problem facing electric power enterprises is the
electric stealing and charge owing issue and most of cases are purposeful stealing or owing. Therefore, it is vital for
an enterprise’s decision maker to find out the abnormal data. Identifying the abnormal customer consumption by
multi-analysis, clustering analysis, and isolated analysis on customer data can help to supervise customers’
consumption behaviors. Perform a research on charge owing customers and differentiate purposeful charge owing
customers from the one who is in poverty. Guarantee enterprises’ benefits and built up a positive social status for
electric power enterprises at the same time.
(5) Trend analysis and prediction. Knowledge mining serves as an effective way for prediction. Presently, the most
common prediction methods are time sequence analysis, system dynamics analysis, and neural network, which can
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provide decision makers with scientific, effective, and graphic information of trend. The trend analysis and
prediction can help to forecast customers’ electric using trend, customer credit rates, customer development potential,
and the changes of customer loyalty, what can help to provide the customers who can bring about high values with
knight service, and take relevant actions on customers who may bring about risks to enterprises. By this way, the
electric power enterprise can adjust production plan, improve market share, and decrease marketing costs.
(6) Manage customer knowledge. Customer knowledge management is an important part of CRM in electric power
enterprises, including collection of customer information, customer knowledge mining, share and application of
customer knowledge. Electric power enterprises have to perfect each procedure of knowledge management in CRM
system in order to provide decision support for enterprises, provide better services for customers, achieving the
values of knowledge mining and knowledge management.
5. Conclusions
Electric power enterprises possess amounts of data. Data is just data if not put into use. If mine and synthetically use
data, we can find out and obtain new knowledge and generate great benefits. Here we have discussed how to use
knowledge mining and knowledge management to construct a set of knowledge-based customer service procedures
that can help enterprises provide necessary information needed by customers in an effective way. That can be
realized by applying knowledge mining and knowledge management to the mutual process between enterprises and
customers. In order to achieve one-to-one customized service and improve electric power customers’ satisfaction
and loyalty, enterprises have to obtain customer-related knowledge by knowledge mining. For example, classify
customers and pay more attention on customers who contribute most to enterprise’s interests. Analyze customers’
personalized needs, construct a customer model and predict customers’ behavior. Predict sales of electric products.
By this way, it can provide necessary knowledge for the operation application in sales, market, and services
departments, and provide necessary causes for production plan and management decision, improving electric power
enterprises’ capability of adjusting themselves to emergency and capability of innovation.
References
Amrit, Tiwana. (2001). The Essential Guide to Knowledge Management: E-Business and CRM Applications..
Prentice-Hall, PTR.
Arndt, D & Gersten, W. (2001). Data management in analytical customer relationship management. Data Mining for
Marketing Applications Workshop at ECML/PKDD.
Chris, Rygielski, Jyun-Cheng Wang & David C.Yen. (2002). Data mining techniques for customer relationship
management. Technology in Society. No.24. p483-502.
Michael J.A.Berry & Gordon S Linoff. (2000). Mastering Data Mining: The Art and Science of Customer
Relationship Management. John Wiley & Sons, Inc.2000.
Michael J.A.Berry & Gordon S Linoff. (2004). Data Mining Techniques: For Marketing, Sales, and Customer
Relationship Management, Second Edition. John Wiley & Sons, Inc.
Michael J S, Chandrasekar S & Gek W T. (2001). Knowledg management and data mining for marketing. Decision
Support Systems. No.31(1). p127-137.
S C Hu & G Jha. (2000). Data mining for customer service support. Information and Management. No.38 (1).
p1-13.
He, Zengyou, Xu, Xiaofei & Joshua Zhexue Huang. (2004). Mining class outliers: concepts, algorithms and
applications in CRM. Expert Systems with Applications. No.27. p681-697.
knowledge management
Other
Knowledge base
Explain and evaluate
Determine task
Select
Transform
Pretreatment
Predict
Classify
Associate
Database
processes
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Planning
Customer
Knowledge portal
Knowledge base
Database
Production
Retailer
(1) (2) (3) (4)
Marketing
Cooperator
Service
Market
research Update of knowledge
(1) Collect customer information (2) Mine and obtain customer knowledge
(3) Integrate and share knowledge (4) Apply customer knowledge
Figure 2. Customer Knowledge Management Process.
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not considered. In fact participants in experiments are often required to perform trivial tasks. The focus of the
experiment is usually to determine the effects of changing the level or frequency of rewards rather than what the
participants are required to do. However, in a human services context the nature of the task is not trivial and in all
likelihood is the reason for the employee being in the sector. The fact that the employee is working in a NFP
organisation is indicative of a set of values in which extrinsic rewards are not the first consideration (Weisbrod
(1983), Preston (1989), Roomkin and Weisbrod (1999)).
Human behaviour is complex and not easily analysed by research that ignores the context of that behaviour. While
extrinsic rewards cannot be ignored in motivation, the role attributed to them by agency theory is not necessarily
correct – it is probably overstated. In this paper there is an attempt to understand the roles of intrinsic and extrinsic
rewards by modelling motivational factors in the context of a disability employment organisation.
The paper continues (section 2) with a statement of the context of the problem – the role of intrinsic and extrinsic
rewards in the disability employment sector. In section 3 is discussed the literature dealing with intrinsic and
extrinsic rewards; followed by section 4 which is a brief description of the organisation in the study. In section 5 is
highlighted the theoretical issues raised in section 3 (literature review) and which give rise to the research question.
Section 6 outlines the research method, and section 7 summarises the statistical findings. Finally, section 8 states the
conclusions.
2. The Context of this Study
This theoretical discussion about the role of intrinsic and extrinsic rewards in the motivation of staff employed by
NFP organisations has practical implications for the disability employment sector in Australia as it is grappling with
greater than average employee turnover. In a study undertaken by Graffam, Noblet, Crosbie and Lavelle (2005) it
was found that the employee turnover rate in the open disability employment industry was 27.3 per cent in
comparison to the all industries average of 12.4 per cent. The higher than average employee turnover is
problematic for the industry. According to Graffam, Noblet, Crosbie and Lavelle (2005) the costs to the industry
including the recruitment of replacement personnel, administrative, advertising and screening costs are significant.
Other costs include interviewing, security checks, the processing of references, lost productivity and the cost of
training, and costs associated with the period prior to departure when employees tend to be less productive.
Therefore the issues of workforce satisfaction and motivation are important for the sector.
The literature discussed below points to two contrary positions regarding rewards. One position argues that
extrinsic rewards will be a source of motivation while the other argues that intrinsic rewards have greater impact,
particularly in a non-commercial setting. In the next section, Extrinsic Rewards, agency theory will be considered.
This will be followed by an examination of the role of intrinsic rewards in motivating NFP staff. The
organisational context and the research method will be discussed. This will be followed by a reporting of the
research findings. Finally there will be a discussion of the results and conclusions drawn.
3. Rewards in the Not-for-Profit Sector
3.1 Extrinsic Rewards
Performance of activities and the measurement of that performance occur in an organisational context in which,
according to agency theory, there is a contractual relationship between the employer (principal) and an employee
(agent) both of whom are considered to be self-interested (Jensen and Meckling 1976; Eisenhardt 1989; Baiman
1990). Agency theory suggests that people are motivated by extrinsic rewards and that employees will only
perform tasks for which they are rewarded. In theory this means that people will only work to the best of their
abilities if they consider their remuneration to be adequate. There should be constant regard for the trade-off
between effort and reward. Therefore, people would only engage in employment that provided maximum extrinsic
rewards. According to Jensen and Meckling (1976) agency theory states that individuals are wealth maximisers.
Altruism is not considered to be a part of the principal/agent relationship.
Agency theory argues that extrinsic rewards will motivate people and improve performance. Gupta and Mitra
(1998) using meta-analysis found that financial incentives have a strong relationship with performance. They
found that financial incentives were particularly powerful with respect to performance quantity. However, results
were uncertain when regarding performance quality – an important consideration in the human services sector.
Also, according to the authors, their meta-analysis does not indicate the relative value of money to intrinsic rewards.
However it does show that money is important.
The results of research in the public sector would appear to contradict the conclusions of Gupta and Mitra.
According to O’Donnell and Shields (2002) the application of performance-related pay in the Australian Public
Service (APS) has been problematic. Similarly the research of Marsden and Richardson (1994) found that
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performance-related pay had limited motivational effects. Also, there were widespread concerns about the
procedural fairness of the system. O’Donnell (1998) found that the attempt to apply performance bonuses to senior
officers of the APS did not contribute to an improvement in performance. Also, the OECD (1993) questioned the
motivational effects of pay increases and bonuses, particularly for senior public service managers. However,
Gaertner and Gaertner (1985) report that performance appraisals that placed emphasis on the development needs of
public sector managers had the potential to increase the performance of the manager. This finding suggests that
extrinsic reward coupled with training or feedback that could assist the individual to improve performance has
greater significance than extrinsic rewards alone. The application of extrinsic rewards usually requires the need for
performance appraisal. However, according to Williams (1998) performance appraisals are often poorly done, and
are seen as being contentious and the source of disagreement between the employee and management.
O’Donnell and Shields (2002) point out that there is evidence that a goal-setting approach in the public sector may
be more effective in improving performance than performance appraisal that is behaviourally-based. Similar
results were reported by Dowling and Richardson (1997) who showed that UK National Health Service (NHS)
managers were positive about role and goal clarity, and feedback and support from superiors. Redman et al. (2000)
found that two-thirds of NHS managers reported that a performance management system contributed to their
motivation and job satisfaction. However, the performance-related pay component of the system was perceived
negatively. Respondents were particularly critical of performance pay being given to individuals in instances
where performance was heavily dependent on a team effort.
The findings of Gaertner and Gaertner (1985), Dowling and Richardson (1997), Redman et al. (2000) and
O’Donnell and Shields (2002) suggests that extrinsic rewards by themselves are problematic and that staff
motivation also involves to intrinsic rewards such as pride at doing a good job and a sense of doing something
worthwhile. Kohn (1993) argues that extrinsic rewards are similar to bribes and send a message to employees that
the tasks they undertake are not worthwhile. However, people working in the third sector do so despite generally
lower pay, because they consider the task to be important.
3.2 Intrinsic Rewards
Williams (1998) points out that people have different values, motives and perceptions and are not passive recipients
who will automatically respond to work systems as management wishes. In keeping with the findings of Etzioni
(1988) and Larson (1977), values are considered to be important in the development of an individual’s commitment
to an organization. Holcombe (1995) argues that bringing about a congruence of individual values with
organizational values is creating a sense of mission that is an employee’s personal commitment to the mission of the
organization. In her study of the Grameen Bank in Bangladesh, Holcombe demonstrates how important employee
identification with the organization’s goals and values is to the achievement of the organization’s mission.
According to Brown and Yoshioka (2003) NFP staff, particularly volunteers, tend to be motivated by the values and
mission of the organisation. They also found that a perception that pay was inadequate was a source of
dissatisfaction, which could lead to a reduction of commitment to the organisation. The authors referred to point to
the values and the mission of the NFP organisation as being an important source of motivation while also pointing
out that extrinsic rewards cannot be ignored.
Yet agency theory cannot explain why people work for NFP organisations despite generally receiving less pay than
for equivalent jobs in the business sector. Almer, Higgs and Hooks (2005) argue that most agency models of
compensation are only concerned with financial benefits. However Etzioni (1988) states that individuals may also
derive utility from non-economic factors or rewards. Larson (1977) reports that serving the public good and
control over the work environment can modify the behaviour of individuals. Therefore, while pay cannot be
ignored, these writers argue that there are factors other than pay that attract people to NFP organisations.
According to Berry, Broadbent and Otley (1995) organisational control, including such elements as goal setting,
performance measurement and rewards, is pluralistic and people working in the ‘caring services’ may consider
remunerative reward as less important than the normative reward of ‘doing a worthwhile job’. This is in keeping
with the arguments of Etzioni (1988) and Larson (1977) and also that of Brown and Yoshioka (2003).
Further, Brown and Yoshioka (2003) cite Mason (1996) as stating that many individuals in NFP organisations
conceptualise money as a means to accomplish larger objectives and not as an end in itself, either personally or
organisationally. Therefore financial incentives and controls may not be as effective in NFP’s. Speckbacher
(2003) quotes Rose-Ackerman (1996) as stating that NFP organisations may more easily attract committed
employees precisely because the absence of owners is a signal to such employees that their selflessness will not be
enriching someone else. This position has been supported empirically by Weisbrod (1983), Preston (1989), and
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Roomkin and Weisbrod (1999). The literature quoted so far has argued that intrinsic rewards are important in the
NFP context.
In fact Deckop and Cirka (2000) are of the opinion that intrinsic rewards have a greater impact in NFP organisations
than in other organisations. Results reported by them support the contention of Osterloh and Frey (2002) that
extrinsic rewards can ‘crowd out’ intrinsic motivation. Deckop and Cirka (2000) found that a merit pay scheme
may reduce intrinsic motivation for those employees who were highly motivated intrinsically before the scheme was
introduced. This position has been questioned by Gupta and Mitra (1998) who argue that their meta-research does
not show the crowding out of intrinsic rewards by extrinsic rewards. However, the authors do not provide the
context of these findings.
4. The Organisation
The organisation in which this study took place provides services for people with disabilities employment agency
that finds open-market employment for people with various degrees of intellectual and physical disability. The
organisation is divided into two units: the Employment unit, is the larger of the two and finds employment in the
open market for its clients, and the Lifestyles unit, which provides independent living skills for intellectually
disabled people. The organisation can be regarded as successful as it has operated for six years, has a staff of about
60 people and has received public recognition for its work, including complimentary newspaper reports. The
organisation is located on a number of sites across Melbourne’s western suburbs, with each site having a manager.
There is an executive manager for the organisation as a whole, and a separate manager for each of the Lifestyles and
Employment units. Each staff member in the Employment unit looks after approximately 20 clients, while Lifestyle
unit staff develop and present programs for individuals and small groups. There are a number of part-time
employees in both units. Many staff reside in close proximity to one of the sites. Staff and management in both
units expressed a strong sense of comradeship. While the two units are aware of each other they consider
themselves to be operating independently, having different clients and different sources of funding.
While the Employment unit staff have considerable autonomy, Lifestyles staff are on duty for the period that clients
are in the unit – from 8.30 am to 3.00 pm. This requirement makes it difficult to have meetings or training as staff
are responsible for the welfare of their clients. The Lifestyle staff have an open-plan staff room that encourages
collegiality. Employment unit staff are spread over a number of sites and are often away from their home site.
The organisation has two main sources of funding. The Employment unit has, to date, received block funding from
the Australian Federal Government, while the Lifestyles unit is funded by Victorian State Government grants. The
relationship between the Federal Government and the organisation is defined contractually and reflects the
introduction of business ideology into the NFP sector. These changes were seen as potentially disruptive requiring
the organisation to adopt a more business-like approach in an attempt to maintain performance.
The Federal Government has decided to fund open employment agencies on the basis of the number of clients they
find employment for rather than by a set grant, that was paid irrespective of the number of clients who had been
found employment. This change had been mooted for a number of years and management decided to improve
employment unit staff performance by offering a bonus if they were able to increase the number of clients placed in
employment. However, management did not extend the bonuses to Lifestyle unit staff as it was felt that it would
be inappropriate.
5. Issues
In this study the context is particularly relevant as it defines employee activities and rewards. Staff of the
Employment unit can participate in the bonus scheme, while staff in the Lifestyles unit cannot. The context also
means that staff of the two units work under differing conditions, as outlined above. Both groups work in a sector
in which pay is less than for an equivalent job in the business sector. Of particular significance is that any intrinsic
rewards are closely linked to the type of work staff do.
NFP organisations are dependent upon the continued motivation of their staff, because they have the option of being
employed in the business sector where pay is generally higher than in the NFP sector. However, pay does not
appear to be the only source of motivation. The literature suggests that the mission and values of the NFP
organisation and intrinsic rewards play an important role in the motivation of NFP staff. The NFP literature,
discussed above, questions the effectiveness of extrinsic rewards as a significant source of motivation.
6. Research Method
The essential research method used was a model to identify key variables – “predictor variables” – that are
important employee motivators. Discriminant analysis (using SPSS) was used as the supporting technique for the
model, which technique revealed the importance of extrinsic and intrinsic rewards in the motivation of staff in an
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Baiman, S. (1990). Agency Research in Management Accounting: A Second Look, Accounting, Organizations, and
Society, 15 (4): 341-370.
Berry A., Broadbent J., and Otley D., (1995), Management Control: Theories, Issues and Practices. London,
Macmillan.
Brown, W., & Yoshioka, C. (2003). Mission Attachment and Satisfaction as Factors in Employee Retention.
Nonprofit Management & Leadership, 14, 1, 5-18.
Deckop, J. R., & Cirka, C. C. (2000). The risk and Reward of a Double-Edged Sword: Effects of a Merit Pay
Program on Intrinsic Motivation. Nonprofit and Voluntary Sector Quarterly, 29, 3, 400-418.
Dowling, B., & Richardson, R. (1997). Evaluating Performance Related Pay for Managers in the National Health
Service. International Journal of Human Resource Management, 8, 3, 348-366.
Etzioni, A. (1988). The Moral Dimension: towards a New Economics. New York, NY: The Free Press.
Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of Management Review, 14, 1, 57-74.
Gaertner, K., & Gaertner, G. (1985). Performance-contingent Pay for Federal Managers. Administration & Society,
17, 1, 7-20.
Graffam, J., Noblet, A., Crosbie, J., & Lavelle, B. (2005). Keeping Quality People Engaged: Workforce Satisfaction
Within the Disability Employment Industry. Final Report, Faculty of Health and Behavioural Sciences, Deakin
University.
Gupta, N., & Mitra, A. (1998). The Value of Financial Incentives. ACA Journal, Autumn, 58-66.
Holcombe, S. (1995). Managing to Empower, London and New Jersey, Zed Books.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure. Journal of Financial Economics, 3, 4, 305-360.
Kohn, A. (1993). Why Incentive Plans Cannot Work. Harvard Business Review, Sept. – Oct., 54-63.
Larson, M. (1977). The rise of Professionalism. Berkeley, CA: University of California Press.
Marsden, D., & Richardson, R. (1994). Performing for Pay: The Effects of ‘Merit Pay’ on Motivation in a Public
Service. British Journal of Industrial Relations, 32, 2, 243-61.
Mason, D. (1996). Leading and Managing the Expressive Dimension: Harnessing the Hidden Power Source of the
Nonprofit Sector. San Francisco: Jossey-Bass.
O’Donnell, M. (1998). Creating a Performance Culture? Performance-pay in the Australian Public Service.
Australian Journal of Public Administration, 57, 3, 28-40.
O’Donnell, M., & Shields, J. (2002). Performance Management and the Psychological Contract in the Australian
Federal Public Sector. The Journal of Industrial Relations, 44, 3, 435-457.
OECD, (1993). Private Pay for Public Work: Performance-related pay for public sector managers. Paris: OECD.
Osterloh, M., & Frey, B. (2002). Does Pay for Performance Really Motivate Employees? In Neely, A. (Ed), Business
Performance Management – Theory and Practice (pp. 107-122). Cambridge: Cambridge University Press.
Preston, A. (1989). The Nonprofit Worker in a For-Profit World. Journal of Labor Economics, 7, 4, pp. 438-463.
Redman, T., Snape, E., Thompson, D., & Ka-Ching, F. Y. (2000). Performance Appraisal in an NHS Hospital.
Human Resource Management Journal, 10, 1, 48-62.
Roomkin, M., & Weisbrod, B. (1999). Managerial Compensation and Incentives in For-Profit and Non-profit
Hospitals. Journal of Law, Economics, and Organisations, 15, 750-781.
Rose-Ackerman, S. (1996). Altruism, Nonprofits, and Economic Theory. Journal of Economic Literature, 34,
701-728.
Speckbacher, G. (2003). The Economics of Performance Management in Nonprofit Organizations. Nonprofit
Management & Leadership, 13, 3, 267-281.
Weisbrod, B. (1983). Non-profit and Proprietary Sector Behavior: Wage Differentials Among Lawyers. Journal of
Labor Economics, 1, 3, 246-263.
Williams, R. S. (1998). Performance Management. London: International Thomson Business Press.
Appendix: SPSS output
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Table 1.
Wilks' Lambda
Wilks'
Test of Function(s) Lambda Chi-square df Sig.
1 .319 34.231 18 .012
Table 2. Eigenvalues
Canonical
Function Eigenvalue % of Variance Cumulative % Correlation
1 2.130a 100.0 100.0 .825
a. First 1 canonical discriminant functions were used in the
analysis.
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develop together. Data management is not only the foundation of information management, but also the foundation
of corporation management.
Information management develops from data management, but its contents are far more abundant than data
management. Information management also named Information resource management, it’s the offspring of
production and information activities. It manages information contents from information carrier and information
system. Information management not means single professional function management, but complicated general
management, which depends on harmony and integration between sections. In corporation information management,
we need not only introduce, spread, update and integrate all kinds of advanced information technology, but also
program, setup, prepare, direct and control the whole information in lifecycle. What more important is syncretizing
information technology and information content. The aim, stratagem, programming and setup of information
management must be consistent with the ones of the corporation, which is the rule of corporation information
management. Information management is a part of corporation management; it serves for the whole corporation’s
development.
Knowledge management is considered the new phase of information management. Traditional information
technique can only provide some fact or truth knowledge, which can’t help the corporation deal with new challenges
appeared in fast-developing markets. Variational market environment claims that the stuff must enhance their work
abilities and learn how to seek for experts’ helps. According to the need of economy developing and management
practice, knowledge management becomes a new area.
3.1 Information management is the foundation of knowledge management; knowledge management is the further
prolongation and deepening of information management
Compared with information management, knowledge management has improved in management objects,
management mode, management technique and management aim. The keystone of information management is to
help a unit use apparent knowledge more effectively. However, the keystone of knowledge management is to
manage human resources and latent knowledge by integrating information management and other methods.
Successful knowledge management claims for integrating information, activity and person, but also apparent
knowledge and latent knowledge.
3.2 Knowledge management needs the support of theory and technology about knowledge management
The core of knowledge management is knowledge innovation. Knowledge innovation is a durative course. In
knowledge economy age, knowledge has become the essential material, but knowledge innovation depends on
information. The mutual character between knowledge and information determines that when information resources
become knowledge resources, it inevitably claims for transferring information to knowledge by information
management theory (store and utilize information resources), study and value organization. The development of
information management theory and technique has paved the way for collecting, processing, communicating,
sharing, applying and innovating information.
3.3 Knowledge management develops the useful parts and discard the useless parts of knowledge management
This appears in three aspects. Firstly, traditional information management mostly provides literatures of the first and
second times. However, knowledge management is not localized in using unilateral information to fulfil consumers’
demand, but providing general and perfect settlement to customers, help them choose available literatures in virtue
of analyzing their demand system. Secondly, traditional information management in managing only information but
persons. However, knowledge management believes that management to persons can not only provide abroad
knowledge resources, but also build favorable structure to help spread knowledge. All these suit the demand of
knowledge economy age. Thirdly, by applying knowledge management, we discard the passive work pattern in
information management. Knowledge management mixes information and knowledge, and further more, brings
communion, innovation and applications. It makes management the core impetus of knowledge innovation.
3.4 Knowledge management is the advanced phase of knowledge management
The practice of information management has developed for long,. Appears between the end of seventies and the start
of eighties of the twentieth century, but it develops fast and has persistent influence. Rapid developed computer
technique and popularized network technique have brought information management more tasks, that is theory
updating and practice innovation. Form eighties of the twentieth century till now, following the step of knowledge
economy, information management has extended its way to knowledge management. Firstly, taking information
pressing for example, knowledge management cares more about digging the deep-seated and latent information,
emphasizing on multiplicity of obtaining means. All these stand for the new trend of information management. Then
talking about its influence, knowledge management is different from all phases of information management before,
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it brings influence of different degrees to all taches of information management, which helps it develop to higher
levels.
4. The running mechanism of the three seedtimes on its manage pattern
The famous manager, Simon said: “The premise of management is decision-making, while The premise of
decision-making is forecast.” The running mechanism of company is that the truth is distilled, identified and
determined, which can becomes useful data. if it can be cognized, then it would be efficient data. If it also can be
validated, produced and combined with experience of experts. In the course, it manages data, information and
knowledge, that is data management.
Information management and knowledge management. However, there is some inherent transform relation among
them. Among data, information and knowledge, only information and knowledge can be helpful for decision-making,
but the use they offer is different. Information can be useful from exterior, while, knowledge supports and instructs
decision-making from interior.
In the stage of knowledge management, it optimizes, upgrades and inaugurates the knowledge management by
controlling, checking, estimating and performing the decision-making and implement.(just as figure 2).
5. The development trend after knowledge management-human dominating management
The truth, pattern and development trend of management are human dominating management. Information
management and knowledge management both emphasize managing and empoldering manpower. The development
trend tends to person’s potential capability. As a strategetic resource, manpower has been the key factor to the
development of the company. From this, a new management pattern comes into being, which is human dominating
management. That from knowledge management to human dominating management is the embodiment of human
first in theory and practice of management (Just as figure 3).
In theory and practice of management at home, the cognition of human first in management is for a long time, but its
practice is later. In our practice, human first that is human power or human capital emphasizes human priority to
object. “The key to human first is humans abilities, which is a ability or resource people can acts on objects.”
The management of human first is a soft management, which differs greatly from traditional management pattern. In
fact the management of human first not only keeps rigidity, but also tries its best to heighten it soft management.
They both make the management of company more scientific and flexible.
The management of human first puts forward that human himself is the most important resource, which combines
the management of human with the management of happening. Its heart is that care about, esteem, empolder, figure,
agglomerate and satisfy persons’ demand. Also it can accelerate the all-round development of human and translate
their go-aheadism. From sentiment management, democratic management, person with ability management and
cultural management, it can explode human’s potential abilities, go-aheadism and creativity, can accelerate the
all-round development of human and push the progress of the society.
The truth of the management of human first is that tries its best to excavate manpower, and exploit humans potential
abilities, which is for embodying one’s potential abilities .Its content includes that excavates humans potential
impression, will, diathesis, skills, passion go-aheadism and so on. Among many contents of management of human
first, prompting is one of the important contents. William James, a professor of Harvard University in American,
finds out humans potential abilities only can be exerted from twenty to thirty percent, if they are in the condition of
lack of prompting. However, if they be bestirred enough, their potential abilities can be exerted from eighty to ninety
percent. From this we know that prompting is an important way to excavate one’s potential abilities. Of course, the
effective prompting must base on the scientific estimate system. The scientific estimate system must include
performance evaluation system and system of estimate on prompting measures.
In the course of globalization, the governor of companies need combine material prompting with spiritual prompting
together to inaugurate management, excavate employee’s potential abilities and heighten company’s competition, all
of which is for welcoming challenges in new century with new faces.
6. Conclusion
The development from data management to information management to knowledge management is a long
continuous process of more than one half of a century and the process is still developing. Management development
is both a continual and a gradual process. It pushes forward step by step from a lower stage to a higher stage. If we
think about the relations between data management and information management and knowledge management, we
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can see that the development is not as simple as one later stage replacing an earlier stage. It is rather a gradual
accumulating process, that is, the later stage develops on the basis of the earlier stage and the later stage contains the
whole or part of the earlier stage. The different stages can coexist with each other, but the priority goes continually
from one to a later stage.
Information currency
Knowledge currency
guarantee
Information currency
Knowledge guarantee
Knowledge management
Support decision-making
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Competition
support
Environment
support
Knowledge Human
Ability of Information
data management management dominating
management management
↓ ↓ ↓ ↓
Data Information Knowledge Excavate
currency processing application potential
↓ ↓ ↓ ↓
Database Information Knowledge Ability
empolder innovation exertion
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medium-enterprises’ growth. Penrose thinks that the driving forces for enterprises’ increase in scales and quality is
due to its capability of mining and using internal resources (Penrose, 1959). H.I.Ansoff proposes the influencing
factors in small- and medium-enterprises’ growth from four aspects, namely the scope of products and market, the
type of chosen strategy, the competitive advantage, and the coordinative effect of branches in enterprises (Wang, Li,
Zhang, 1987, p1-29). Chandler also studies the growth of small- and medium-enterprises, thinking that the key for
the growth and development of enterprises is whether the management coordination mechanism formed by
management levels and corresponding organizational structure works or not (Chandler, 1994). Peter F. Drucker
points that management and management structure are two important factors in the process of a small- or medium-
enterprise growing into a large enterprise. And he also mentions that whether an enterprise can grasp an opportunity
for further development is determined by its internal resources. The capability of realizing its own potential in
development is also an important factor that affects the growth of an enterprise (Drucker, 1987, p794-795). Porter
researches some small- and medium-enterprises in clusters, thinking that the driving force of their growth is
competition, especially the competition in the fields of skillful labors, capitals, common infrastructures, and policy
supports (Porter, 1990). Everett M.Rogers finds in his researches that the technological innovation is an important
force in driving the enterprise growth. He also thinks that the employees who possess innovative ideas can drive the
development of enterprises by technological researches (Zhang, 2006, p191-192). Barrow discusses the growth of
small- and medium-enterprises from the design of organization, the business mode, the market strategy, the finance
management, and the personnel management in his work “The Essence of Small Business” (Barrow, 1993).
P.A.Julien thinks that the development of small enterprises is determined by their abilities of obtaining and
controlling information, systematic innovation, and forming enterprise net, in his researches (Julien, 1998). Capello
researches the factors that affect the growth of small- and medium-enterprises from a cluster angle, thinking that the
collective learning is one of forces that drive the development of small- and medium-enterprises. In his opinion, the
collective learning under the condition of mutual trust and cooperation guarantees the knowledge for enterprises’
growth (Capello, 1999, p353-365).
Secondly, Long Wang, Canhua Kang and other domestic scholars study the driving forces of small- and
medium-enterprises’ growth. In Long Wang and Canhua Zhang’s researches on the growth of small- and
medium-enterprises, they propose that the driving force is the innovation net. They think that the innovation net can
effectively decrease the uncertainty of innovation and overcome the ability limits of individual enterprise in complex
technology innovations, which can help member enterprises gain driving forces generated by the win-win games
(Wang, Kang, 2005, p85-86). Jing Cheng thinks that venture investment can drive the development of high-tech
enterprises. She advocates to construct a mechanism for venture investment and to develop a growth board capital
market, realizing a benign cycle between venture investment and growth board market, driving the growth of small-
and medium- enterprise (Cheng, 2004, p25-26). Ruilong Yang thinks that the driving forces for small- and medium-
enterprises’ growth are enterprises’ resources’ values, scarcity, hard-to-be-imitated and hard-to-be- substituted,
which can provide an enterprise with sustainable growing forces (Yang, 2005, p66-67).
2.1.3 Researches on barriers and restraints in the growth of small- and medium-enterprises
Scholars who are engaged in this field include Yimin Ma, Weijun Fan, Ziyin Ni, Yongliang Zhao, Rongchang Jia,
Xianfang Gong, and Yanjun Ma. They discuss this issue from angles of business idea, credit, technology, financing,
and property right.
Yimin Ma analyzes the barriers in the development of small- and medium-enterprises from five aspects, respectively
the short-term business idea, the ethical credit crisis, the insufficiency of core competence, the unregulated
organizational administration, and the imperfect exterior support system (Ma, 2006, p78-79). Weijun Fan thinks that
there are six factors that restrain the growth of small- and medium- enterprises. One is stresses on technology too
much. The second is the failure to deal with market changes in time. The third is the traditional idea on capital
operation. The fourth is the construction of teams in an enterprise. The fifth is the dependence on policy too much.
The sixth is the imperfect enterprise system (Fan, 2005, p20-27). Ziyin Ni and Yongliang Zhao discuss the barriers
in the growth of small- and medium-enterprise from five angles. One is absence of clear strategies and program for
future development. The second is that the enterprise follows an opportunity-oriented development mode that was
used in the beginning and the enterprise may blindly enter a wrong industry that conflicts with its resources and
capabilities. As a result, the enterprise can not mine the proposed values and effects from limited resources. The
third is that the family members control the enterprise and the business decision-making right is centralized in the
entrepreneur. The fourth is that the enterprise replaces the economic behavior regulations with ethics and morals.
The fifth is that the shortage of clear organizational responsibilities, controlled management, competition
mechanism, common values, and collective corporate culture (Ni, Zhao, 2005, p38-39). Rongchang Jia thinks that
there are six factors that block the growth of enterprises, namely strategies, financing, property right, talents,
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technologies, and management (Jia, 2004, p8-11). Xianfang Gong and Yanjun Ma think that the governance mode
that combines the ownership and control right together in an enterprise has many disadvantages. The entrepreneur
who has led a small- or medium-enterprise to a success does not necessarily have a son who is good at business.
Therefore, the enterprise has to change its governance mode in order to survive. If an enterprise fails to make
adjustment in governance structure and management mode, it will not gain further development and even face living
crisis (Gong, Ma, 2003, p11). According to Tushan Jiang, an officer in Shaanxi Federation of Industry & Commerce,
the government activities exert important effects on the development of small- and medium-enterprises and
presently these effects tend to be negative. He also thinks that many severe problems restrict the growth and
development of small- and medium-enterprises, such as the incomplete reformation in local governments, the
redundancy of personnel, the lagged-behind policy guidance of government to small- and medium-enterprises, the
poor execution of local policies, and the terrible credits (Gu, Fang, 2003, p75-76).
2.2 Researches on the cluster environment in which small- and medium-enterprises grow
2.2.1 Researches on the definition of small- and medium-enterprises’ cluster
Many foreign scholars are engaged in researching this field, such as Marshall, Weber, Krugman, Hoover, and
Williamson. Some domestic scholars try to define the small- and medium-enterprises’ cluster, such as Baoxing Qiu,
Aaihua Xiong, Jingduo Chang, and Jianfei Zan.
Marshall defines a corporate cluster as an industrial region from an “external economy” angle, naming a special
region that collects the specialized industry as an “industrial region” (Marshall, 1964). Michael Porter defines the
small- and medium-enterprises’ cluster from a competitive advantages angle as some small- and medium-enterprises
and institutions in certain specific industry collecting together in one specific region and forming a stable and
sustainable collection with competitive advantages (Porter, 2002, 1998). Weber defines the corporate cluster from an
angle of local factors as a high-centralized stage as enterprises combine together to realize the local industrialization
(Weber, 1997). Krugman thinks that the cluster is a special economic entity formed in the interaction of
transportation costs and production factors’ transmission under the precondition of an increase of scale pays in
amounts of enterprises (Krugman, 2000). Hoover, taking the economy of scale as a breakthrough, thinks that the
small- and medium-enterprises’ cluster is an enterprise-collected scale economy in one specific industry and region
(Hoover, 1990). Williamson, from an angle of the organization form of production, thinks that the corporate cluster
is an organization combined by many mall- and medium-enterprises based on specialization and coordination. It is
an inter-medium organization between pure market organizations and leveled institutions. It is more stable than
market and more flexible than leveled institutions (Williamson, p57-63).
Besides, many domestic scholars try to define the small- and medium-enterprises’ cluster, such as Baoxing Qiu,
Aaihua Xiong, Jingduo Chang, and Jianfei Zan. A representative Baoxing Qiu defines the small- and
medium-enterprises’ cluster as follow. (1) It is composed of a group of small- and medium- enterprises that are
independent but have certain special relationships. (2) The special relationships between these small- and
medium-enterprises indicate specialization and coordination. The coordination is an interactive behavior between
enterprises in a cluster. It will lead to the “external economy” proposed by Marshall. (3) The interactive behavior
includes exchange and accommodation between enterprises. (4) The exchange is to obtain external resources
effectively, sell products and services, and drive the accumulation of knowledge and technology. The
accommodation is to reduce the conflicts among members and exclude uncertainty of environment in order to
achieve a long-term stable relationship between enterprises. (5) There is a complementary and competitive
relationship between enterprises in a cluster. (6) The long-term relationship between small- and medium-enterprises
is sustained by credit and commitment but not contracts, which serves as a unique advantage of the cluster as
confronting external competitors (Qiu, 1999). Aihua Xiong, Jingduo Chang, and Jianfei Zan have similar opinions
on the definition of small- and medium-enterprises’ cluster. According to their opinions, many small- and
medium-enterprises localize themselves in a relatively centralized geographical space and focus on certain
specialized production, which helps to achieve a scaled production in one region. As a result, a close and flexible
relationship with specialization and coordination in enterprises is formed. That is a small- and medium-enterprises’
cluster (Xiong, 2006, Chang, 2006, Zan, 2005).
2.2.2 Researches on the positive effects of the cluster on small- and medium-enterprises
Scholars inside and outside study the positive effects of the cluster on small- and medium-enterprises from aspects
of division and coordination, external economy and scale economy, obtaining financing loan, driving innovation,
saving costs, shaping brands of clusters, and knowledge overflow.
Some foreign scholars analyze the positive effects of the cluster on small- and medium-enterprises from the angles
of division and coordination, external economy and scale economy, obtaining financing loan, and driving
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innovations. Schmitz explains the effects clusters on the small- and medium- enterprises from an angle of division
and coordination, thinking that division and coordination can improve the efficiency of an individual enterprise and
the whole cluster at the same time (Schmitz, 1994, p322-336). Based on Marshall’s theories of external economy,
Krugman concludes the positive effects of the cluster on enterprises as three types, namely the market-agglomerate
effect, the middle investment effect, and the technology overflow effect. A. Saxenian argues the innovative root
concept that in a specific cluster the mutual trust and communication between small- and medium-enterprises speed
up the spread of new thoughts, ideas, information, and innovation, which drives the enterprise innovation (Saxenian,
1999). Besides, Freeman and other foreign scholars make relevant researches on the positive effects of the cluster on
enterprises from an angle of clusters’ knowledge overflow. Freeman thinks that clusters’ knowledge overflow effect
is the essential power that drives the development of clusters’ new net and enterprises (Freeman, 1991, p499-514).
Imai K. thinks that it is easy for cluster members to generate the knowledge overflow effect due to their closeness in
geography. Enterprises in a cluster share knowledge resources by formal or informal channels, what helps to
improve their innovative capability (Imai, 1989). Jafe A.Trajtenberg thinks that the growth of an enterprise depends
on the knowledge overflow effect that is generated from the informal information communication (Trajtenberg, 1993,
p577-598).
At the same time, many domestic scholars try to study the positive effect of the cluster on small- and
medium-enterprises from angles of driving innovation, costs saving, and shaping the cluster brand. Xiaochun Tu
thinks that a cluster can benefit enterprises’ innovation in technology and management, pointing out that the driving
forces generated by a cluster for enterprises include the following aspects. One is the net between enterprises. The
second is the direction of government to innovation. The third is the close production-academy-research cooperation
net between universities and research institutes. The fourth is that the intermediary institutions provide opportunities
for the foundation and innovation of new enterprises. The fifth is the open learning mechanism (Tu, 2003, p29-32).
According to Yongsheng Shang, the open collective learning mechanism is an important factor that drives
innovations in enterprises of clusters. By means of a collective learning mechanism and the knowledge overflow
effect, enterprises can obtain the knowledge that is hard to get by an individual enterprise (Shang, 2006, p38-40).
Yiqing Wu thinks that under the same technological condition, the cost saving effect of the cluster on enterprises is
caused by the aggregated economy, the economy of scale, the division of labor, the scope economy, and the supply
of labor. It is the corporate aggregation and specialization that help to realize the economy of scale and improve the
production efficiency of the cluster and enterprises, decreasing the transaction cost (Wu, 2004, p6-11). Jingfen Zhu
thinks that the vertical suppliers in the cluster contribute to the decrease of transaction costs and risks (Zhu, 2003,
p57-63). Wei Qiao thinks that a general cluster brand can benefit the small- and medium-enterprises in constructing
market net, achieving coordination effects, and creating market advantages. In advertising, a general cluster brand
can motivate enterprises, changing the fact that an individual enterprise refuses to invest more in advertising due to
the large costs. Integrating the strengths of the small- and medium- enterprises to perform advertising can benefit
them at the same time (Qiao, 2003, p75-76). Xizhen Ren emphasizes the important significance of building up a
cluster brand. By means of building up a cluster brand, enterprises can save costs for enterprises in advertising on
one hand. And on the other hand, it can benefit all enterprises and reduce the economic externality (Ren, 2006,
p78-80). Xuemei Liu thinks that the cluster brand is abstract and refinement of all enterprises’ essence and it can
bring about sustainable positive effects on enterprises (Liu, 2006 p51-53).
Besides, other domestic scholars, such as Baojun Yang, Jun Xiong, Junshu Lv, and Jing Kang research the positive
effects of the cluster from different aspects. From the complementary mechanism, Baojun Yang thinks that the
enterprises in a cluster form a close industrial relationship by specialization, achieving a mutual development (Yang,
2003, p18-21). Jun Xiong thinks that a cluster can help enterprises save costs in transportation, market information
collection, and technological knowledge innovation (Xiong, 2000). Junshu Lv thinks that the cluster provides
enterprises with unified market, product standards, common marks, and specialized technologies, driving the
development of the cluster and enterprises (Lv, 2005, p74-75). Jing Kang thinks that the cluster exerts positive
inspiring effects on small- and medium-enterprises from two angles, namely competitive coordination and external
scale economy (Kang, 2004, p29-30).
2.2.3 Researches on the negative effects of the cluster on small- and medium-enterprises
Some scholars study the negative effects of the cluster on small- and medium-enterprises from many aspects,
including the low labor division and coordination, disordering competition, poor acquirement of information,
industrial structure in a cluster, difficulties in financing, government policies and system.
Mcclenahen thinks that the poor organization of enterprises’ cluster contributes the absence of a supportive and
dependent specialized coordinative industrial net, which heavily restrain the development of small- and
medium-enterprises in a cluster (Mcclenahen, 2002). An American economist Akerlof points out that the Lemon
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market caused by information asymmetry in a cluster will restrict the development of individual enterprises and the
whole cluster, and even lead to the decline of enterprises and the cluster. Xigang Xie argues that the barriers in
information exchange in small- and medium-enterprises’ cluster limit the enterprise innovation and technology
upgrade (Xie, 2006, p51-55). According to Jici Wang’s researches and investigations, the low technological products
of enterprises and the production overlap in the cluster lead to the vicious competition, which brings about severe
negative effects on enterprises and the improvement of cluster’s competence (Wang, 2002). Weiyi Wang thinks that
the difficult financing and dysfunctional government service are key elements in blocking the development of small-
and medium-enterprises in the cluster (Wang, 2003, p5-7). Bin Wang and Cheng Chen find that the cluster affects
small- and medium-enterprises chiefly from the system aspect. They think that there is a pay-increment and
self-enhancement mechanism in the path dependence of small- and medium-enterprises turning into a cluster system
(Wang, Chen, 2005, p94). Bedsides, Xiaojun Xia, Qun Li, and Xiufen Gong also study the negative effects of a
cluster on small- and medium-enterprises. Xiaojun Xia analyzes this issue in general and thinks that the poor
organization in a cluster, the disordering competition in one industry, the old technologies in production, and the
unilateral products, the dated equipments, and the cluster’s environment pollution threat the sustainable development
of small- and medium-enterprises and the cluster (Xia, 2003, p15-18). According to Qun Li, if an enterprises’ cluster
is at the border of administrative division, this fact will lead to a mutual exclusion between enterprises in one cluster.
As a result, it will hurt the development of the cluster and its enterprises due to the absence of effective coordination
mechanism (Li, 2005, 60-62). Xiufen Gong researches the small- and medium-enterprises and the cluster from the
cluster’s cultural root angle, thinking that it is the insufficiency of risk and innovation consciousness, the shortage of
talents in engineering technology and business management that cause many negative effects in a cluster, such as the
products with low technological elements, the low motivations for technological innovation, and the neglect over
brand consciousness (Gong, 2005, p20).
3. A brief review
The enhancement of national economic strength is caused by not only a lot of large enterprises in the market, but
also, or even more, the fast development of small- and medium-enterprises. After all, the small- and
medium-enterprises possesses certain advantages over large enterprises. At present, a new form for small- and
medium-enterprises’ growth is emerging, in which many small- and medium- enterprises combine together to form a
cluster for the sake of obtaining development resources and market competency. It is a significant work to study the
law of small- and medium-enterprises’ growth and operation under the cluster background for achieving a
sustainable increase in China economy. However, few researches concern a deep and general study on the growth of
small- and medium- enterprises. Most of them are about the definition of small- and medium-enterprises’ growth,
the present situation of their growth, the surface reasons and the driving forces of the growth. Seldom do the
researches discuss the growth of small- and medium-enterprises’ growth considering the cluster background.
Especially, almost none of them focus on the effects of the cluster on small- and medium-enterprises. That is the
issue discussed in this paper.
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0 1 2 3 ti-1 τ ti time
Contingent payoff
The starting point for pricing an EDS is the basic default swap pricing framework known from CDS contracts. The
present value (PV) of an EDS for selling protection can be viewed as the algebraic sum of the present values of its
premium payoff
two legs, i.e. PV = V −V .
Before we go further, we should know the following notations:
dfi is the risk-free discount factor from time t0 to time ti;
pndi is the no default probability (survival probability) from t0 to ti;
pndi −1 − pndi is the probability of a trigger event occurring during period ti-1 to ti;
Ai is the accrual period from ti-1 to ti.
In this model, the occurrence of the equity event is supposed on average in the middle of each coupon period, and
the settlement was assumed at payment date i, where i ∈ {1, 2,...m} .
Let’s consider one possible case (please see Figure 1): τ ∈ ( ti −1 , ti ] , where τ is the default time, the protection
buyer will pay premium sA j , j ∈ {1, 2, ...i − 1} at each payment date until ti-1, he has to pay the extra premium of
sAi −1 2 at τ for the period ( ti −1 , τ ) to the protection buyer.
The valuation of the premium leg can be expressed as:
V
premium
=s ∑ dfi × pnd i × Ai + s ∑ dfi × ( pnd i −1 − pnd i ) × Ai 2 (1)
In this model, as the contingent payoff and extra premium are always paid at the same time, it is straightforward that
the valuation of the contingent payoff leg is:
V payoff
= (1 − rec ) ∑ dfi × ( pnd i −1 − pnd i ) (2)
Now, we get the valuation for a single-name EDS with € 1 notional principal:
PV = V premium − V payoff
= s ∑ dfi × pndi × Ai + s ∑ dfi × ( pndi −1 − pndi ) × Ai 2
− (1 − rec ) ∑ dfi × ( pndi −1 − pndi )
So far, the process for pricing an EDS is the same as that for CDS. The subsequent step is to calculate the price
using default probability or survival probability. For a CDS contract, default probabilities can be taken from some
rating agencies’ data for the corresponding reference entity’s credit rating group. Therefore, the calculation for CDS
should be straightforward, while, the obstacle for valuation of EDS is how to get survival probabilities for EDS.
Fortunately, the default payment leg of the EDS is identical to that of an OTP with the same trigger level, recovery
rate, maturity time, notional principal, and reference stock. The expected present value of the payment inherent to an
OTP can be expressed as follows:
O T P (t N )= ∑ d fi × ( p n d i −1 − pndi ) (4)
Then, the survival probability pndi can be derived from the valuation of an OTP, via a simple bootstrapping
algorithm. Firstly, we have to calculate the price for OTP. Fortunately, the valuation of OTP has been already
described by P. Wilmott. OTP ( t ) is the solution of the Black-Scholes equation with OTP ( Sl , t ) = 1 , where Sl
N
O T P (t N ) − O T P ( t N −1 )
p n d n = p n d n −1 − (5)
df N
This algorithm is similar to the bootstrapping procedure to derive discount factors from par yield curves, where the
current discount factor depends on the solution of the previous ones. Therefore, to value an EDS contract, we first
have to bootstrap to extract the survival probabilities for each payment date (N) given the value of a series of OTPs.
In the second step these survival probabilities can be used to value EDS contract with equation (3).
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References
Albanese, C. & O. Chen (2004). Pricing EDSs. Working Paper. Imperial College.
Choudhry, M. (2004). Structured Credit Products:Credit Derivatives and Synthetic Securitization. John Wiley &
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Cluley, P. & E. Dwyer (2004). Documenting EDS. Asiarisk. June, pp.28-29.
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Sawyer, N. (2003). A New Direction. Asiarisk. December, pp.S2-S3.
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International Journal of Business and Management October, 2007
A Research on Franchise
Mode of China’s Clothing Enterprises
Dong Xu
College of Art and Apparel, Tianjin Polytechnic University, Tianjin 300384, China
Tel: 86-22-8395 6782 E-mail: tjxudong@163.com
Abstract
This paper analyzes the importance of franchise, a high class business form in the globalization market, discusses
the conditions of franchise t for China’s clothing enterprises development and franchise mode suitable for Chinese
enterprises, and proposes relevant measures to solve the problems that clothing enterprises are facing when
developing franchise, which has significant value for the application and development of franchise mode in China’s
clothing enterprises.
Keywords: Franchise, Chain, Franchisor, Franchisee
As an effective way to sell commodities and provide services, franchise, initially covering machine manufacture,
now comes down to retail trade, fast food industry and other various industries and is creatively applied to modern
logistics distribution. In America, where franchise is the most popular, 30% of national consumption expenditure is
used in franchise stores. In recent years, the sale of franchise amounts to 1000 billion dollars. After China entered
WTO, China gradually cancelled the import quota of textile clothing. As a result, an important way for international
clothing brands to occupy China’s market is to quickly enlarge capital. Facing economy globalization and fierce
market competition, China’s clothing enterprises should quickly improve the level of design, production and sale,
establish a more effective terminal sale system for clothing to circulate, and carry out researches on and learn from
the successful experiences of sale methods of franchise of multinational clothing enterprises.
1. The actuality and development of China’s franchise
The definition of franchise, giving by International Franchise Association, is: a franchise operation is a contractual
relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a
continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee
operates under a common trade name, format and / or procedure owned or controlled by the franchisor and in which
the franchisee has or will make a substantial capital investment in his business from his own resources. In 1997, the
Domestic Trade Ministry of China enacted “ Business Franchise Management Methods ( Tryout)”, in which it says
that franchise refers to a condition where franchisor grants his or her own trade mark (including service trade mark),
trade name, products, patent, proprietary technology, and management mode to franchisee in the form of contract,
and the franchisee should abide by the regulations of the contract to manage under the business mode unified by
franchisor and provide relevant fees to franchisor.
In China, franchise started in 1980s. International franchise organizations, and the leading companies in fast food
industry, MacDonald and KFC, entered China in the form of joint venture, which provided a base and accumulated
experiences for the large scale development of franchise in China. After 1990, foreign franchise organizations
developed their business by selling franchise right and it drove some famous Chinese companies to develop
franchise in a designed way and later, it covered not only fast food industry and supermarket, but also extended to
manufacture industry. Some famous enterprises, such as U-Right, Baleno, Giordano, Jeanwest, Threegun and Lining,
started franchise and developed quickly. Monopolistic stores of famous clothing are mostly the products of this kind
of management mode.
With the development of China’s market economy system, especially after entering WTO, China now is one of the
biggest franchise markets in the world. International big franchise enterprises will quickly take up China’s market
and incorporate medium sized and small enterprises which already have certain management range and capital
accumulation. The fierce market competition forces the domestic existing powerful enterprises to carry out measures
to develop excellent brands, to raise entire service level, to try to bring in franchise management techniques, and to
enlarge market. At the same time, this condition provides chances for those medium sized and small enterprises and
those investors, who have already accumulated capital, to choose franchisors, integrate enterprises and to
re-establish companies.
Franchisee provides management site, storage and management for the monopolization store under the management
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of franchise. Thereby, it decreases the management risk of franchisor. On the other hand, the franchisee benefit from
the successful management system and good business credit of the franchisor, and obtains famous trade name and
trade mark, proprietary management skills, and business and technique support. In a very short time, the franchisee
can start a new business. And under the fame of franchisee, the franchisee can gain favorable business return and
reduce risk when starting a new business. With franchise, famous enterprises can widely attract social idle capital
and labors to realize a rapid expansion of the target market. At the same time, the franchisor and
franchisee—medium sided and small enterprises, throng the integration of capital , labors, experiences, can both
achieve fame and profits. Because both parties, the franchisor and franchisee, expect rather high of the business
profits, they are lacking of risk consciousness. As a result, although the franchise started rather late in China, it
develops quite fast. Then, some nonstandard phenomenon appears. For example:
(1) Some enterprises, without a mature clothing brand and management technique, are anxious to develop franchise.
For the lack of good management system, the franchise enterprises cannot provide an effective supervision
management to the franchisee in after service, management direction and the control of service quality.
(2) The standard degree of some enterprises is quite low. They have not yet established a good enterprise image and
enterprise culture. Consequently, their employees cannot obtain a systematical training in management. Although,
the stores unify their mark, trade name, their service levels vary greatly.
(3) They cannot distinguish franchise from agent management and chain management. The management right is not
clear. Some franchise enterprises have not registered and protected their own brand and patent. China has just
enacted laws on franchise. People are lacking in the consciousness of abiding by contract. Some franchisees that
have not got high management techniques may violate contract under the temptation of profits.
(4) Business automation degree is not high. Not all famous enterprises realize to use bar code management system,
automatic accounting system, sale management system and logistic management system. The franchisor enterprises
cannot supervise franchisee enterprises on time. Their service consciousness is not good enough.
(5) The construction of distribution center lags behind. The average distribution rate of most enterprises is under
50%, which limits the scale of franchise.
To develop franchise in China’s clothing industry, we should bring in and learn form the techniques and experiences
of international franchise, should lead enterprises to choose suitable development mode. Famous enterprises can
develop franchise depending on their own strength and start a bigger market expansion. Medium sided and small
enterprises, according to their employees, capital and technique condition, can take advantaged of management
skills and management mode of famous enterprises to explore new market and to obtain better profits.
2. The advantages for clothing enterprises to develop franchise
From the development future of China’s franchise, the clothing enterprises of China now have already had their
advantages to develop franchise.
2.1 Because franchise grants trade names, trade brands and management skills, when expanding international
market, the franchisee enterprises can gain the cooperation of local franchisee.
As a result, the enterprises could appropriately deal with political, economic, social culture differences. This brings
conveniences for multinational management. China is now setting up perfect business circulation market system and
modern enterprise system and enlarging the openness of circulation, which opens up a channel for China’s clothing
enterprises to step into international market. To improve clothing brand and to enlarge domestic and aboard market
with franchise attracts clothing enterprises with good management, good fame and famous brands.
2.2 With the development of economy globalization and trade automatization, the trade blocks among countries
reduce.
After China entered WTO, the clothing export rating is being gradually cancelled and import tariff is reducing
gradually. Consequently, the disadvantages of importing clothing are deceasing. The international famous clothing
brands enter Chinese market in the form of franchise. Thus, the market share should be re-distributed, the
reconstruction and rebuilding and integration of medium sided and small enterprises have new aims and they get
more existing and development space. At the same time, the successful experiences of international franchise
enterprises provide signification direction for China’s clothing brands to enter international market.
2.3 Franchise has more than 100 year’s history.
But now, in China, there are few clothing enterprises carrying out franchise. The domestic clothing marking lacks in
franchise competition opponents. Famous clothing enterprises can take franchise as a new financing method. They
can attract the domestic and abroad enterprises to join them with less capital and enlarge their brands’ images,
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explore and establish sale net, master the initiative right of the market, take up more sufficient raw material
resources and obtain favorable investment return.
2.4 In China, we have already established franchise associations who are now advancing the regulation of
franchise.
Through researches, discussions and forums, we can improve recognition level and management level of clothing
franchise enterprises to a rational level, enhance their contract consciousness. Local governments are actively
supporting famous products and enterprises, and establish priority policies to attract investment, speed up city
development, grantee the construction of distribution center, all of which bring good opportunities to franchisors and
franchisees.
2.5 With the prevalence of broad band and computers, more and more clothing enterprises bring in computer
management system.
The modernization of management makes franchise enterprises realize high effective and exact goods distribution,
information feedback, and afterwards service and management direction to franchisees.
2.6 The rationalization of consumption market, the enhancement of purchasing ability, enhancement of
consciousness of protecting knowledge property right, patent laws and quality, will lead the market to famous
clothing products with high credibility.
The differentiation of market will force more and more medium sized and small enterprises to join franchise, and
force them to bring in management skills, business management and products supply from mature business brands.
After that, they can change their business images, obtain new development chances and make sure that the market
economy can enter a good circulation.
3. The establishment of franchise in clothing enterprises
Clothing enterprises who want to start franchise must meet the following requirements: 1. have famous clothing
brand and can provide high quality products and high service quality. 2. have the ability of exploring first class
products continuously, have various products and good quality, and have good fame among customers. 3. have a
perfect enterprise system and enterprise culture concept, apply modern management tools and method, have
successful and an easily-spread management experiences and can be easily copied, and can rationally make use of
capital and labor resources of franchisee. 4. have stable and quality-guaranteed raw material supply channel and
strong goods distribution ability. 5. can provide long-term support to franchisee. Because the sale of clothing has the
season attribute, fashion attribute and period attribute, the market reflection is sensible and the value of brand
accounts for a great degree in the value of goods.
First, when choosing franchisee, a clothing enterprise must obey the following standards: the franchisee must
acknowledge the brand and management concept of the enterprise, must have certain capital ability and good fame,
must own basic makings of management and have keen observation of clothing market, in order to ensure that the
enterprise can depend on the capital, material and labor of the franchisee to make their mature management skill and
products gain better market effect.
Second, clothing enterprises should take franchise as an important method to popularize their brands. Enterprise
brand includes the trade mark of clothing, enterprise image, product quality, marketing strategy, and service
technique and teamwork spirit of the brand. In the process of popularizing their products, they should follow out the
social responsibility and humanity of the enterprise. For clothing enterprises, unified mark and monopolistic store
image are not external form, while fame and product quality are more important.
Third, the clothing enterprises should frequently provide professional training to franchisee to make franchisee
better understand the detailed rules of management, the description of the products, price table, service procedure,
report form flow, and advertisement and marketing methods. The clothing enterprise should help franchisee benefit
from management skill, updating of knack, marketing, advertisement propaganda, research and developing, and the
expansion of net. The clothing enterprise gains mutual development from the organic integration with franchisee. If
the enterprise just takes in franchise fees can does not care about the profit and development of franchisee, or if the
franchisee just has an eye to the main chance and does not care about the enterprise image and fame, both parties
would suffer from the harm of profit lost.
Fourth, clothing enterprises should help franchisee to establish the most lucrative business mode, and should strictly
carry out unified standard in management system, store design, and advertisement propaganda, standardize
management, establish and share sale channel with franchisee, make each franchisee keep the same pace in
in-season clothing distribution and out-season cut rate, and at the same time, should care about the different
demands among various areas, such as clothing specification, color and price.
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Fifth, the clothing enterprises can also establish service performance evaluation and supervision system. They
should take advantages of comparison purchase, fake purchase and customer investigation to set up products and
service complaint center. By this way, they can find out and deal with the franchisee store’s problems in quality,
service, cleaning and value in time, treat with the franchisee that violates the contract when managing. They should
clamp down those franchisees that play falsification and severely damage the fame of the brand and the enterprise
image.
4. Clothing Enterprises should pay attention to the following problems when carrying out franchise
When carrying out franchise, clothing enterprises should notice how to expand market with the help of franchisees,
should gain ideal return from market, and should protect their own profits from losing.
(1)The clothing enterprises should decide the number of franchisee stores and scales based on their own capital
management condition and goods distribution ability.
They should try best to centralize their franchisee stores. By this way, they can carry out gradual strategy and
guarantee reasonable distribution time and logistic cost when distributing goods. They can transfer and expand
logistics line with the increasing of franchisee stores.
(2)When signing contract with franchisees, besides franchise item, training methods, goods supply, balance way,
advertisement and marketing, the clothing enterprises should provide franchisees with related management skills,
operation criterion, marketing strategies, definitude the rights and obligations of the two parties, especially the
responsibility of fell back.
(3) The clothing enterprises should notice the control of put in and stock in different areas. They need to know the
goods analysis reports and storage management condition of their franchisee stores in time. They should accord to
(stock and sale ratio * predicted sale) to determine stock in trade.
(4) The clothing enterprises should notice to prevent franchisees from purchasing products themselves when
products are in shortage or when the franchisees are driven by profits. If so, the products would circulate beyond
franchise and this will damage the entire image of the clothing enterprise. If the clothing enterprises can provide
basic products when franchisees just start management, control takings and carry out close operation of capital and
goods, the franchisees, at the beginning period, will gain the same operation and management as the direct stores,
which will be good for building up the brand fame and influence of the enterprises.
(5)The clothing enterprises should care about Chinese existing policies, laws, regulations, and international
traditions in franchise. They should especially care about asset regrouping, housing leasehold, creditor’s right and
debt, and related insurance business which may appear in the process of franchise.
With the opening up and flourishing of clothing market, the franchise in China’s clothing enterprises will step into
mature stage, will accumulate experiences for further improving brand effect and scale profit of clothing brands, and
forcing the information development in clothing business.
References
(1999). Franchise. Business and Executive Pub.1
Liu, Shaojian. (2000). Mistakes of franchise in China’s clothing enterprises. In: 6th Textile guide paper. pp. 63-64.
Sun, Xiping. (2000). The existing problems and development strategies of China’s franchise. In: 5th Business
research. pp. 33-35..
Zhao, Ping. (1999). Clothing marketing. Beijing: China Textile Press.
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public service. But to offer public service with high efficiency and high quality, except for the consciousness of high
responsibility, the government also should possess the public service ability corresponding with it. The work of
government mainly involves two aspects of management and service, and operates by means of service because the
service always interlaces with the management. The government manages the public service by means of the service,
which is propitious to position the service role of government, strengthens the service work which has been weaken
for a long time and better carries out the tenet of “serve the people”. From the view of the management and service,
whether for management work or for the service work, the government and its missionary should possess the
abilities of three aspects in public service (Ren, 2005, pp.50-53). The first one is the ability of consultation and
reception. The work of consultation and reception is the important part of the work of public service and the national
public servants who assume this work usually relate them with the public by means of offering public services such
as consultation of policies, the popularization of law and regulations, the publication of sorts of governmental
information, the consultation of the governmental function of management and the reception of letters and visits.
These services are the assistant services of the government, which are associated with the succeeded services
successfully, but also the relations between the government and the public, and the authority and image of the
government even the nation. Generally speaking, the assessment of public to the governmental public service is
firstly decided by the national public servants’ abilities of consultation and reception, and that is the so-called
“primacy effect”. The second one is the ability of operation service. Except for the work of consultation and
reception, the government should also offer various social services in the countryside such as rural public policy,
rural compulsory education, rural public sanitation, rural social security, rural irrigation establishment and rural road
construction. The third one is the ability of management service. Except for the direct services, the government also
should perform some necessary functions of management which usually are offered by indirect means of service.
These actions of management service are involved in every aspect of public affairs. In fact, in most governmental
actions, the service actions always interlace with the management actions. Taking the registration of marriage as an
example, to the government, it is not only the management action to legally perform the administrative function, but
the service action to serve the social public.
3. Approaches to enhance the rural public service ability for government
For a long time, the governmental system in China always emphasized management and ignored service,
emphasized economic construction and ignored social development. So the service ability of government was
seriously limited, especially in the domain of the rural public service. It can not lack in the incentive mechanism to
foster public service ability to enhance the public service ability of the government.
3.1 Fostering the spirit of public service and establishing the people oriented value
The government with the spirit of public service must have strong consciousness of public service, would not shirk
off the responsibilities to satisfy the legal and rational requirements of the public, advance the public benefits, and
improve people’s living quality, would try to find out the public requirements rapidly, not only reply to the former
requirements expressed by the public, but also have the forethoughts to study and resolve problems with the active
attitude, and would pursue excellence and provide public service through more economic and effective ways.
Therefore, the government with the spirit of public service must have strong internal requirements to improve the
public service ability. On the contrary, the government lacking of the spirit of public service must have passive and
negative public service, and lack the wishes to improve the public service ability.
The people-oriented value is to take the people as the intention and take the realization of people’s complete and free
development as the core of public service. It establishes the ultimate aim and indicates the direction for public
service, and becomes the top standard which can judge whether the public service is legal and rational or not.
Without the people-oriented consciousness, public service is only a kind of impulse, just as the socialist Emile
Durkheim said, “Even if we stride to the future provided that we have no aim, we will achieve nothing”. Both the
public service spirit and the people-oriented value together offer ceaseless internal impetus to consciously and
actively enhance the public service ability for the government.
To foster the public service spirit, the key rests with finding out the governmental position and changing the
traditional feeling of superiority and the consciousness of the selfishness of the government. Under the traditional
system, the government’s role is to play the producer, supervisor and controller, its function to offer public service
for the society and the people was ignored, and even the ultimate mission of serving the people was neglected more
or less. To reestablish a government with the public service spirit, it should transform the government from the
former controller into the servant, transform its aim from the control into service, and change its orientation from
blindly emphasizing the regulation to the strong party-oriented and return the relations between the people and the
government back to relations between the master and the servant again.
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To establish the people-oriented value, it should take “the public paramount, everything for the people and
everything serving the people” as the start and end-result of public service. The public service should be surrounded
by the following aspects to do works all the while. The first one is to take the realization of people’s complete and
free development as the core of the public service. Only the public service pursues the social development with
people’s complete development, it can promote the whole progress of the social living in various aspects based on
the harmony and balance. The second one is to take the progress of the people’s complete and free development as
the standard of the legal and effective public service. The validity and legitimacy of the public service can not only
be judged by according with some certain law and regulations or some certain officer’s individual will. All the law,
policy and service activity which cannot accord with the people’s complete and free development lack legitimacy.
And the public service without legitimacy has no validity at all. The third one is to take the universality principle as
the value concept of public service. The public service is to stand for everyone’s universal benefit, and is not to
realize most people’s benefit which bases on depriving the right and benefit of the minority. The universality
principle requests the public service provided by the government should not be distinguished by area, nation, sex,
occupation and intelligence etc. and the discrimination should not exist (Qi, 2007, pp.89-92).
3.2 Transforming the government functions and establishing the reasonable responsibility sharing system
To offer the public goods is the basic function of the government. Those opinions which some people think it can
resolve the problems of public product supply through the approaches of rural self-organization or marketizations in
the countryside are not unpractical. At present, the rural public service function of our government is not only the
problem of deviation, but more problems of service deficiency or absent service, and the public services of the
government are not overfull, but seriously are lacked. The characteristics of the public goods decide that the rural
pure public goods should be provided by the government. But because of the weak status of the countryside and the
characteristics of foundation and overflow of benefits in the rural public goods, under the conditions of low level of
rural economic development, limited degree of rural market, undeveloped rural self-organization, even for the rural
quasi public goods, the government can not perform its leading function. The governmental function of rural public
service should not be weakened but should be strengthened.
To establish the labor-division system between the central government and the local government is the key to
enhance the governmental ability of rural public service. The central government should seriously assume the supply
responsibility of national pure public goods and part supply responsibility of quasi public goods, offer public
services with the characteristics of society and administration such as the compulsory education, public sanitation,
social security and legal service for the rural citizens same to the urban citizens, and offer producer services which
are propitious to the coordinated development of the urban and rural areas. In the near future, based on the taxes and
fees reform in the countryside and the administrative system reform of county and village, the central and provincial
finances should designedly increase the supply degree of the rural public service and the transfer payment degree of
local and towns’ finances to ensure the normal operation of rural local governmental organizations and the supply
ability of rural public service. The supply responsibility of local public goods such as basis establishments including
rural roads and water supply etc, rural social security and rural science and technology information service should
assumed by the local governments. At present, the keystones of the finance security of rural public service are the
rural construction of basic establishments, compulsory education, public sanitation, new rural cooperative medical
treatment system and rural technology training etc. To avoid the problems of imbalanced structure induced by
blindly pursuing profits in the supply of rural public service, emphasizing “visible” and ignoring “invisible”,
emphasizing those projects easily upgrading and target hitting but ignoring those supply projects with strategic
meaning and long period, the central and provincial finances should reduce usual proportion of finance transfer
payment in the payout of rural public service, and simultaneously increase the degree of “special transfer payment”.
3.3 Building the pluralistic rural public service supply mechanism leaded by the government
At present, because of the serious function deficiency of rural public service, low degree of rural self-organization,
low participating degree of public service supply from civil organizations, limited level of rural marketization and
immature multi-public governance structure, the government should perform its “powerful function” in the domain
of public service and assume more public service responsibilities. However, from the view of development, as the
principle part of public service supply, the government should not exclude the diversification of the principle parts
of public service. To enhance the governmental ability of rural public service, the precondition is that the
government must change itself from all-powerful government to limited government, so the government can “be
absorbed in its profession”. Only the government learns to give up something, it can achieve something. The
diversification of the principle part of public service supply is the breakthrough to enhance the governmental ability
of rural public service.
Above all, the civil organizations must be brought into the construction of public service system. Because their
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special advantages in the public service, the civil organizations are propitious to improve the governmental ability of
service. First, the civil organizations have special function in some commonweal and social public services. They
can not only fill up some “blankness” of government in public service, but also facilitate the transformation of the
governmental functions. Second, the participation of civil organizations can influence governmental public policies
to a certain extent, make governmental public policies more pressing close the reality and the public, and enhance
the validity of public policies. Third, because of the civil nature of civil organizations, the distortion degree in the
transfer process of information is relatively low and it is propitious to enhance the investment efficiency of public
service.
In the next place, both the practice and theory researches indicate that to use market mechanism offer public service
can enhance the supply efficiency. With the change of system conditions and scientific technology, parts of rural
public goods completely are supplies by the personal according the principle of “Who invest and who benefit”. For
example, the so-called “club goods” including farmland irrigation and watercourse maintenance in the village can be
provided by the personal because of their natures of “exclusion” to a certain extent.
Therefore, the aim orientations to establish new supply system of rural public service are the governmental guidance
and the public participations. First, it should establish the supply mechanism with various drives, reasonable work
division and mutual complementary among the government, the personnel and the civil organizations, and form the
diversification situation of supply principle part of public service. Second, it should fully use the market mechanism
and market power to enhance the efficiency of public service, and use many ways including user charge, contract,
license management and internal market to increase the validity of rural public service. Third, it should establish
new supply decision procedure and requirement expressing mechanism of rural public service, realize the
transformation of decision procedure from “from above to below” to “from below to above”, and make the rural
public service supply more reflect the farmers’ requirements and wills. So, it should establish the expedite
expressing mechanism to express farmers’ favors of public service as soon as possible, perform the self-organization
functions of civil organizations, and extend the farmers’ rights to know and rights to speak in the public service
supply.
References
E.S.Savas. Interpreted by Zhou, Zhiren. (2004). Privatization and Public-Private Partnership. Beijing: China
Renmin University Press. p.4.
Fan, Yongming & Du, li. (2003). Public Economics. Shanghai: Fudan University Press.
Qi, Mingshan & Chen, hu. (2007). People-orientedism in Public Administration and People Orientation in Public
Service. Tian Fu New Idea. No.1. pp.89-92.
Ren, Jie. (2005). Ability of Public Service. Beijing: China Renmin University Press. pp.50-53.
Xie, Laiwei. (2006). Reconstruction of Public Service System for New Socialistic Country. Rural Economy. No.5.
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(1) The current wage management pattern should be changed. In the past, each unit calculates its wages respectively.
After the construction of this system, they just need to report their attendance checking results with disks and it is up
to the human resource department to calculate their wages with the computer system. With this reform, the units in
our factory will have less burdens, especially for those production shops without special administrative clerks. In
this way, their technical staff will have more time to devote themselves to the on-the-spot work.
This pattern is similar to that employed by some foreign companies: wages are controlled and disposed by their
human resource departments and the computer system will record their staff’s attendance results automatically in the
way of swiping cards. According to the situation of our country and the quality of our staff, our way seems to be
more realistic and strict than theirs.
(2) The former way in which wages are audited manually should give way to the computer. As a result, some
omissions and errors will be avoided.
(3) Our knowledge about the total wages should be increased. In the current condition, it takes a great amount of
time and energy to calculate manually the accumulated wages and bonus in the present month or year. Instead, the
computer will enable us to have different statistical reports based on the requests of the administration at all levels in
a convenient, fast and intuitional way. In addition, some comparative analysis can be conducted to learn about the
dynamic unitization of wages and bonus, hence improving our knowledge and control of them.
(4) A human resource inquiry system should be established to enable the director to learn about the issuing of wages
and bonus in the present month, payment of personal income tax, issuing of housing public fund and housing
allowance, the accumulated utilization of the total wages in a year, the proportion of bonus among different units
and the changes in personnel and posts and so on.
(5) We should take some efforts to enhance the efficiency of our communication among different posts and units. In
the past, we had different posts in charge of wages, bonus and insurance separately. Therefore, in order to have the
insurance contribution amount, the total income of each person in the factory needs to be input into the computer
manually. However, with the computer system, the information about each person’s wages can be shared by the
posts in charge of insurance and statistics. In this way, our work efficiency and quality will be enhanced without any
doubt.
(6) We should take into consideration some detailed things such as the data transmission format and the interface to
the financial department to provide convenience for its future work.
(7) A complete personnel document database should be set up to enable us to know about something in personnel,
posts and titles in an overall, exact and timely way.
3. Principles for the Construction of Human Resource Management System
During the course of application design, the following principles should be obeyed:
(1) to set up a set of safe, reliable and perfect human resource management network and coordinate the functions of
the management level and the operation one in order to realize our computerized, systematic, net-connected and
scientific management of human resources
(2) to enhance the centralization and standardization of our management, to ensure standardized and perfect data and
to guarantee detailed and uniform reports
(3) to remain the reasonable parts in our former operation and management and to make some adjustments in those
unreasonable ones as required by the computer network management
And the following principles should be obeyed in our technology design:
(1) Computer technology should be relied on to reduce our construction investment and make it easier to implement.
(2) The extensibility of the system should be taken into consideration. And modular design should be used in our
design of software and hardware.
(3) Data safety should be ensured during transmission and processing.
(4) On the premise of our advanced system, its practicability should also be ensured.
4. General Design
The Design of the Computer Management Pattern and the Operation Process
Human resource system is composed of some subsystems such as personnel management, wage management,
economic responsibility system, bonus management, insurance management, checking of staff’s attendance,
distribution of bonus in grass-roots units and so on. Among the above, with the personnel management subsystem as
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the basis of the whole, other subsystems are expected to control wages, economic responsibility system, bonus,
insurance, checking of staff’s attendance, distribution of bonus in grass-roots units. With the human resource
department, functional departments and staff as its objects, this system aims at coordinating the business connection
among the three to provide prompt, exact and overall information for the administration’s decisions and improve our
efficiency. In addition, multistage safety control is employed in our system management to ensure safety and
reliability of the data.
4.1 Personnel Management Subsystem
This subsystem can be used to assist our managers to manage the staff’s title, position and education qualification, to
transfer personnel among different departments according to our actual needs, to analyze the components of human
resources such as education qualification, title, position, sex and so on and then to create intuitional data and charts.
In this system is stored the information about the in-service and retired staff’s service conditions, education
qualification, rewards and penalties, personal resume, spouse and family members and so on. In addition, with this
subsystem, we are able to input, correct, delete, search, print and analyze information and to have an overall
knowledge about personnel information.
The operation process of this subsystem is shown in Figure 1:
grass-roots
grass-roots Units
Units Wage subsystem
post transfer
quota of staff
Staff
transfer between units
staff form
(including leave
temporarily records)
transfer changes in
Insurance subsystem
post
Staff Staff
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DBF base of
grass-roots units
Personnel
datasheet Temporary wage table(1) Wage entry table
annual public
withholding fund
tax The financial department
Calculation
Initialization
at the Initialization at
beginning of a the beginning
create of a month add
Create: Create:
1.DBF base to be handed 1.Machine accounts for
to grass-roots units overtime work
2.Monthly summary table 2.Yearly summary table
and monthly tax table and yearly public fund
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The evaluation requisition includes: title of unit, basic bonus, evaluation items( awards and penalties in scores),
commendation items (amount of money). The total amount of staff and bonus will not be mentioned in this note.
Note: Here a unit is not necessarily an administrative unit. It can be defined in a flexible way.
(2) distribution of bonus: the system will form a bonus distribution form based on the above requisition. This form
will be given to all units as well as the financial department. In fact, there are a lot of items in this form, so the
calculation is quite complicated.
4.4 Labor Insurance Subsystem
This subsystem is composed of industrial injury insurance management, endowment insurance management,
complementary endowment insurance management, medical insurance management, unemployment insurance
management and early retirement management. It will assist our managers to deal with maintenance of labor
insurance and distribution of insurance compensation according to relevant policies.
The operation process of industrial injury insurance is shown in Figure 3:
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(6) providing statistical data of wages in a month or year, such as the total, personal annual income, average monthly
income and so on
(7) providing statistical information about the staff’s attendance, such as the attendance rate, overtime work and so
on
(8) providing relevant information for finance and labor insurance, such as personal income tax
(9) providing inquiries for history wage information, such as the information about a person’s wages, bonus and
attendance in a certain month 5 years ago
Bonus management subsystem is mainly in charge of:
(1) Creating the summary evaluation form for each unit
(2) Making up endowment insurance for the in-service staff
(3) paying for the in-service staff’s unemployment insurance according to relevant policies of our country
The subsystem of attendance checking and bonus distribution in grass-roots units is mainly in charge of:
(1) attendance checking: every workshop inputs its checking results into the computer and hand in its disk to the
human resource department. The records should include: work days, overtime work time, sick and private affair
leave, middle and night shifts, number of shifts, shift allowance, night shift allowance, health care standard. In
addition, some cut payment items are also included: housing fare, electricity and water charges, living expenses and
so on.
(2) distribution of bonus: grass-roots units are expected to figure out every person’s basic bonus and commendation
according to the bonus distribution table made by the human resource department and input them into the computer
to create every one’s bonus. After that, they should hand in their disks to the human resource department and have
the bonus distribution table printed.
6. General Design of Logical Structure
As is required in the functional design of this system, independent operation and virtual network are connected in
the human resource management system. In addition, the client/server structure is combined with point-to-point
communication in our system, in which the C/S structure will get support from the whole management network in
our factory.
7. System Environment and Development Tool
Our system employs the client/server structure.
The server side employs computer server+ WINDOWS NT4.0 (Chinese) +ORACLE 8I (ENTERPRISE)
The client side employs WIN98 or UCDOS (UCDOS is employed by grass-roots units)
TCP/IP is employed for network protocol and POWERBUILD/FOXPRO is employed as the development tool to
connect the server and the client (FOXPRO is employed by grass-roots units)
8. Conclusion
It took us nearly a year to implement the whole project, from investigation and research to debugging, during which
we spent 3 months in programming. Actually, the hierarchical method, instead of the former way in which the
technical staff’s involvement from the very beginning to the end resulted in the separation between operation and
professional knowledge, helped us to shorten our programming period.
Our human resource management system basically covers all the business of the human resource department. In
order to satisfy the financial department’s demands, we also develop the interface between the system and the
financial department. In this way, it is possible to deliver the data about wages and bonus to the financial department.
By combing computer technology, network technology, communication technology and modern management idea
together, our human resource information will be shared sufficiently. Meanwhile, this system will improve our
efficiency , ensure the consistency, validity and timeliness of our data as well as make it more convenient for other
systems to use the human resource information. In a word, the application of this system will push our enterprise a
significant step towards modern management and bring about certain economic and social effect.
References
Feng, Shilin, Huang, Zhongquan & Zhang Genbao. (2004). Design and Actualize of Human Resource Management
Information System of Enterprises. Machine Tool & Hydraulics.
Liu, Ming & Han, Yali. (2006). Design and Development of Human Resource Management Information System.
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Labor insurance
Early-retired staff’s wages
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performance”. Among them, the operators were 68.8%, and the non-operators were 58.4%. The significant
difference test of percentage indicated no statistical proportion differences. The value of “Z” was 1.54, P> 0.05.
3.4.3 Anticipation of the professional development
The results indicated that 27.2% participants answered “hard working can bring opportunities for promotion”.
Among them, the operators were 41.3%, and the non-operators were 19.7%. The significant difference test of
percentage indicated that the percentage of the operators was obviously higher than the percentage of the
non-operators, and the value of “Z” was 3.95, P< 0.001.
From the above survey results, we can get the following three points.
Firstly, over 1/2 participants were not sure whether their supervisors affirm their performance. Maybe there were
communication problems between the supervisors and the underlings. Some researches showed that in an
organization, the approval of significant others’ was an important source of employees’ satisfaction and could
influence the tendency of the individual demission.
Secondly, less than 1/3 participants thought “hard working can bring the opportunities for promotion”. It seemed
that many participants didn’t agree the hard working was an important factor for professional development. It is very
easy for an employee to feel unsatisfied with his/her work and decrease the devotion to job if he/she doesn’t believe
that endeavor is related with professional development.
Thirdly, more operators, compared with non-operators believed the hard working could bring opportunities for
promotion. Such difference between operators and non-operators could be attributed to the important roles of
operators in Nuclear Power Plants. Since managers paid more attention to the operators, it is easier to notice their
work performance and hard work which may result in more opportunities for promotions than other positions.
4. Conclusions
To sum up, we obtain the following conclusions.
Firstly, the overall job satisfaction of employees’ in Nuclear Power Plants needs to be further improved. This point is
manifested by the following aspects: only about 1/2 participants liked their own job, 1/3 participants could keep
maximal devotion to their jobs, and about 1/2 participants had the tendency to change their positions.
Secondly, the conflicts between job and family experienced by employees shall not be neglected. The survey results
showed that about 1/2 participants’ families complained the normal family life was affected by work. This should be
noticed by the managers. It is easy for employees to experience negative emotions when they have conflicts with
their spouses or family members. As a result, employees would attribute this negative result to their jobs or the
organization and produce unsatisfied feelings about the jobs which may affect work efficiency. A serious family
conflict may disperse employees’ attentions, and increase the accident probability. If it is not possible to change the
current working systems such as working on shifts, managers could consider some other methods to alleviate such
conflicts. For example, to establish a reasonable vacation system, to organize family parties on a regular basis etc..
These compensatory measures can facilitate mutual understanding of family members and to decrease negative
emotions.
Thirdly, the differences between operators and non-operators demonstrated through the survey should be taken into
account when policies related to human resources development to be made. Due to the importance of their positions,
operators have higher proportions in positive feelings about their work, maximum devotions to their job, high
demand of training, approved work performance and optimistic anticipations of occupational development. On the
contrary, non-operators have lower proportions on those items. Non-operators are a necessary part of Nuclear Power
Plant. The negative emotions and lower satisfactions surly will impact the overall morale as “group emotions” when
these feelings are perceived by others. Therefore, the managers of Nuclear Power Plants should constitute more
scientific, effective and human-centered managing policies according to the job characters and different
psychological experiences of operators and the non-operators to fully enhance the employee’s job satisfaction. One
of managers’ responsibilities is to create a harmonious workplace in which all employees can actualize their values.
When employees feel satisfied with their work, their will devote themselves delightedly to their jobs. As a result,
invisible power underlain in humans will be transferred into visible profits. That is very thing that human resources
development tries to work on.
References
Dail L. Fields. (2004). Taking the Measure of Job: A Guide to Validated Scales for Organizational Research and
Diagnosis. China Light Industry Press. pp.2-3, 183-184.
Raymond A. Noe, John R. Hollenbeck, Barry Gerhart & Patrick M. Wright. Interpreted by Liuxin (2005). Human
Resource Management: Winning the competitive advantages (the 5th edition). China Renmin University Press.
pp.475 & 485.
Zhang, Xichao. (2006). Employee Assistance Programs: Theory and Practice of China EAP. China Social Science
Press. p. 90.
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in place to retain and extract the knowledge and expertise from the mangers that have the potential to leave their
organizations.
The use of mentoring programs in government, non-profit, and even corporate organizations could be an extremely
effective tool in helping new employees become assimilated in the organization, learn the organization’s culture,
develop an understanding to the organizations politics, learn job specific knowledge, and gain valuable information
from employees that are leaving the organization. According to Soonhee (2003), effective succession planning that
includes employee mentoring are the keys to addressing the leadership shortages that will be created through a
developing wave of an enormous number of government retirements. Soonhee (2003), advocates the use of
employee assessments to provide insight into employee strengths and weaknesses, especially as it relates to the
technical aspects of job functions. These assessments can provide valuable information about the bench strength of
new and developing employees. Assessment procedures can take into account career development, training needs,
retirement plans, workforce diversity, succession planning and mentoring programs. Skills assessment information
can provide an important framework to knowledge extension by developing a mentoring program based on the
needs, strengths, skills, and deficiencies of the employees.
According to Kelly (1988) mentoring and employee development is important for many reasons. In his Harvard
Business Review article he says, “We are convinced that corporations succeed or fail, compete or crumble, on the
basis of how well they are lead. So we study great leaders of the past and present and spend vast quantities of time
and money looking great leaders to hire. I have no argument with this enthusiasm. Leaders matter greatly. But in
searching so zealously for the next great leader we tend to lose sight of the people those leaders will lead. Without
his armies, after all, Napoleon was just a man with grandiose ambitions. Organizations stand or fall partly on the
basis of how well their leaders lead, but partly also on the basis of how well their followers follow.”
According to Certo (1990),succession planning and mentoring play a key role in organizational success.
Organizational objectives cannot be attained with appropriate staff. Future needs for manpower are mainly
influenced by employee retirements, employee turnover, the nature of the present workforce, and the rate of growth
of the organization. Organizational human capital officers must answer questions like:
What are the employee retention rates?
How can knowledge be extended and transferred within the organization?
What are the anticipated retirements and what is their impact on the organization in terms of knowledge and
experience if they were to leave the organization?
Who are the future leaders that can assume the roles of the leaders that are leading?
What types of people does the organization need to reach its objectives?
How many of each type employees based on certain educational levels and years of experience are needed?
What steps can recruitment take to recruit the most skilled and qualified employees to meet the organizational hiring
needs?
Can present employees be trained and developed to meet future employment needs?
According to a survey done by the Institute for Corporate Productivity (i4cp), out of more than 300 organizations,
fewer than 50 percent do not have mentoring and coaching programs, although most consider them valuable. The
study, titled “The Coaching/Mentoring Practitioner Consensus Survey,” was conducted in May in conjunction with
HR.com. Of the organizations that do have coaching and mentoring programs, fewer than 20 percent said they
would describe them as good or excellent. According to the study, 49 percent of organizations have formal coaching
programs, and 47 percent have formal mentoring programs. In terms of how many employees use coaches or
mentors, however, the study found that more than half of organizations reported usage by 5 percent or fewer of their
employees.
“Three out of five respondents said they considered coaching to be quite valuable or very valuable yet, 82 percent
reported their coaching programs were only ‘average’ or below,” said Jay Jamrog, i4cp senior vice president of
research in the June 2007 issue of Chief Learning Officer.
“There seems to be a tremendous missed opportunity here. Our study shows that the most common use for these
programs is to develop executives and other managers. In an age when so many organizations are saying there’s a
shortage of leadership, they’re underutilizing one of the best tools available. By boosting both the quality and usage
of these programs, organizations might make a huge dent in today’s and tomorrow’s leadership shortages,” Jamrog
said.
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Increasing the number of employees use coaching or mentoring programs is critical to stave off future situations in
which leadership lacks. This phenomenon may indicate a potential problem for organizations in regard to leadership
development initiatives.
As outlined in Phillip (2006), the goals of these mentoring programs are to transfers skills from senior employees to
junior ones. The mentoring process usually targets more subtle skills requisite to the enhancement of career potential.
This process often includes skills assessment tool, a career assessment tool, and the development of an individual
development plan, which is a career planning document with development goals. The individual development plan
is a professional development plan that the employee develops with input and perspective from the employee’s
supervisor, experienced peers, and mentors. Each employee is assigned two mentors that were different individuals
than the employee’s supervisor. One mentor was a career planning mentor and the other was a skills development
mentor. The essence of a comprehensive program consists of four key elements:
(1)Involving participants in developing an understanding of leadership attributes that were most relevant to the
agency and to them.
(2)Facilitating participants’ development through new knowledge development and learning activities.
(3)Exposing the participants to successful organizational leaders.
(4)The transfer of technical skills and key organizational knowledge to participants.
The topic of mentoring has received a considerable amount of attention in employee development research and
literature. According to Love (2004), mentoring has tremendous organizational value in succession planning,
organizational knowledge transfer and employee retention. When employees are hired and brought in, it is critical
for the organization to help the employee get acclimated and develop a connection with the organization. This
connection is the bond that will allow employees to adopt and commit to the organizations mission, values, and
goals.
According to Magretta 2002, mentoring and leadership development is about value creation. Senior leaders need to
create value on a variety of levels with all organizational stakeholders including employees. If a leader establishes
lofty goals and employees do not commit to meeting the goals or buy into the value of those goals, organizational
success is often limited. The phase value creation as it relates to leadership and employee development outlines an
important shift in the mindset from the emphasis of managing the operations to managing performance and people.
According to Lois (2005) effective mentoring is a result of a developmental relationship normally between two
individuals, usually between an extremely experienced employee and a less experienced employee. The value of this
relationship is the learning that takes place from activities where the senior employee exposes the junior employee
to his or her knowledge, contacts, organization culture, understanding of the political and social issues within the
organization, and knowledge of a job’s requirements (Kram, 1985).
From an organizational structure and organizational behavior perspective, the mentoring relationship is
distinguished from other organizational relationships in that the participants may not formally work together
(Phillips-Jones, 1982)
Through literature it is well established that mentoring relationships offer a number of important career benefits to
the new employee or protégé. For example, individuals who are mentored report higher levels of career satisfaction
and career advancement (Scandura, 1992; Turban & Dougherty, 1994; Dreher & Ash, 1990).
Linking leadership development to the organization's mission and strategic goals is a smart business strategy. A solid
mentoring program serves as a catalyst to developing future leaders and retaining new employees. The benefits of a
good mentoring program allow an organization to take advantage of intellectual capital, human capital, and extend
valuable organizational knowledge. The looming retirements of government employees that are members of the
“Baby Boomer” generation demands solid commitment to the development of future leaders. According to Watt
(2004), successful organizations maximize their investment in human capital by developing leadership potential
throughout the organization with integrated programs that emphasize corporate values, critical skills and
competencies, knowledge management, succession planning, and a global mindset for business success. With
collaborative leadership taking center stage as the new paradigm in today's global marketplace, organizations that
strategically focus on building leadership capacity for the future will reap the benefits in the years to come (Joiner,
Bartram, & Garreffa 2004).
In reviewing the literature on the organizational values of mentoring it is important understand leadership,
follower-ship, and employee development. Wren (1995) outlined that leadership and leadership development is an
interactive process in which leaders and followers engage in mutual interaction in a complex environment to achieve
mutual goals. Bennis and O’Toole (2000) defined leadership development as a process of growth through interaction
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and experience. They outline that for new leaders to develop they must be indoctrinated to the rules policies,
processes, and values of the organization. Mentoring can speed up this process and allow assimilation of critical
knowledge. Effective mentoring and leadership development involves the consistent interaction among group
members and is capable of elevating the expectations of competency of the group to achieve goals, as well as
producing exceptional performance (Bass, 1990; Boehnke et al., 2003).
Northouse (2004) held that some individuals are mentors or leaders due to their formal position within an
organization, while others are leaders due to the way that other members of the organization respond to them.
Northouse (2004) added that leadership skills and mentors can emerge when they are perceived by others as
influential members of a group or organization, regardless of their formal positions and titles.
In order to cope with the changing organizational environment, Isaac, Zerbe, and Pitt (2001) contended that
organizations need people who are capable of being both managers and leaders in the way that they influence,
mentor, and develop others in formal and informal capacities.
In considering the value of mentoring in organizations it is important to consider a variety of theories. For example,
the Hollander’s Exchange Theory head that the transactional exchange between leader and follower is the essence of
leadership. The crux of this theory mimics some of the same relationship aspects that happen in an effective
mentoring relationship. Mentor and protégé negotiate the terms of the exchange, resulting in the follower’s
compliance of the negotiated terms for the leader’s guidance and support toward achieving the mutual goals (Bass,
1990).
From the perspective of Kelley (1988), a good protégé or potential future leader has a number of essential qualities.
They manage themselves well. This is about having an ability to think for oneself, exercise control, and work
independently without close supervision. They are comfortable being a leader, follower, or just the member of the
team.
They are committed to the organization and to the purpose, principles, and coworkers. They care passionately about
their careers, work ethic, and the value of their contributions to the organization.
They build their competence and focus their efforts for maximum impact. This is about a passion for excellence in
which they generally hold higher performance standards than the work environment requires, and continuing
education is something that they seek out to improve their skills and value to the organization.
They are courageous, honest, and credible. This about establishing themselves as ethical employees whose judgment
can be trusted. They give credit where credit is due, admitting mistakes, and being unselfish in sharing the accolades
and recognition that go with accomplishments.
1.1.1 The Path-Goal Theory
The Path-Goal Theory is based on the premise that mentors behavior has the ability to influence the performance
and satisfaction of the protégé. By using a combination of four leadership styles (directive, supportive, participative,
achievement-oriented) as appropriate to the mentoring situation and relationship, a mentor is responsible for
clarifying the protégé’s path which leads to successful knowledge transfer and development (Lussier & Achua,
2001).
Hersey and Blanchard used a bell shaped curve within a grid to depict a job’s life cycle. They positioned that
employees’ job maturity (capability, education, experience) and psychological maturity (motivation, willingness, and
confidence) are revealed in the employees’ performance (Bass, 1990). From this perspective, mentors can develop
protégés through the use of four leadership styles: telling, selling, participating, delegating, according to the protégés
task relevant maturity (Bass, 1990).
Career-related benefits of mentoring are those aspects of the relationship that prepare protégés for advancement in
their careers, while psychosocial benefits are those that enhance their sense of competence, identity, confidence, and
effectiveness (Khandwalla 2004). An example of a career-related benefit of the mentoring relationship can occur
when a mentor develops a relationship with the protégé and assessment of skills to make recommendations for
desirable projects and promotions. Connections made between the mentor and the protégé can influence job
satisfaction, employee retention, and employee retention (Chao, Waltz, & Gardner, 1992).
1.1.2 Maslow hierarchy of Needs
Maslow (1954) maintained that humans have at least five basic needs: physiological, safety, love, esteem, and
self-actualization. He contended that within an organization, employees are motivated by their desire to maintain or
achieve certain conditions upon which these basic needs lie. Maslow’s theory provided insights for mentors to
devise, implement, and support programs or practices to motivate their constituents through the satisfaction of
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Ultimately a mentoring program can become a key aspect of an organizations social structure. These programs can
be the catalyst for the development of strong communities of practice that can solve problems, develop new ideas,
share knowledge, and develop important organizational strategy (Lave and Wenger 1991). Mentoring programs and
relationships allow employees share ideas and concepts that will not only allow protégé to learn from the mentor but
also allow the mentor to learn from the protégé.
2. Conclusion
From an employee and organizational development perspective, mentoring is not new idea it has always been
existed in formal or informal ways. Mentoring is a strategy that allows new employees to achieve comprehensive
growth and development in their professional career and personal life. Number of articles and related studies show
how mentoring can be beneficial in perpetuating employee assimilation, improving work performance, employee
job satisfaction, developing future leaders, and in organizational knowledge transfer. The federal, corporate, and
non-profit organizations face tremendous challenges with succession planning and knowledge retention because so
many employees in leadership are eligible to retire. Mentoring programs can be a useful tool in making that
transition less painful. Succession planning is not just about finding another person to fill the job of someone that is
leaving. Successful succession planning is about getting the organizational and job specific knowledge that is not
recorded in an organizational manual, out head of the employee before they leave and the valuable organizational
knowledge is lost (Delong 2004).
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Allen, T. D., Poteet, M. L., & Burroughs, S. M. (1997). The Mentor’s Perspective: A Qualitative Inquiry and
Future Research Agenda. Journal of Vocational Behavior, 51, 70-89.
Bass, B. M. (1990). Bass & Stogdill’s Handbook of Leadership. (3rd ed.) New York, NY: The Free Press
Bennis, W., & O’Toole, J. (2000, May-June). Don’t Hire the Wrong CEO. Harvard Business Review, 78, 170-177.
Boehnke, K., Bontis, N., DiSteffano, J. & DiStengano, A.C. (2003). Transformational Leadership: An Examination
of Cross National Differences and Similarities. Leadership and Organizational Development Journal, 24, 5-15.
Certo, Samuel. (1990) Principals of Modern Management. Dubuque, Iowa: Brown Company Publishers.
Chao, G. T., Waltz, P. M. & Gardner, P. D. (1992). Formal and Informal Mentorships: A Comparison on Mentoring
Functions and Contrast with Non-mentored Counterparts. Personnel Psychology, 45, 619-636.
Delong, David. (2004). Lost Knowledge. New York: NY, Oxford University Press.
Dreher, G., & Ash, R. (1990). A Comparative Study of Mentoring Among Men and Women in Managerial,
Professional, and Technical Positions. Journal of Applied Psychology, 525-535.
Joiner, T.A., Bartram, T. & Garraffa, Terese. (2004). The Effects of Mentoring on Perceived Career Success,
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Lave, J. and Wenger, E. (1991). Situated Learning: Legitimate Peripheral Participation. Cambridge: Cambridge
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Love, J. (2004) . The Keys to Mentoring Success. Training, Vol. 41 Issue 12, p83-83.
Lussier, R. N., & Achua, C. F. (2001). Leadership: Theory, Application, Skill Development. Cincinnati, OH:
South-Western College Publishing.
Khandwalla, P. N. (2004) Competencies for Senior Manager Roles, Vikalpa: the Journal for Decision Makers, Vol.
29 Issue 4, p11-24.
Kelley, Robert. (1988). In Praise of Followers, Harvard Business Review, Issue 4.
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already appeared on a green market formed by green products, green products production technology, according to
the incomplete statistics, the green market breakthrough 600 billion U.S. dollars at the end of the 20th century, the
environmental protection industry will truly become the world economy's pillar industries. Development of green
products can help enterprises to enhance their competitive advantage and expand market share, therefore, China
should conform to the world trade green wave, maximum use of green markets, and promote the further
development of foreign trade.
2.4 Favorable to the protection of the ecological environment, and to the realization of interaction of the trade and
the environment
Green barrier forces the enterprises of our country to pay close attention to the ecological environment while
producing the products, reduces the consumption of resources and the energy, shifts the initiative that enterprises
prevent the environmental pollution fundamentally, offers a new management methods for solving the
environmental problem. Since reform and open policy, it has been more than 20 years, we have created the
world-renowned achievements, but also have faced serious threat of enormous energy depletion and environmental
destruction. China's production and processing system performance is still low the production technology, low the
resource utilization ratio and low the value-added products, the energy consumption of unit output value is
equivalent to 3-4 times of the developed country. The reality that the ecological environment worsens day by day
has already become one of the most urgent, most important problems faced by economic and social development of
our country. Fortunately, green barrier can solve this problem and make the ecological environment maintained.
3. Counter strategies of breaking through green barrier and developing sustainable trade
It is necessary to set up an omni-directional brainstorm system participated in together by government and enterprise,
take practical strategies to promote China's foreign trade to vigorous development.
3.1 The government aspects
Our government is not only managers and participants in economic activities but also protector and supporter in
China's export trade, so the government department should take strong means voluntarily, protect the export trade
interests of our country, main strategies such as: integrating environmental protection into long-term strategic
development plan; speeding up the steps of in line with our environmental protection standards and international
standards; taking the lead to set up early warning systems for green barrier; speeding up the training of international
green talented person.
3.2 The enterprise aspects
In the export trade, enterprise is not only a direct participant, but also a concrete implementer of different tactics and
strategies. Therefore, the export enterprise should be guided by the government, and has the courage to face the
challenge of green barriers, main strategies such as: carrying out actively the green management under the guidance
of the green concept; applying actively for the ISO14000 environment management system authentication;
distracting international market risk through the implementation of the strategy of market diversification; conducting
overseas direct investment at the appropriate time to go round green barrier.
References
Jin, Saimei & Cao, Qiuju. (2005). The study of problem of China's agricultural exports experienced a "green
barriers". Commercial research.
Li, shuangyuan & Li, xianbo. (2003). Special research of WTO legal issues. Beijing: Chinese Fangzheng Publishing
House.
Zhang Bei. (2005). The influence of the technological barrier on Chinese Foreign Trade and the counter-measures of
our country. Commercial research.
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goods, and the underlying resale behavior. Past studies related to consumer resale behavior can mainly be found in
three streams of research: (1) consumer disposition behavior (Hanson, 1980; Harrelland and McConocha, 1992;
Jacoby et al., 1977; Paden and Stell, 2005; Young and Wallendorf, 1989);(2) informal markets: farmers’ market
(Heisley et al., 1991; Pyle, 1971; Sommer et al., 1980), garage sales (Herrmann, 1996, 1997, 2004, 2006; Herrmann
and Soffer, 1984), and flea markets (Belk et al., 1988; Bruin, 2000; Sherry, 1990); and (3) consumers’ extended self
related to physical belongings (Belk, 1988; Lastovicka and Fernandez, 2005, 2006; Price et al., 2000). Although
scholars have studied market phenomena related to consumers acting as resellers, none have focused on consumers’
online resale behavior, and knowledge about the specificity and meaning of various types of consumer online resale
remains primitive. Research on the formation of consumer online resale motivations and their backward influence
on offline purchase plans and decision-making when consumers intend to resell at the time of purchase is
particularly scant. For instance, consumers may feel more affordable and be more willing to purchase high-priced
products if they have skills in using online auctions to recover part of the product costs. In view of the prosperity of
C2C e-commerce, it is crucial to scrutinize the behavior of C2C resellers, especially the motivations to resell, in
order to more completely explain the consumer resale phenomenon.
2. Consumer Disposition and Resale
Much of the research on consumer behavior has focused on the acquisition phase; hence the disposition process has
received relatively less attention (Mowen, 1995; Lastovicka and Fernandez, 2005; Rassuli and Harrell, 1990).
Jacoby, Berning, and Dietvorst (1977), in the first study on consumer disposition, developed a conceptual taxonomy
to describe consumer disposition behavior, classifying resale as one of the disposition choices. Following Jacoby’s
research, Hanson (1980) developed an explanatory model of several salient factors involved in the disposition
decision process. Harrell and McConocha (1992) conducted a field study to discover how consumer characteristics
are related to the selection of disposition options. These studies indicate that, rather than giving or throwing away
unwanted goods, consumers can resell them in venues such as flea markets, garage sales, or consignment stores.
Jacoby et al. (1977) suggested a promising direction for future research on studying consumer disposition patterns,
which they believed would vary over time. The “disposition phase” refers to what consumers do with a product
once they have completed using it (Mowen, 1995). However, consumers may resell unused goods or goods which
are not used completely in order to recover part of the acquisition cost. One of the most important emerging
disposition channel is the Internet via online auctions. In addition to C2C websites, consumers have traditionally
resold their unwanted goods through the following venues.
(1) Consignment stores: Consignment stores are designated to sell goods for consigners who have the desire to sell
unwanted goods and are charged a service fee. Consignment stores only receive the service fee after the sale is
complete. EBay “drop-off stores” often use the consignment model of selling in order to assist consumers in
reselling products. These online drop-off store owners use eBay as a platform to sell goods for consigners who
lack the time or expertise to sell on eBay.
(2) Flea markets: A flea market or swap meet is a place where vendors come to sell or trade their goods. The vast
majority of flea markets in rural areas involve the sale of second-hand goods. The semi-spontaneous nature and
vendor-oriented open-market layout of flea markets sometimes includes concerts and carnival-type events to attract
shoppers. Several studies have focused on the social embeddedness of consumption, the marketplace ambience, and
comparisons of flea markets to traditional retail stores (Belk et al., 1988; Sherry, 1990; Wallendorf and Amould,
1988).
(3) Garage sales : “A garage sale is usually a community-based special sale that can be found in virtually all
American communities, and which is the temporary public sale of used goods, primarily household items and
clothing from in and around a private residence” (Herrmann, 2006, p. 182). Sellers at garage sales have a wide
range of styles and motivations, from periodic housecleaning and socializing to making a profit and generating cash
(Herrmann and Soiffer, 1984). In contrast to retailers’ profit-making motivation, several studies on consumer sellers
at garage sales have shown that the social relations of the garage sale experience may be a major reason for sellers’
and buyers’ participation in such sales events. Herrmann(1997) argued that the U.S. garage sale is a complex site
that provides the potential for specific exchanges to be constructed as gifts or commodities, or both. Hermann (1997)
has explained that participants of different races and classes can transmit something of themselves with their
possessions, transform their own lives in the process, and contribute to a broader spirit of community through these
reciprocal transactions.
(4) Pawn shops: A pawnbroker offers monetary loans in exchange for an item of value to be held by the pawn broker.
These stores sometimes carry a negative impression due to the fact that they often offer a low price for used goods.
People who pawn goods usually need money urgently and value the privacy of the transaction.
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Buyers may need more information when buying used products because the preservation condition, quality, price,
and after-sale service of used goods vary dramatically in every transaction. The information search and opportunity
costs restrict the development of the physical secondary markets due to the lack of an efficient solution to solve such
problems. Belk et al. (1988) commented that informal markets, such as farmers markets, garage sales, and flea
markets, may be seen as modern anachronisms in which smaller scale, more direct, and often less efficient exchange
mechanisms have partly supplanted newer, less costly, larger scale exchange institutions. However, the inefficiency
has somewhat been redressed by the information revolution in C2C online auctions, which can greatly decrease
costs in searching of buyers, sellers, and products, and allow goods to be sold in a timely manner at more reasonable
prices.
3. Consumer Interviews
We conducted consumer interviews to collect information of possible consumer purchase decisions and online resale
behavior. Through a snowball process, a purposeful sample of 25 participants who had successful experience in
selling a number of products online took part in this study. To enhance the generalizability of our findings, we
gathered data in Taiwan and China and compared the interview findings with existing studies conducted in Western
countries. Participants ranged in age from 19 to 42, with an average age of 28. Novice users with only one resale
experience and veteran users with 17,637 resale experiences were both included in the interviews (see
Table 1. All names in the table were altered for participants’ privacy.
Patton (2002) identified three basic types of qualitative interviews for research or evaluation: informal
conversational interview, interview guide approach, and standardized open-ended interview. We employed the
interview guide approach considering the main purposes of the study are clear, and we already had enough
information to develop guidelines for interviews. Intensive interviews were conducted using a conversational,
unstructured, exploratory interview style guided by an outline in order to explore resellers’ resale motivations,
product supply source, product condition, pricing strategy, resale goals, and resale satisfaction. Resellers can sell
different products with different reasons, so we asked each participant to give several examples of successful online
resale transactions. Each consumer interview lasted about one hour. We collected 131 resale transaction cases from
the 25 participants, with each participant providing 5 resale examples, on average. One advantage of investigating
online resale is that all transaction records within two years are kept in the auction system, including the messages
between sellers and buyers. Interview participants were encouraged to log on to their account to view the records
of their resale if they do not remember the details of the transaction during the interviews, which helped to improve
the accuracy of information.
All interviews were recorded for further analysis and interpretation (Spiggle, 1994). During the qualitative research
process, data collection and analyses were processed simultaneously, and results of any data analysis led to further
data collection (Siggle, 1994, Strauss and Cobin, 1990; Glaster, 1992). We continued the interviews until we no
longer distinguished significant resale patterns from newer interviewees. Patton (2002) noted that the sampling size
of a qualitative study depends on the research questions of interest, how to use the research results, and the resources
of the researchers. In our study, one hundred and thirty-one resale cases from the 25 interview participants have
provided sufficient information to achieve the current research goals, that is, to identify critical dimensions for
identify motivations of consumer online resale and distill implications for managers and further research.
Table 1. Summary of Participants’ Information
Name Place Gender Age Occupation Resale Frequency
Kevin Taiwan M 32 Marketing Planner 62
Ivy Taiwan F 25 Realtor 148
Ann Taiwan F 23 Teacher 51
Alex Taiwan M 40 Driver 12
Chen Taiwan M 35 MIS Engineer 3
Wang Taiwan M 26 Telemarketing Sales 213
Vicky Taiwan F 32 Nurse 55
Lisa Taiwan F 23 Graduate Student 62
Tony Taiwan M 22 College Student 5
Yang Taiwan M 22 College Student 34
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in our interviews:
Table 2. Definitions of C2C Online Resellers
C2C Online Reseller Type Definition
Resellers only perform “professional resale” in C2C online
Professional Resellers
auctions.
Resellers perform “professional resale” and “consumer resale”
Mixed-Role Resellers
simultaneously in C2C online auctions.
Resellers only perform “consumer resale” in C2C online
Consumer Resellers
auctions.
“When traveling in Italy, I found that a Prada bag is much cheaper there. I purchased one for myself and one for
my sister as a gift. But after returning home, my sister told me that she didn’t like the style. I ended up listing the
bag on Yahoo and made a surprising windfall of NT$5,000 (approximately US$150). After that experience, I pay
special attention to products with large price gaps around the world.”(Ivy)
Utilitarian trade-up motives:
When the resale is strongly linked to trade for other purposes of consumption, consumers conduct a “utilitarian
trade-up motivation” resale. The resale is just an instrument to amass money for a specific subsequent consumption
or in order to compensate for excessive spending before. For example, students may resell durable goods for tuition
before semester starts, or consumers may resell because they need to counteract a significant or unexpected financial
loss. Examples can be found in our interviews:
“I had experiences before in reselling my used mobile phone, shoes and PC monitors in order to cover a shortage of
NT$10,000 needed for a new laptop computer.” (Ann)
“I love to change my aftermarket car parts by myself and have purchased lots of components to install on my car.
Because these replaced components are usually usable and have value, I resell them on auction sites to get money
for more purchases.” (Wu)
Emotional/social motives:
Most consumer resale is due to emotional and social motivations, not making a profit. The possible emotional
motivations are as follows: avoidance of wasting (Herrmann and Soiffer 1984, Jacoby et al 1977, Okada 2001),
environmental protection (Herrmann and Soiffer 1984), socializing (Belk 1988, Cameron and Galloway
2005,Herrmann and Soiffer 1984, Herrmann 2006, Rafaeli and Noy 2002), achievement and entertainment
(Herrmann and Soiffer 1984). Understanding these motivations helps to explain why consumer resale needs not to
involve sophisticated profit-and-loss calculation. Examples can be found in out interviews:
“I spend lots of money on online games. A few months ago I became tired of playing online games and wanted to
quit. I sold these virtual weapons and treasures on auctions for NT$20,000.” (Chen)
“Reselling on auction site is like playing a game because every time you sell a thing successfully, you receive a
positive feedback. Some friendly buyers even leave very sweet and encouraging comments on your pages that
always make me feel happy and thankful.” (Susan)
House grooming motives:
To consumers, money and space are both precious resources. Consumers in limited living space have to get rid of
some belongings to keep house organized and clean. Notwithstanding these goods are in good conditions;
consumers have no choice but to give up in exchange for room. Herrmann and Soiffer (1984) found“house cleaners”
are the largest group shown in U.S. garage sale. These consumers become sellers in the wake of growing children
accompanying the need to create space, or as a result of relocation having to dump the stuffs stacked in garage.
Coulter and Ligas (2003) also reported that “Purgers” type of consumers love to dispose goods in order to keep
living space tidy. Examples can be found in out interviews:
“I do not have enough room to keep my children’s clothes, toys and baby care items. Reselling these items can make
lots of money and create more space in my house.” (Kelly)
“Books lose their value after reading them. Therefore, I’d like to resell them to create more space.”(Candy)
6. Discussion and Conclusions
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Our study discovered that utilitarian trade-up is a prominent and unique motive for consumers to resell online. It is
interesting to find that consumers with resale skills treat goods as liquid assets and an alternative cash account which
allow them trade up for other products by selling the old ones. Moreover, emotional motives are found outweighed
than monetary drivers for consumer resale. This is because online resale has offered consumers the psychological
benefits of fun, enjoyment and sense of achievement.
The results of our interviews do not entirely verify our speculation about the less social relationships involved in
online consumer resale as compared to the transactions made in the face-to-face secondary markets such as garage
sale. As a matter of fact, the participants in our study revealed a strong socializing motive to resell online. In spite of
lack of face-to-face contact, the Internet has provided positive features in online resale transaction facilitating
interpersonal relationships development across national and cultural boundaries. Consumers worldwide can
exchange information instantly at a lower cost by email, MSN messenger, chat rooms, or Internet phone programs.
Consumers of the same interests can interact online with each other to share their hobbies without geographic and
time constraints. Therefore, socializing is still an important motive for consumers to resell online.
7. Managerial Implications
Marketers should be aware of the changes that the online secondary market has brought for the potential link
between the new product and secondary markets (Purohit, 1992; Zhao and Jagpal, 2006). While the speculated
cannibalization effect predicts that the C2C online auction market may steal some sales from retailers, online auction
sites that resell consumers’ unwanted goods may actually carry over and lead to more new product sales from
retailers (Paden and Stell, 2005). Those who shop in stores can pass on and sell extra units of products to those who
prefer to shop online. The other types of consumer online resale can also bring consumers the cash to recover part of
the original purchase payment, which could encourage consumers to buy more new products from retailers, in turn
enhancing retail sales (Paden and Stell, 2005). Moreover, online resale might act as useful vehicles by which some
buyers reduce their purchase risks, allowing consumers to spend less time evaluating product information and,
therefore, to purchase more new goods. Hence, the possible positive or negative impact of the online secondary
market on consumers and retailers deserves further examination in future research.
With continuous growth of the Internet user population and the development of the Internet infrastructure, there is
little doubt that the phenomenon of consumers serving as online resellers will proliferate. Given the potential
impact on changing consumer purchases and consumption patterns, online consumer resale behavior should be
extensively researched and addressed. Although a large portion of consumers have not sold or purchased via the
Internet, the impact of C2C e-commerce is intensifying, with more selling agents and online resale consignment
stores emerging daily (Paden and Stell, 2005). In sum, the more efficient the information flow on the Internet and
the lower the costs of reselling products online, the faster consumer behavior will transpire. Therefore, it is
important to pay more attention to these evolving consumers.
References
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Dynamics in Online Auctions. Journal of Consumer Psychology 13 (1-2):113-123.
Bajari, P. and Hortacsu, A. (2004). Economic Insight from Internet Auctions. Journal of Economic Literature 42:
457-486.
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Belk, R. W., Sherry, J. F. Jr., and Wallendorf, M. (1988). A Naturalistic Inquiry into Buyer and Seller Behavior at a
Swap Meet. Journal of Consumer Research 14 (March): 449-470.
Bruin, A. de and Dupuis, A. (2000). The dynamics of New Zealand's largest street market; the Otara flea market.
International Journal of Sociology and Social Policy 20 (1-2):52-73.
Brown, J. and Morgan, J. (2006) Reputation in Online Auctions: The Market for Trust, California Management
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Cameron, D. D. and Galloway, A. (2005). “Consumer Motivations and Concerns in Online Auctions: An
Exploratory Study.” International Journal of Consumer Studies 29 (May):181-192.
Dykema, E. B. (1999). Consumers Catch Auction Fever. Forrester Report. Cambridge: MA 02139.
Ebay news release. (2007). [Online] Available at:
http://pages.ebay.com.sg/presscentre/Quarterly_FastFacts/eBay%20Marketplaces%20Fast%20Facts%20Q107.pdf
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Without team goals, members in a team probably suffer direction problems. Teams take extremely important tasks, if
they have no explicit team goals, members will not actively work in a team, lack of motivation and lack of
achievements to achieve goals .It goes without saying that this will give rise to disastrous losses for organizations.
For example, if a team leader set a specific goal for you, this month you should sell 8 televisions, actually this is
possible. Another lead told you do your best for our team goal. It is obvious that this first way is best way choice,
because it can direct, guide and push you as soon as possible to finish this task, probably, you will sell more than
specific goal. It is intangible feeling and incentives. Its setting have brought motivation and incentives for whole
team. Goals are most likely to lead to higher performance when members have the abilities and the feelings to
accomplish the goals. For instance, selling 8 televisions within one month, you must actually be able to accomplish
the goal and fell confident in those abilities. However, if you are given 80 number of television for selling, it is
impossible actually, you will be under pressure.
Analysis: Hence, it is essential for setting an appropriate goal for every team. Setting team goals are reasonable and
proper for members in a team to exert their performances. Difficult goals are likely to lead to higher performance
than are less difficult ones. If the goals set are too difficult, it is impossible to achieve it. The morale of members
will fast lower, not to mention their better performance. Specific goals are more likely to lead to higher performance
than a general goal.
5. The Importance of Feedback
According to Schermerhorn, et al (1994) that feedback is people based on your work performance; point out positive
things or negative things you did. At present, there are more and more companies have ignored feedback for their
employees. It seems that feedback is not important for companies and employees. In this people’s mind, feedback is
not directly related to interests of company and employees. However, a research (Nadler, 1991) discovered that
feedback have a deep influence on people’s work performance and motivate people work efficiently. Apart from that,
feedback can provide descriptive information about the group's performance or process, but it can also provide
evaluation or judgmental information.
Taking Tianbing Company as an example, at Tianbing Company, President Qiu was trying to appraise performance
of team in the end of year 2004.In the big ceremony day, he praised generally different teams in this year to
contribute this company. Because of this year, each team played a big role on achievement of company, but also
exists some problems. In order to reward this achievement and remedy some existing problems, Tianbing Company
made a decision, which is each team manager assigned one activity to relax and Company would be responsible for
overhead of activities. At the same time another extra condition is each team should think bout weakness and
strengths within 2004.It is real to say that this suggestion was very successful. Marketing team’s activity is assigned
“visiting each member in a team” as their relax style. This department used to be very busy selling, which almost
has no time to understand each other. Through this opportunity they got to know and understand each other. When
this activity finished, they, according to requirement of the company, reported demerits and merits of team for
manager, also they were aware that they did not very well last year and they try doing their best for company.
Actually, before this activity, the manager had known about this team’s weakness, like work individually, lack of
working motivation working and lack of cooperation in a team. When the manager got the report and then directly
told all of members of his and company’s main incentive, which is to help them enhance cooperation and motivation
and to make them understand importance of teamwork. Although this team made a progress in this year, if this team
has strong motivation and better cooperation, it is probable that the number of selling will definitely increase
(Tianbing 2004).
Analysis: In this case, initially the manager did not take a directly way to tell them to correct this team’s demerits,
but by an activity to make feedback for this team. To the large extent, the manager dwelled on these members’
behavior and to consider which ways is the best way. Therefore, this kind of feedback is effective and meaningful.
Because this team is no long lack of motivation work with other members, but now when they are willing to work
with their members with full of motivation and strong cooperation through process of work. They believed that their
team is best team in the world.
6. Team building
“Team building is a catchall term for a whole host of techniques aimed at improving the internal functional of work
groups” (Kreitner et al 1995:354). Modern society and culture continues to become more fluid and dynamic. It is
undoubted that people work in a team is very important for an organization However, if want to increase team‘s
effectiveness, certainly team building plays a vital role in enhancing member’s work performance (Torrington, 2002).
Danddang Machine factory is well known hi-skilled factory. Most of staff working in this company is required in a
group work and this factory makes full use of advantages of team building and also it has achieved some areas
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successfully. Different functional teams have different tasks in factory and therefore managers are concentrating on
selecting workers who have different abilities, habits experiences to join a group to fulfill a specific task. Indeed, as
mentioned earlier, establishing team goals or missions are extremely important. Dangdang also organize different
goals for different functional team in order to certain team directions. In next stage Dangdang takes a long time to
decide distributions of workload of teams or individuals. More surprised, it gives timetables for every team. The
managers claimed that if want to increase team’s effectiveness, we can not neglect timetable which can warn or tell
team how many time they can use and also the timetable can push team work hard. Also they mentioned that
developing team member’ self-management skills also important, since every task is not easy for a team, team
members must know how to encourage their members, like praising each other for good work and results (Thomson
et al, 1994). Another one key point pinpointed is to harmonize individual‘s personality types in case of avoiding
unnecessary arguments. Dangdang factory especially according to these problems, they held some activities and
discussion mission so as to minimize arguments in teamwork. Finally, it emphasizes that training people work
together also is the organization’s an important topic. Inform and educate the importance of teamwork and how to
fit into a team and how to maximize team performances and achievements (Dangdang 2006).
Analysis: From example of Dangdang, it is true to say that teamwork cannot make a success without team building.
Team building consists of important factors, which affects teams’ performances and motivation, they are
respectively selection of participants, establishing goals, distribution of workload, timetabling, developing
self-management skills, harmonizing personality types and training on how to work together (William, 1995) .It
goes without saying that these factors are main elements that influence team building. Nevertheless, when managers
desire to motivate teamwork, it is probably to take into team building with these seven factors account.
7.Conclusions
Motivation is typified as an individual phenomenon and described as intentional and also is multifaceted. Every
person in the world is unique. Hence it is true to say that it is difficult to totally motivate people well in an
organization, because the influential factors of motivation are countless. However, motivation of individuals directly
is related to motivation of a team. Managers found out how to motivate individuals well and then based on these to
motivate people will in a team in order to fulfill goals of team and also missions of whole organization. According to
examples and analyses of organizations, team goal setting, the importance of feedback and team building are very
important motivators for organization. In other words, if want to motivate groups motivation, these three factors are
indispensable .It is worth noting that making full use these factors are not only can bring plenty of benefits for
individuals but also for organization. Enhancing work performances of team or individuals, it is beneficial for
organization to increase competitive advantage in this crucially competitive market.
References
Dangdang. (2006). Team building of Dangdang [online] Availble from:http://www.dangdang.com/dd-profile asp.
Hucainski, A., and Buchanan, D. (2004). Organisational Behaviour:An Introductory Text (5th edition).Harlow:
FT Prentice Hall.
Koontz, H., and Weihrich, H. (1990). Essentials of management (5th edition), Singapore:Mcgraw-Hill ,Inc.
Kreitner, R. and Kinicki, A. (1995) Organizational Behavior, (3rdedtion). Irwin,inc.
Mullins,L.J.(2004). Management and Organizational Behaviour(7th edtion).Harlow: FT Prentice Hall.
Nadler D, A. (1991). Organizational Behavior and Human Performance, International Journal of Project
Management. Volume 9. pp. 93-98.
Thomson,R., and Mabey, C. (1994). Developing Human Resources. Jordan Hill: Butterworth-Heinemann Ltd.
Torrington D, Taylor S & Hall L. (2002). Human Resource Management, (5th edition).Harlow: Pearson Education
Limited.
William,G.D. (1995). Team building: Current Issues and New Alternatives(3th edtion),Pearson Education POD,
ISBN 0-201-62882-1.
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in the traditional management accounting, but also new methods such as value chain analysis, activity based analysis,
product life cycle costing, competitor analysis, target costing, presentiment analysis, brand value accounting and
quality cost analysis. This article mainly introduces the following methods of SMA.
3.1 Method of value chain analysis
The early idea of value chain was put forward by American Mckinsey & Company. The appellation of “value chain”
was formally appeared in the book of “Competitive Advantage” wrote by American strategic management expert,
professor of Business School of Harvard, Porter M. The value chain is the various sectors in the production and
increment of value and actually it is the production and management chain which is consisted by enterprise’s orderly
and relative activities of production and management. The method of value chain analysis can be performed
according as the following steps: (1) validating the enterprise value chain, (2) distributing cost, income and capital
to every basic value activity, (3) finding out cost driver of every value activity, digging the potentials to reduce cost,
(4) analyzing the main competitors’ value chains and cost drivers, (5) confirming the method of optimizing value
chain, such as better controlling cost causes and reestablishing value chain etc.
This method calls for the optimization of transverse and lengthways value chains. The transverse optimization to
value chain mainly studies such basic activities as stocking, production, consignment, after service and marketing
etc. and such assistant activities as stock, technique development, the management of human resources, general
management, distinguishes value added activities (such as obtaining orders, producing products, sending production
etc.) and non-value added activities (such as storing, withdrawing goods, inferiors, doing poorly done work over
again etc.), tries to reduce non-value added activities, strives to cause the optimized operations of every basic
activity and obtain the optimized harmony among basic activities. The lengthways optimization to value chain is to
place enterprise value chain in the three exterior value chains including supplier value chain, dealer value chain,
final consumer value chain, study the relations of every basic activity of enterprise with other value chains, and find
out the method to reduce cost and increase consume value.
The Nike Company is the good example which succeeds in using the method of value chain analysis. Nike’s modus
operandi on the lengthways optimization of value chain is to contract its making sectors with some Asian countries.
This method makes Nike obtain low-cost labor forces and a great lot discounts from suppliers, and reduces its costs.
The modus operandi on the transverse optimization of value chain is to adopt manifold sales channels such as retail,
Nike city and e-business etc. The e-business begun from the 1990s Nike.com and Nike also allows other network
companies sell its production. So the strategy of e-business emblazes its direct relation with consumers.
3.2 Method of activity based analysis
To establish and maintain the competitive predominance and adapt the consumptive tendency of individuation, after
WW II, enterprises turned production modes from singe and batch size traditional production mode to the modern
production mode emphasizing product R&D, marketing and diversification. This transformation also makes the
production cost confirmed by traditional costing method is widely divergent with the actual cost consumed by this
production. Professor Kaplan systematically put forward the method of activity based analysis in 1984. This method
thinks that: production induces the happening of activity, production is the result of various activities, resources
consumed by activities include short-term variable cost changing with direct changes of output and long-term
variable cost concluded by traditional costing, changing with changes of the activity amounts, which is stable in
short-term. The method of activity based analysis further divides traditional cost distribution standard into various
cost drivers, distributes costs of resource to each activity according as the resource consumption of activity, traces
back to the process of formation and accumulation of production cost from the cost driver of activity, and
consequently obtain the production cost.
The method of activity based analysis includes activity-based costing (ABC) and activity-based management
(ABM). At present, abundant researches has extended from ABC to ABM. The ABM is to divide activities
consisting production cost through activity analysis into value added activities and non-value added activities, try to
reduce the non-value added activities and enhance the utility rate of resources.
At present, the method of activity based analysis has been exercised in many industries such as real estate, finance,
manufacture, logistics and retail etc. in many western countries, and most enterprises applying this method has
tasted the advantages of this new method. One of the biggest carmakers in US, Kreisler Company begun
implementing this method about costing, fixing price and management in the interior of enterprise, and in almost
short ten years, it predigested production design and making flow, spurned many non-value added activities,
therefore the incomes from economization and increment because of this method has achieved more a hundred
million dollars.
3.3 Method of competitor analysis
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The method of competitor analysis reviews the competitiveness of enterprise through the analysis to competitors
from the view of market. One important issue is to offer competitors’ information of past, present and future when
enterprise makes strategic decisions. This method just makes up this deficiency of traditional management
accounting on this aspect.
To use this method, enterprise should firstly know “who is the competitor”? Taking the famous theory of Poter’s
“five forces model” as references, we divide the competitors faced by enterprise into three kinds enterprises which
respectively offer different services including (1) similar productions or services, (2) mutually replaceable congener
productions or services, (3) attempting influencing or changing consumers’ consumption habits and tendencies to
the target market of enterprise. The second and third kind competitors are fully influenced by the consumers’
consumption habits and abilities, so the competitors analyzed by enterprise are mainly the stable first kind, where
enterprise mainly studies the competitor with most competitiveness. In succession, enterprise should analyze
competitors’ management target and tactics. Then, enterprise can analyze competitors’ competitive advantages and
disadvantages, resources, flow, values and how to face exterior challenges and so on through the analysis method of
SWOT.
Generally speaking, the competition between enterprise and the first kind competitor mainly is embodied in the
price, production, service quality and marketing measures. Through “value chain analysis” to competitors, enterprise
can find out their every unit value activity and analyze them how to perform value activities, through adopting the
same analysis method with the method of value chain analysis for enterprise itself. The method of “Benchmarking”
is also an effective tool to analyze competitors, which compare performance indexes with the best operator’s
performance indexes in industry or relative industries, introduce modus operandi of successful enterprises in this
aspect and improve oneself management activities and flow. Enterprise also should establish intelligence collecting
system to collect special competitors and continually collect and analyze competitors’ intelligences. The analysis
method using “BCG Matrix” to competitors is to firstly confirm every competitor’s position in the matrix, and
compare with this enterprise’s position to find out which competitors lie in the preponderant status in national or
world competition.
The Motorola Company is the successful example which emphasizes the application of the method of competitor
analysis. In 1970s, because Motorola didn’t pay attention to its competitor’s information in color TV industry, it was
extruded from the industry. Since 1980s, Motorola established the department of competitive intelligence, begun to
notice and completely know its competitors, analyzed these competitors’ successful experiences becoming world
leader, compared its own operation mode with Japanese corporations’, made new strategic target of exceeding
Japanese standards, strictly supervised the development, production, after service and sales of products, and finally
became the Titan in the international market of mobile communication facility.
American XEROX is also the successful case applying this method. This corporation was keeping the status of
monopoly from 1960s to 1970s in the world market of copycat. But because it ignored the existence of its
competitors, XEROX had encountered all oriented challenges from 1976 to 1981. One of the strongest competitor,
Japanese Cannon sold copycats with closing to the cost price of XEROX to the global market, as a result, the world
market share of XEROX dropped rapidly from 82% to 35%. To make clear the depreciating strategy of Cannon,
XEROX performed abundant competitor’s intelligence researches. Through the comparison and analysis of
competitor with itself, XEROX adjusted the production strategy and tactics of copycat from various aspects,
depressed production cost, enhanced the production quality, and finally recaptured market share from Cannon.
3.4 Method of target costing
In the late of 1950s, Japanese Toyota took the lead in putting forward the concept of “cost design” which was
originally applied in the R&D stage of new CROWN car and translated “target costing/cost design” by US. The
method of target costing makes consumers and market as its direction, adopts cooperating mode of
trans-departments in the stage of product layout and design, and uses methods such as value engineer, market
research, product function analysis and cost analysis etc. to realize the target cost which can achieve the target
profits. One investigation made by Japan Kobe University showed, this method had been abroad applied in the
manufacturing (transport vehicle and facility (100%), electronic products (88%), exact apparatus (75%)) of Japan.
The method of target costing has some differences with traditional decision method of product design and price. The
traditional method is to firstly make market investigation, then design new product, compute product cost, evaluate
whether the product has market, finally figure out the price of the product with adding necessary profits. The basic
applied principle of target costing method is to (1) confirm product price, i.e. “target price” which can be accepted
by consumers and has competitiveness in the market through market researches, (2) collect information and confirm
the “target profits” which the best competitor of this product or enterprise want to obtain or anticipate to obtain, (3)
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subtract “target profits” from “target cost” and confirm “target costing”, and decompose the target costing according
as the product structure or various activities forming product or the contents of product cost, for example, reviewing
every components of product and seeing whether it can obtain the possibility of reducing cost in the premise of
maintaining the invariability of product function and performances, and in some instances, the product design needs
to be modified, the materials in production need to be replaced, the process of making needs to be changed, (4)
organize design, production and sales according as the target after improving, to obtain the target cost.
The method of target costing is guided by consumer and market, considers cost, consumer and competitor at the
same time in the cost management, introduces competitive factors, presents the basic idea of strategic management,
and this also causes the successive successes of Japanese productions in occident market since 1980s. China and
many occident countries begun to notice and study this method in 1990s and many enterprises enormously improved
product cost and financing status through implementing the system of target costing. The applications of this method
in the famous corporations of US such as Boeing Company, Ford Motor, Kreisler Company and Compaq Computer
etc. and many middle and small sized manufacturers, the Menglo Electrical Appliance of Canady and the Tantalus
Motor Fitting Company of England all are thought very successful.
4. The applied actuality of SMA in China
SMA has still belonged to a new research domain, which many concepts and methods possess strong operation and
validities. If we want to extend SMA, we think first we should encourage close combination of academe with
enterprises, strengthen the researches of theory and method of SMA, especially to its application, seriously
summarize and extend those successful cases. Secondly, aiming at the problems of deficient popularization of the
SMA knowledge, we should strengthen the studies and trainings of enterprise management layers and financing
personnel to establish their strategic consciousnesses and enhance the applied level of SMA. Thirdly, we should also
actively establish sensitive information system of SMA, collect and clear up intelligences of consumes, industry
analysis and competitors from the interior and exterior of enterprise, the alteration of domestic and foreign policies
and laws, and market and economic development tendency in international market, offer timely and effective
information for decision-makings, for the sake of adapting changeable market and drastic competition and grasping
and maintaining long-term competitive predominance in the competition.
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