Sauth African Business Review 3A

Southern African BusinessReview Volume 10 Number 3

December 2006

ISSN 1561 896 X____________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Policy

The Southern African Business Review is a refereed and accredited scientific journal of the College of Economicand Management Sciences of the University of South Africa (Unisa). The journal was first published in 1997 toserve as a vehicle for the publication and dissemination of research of a high standard in the fields of the economicand management sciences, including accountancy and related subjects.

Editors

Prof. A.A. Ligthelm, Bureau of Market Research, UnisaProf. E. Sadler, School of Accounting Sciences, Unisa

Editorial Board

Prof. M. Shahia, Executive Dean, College of Economic and Management Sciences, UnisaProf. N. Garrod, Deputy Vice Chancellor, Thames Valley University, Great BritainProf. P. Nel, Head of School, Management and Entrepreneurship, Unitec, New Zealand

Editorial PanelProf. F. Ahwireng-Obeng, University of theWitwatersrandProf. G.C. Angelopulo, University of South AfricaProf. M. Anstey, Nelson Mandela MetropolitanUniversityProf. A.J. Antonites, University of South AfricaProf. K. Barac, University of South AfricaProf. R. Barker, University of South AfricaProf. A. Barnard, University of South AfricaProf. M. Beaumont-Smith, University of South AfricaProf. C. Bester, University of the Free StateProf. K. Bhowan, University of KwaZulu-NatalProf. A.E. Booysen, University of South AfricaProf. F. Booysen, University of the Free StateProf. C. Boshoff, University of StellenboschProf. H. Brand, University of PretoriaProf. A. Brettenny, Nelson Mandela MetropolitanUniversityProf. T. Brevis, University of South AfricaProf. A. Brink, University of South AfricaProf. A. Brits, University of South AfricaProf. R. Butler, University of StellenboschProf. J. Buzz, University of KwaZulu-NatalProf. A. Bytheway, Cape Peninsula University ofTechnologyProf. M. Cant, University of South AfricaProf. S.J. Claassen, University of PretoriaProf. D. Coetsee, University of JohannesburgProf. J. Coetzee, University of JohannesburgProf. K. Coetzee, North-West UniversityMs M. Coetzee, University of South Africa

Dr S. Coetzee, University of South AfricaProf. C.J. CronjeÂ, University of South AfricaMs S. CronjeÂ, University of South AfricaProf. F. Crous, University of JohannesburgProf. J. Degadt, Catholic University, BrusselsProf. M. de Beer, University of South AfricaProf. H. de Jager, University of PretoriaProf. C.J. de Villiers, Massey University, New ZealandProf. P. de Wit, University of PretoriaProf. P.J. du Plessis, University of PretoriaProf. A. du Toit, University of JohannesburgProf. G.S. du Toit, University of South AfricaDr R. Elliott, Rhodes UniversityProf. B.J. Erasmus, University of South AfricaDr G. Farrell, South African Reserve BankMr G. George, University of KwaZulu-NatalProf. G.K. Goldswain, University of South AfricaProf. P. Grobler, University of South AfricaDr I. Hipkin, University of Exeter, United KingdomProf. C. Hoole, University of PretoriaDr R.C.C. Jafta, University of StellenboschDr M. Jakovljevic, University of the WitwatersrandProf. L.R. Janse van Rensburg, North-West UniversityDr C.S. Jonker, North-West UniversityProf. C. Jooste, University of JohannesburgDr P. Kilbourn, University of JohannesburgProf. P. Koortzen, University of South AfricaProf. J. Kroon, North-West UniversityProf. L. KruÈger, University of South AfricaProf. L. Labuschagne, University of JohannesburgProf. H. Lambrechts, University of Pretoria

Prof. J. Lambrecht, European Institute of HigherEducation, BrusselsProf. K. Lazenby, University of the Free StateDr I. le Roux, University of PretoriaDr T. le Roux, North-West UniversityProf. R. Lotriet, North-West UniversityProf. M.K. Luhandjula, University of South AfricaProf. V. Makin, University of South AfricaProf. M.P. Mangaliso, University of Massachusetts, USAProf. N. Martins, University of South AfricaProf. A. Marx, University of South AfricaMs M. Matthee, North-West UniversityProf. R. Mpofu, University of South AfricaDr D. Mulder, University of the Free StateProf. N. Nattrass, University of Cape TownProf. D. Nel, University of the WitwatersrandProf. I. Nieman, University of JohannesburgProf. W. Niemann, University of PretoriaProf. C. Nieuwenhuizen, University of South AfricaMr J. Oliver, University of the Free StateDr R.M. Oosthuizen, University of South AfricaProf. T. Oosthuizen, University of JohannesburgProf. P.N. Palmer, University of South AfricaProf. W.J. Pienaar, University of StellenboschProf. M. Pietersen, University of JohannesburgProf. L. Pretorius, University of South AfricaDr M. Pretorius, University of PretoriaProf. F. Prinsloo, Nelson Mandela MetropolitanUniversityProf. P.J. Rall, University of South AfricaProf. D. Remenyi, Trinity College, DublinProf. G. Roodt, University of JohannesburgProf. I. Rothmann, North-West UniversityProf. S. Rudansky-Klopper, University of South AfricaProf. M. Saayman, North-West UniversityProf. P. Schaap, University of PretoriaDr R. Scheepers, University of StellenboschProf. H. Schenk, University of South AfricaProf. N. Schoeman, University of PretoriaProf. P. Scholtz, North-West UniversityProf. A. Schoombee, University of JohannesburgMr D. Schutte, University of South Africa

Dr E. Slabbert, North-West UniversityProf. J. Smallwood, Nelson Mandela MetropolitanUniversityProf. B. Smit, University of StellenboschProf. L. Stack, Rhodes UniversityProf. L. Stainbank, University of KwaZulu-NatalProf. R. Steenkamp, University of South AfricaMr G.J. Steyn, University of PretoriaProf. T. Steyn, University of PretoriaProf. J.W. Strydom, University of South AfricaProf. S. Temlett, University of the WitwatersrandProf. N. Terblanche, University of StellenboschProf. S. Teufel, University of Fribourg, SwitzerlandProf. D.H. Tustin, University of South AfricaDr B. Urban, University of JohannesburgProf. C. van Aardt, University of South AfricaProf. S. van der Berg, University of StellenboschProf. B. van Heerden, University of South AfricaProf. N. van Heerden, University of PretoriaProf. L. van Schalkwyk, University of StellenboschDr C. van Staden, Massey University, New ZealandProf. A. van der Watt, University of JohannesburgProf. J. van Vuuren, University of PretoriaProf. L. van Vuuren, University of JohannesburgProf. L. van Wyk, North-West UniversityDr C. van Zyl, University of South AfricaDr J. van Zyl, University of StellenboschProf. P. Venter, University of South AfricaProf. F.N.S. Vermaak, University of PretoriaProf. S.S. Visser, North-West UniversityProf. A. Viviers, University of South AfricaDr S. Vosloo, University of South AfricaProf. D. Wagner, University of Potsdam, GermanyMs S. Wakelin-Theron, University of South AfricaProf. J. Walters, University of JohannesburgProf. M. Ward, University of PretoriaMs J. Wilcocks, University of South AfricaProf. H.C. Wingard, University of South AfricaProf. M. Wissing, North-West UniversityProf. H. Wolmarans, University of PretoriaProf. J. Wolvaardt, University of South AfricaMr R. Wordsworth, University of South Africa

Linguistic and Technical Advisor

Ms R.A. Arnold

Submissions and correspondence to

Ms Erna KoekemoerBureau of Market Research, P.O. Box 392, Unisa 0003, South AfricaTel: +27 12 429-3228 Fax: +27 12 429-3170E-mail: [email protected] Website: www.unisa.ac.za/sabusinessreview

Cover design by Unisa PressPrinting by Unisa Production Printers

# 2006 by College of Economic and Management Sciences, University of South Africa and individual contributors.All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in anyform or by any means, electronic or mechanical, as a photocopy or otherwise, without the written permission of thepublisher

ISSN 1561 896 X Southern African Business Review

Southern African BusinessReview Volume 10 Number 3

December 2006

ISSN 1561 896 X____________________________________________________________________________________________________________________________________________________________________________________________________________________________________

C O N T E N T S

Research articles

A model to calculate the cost of logistics at a macro level: a case study ofSouth Africa

1

F.J. Botes, C.G. Jacobs & W.J. Pienaar

An evaluation of the most important competitive analysis methods applied byglobal mining firms to determine the future intent of a competitive force

19

H.L. Brummer, J.A. Badenhorst & E.W. Neuland

The potential impact of formal retail chains' expansion strategies on retailtownship development in South Africa

48

D.H. Tustin & J.W. Strydom

The role of internal communication in service delivery: an assessment of theMetropolitan Health Group

67

M. Landman & G. Angelopulo

Stress-management strategies of firefighters: a fortigenic approach 94

R.M. Oosthuizen & P. Koortzen

A critical review of the effect of accounting for financial instruments on theaccounting framework

115

D. Coetsee

The development of a continuous improvement capability to attain higherlevels of output quality: a prescription for focused change in South Africanmanufacturing companies

130

H. Fakier & L.P. KruÈger

Relationship marketing: the effect of relationship banking on customer loyaltyin the retail business banking industry in South Africa

149

P.L.S. Ackermann & L.J. van Ravesteyn

The Southern African Business Review is a publication of the College of Economic andManagement Sciences, University of South Africa.

A model to calculate the cost of logistics at a macrolevel: a case study of South Africa


A B S T R A C T

The article identifies the need to calculate the cost of logistics in South

Africa. Current data sources do not fulfil this purpose; for example,

figures on the cost of logistics published in South African national

accounts are becoming less useful over time as communications

becomes an increasingly larger component of the transport, storage

and communication sub-sector for which figures are available.

A Logistics Cost Model was developed for the purpose of calculating

the cost of logistics in South Africa. The model enables relatively easy

updating of the data to predict the costs of logistics in future years, as

well as time series comparisons by retrofitting historical data to the

model. It also enables updating of the results with improved data as the

study progresses, as well as enhancing the performance of sensitivity

analysis of key input parameters.

Based on the output of the model, it can be deduced, firstly, that the

cost of logistics represents a considerable percentage (14.7%) of the

gross geographic product, and secondly, that the propensity to

outsource logistics tasks is low (33%) and that about two thirds of all

logistics tasks are currently undertaken inhouse

INTRODUCTION

Need to calculate the cost of logistics

A number of studies, including those of the Reynders Commission (1972: 489),Dehlen (1993: 10), Porter (Monitor Group 1995: Appendix), NaudeÂ (2001: 142) andPretorius (1997), have highlighted high logistics cost as one of the factors that inhibitSouth Africa's competitive advantage. Yet South African transport policy andtransport plans focus almost entirely on passenger transport rather than on freighttransport (Radebe 2005). Although the importance of lower logistics cost has recently

Dr Botes, Mr Jacobs and Prof. Pienaar are in the Department of Logistics, University of Stellenbosch.

E-mail: [email protected]

1Southern African Business Review Volume 10 Number 3

been noted at the highest level (South Africa 2005), government still does notappreciate the full extent of the problem and the need to implement an action plan toaddress current deficiencies in the logistics system.

In order to understand and appreciate the full extent of the cost of logistics in theSouth African economy, it is imperative that the logistics cost be available. This wouldbe of benefit to a number of stakeholders. Firstly, government departments andparastatals should have an interest in the overall cost of logistics as (1) it is anindicator of the overall state of the economy, (2) logistics has a direct impact on thecompetitive advantage of a country and is thus an important input in thedevelopment of trade policy, and (3) it should be an input in the development oftransport policy, as it provides information on the cost of transport per commodity permode.

Secondly, knowledge of logistics cost would benefit producers and marketers whoseek to compare the cost of logistics of their commodity or sector with that of othercommodities or sectors locally or abroad. Furthermore, it serves to indicate therelative cost of specific components in the logistics chain, which enables suchcompanies to focus their efforts on the particular aspects where costs are highest.

Thirdly, companies that provide third-party logistics would be able to view thesize of different markets, for example, the value of the transportation or warehousingcost for different commodities and the modal composition of the transportation ofdifferent commodities. It would also provide a benchmark to such firms that wouldenable them to monitor their relative competitiveness in a certain market segment.

Current sources of logistics data

There are currently two organisations in South Africa that publish official data on thecost of logistics, namely the South African Reserve Bank (SARB) and Statistics SouthAfrica (StatsSA). The SARB lists logistics cost in the Quarterly Bulletin under the`Transport, storage and communication' heading (SARB 2004: S-111). StatsSA liststotal volume (tonnage) of goods transported by road and rail, as well as the total grossincome of third-party road transport providers and Transnet (StatsSA 2003a: 16.10).

Although the accuracy of the data published by these sources is not disputed, thefollowing deficiencies have been identified when the data are to be used for thelogistics planning purposes listed:

. The aggregation of transport, storage and communication cost in the SARBofficial published data is meaningless for logistics planning purposes.

. Both the SARB and StatsSA base transport and storage costs on total gross incomeof primary service companies (namely, third-party providers). This means thattransport and storage that are provided inhouse, which in fact constitute a majorshare of total logistics cost, are excluded from the official published figures.

2

A model to calculate the cost of logistics at a macro level: a case study of South Africa

. The SARB definition of `transport' includes both freight and passenger transport,whereas the transportation of passengers does not form part of logistics.

. Income of companies that provide both passenger-related services and goods-handling and storage facilities (for example, the Airports Company of SouthAfrica) is included in the definition of `storage'.

. StatsSA figures exclude cargo transported by air and sea (coastal shipping).

Because there is no generally accepted benchmark or standard source thatpublishes logistics costs in South Africa on an annual basis, the results of ad hocstudies are quoted from time to time. Raath, for example, estimates logistics andtransport costs in South Africa at 17% of the gross domestic product (GDP) (Raath2004: 21). Given that South Africa's GDP was R1 209 497 million in 2003 (SARB2004), the total logistics cost in South Africa, according to that estimate, amounts toR205 615 million. Apart from the fact that no scientific methodology is described toindicate how this figure was arrived at, it is also not broken down into `transport' and`storage' components.

In the light of the foregoing discussion, there is thus a need (1) to provide anunambiguous definition of `logistics costs' and (2) to calculate logistics costs for SouthAfrica in terms of a generally accepted methodology.

Literature review on current methodology

Delaney (2003) popularised the quantification of logistics costs, which is presentedannually for the United States in the State of Logistics Report. The methodology usedin this ongoing study to quantify the inventory-carrying cost component of logisticscost is based on the Alford-Bangs formula (Alford & Bangs 1955: 396±397), whereastransportation cost is calculated by means of Smith's methodology (Smith 1986: 4).The 2003 State of Logistics Report quotes the logistics costs in the US at $910 billion,which is about 8.7% of GDP (Delaney 2003).

Although the State of Logistics Report is currently the generally acceptedbenchmark of logistics cost in the United States, it is sometimes at odds with othersimilar reports and benchmarks. For example, it indicates that warehousing costsremained unchanged during the past three years, whereas other reports, such as thatby Davis Logistics Cost and Service Database published by Davis (2004), show anincrease driven by increased distribution complexity. The latter is an ongoing annualsurvey in which manufacturers, distributors and retailers participate to receive acustomised benchmarking report of logistics cost and service.

Although these popular benchmarks sometimes offer conflicting data, they sufferfrom the same inherent constraint, namely that they rely on surveyed informationsupplied by companies. Firstly, the accuracy of the output is entirely dependent on thereliability of the information supplied by sources, which can often not be verified. In

3


this regard, it is well known that many companies are not aware of the total cost ofinhouse services, of which logistics is no exception. This is not because companies areignorant about such costs, but financial control systems are often designed to ensurefinancial control rather than for wider costing and planning purposes. In addition,the definition of cost items may also differ between companies, which makes itextremely difficult to obtain a uniform dataset.

Secondly, the sample size may not be sufficiently representative to allowestimation of the national total. This is due to the reluctance of many companies toparticipate in such surveys on a regular basis. It was, for example, noted in a majortransportation policy study that `ìt was often easier to find data on SA industries inthe USA than in SA. The data that do exist are often inaccurate or out of date''(Monitor Group 1995: 4).

Thirdly, if the study is to be repeated annually, the survey should ideally obtaindata from exactly the same companies each year. This is difficult to achieve, as somecompanies disappear or may withdraw from the programme, which means that thestudy cannot be repeated exactly from year to year, casting further doubt on theaccuracy of the data.

Fourthly, it is extremely time consuming, both for the surveyor and for thosesurveyed, to compile and analyse the data.

Based on the literature review, it can be concluded that practices described in theliterature to calculate logistics cost have proved to be unsuitable for generalapplication. For this reason, there is a need to develop a generally acceptedmethodology to calculate the cost of logistics in South Africa.

Terms and definitions

There is a need to define the following key terms for the purpose of this study:

. `Commodity' is the physical output of production, mining or cultivation, as well aswaste and defective goods returned to the supplier and scrap.

. `Throughput' represents the total volume of commodities that are transported andstored in the study area. This includes commodities that have both origin anddestination in the study area, as well as transport, handling and storage ofimported and exported commodities from the point where they pass through aborder control point. The activities in a seaport or airport up to the point wherethe commodities are loaded on to a vessel or aeroplane are thus included.Although the throughput of specific commodities is measured in a variety of units(such as weight, units or volume), this multitude of units is converted to acommon physical unit, namely `ton equivalent', for the purposes of this study (forexample, one litre of fuel is equal to 0.8 kg).

. `Logistics' is considered to be that part of the supply chain process that deals withthe transportation, warehousing, and inventory administration and management

4


of commodities between the origin (that is, where they are produced, mined orcultivated) and the destination (that is, the point of delivery to the consumer eitheras input to further production processes or for consumption). By definition, thisexcludes the cost of passenger transport, costs such as transport, storage, packagingand handling of mail and luggage, as well as the storage and transport tasks thatoccur during the production, mining or cultivation process.

The extent of logistics within the supply chain process can be explained bymeans of the following example. Once iron ore enters the smelter, it exits thelogistics chain and enters the production process. After the hot rolled steel isproduced, it again enters the logistics chain as an altogether different commodity,but exits again when it enters the body-pressing plant of a motor manufacturer.The entire process ends when a consumer finally takes delivery of the commodity,which may consist of many individual commodities that are dealt with separatelyuntil they are finally assembled into one product and delivered to the client.

. `Cost' means the direct financial cost of performing logistics tasks that will bereflected in national accounts, up to the point where the final consumer purchasesthe commodity. It therefore excludes external costs, for example, air pollution,noise, vibration, or other disutilities that are not for the account of any party.

DESCRIPTION OF THE LOGISTICS COST MODEL

Model overview

A Logistics Cost Model (LCM) has been developed in order to calculate the logisticscost for South Africa. The LCM is unique in a number of ways and is animprovement on existing approaches for the following reasons:

. The LCM employs a `bottom-up' approach to compute logistics cost byaggregating detailed commodity-specific data, including throughput, transportand storage characteristics, as well as transport and warehousing unit costs. Theaggregation of logistics costs is based on primary input elements (the amountproduced of a specific commodity) and the cost of performing specific tasks (suchas transport, storage and handling) of that commodity in the logistics chain.Validity of output data can thus be verified at the primary source before anyaggregation takes place. This departs from existing methods that extrapolatelogistics cost data that were collected by means of sample surveys.

. Although individual data elements are sourced from readily available primarysources ± mostly census data and industry/sector analyses ± they do not excludethe undertaking of specific surveys to further enhance the quality and accuracy ofinput data. However, there is no need to conduct the same surveys every year inorder to produce accurate output. Once set up, the LCM subsequently focuses

5


research on the refinement of individual input elements. It would even be possibleto add more detailed layers to the LCM in order to undertake a detailed analysis ofa particular industry.

. The fact that the LCM is able to run off an MS Excel spreadsheet platform meansnot only that different sensitivity analyses can easily be performed, but also thateasy updating of data is possible if more reliable figures are obtained. This wouldeven allow the construction of a past record of logistics costs by retrofittinghistorical data to the model.

. Data are presented per mode (collection/distribution by road, long haul transportby road, rail, air, coastal shipping and pipeline), per cost component(transportation, warehousing, inventory management, holding cost, as well asadministration and management) and per industry/sector (as defined in terms ofthe standard classification of primary (agriculture and mining) and secondary(manufacturing) sectors.

The LCM consist of four sub-models, namely the transport cost sub-model,warehousing cost sub-model, inventory cost sub-model, and management andadministration cost sub-model. The following section provides a detailed descriptionof each of the sub-models.

Total logistics cost

TLC is the national total logistics cost from (1.1)

TOTC is the total overall transport cost from (2.9)

TSHC is the total shipping and handling cost from (3.11)

TIC is the total inventory cost from (4.9)

TMAC is the total management and administration cost from (5.3)

TLC = TOTC + TSHC+ TIC + TMAC (1.1)

Transport cost sub-model

Transport cost is calculated as a function of throughput, modal usage, transportdistance and the unit cost of transport per ton throughput.

Tonnages of commodity transported are calculated by estimating the percentageof the total throughput transported per specific mode and multiplying the estimatedpercentage by the actual tonnages per commodity:

ETik is the estimated tonnage of commodity i transported by mode k (2.1)

EPik is the estimated percentage of commodity i transported by mode k (2.2)

ATi is the actual total tonnage of commodity i (2.3)

ETik = EPik. ATi (2.4)

6


The total overall transport cost is the sum for all commodities of the totaltransport cost per commodity. The total cost of transport per commodity is the sum ofthe cost of transport per mode for the commodity, which in turn is the estimatedtonnage transported per mode, multiplied by the mode unit cost in Rand per ton-kilometre, multiplied by the mode average distance transported of each commodity inkilometres.

The subscript indices that will be used are i for commodity family/commodityand k for the transport mode:

TTCPi is the total transport cost per commodity i (2.5)

MCTKk is the modal unit cost per ton-kilometre per transport mode k (2.6)

PATDik is the commodity-specific average distance transported percommodity i by mode k (2.7)

TTCPi =Pn

k�1 ETik. MCTKk

. PATDik (2.8)

TOTC is the total overall transport cost

TOTC =Pm

i�1 TTCPi (2.9)

Warehousing cost sub-model

Warehousing cost is a function of the duration and volume of storage, the unit cost ofstorage and the handling cost of goods. For each commodity, the average intra-seasonal storage time is estimated as the time-weighted difference between time ofproduction and time of consumption. (It is assumed that the quantities produced andconsumed are equal in the long run.)

The subscript indices that will be used are i for commodity family/commodityand j for the month of the year:

pij is the fraction of commodity i produced in month j (3.1)

cij is the fraction of commodity i consumed in month j (3.2)

ISTi is the intra-seasonal storage time in months of commodity i

ISTi =P12

j�1 j . pij ±P12

j�1 j . cij (3.3)

The total average storage time for a commodity is the sum of intra-seasonalstorage time as well as the average time spent at storage facilities for consolidationpurposes:

TASTi the total average storage time in months for commodity i (3.4)

CCi is the collection consolidation time in months for commodity i (3.5)

DCi is the distribution consolidation time in months for commodity i (3.6)

TASTi = ISTi + CCi + DCi (3.7)

7


The storage cost per ton is the commodity of the storage cost per ton-month and

the total average time spent in storage.

SCTMi is the storage cost per ton-month (3.8)

SCPTi = SCTMi. TASTi (3.9)

The cost of storage and handling per ton of commodity is the sum of the storage

cost, handling cost, and warehousing administration and overhead cost per ton of

commodity:

SHCPTi is the storage and handling cost per ton for commodity i

HCPTi is the handling (loading and off-loading) cost per ton for commodity i

WAOHPTi is the warehousing administration and overhead cost per ton for

commodity i

SHCPTi = SCPTi = WAOHPTi + HCPTi (3.10)

The total storage and handling cost for all commodities that were stored and

handled is the sum of the cost for storage and handling per ton of commodity (3.10)

multiplied by the actual tonnage of commodity (2.3):

TSHC =Pn

i�1 SHCPTi. ATi (3.11)

Inventory cost sub-model

Inventory cost is a function of the value of commodities, the volume of goods

transported and stored, the time in transit and the time value of money.

The inventory cost per commodity i is the prevailing annual interest rate,

multiplied by the average value per ton of commodity, multiplied by the sum of the

ton-years spent in transit and in storage:

AMTSk is the average modal travel speed in km/h (4.1)

TTPTik = PATDik / AMTSk / 24/ 365 is the transit time per ton of

commodity i per mode k (4.2)

STPTYi = TASTi /12 is the storage time per ton of commodity i in years (4.3)

TTT =Pn

k�1TTPTik. ETik is the total ton-years in transit of commodity i (4.4)

TSTi = ATi. STPTYi is the total ton-years in storage for commodity i (4.5)

AVPTi is the average value per ton of commodity i (4.6)

IR is the prevailing interest rate per year (4.7)

ICi = IR . AVPTi. (TTTi + TSTi) is the inventory cost per commodity i (4.8)

8


The total inventory cost is the sum over all commodities of the inventory cost per

commodity TIC =Pn

i�1 ICi (4.9)

Management and administration cost sub-model

Total management and administration cost per ton of commodity is the warehousingadministrative and overhead cost per ton of commodity, plus the sum for all modes ofthe modal transport cost per ton of commodity, multiplied by the commodity-specificaverage transported distance for the mode, multiplied by a mode-specificadministrative percentage:

MAPCk is the mode-specific administrative percentage of cost for mode k (5.1)

MACTi = WAOHPTi +Pn

k�1 MCTKk. PATDik

. MAPCk (5.2)

Total management cost for all commodities is the sum for commodities of thetotal management and administration cost per ton of commodity (4.2) multiplied bythe actual tonnage of commodity (1.3).

TMAC =Pn

i�1 MACTi. ATi (5.3)

CALCULATION OF THE LOGISTICS COST IN SOUTH AFRICA FOR2003

Introduction

The following application of the LCM calculates the logistics cost for South Africa in2003. Apart from demonstrating the practical worth of the results to interested partiesin South Africa, it could also serve as a guideline for constructing similar models inother study areas. The description of the methodology of the application of themodel, the sources of the input parameters for each of the sub-models, as well as theoutput and results of the model are outlined in the following sections.

Determine the throughput

Throughput is the primary input parameter on which all other cost calculations arebased. For the purpose of calculating throughput, commodities are listed in threemain categories (see Table 1). The two primary sector categories are mining andagriculture, whereas the secondary sector includes all industry (namely, themanufacturing sector). Further commodity breakdowns are in accordance with thoseof officially published data. In the case of `minerals', the Department of Minerals andEnergy classification (Jonck, Van Averbeke, Harding, Duval, Mwape & Perold 2003)was used; for àgriculture', the classification of the Department of Agriculture(Brouwer 2004) was used, and for `manufacturing', the Standard IndustrialClassification (SIC) as applied by StatsSA1 was used.

9


Table 1: List of commodities

PRIMARY SECTOR SECONDARY (MANUFACTURED/

PROCESSED)

MININGPRECIOUS METALS ANDMINERALS

ENERGY MINERALSCoal

Hydrocarbon fuels

Uranium

NON-FERROUS METALSAND MINERALSAluminium (metal)

Aluminium (concentrate)

Aluminium (refined)

Antimony

Antimony (processed)

Cobalt

Copper

Lead

Lead (refined)

Nickel

Titanium

Zinc

Zirconium

Tungsten

Magnesium

Tin

FERROUS MINERALSChromium

Iron Ore

Manganese

Silicon

Vanadium

INDUSTRIAL MINERALSAggregate and sand

Alumino-silicates

Dimension stone

Fluorspar

Limestone and dolomite

Magnetite

Phosphate rock

Processed phosphates

Special clays

Sulphur

Vermiculite

Other

AGRICULTUREHORTICULTUREApples

Apricots

Grapes (domestic market)

Grapes (export)

Grapes (process)

Grapes (dried)

Graped (pressed)

Pears

Peaches

Plums

Prunes, cherries, quinces

Figs

Strawberries, berries

Watermelon, melon, other summer fruit

Avocados, bananas

Granadillas, litchis

Guavas, loquats

Mangoes, pawpaw

Naartjies

Pineapples

Oranges

Lemons

Grapefruit

Fruit (dried)

Vegetables

FIELD CROPSMaize

Wheat

Grain sorghum

Groundnuts

Sunflower seed

Soya beans

Oats

Barley

Rye

Dry beans

Cowpeas, drypeas, lentils

Chicory

Sugar cane

Chicory

Cotton (lint)

Cotton (seed)

Cotton (seed-cotton)

Wattle bark

Lucerne, hay

Tobacco

LIVESTOCK

Red meat

White meat

Butter

Cheese

Condensed milk, powdered milk

Fresh milk

IRON AND STEEL-BASED PRODUCTSBasic iron and steel products

Basic non-ferrous metal products

Fabricated metal products

Machinery and equipment

Electrical machinery and apparatus

Motor vehicles, parts and accessories

Miscellaneous products

CHEMICALS AND PETROLEUM-BASEDPRODUCTSIndustrial chemicals

Other chemical products

Petroleum products

Rubber products

Plastic products

Non-metallic mineral products

PROCESSED FOODS AND BEVERAGES

Canned and prepared meats

Dairy products

Canned fruit and vegetables

Fish products and similar foods

Vegetable and animal oils and fats

Grain mill products

Bakery products

Sugar

Chocolates, sugar confectionery and cocoa

Roasted peanuts and other nuts

Coffee roasting, tea blending and packaging

Food products, not elsewhere classified

Animal feeds

Distilleries and wineries

Soft drinks and carbonated water industries

TEXTILE, LEATHER AND WOOD-BASEDPRODUCTSWoolscouring and combing

Spinning, weaving and finishing of textiles

Soft furnishings

Tents, tarpaulins and other canvas goods

Knitted garments, hosiery and knitted cloth

Carpets and rugs

Other textiles

Men's and boys' clothing

Women's and girls' clothing

Tanneries and leather finishing

Footwear

Sawmilling Ð from round log

Board Ð laminated, plywood, particle, etc.

Carpentry and joinery

Furniture

Packaging

Stationery

Printing, publishing and allied industries

10


The throughput for each commodity has been sourced from the publicationsmentioned. Some adjustments were necessary in order not to double-countcommodities, as more than one source sometimes listed the same commodity line.For example, the Department of Agriculture includes butter and cheese in itsclassification of dairy production, whereas these commodities are listed by StatsSA asmanufactured items.

Total throughput (local production plus imports) amounts to 753 million ton-equivalent. The secondary sector accounts for 44% of the total throughput. Theremaining 56% is from the primary sector (mining and agriculture).

Input to the transport cost sub-model

The inputs required to calculate transport cost are split according to mode in terms oftonnage carried, average distance over which a particular commodity group istransported and the unit cost of transporting a particular commodity type by eachavailable mode. For the purposes of the case study, six modal applications wereidentified, namely (1) collection and distribution by road, (2) line-haul transport byroad, (3) rail transport, (4) air transport, (5) coastal shipping (from the point wheregoods enter or leave the country) and (6) pipeline transport.

The modal split and average distance that each commodity is transported by eachmode was determined from information obtained from operators and practitioners. Inthe case of the primary sector (mining and agriculture), fairly detailed informationwas available. A recent study published by the CSIR (Van Dyk 2004) on logisticspractices in the fruit industry formed the basis for input in that sector. However, nosuch information was available for the manufacturing industry, and a detailed freightdistribution model is required to simulate movements of manufactured and processedgoods accurately. The modelling of transport desire lines for the secondary sector isessential to enhance the accuracy of the model in future, particularly because thissector has a major impact on total transport cost. It should also be borne in mind thatthe hauling distances reflect averages for the different sectors and may varyconsiderably from commodity to commodity within a particular sector.

Unit cost of transport per mode was entered in terms of Rand per ton-kilometre.The aim was to determine a typical cost per ton-kilometre for each mode andcommodity category, as the unit cost per unit commodity could differ substantiallybetween commodities, even if they are transported by the same mode. The accuracyof these input data varied greatly between modes and commodities for severalreasons:

. Some industries were more forthcoming in providing costs than others. Thedivisions owned by Transnet were reluctant to divulge the cost of air, rail andpipeline transport. In contrast, the organised road freight industry publishes detailsof the operating cost of different vehicle classes in the Vehicle Cost Schedule (Road

11


Freight Association 2003). Operating cost of road freight transport was verifiedfrom data collected and costs calculated independently by the Bureau forEconomic Research (2003: 288±290).

. The cost of coastal shipping fluctuates substantially, depending on the demand fortransport at a particular time.

A summary of the total transport cost by mode and sector is presented in Table 2,and the amounts transported by mode are summarised in Table 3.

Table 2: Transport cost by mode (R million)

Road

(Distribution)

Road

(Line haul)Rail Air

Pipe-

lineWater TOTAL

Mining 278 4 577 8 146 0 0 0 13 001

Agriculture 945 3 089 579 0 0 8 4 621

Primary 1 223 7 666 8 726 0 0 8 17 622

Secondary 27 247 74 627 2 569 10 702 71 235 115 451

TOTAL 28 469 82 293 11 295 10 702 71 243 133 073

Table 3: Amount transported by mode (million ton)

Road

(Distribution)

Road

(Line haul)Rail

Other (air,

water,

pipeline)TOTAL

Mining 4 110 143 0 257

Agriculture 32 37 7 1 77

Primary 37 147 149 1 334

Secondary 322 296 28 15 661

TOTAL 359 443 178 16 995

It should be borne in mind that the total tonnage transported by all modescombined exceeds the total throughput, as the same commodity could make use ofmore than one mode. For example, commodities transported by rail for the line-haulleg of a journey could be delivered to their final destination by road. In otherinstances where specialised vehicles are used (for example, transportation of motorvehicles), trucks (both road and rail) may return empty, which effectively doubles thetravel distance for that product.

12


Input to the warehousing cost sub-model

Duration of storage

Two reasons for storage in the logistics chain were identified in this study, namely,storage for freight consolidation purposes and intra-seasonal storage.

Freight consolidation takes place where commodities are accumulated at a certainlocation for onward transport in order to optimise the utilisation of the transportmodes delivering to and collecting from the accumulation point. A distinction is alsomade between consolidation for collection as opposed to consolidation fordistribution. An example of consolidation for onward carriage is farmers deliveringbananas, typically with a three- to five-ton truck, to cooperatives where the onwardconsignments are consolidated and hauled to major centres with 28-ton combinationtrucks. An example of consolidation for distribution is several 28-ton combinationtrucks, each with a different commodity on board, delivering to a cross-dock centre,where their loads are broken up and commodities re-sorted and combined fordelivery to retail outlets with smaller eight-ton trucks.

Certain commodities are harvested during a specific season, but are consumed ata constant rate throughout the year (for example, maize). Other commodities areharvested during a specific season but have only a limited storage life, for example,fresh deciduous fruit. The seasonality of production of certain commodities and thedelayed consumption thereof necessitate intra-seasonal storage.

The intra-seasonal storage duration of commodities that are evenly produced andevenly consumed throughout the year has been assumed to be zero. The duration ofstorage of all commodities that have a non-zero intra-seasonal storage duration iscalculated by determining the difference between the weighted mean time ofproduction and the weighted mean time of consumption.

Unit cost of storage

Unit costs of storage in terms of Rand per ton per day were collected for eachindividual commodity line. The following six main types of storage have beenidentified for the purpose of this study:

. Hard standing outside (dry commodities)

. Bulk warehouse (dry commodities)

. Silo (dry commodities)

. Shelved warehouse (dry commodities)

. Cold storage (dry commodities)

. Bulk tankard (liquid commodities)

. Specialised tanks (liquid commodities)

. General storage inside (dry commodities)

13


. Cold storage (dry commodities)

. Storage tanks (liquid commodities)

. Cold storage tanks (liquid commodities).

Storage cost is allocated for each commodity type according to the type of storageassociated with the commodity.

Unit costs of storage include storage and handling costs expressed in Rand perton. Storage costs are the costs of establishing and maintaining the storage facility andare spread over the expected throughput of the facility. Handling cost reflects themarginal cost of handling each unit of throughput.

Storage cost, in Rand per ton, is derived by multiplying the duration of storage ofa specific commodity with the storage type-specific storage cost per ton-month.Handling cost accrues to the commodity as it is handled. The sum of this storage costand handling cost form the storage unit cost.

Inventory cost

For the purpose of calculating inventory cost for goods in South Africa, primarygoods are valued at R290 per ton throughput and secondary goods at R671 per tonthroughput. These values were obtained by dividing total throughput by the totalvalue of goods produced as reflected in the national accounts (SARB 2004). Transittime consists of the duration of storage and the transport time. Transport time isbased on the amount transported and the transit time for each mode and commoditytype. The time value of money is the average annual prime bank lending rate for 2003(12.5%).

Management and administration

The cost of management and administration was taken as a percentage of the unitcost of transport and warehousing. These percentages, which vary according tostorage type and transport mode, were derived from information obtained fromoperators and practitioners.

OUTPUT OF THE LOGISTICS COST MODEL

The results of the aggregate approach are presented in Tables 4 to 6. The followingpoints serve to highlight the main aspects of the results of the case study:

. Logistics cost in South Africa, as defined in this study, amounts to R177 978million. This represent 14.7% of GDP.

. Transport cost is by far the main contributor to logistics cost, contributing 75% tothe total.

14


Table 4: Total logistics cost for 2003

Transport(R)

Storage(R)

Managementand

Administration(R)

Inventory(R)

TOTAL(R)

Primary 17 622 4 562 6 615 616 29 416

Secondary 115 451 9 595 21 945 1 572 148 563

TOTAL 133 073 14 157 28 560 2 188 177 978

Table 5: Logistics cost as a percentage of GDP

Transport%

Storage%

Managementand

Administration%

Inventory%

TOTAL%

Primary 1.46 0.38 0.55 0.05 2.43

Secondary 9.55 0.79 1.81 0.13 12.28

TOTAL 11.0 1.2 2.4 0.2 14.7

Table 6: Logistics cost items as a percentage of total logistics cost

Transport%

Storage%

Managementand

Administration%

Inventory%

TOTAL%

Primary 9.90 2.56 3.72 0.35 16.53

Secondary 64.87 5.39 12.33 0.88 83.47

TOTAL 74.8 8.00 16.00 1.20 100.0

. The secondary sector (manufacturing and processing) accounts for 84% of alllogistics cost.

. Inventory holding cost is the most sensitive to external changes, despite the factthat it makes up the smallest component of logistics cost. The primary reason forthis is that any change in the prime lending rate has an immediate and directeffect on the opportunity cost of the value of the inventory. A sensitivity analysisshowed that, if interest rates return to their 1996 level of about 20% inventory, andassuming that all other costs remain constant, holding cost would increase toR3 502 million (2.4% of total logistics cost).

In this respect, it should be borne in mind that interest levels during 2003 wereat their lowest levels for almost three decades. This has a further implication in

15


that there is not much scope for a further reduction of this component, and the

most likely trend in the near future would be upward should the prime lending

rate increase.

. It is estimated that goods transport contributes R40 490 million (37%) and that

storage constitutes R4 694 million (4%) of the total `transport, communication and

storage' figure of R110 709 million indicated in the national accounts of South

Africa (Botes 2004). This means that third-party goods transport and storage

(warehousing) account for 3.7% of GDP.

. Given that third-party logistics is estimated to amount to R45 184 million, the

propensity to outsource logistics is fairly low at 0.33.

. Goods transport accounts for 73% of total diesel fuel consumption in South Africa.

CONCLUSIONS

. The development of the model provides a lasting product that enables relatively

easy updating of the data to reflect the cost of logistics in future years, as well as

time series comparisons by retrofitting historical data to the model. It also enables

updating of the results with improved data as the study progresses and the

performance of sensitivity analysis of key input parameters.

. Logistics cost represents a considerable percentage of GDP. However, its

contribution is less than some reports in the popular press suggest.

. The propensity to outsource logistics tasks is low (33%), and about two thirds of all

logistics tasks are currently undertaken inhouse.

. Figures on logistics costs published by the SARB are becoming less useful over

time as communications becomes an increasingly larger component of the

transport, storage and communication sub-sector.

OPPORTUNITIES FOR FURTHER RESEARCH AND REFINEMENT

. The study should be extended to allow for a more detailed analysis of specific

input parameters.

. The procedure should be undertaken on an annual basis to develop a historical

database that in time will allow time-series analyses to be performed.

. A survey should be undertaken to understand the underlying reasons for the low

propensity to outsource logistics tasks.

. The South African Reserve Bank should be requested to separate logistics and

communications as items in their future reporting.

16


NOTES

1 The 1993 edition of the Standard Industrial Classification (SIC) of all Economic Activities,5th edition, Report No. 09-90-02, was used to classify the statistical units in the StatsSAsurvey. The SIC is based on the 1990 International Standard Industrial Classification ofall Economic Activities (ISIC), with suitable adaptations for local conditions.

REFERENCES

Alford, L.P. & Bangs, J.R. (eds). 1955. Production Handbook. New York: Ronald Press.Bureau for Economic Research. 2003. The feasibility of a fuel tax levy in the Western Cape.

Cape Town: Western Cape Provincial Treasury.Botes, F.J. 2004. Unpublished research. Department of Logistics, University of Stellenbosch,

Stellenbosch.Brouwer, A. (ed.) 2004. Quarterly agricultural review and forecast. Pretoria: Department of

Agriculture.Davis, H.W. 2004. Davis Logistics Cost and Service Database.

[Online] www.establishinc.com/davisdatabase_info.asp.Dehlen, G.L. 1993. Efficiency of transport to enhance South Africa's international

competitiveness. Research Report No. RR92/078. Pretoria: CSIR.Delaney, R.V. 2003. 14th Annual State of Logistics Report. United States of America: Cass

Information Systems.Jonck, M., Van Averbeke, N., Harding, A.J., Duval, J.A.G., Mwape, P. & Perold, J.W. (eds).

2003. South Africa's Mineral Industry 2002/03, 20th revised edition. Pretoria: Departmentof Minerals and Energy.

Monitor Group. 1995. Presentation to the Parliamentary Standing Committee on Trade andIndustry and the Media. Global advantage of South Africa project. Phase One Findings:National Industrial Strategy Issues. Conducted for the National Economic Forum.

NaudeÂ, W.A. 2001. `Shipping costs and South Africa's export potential: An economicanalysis', South African Journal of Economics, 69(1): 123±146.

Pretorius, J. 1997. The effect of conditions in the transport sector on the competitiveness ofSouth African industries in foreign markets. MCom (Transport Economics) dissertation,University of Stellenbosch, Stellenbosch.

Raath, L. 2004. Transport World Africa Yearbook. Shelly Shorten Publishers.Radebe, J. 2005. Address at the launch of the National Freight Logistics Strategy. [Online]

Available at: www.info.gov.za/speeches/2005/05100612151006.htm.Reynders, H.J.J. (chairman). 1972. Report of the Commission of Inquiry into Export Trade of

the Republic of South Africa, Chapter 12: Transport and related matters. Pretoria:Government Printer.

Road Freight Association. 2003. Vehicle Cost Schedule. Pretoria. March.Smith, F.A. 1986. Transportation in America. Washington DC: Transportation Policy

Association.South Africa. 2005. Address of the President of South Africa, Thabo Mbeki, at the Second

Joint Sitting of the Third Democratic Parliament, Cape Town, 11 February.

17


SARB (South African Reserve Bank). 2004. Quarterly Review (March). Pretoria.StatsSA (Statistics South Africa). 2003a. Land Freight Transport. Statistical release P7142,

Pretoria, South Africa. December.Van Dyk, F.E. 2004. Fruit logistics scenario analysis. CSIR, Stellenbosch. (Contract Report

CR-2004/19). [Online] Available at: www.dfpt.co.za/fruitlog/index.htm.

18


An evaluation of the most important competitiveanalysis methods applied by global mining firms todetermine the future intent of a competitive force


A B S T R A C T

Global mining firms make an important contribution to employment

opportunities, the gross domestic product and export earnings in the

South African economy. Various macro-environmental influences have

created a dynamic and turbulent competitive environment for the global

mining industry. The complex nature of this environment requires

increased strategic flexibility, speed and innovation to manage environ-

mental discontinuities and unpredictable changes for the creation or

maintenance of any competitive advantage. Remaining informed about

events in the external environment becomes an absolute imperative. A

purposeful, continuous analysis of the competitive environment is

imperative in order to make strategic decisions for survival and growth

in the turbulent mining industry. The question is what methods of

competitive analysis are applied by mining firms and whether these

methods offer sufficient insight into the competitive environment to

make sound strategic decisions. In an empirical study, global mining

firms indicated that they mostly apply financial analysis, competitor

analysis, scenario analysis and SWOT analysis as competitive analysis

techniques. In this article, these four methods are qualitatively

evaluated for their appropriateness as competitive advantage techni-

ques. It was found that competitor analysis is one of the best methods of

competitive analysis. Financial analysis, scenario analysis and SWOT

analysis have value if they are used as part of a wider analysis. It can

therefore be concluded that global mining firms, to some extent, apply

useful techniques in the analysis of a competitive force.

Keywords: Competitive analysis, competitive learning, competitive intelligence, global

mining firms


Dr Brummer is Manager: Business Analysis, Strategy and Business Development, Kumba Resources Ltd. Prof.

Badenhorst and Prof. Neuland are in the Department of Business Management, University of South Africa.

E-mail: [email protected]

INTRODUCTION

The global mining industry has undergone considerable upheaval in recent times; infact, during the past decade it has seen some of the greatest changes in its history.Commodity price and exchange rate fluctuations, regulatory influences, globalopportunities, global competition, mergers, takeovers, strategic alliances, restructuringand even a departure from the business scene are some of the critical issues thatmining firms currently have to face on an ever-increasing scale. Amid this complexenvironment, the struggle to create a sustainable competitive advantage has become acommon denominator for many mining firms (Skirrow 2000: 1).

For centuries, the mining industry has been the very backbone of the civilisedworld. This is evident in the early development of resource-rich developed countriessuch as the USA, Canada and Australia (National Research Council 1990: 57). It isalso aptly illustrated in a developing country such as South Africa, where the miningindustry made an important contribution to the national economy during theprevious century. In 2003 alone, this industry contributed R78.5 billion (US$10.4billion) or 7.1% to the country's gross domestic product and an additional 8.0%through associated multiplier effects (Department of Minerals and Energy 2002/2003:6, 2003/2004: 9). In addition, the mining industry contributed 39.7% of the country'sexport earnings during 2003 (Econometrix Ecobulletin 2004).

As the world moved into the third wave of civilisation during the latter part of theprevious century, revolutionary changes in information technology and knowledgediminished the importance of òld-world' industries such as mining and agriculture(Institute for Futures Research 2000: 6±14) At present, the mining sector's role in theglobal economy has diminished, and is fairly small in comparison with other sectors.In addition, a new breed of global mining firms is emerging in a world of shrinkingopportunity, where only a handful of firms dominate the business landscape over themedium to long term (Skirrow, Binns, Albi & Souza 2001: 2). This is evident fromthe fact that 50 of the largest mining firms in the world combined represent 82% ofthe total market capitalisation of the global industry, which consists of approximately400 listed firms (Royal Bank of Canada 2004; Bloomberg 2004).

Various macro-environmental influences have created a dynamic and turbulentcompetitive environment for the industry as a whole. The complex nature of thisenvironment requires increased strategic flexibility, speed and innovation to manageenvironmental discontinuities and unpredictable changes for the creation ormaintenance of any competitive advantage (Hitt, Keats & De Marie 1998: 26).Crowson (2003: 2) emphasises the fact that the global mining industry does not existin a vacuum, but is part of a larger world. Remaining informed about events in theexternal environment is thus an absolute imperative. Klinger (2002) contends that inthe past, mining firms were not skilled at reading these competitive trends and forcesaffecting the industry.

20

An evaluation of the most important competitive analysis methods applied by global mining firms ...

It is obvious from the scenario described that a purposeful, continuous analysis ofthe competitive environment is imperative in order to make strategic decisions forsurvival and growth in the turbulent mining industry. The question is what methodsof competitive analysis the mining firms apply and whether these methods offersufficient insight into the competitive environment to make sound strategic decisions.

COMPETITIVE ANALYSIS CONCEPT AND IMPORTANCE

The basic premise underlying the concept of competitive analysis is the inseparabilityof a firm, its competitive environment and its endeavours to survive and prosper inthis environment. An understanding of the dynamics of the latter is a key element inthe formation of a firm's strategic thinking. Competitive analysis could aptly bedescribed as the analysis of any particular competitive force active in the competitiveenvironment and is designed to help answer the question: ``What is such acompetitive force likely to do in a given situation?''(Oster 1999: 412). It is importantto determine how the possible future moves of a particular competitive force willaffect the home firm (the firm conducting the competitive analysis).

In the context of this article, competitive analysis could be defined as follows:

A step in the competitive intelligence process in which information about all thefactors of a specific competitive force is subjected to systematic scientific andnon-scientific examination, in order to identify relevant facts and determinesignificant relationships and to derive meaningful insight with regard to thefuture intent of such a competitive force. Such synthesised information shouldconsequently stimulate management decision-making and action within thehome firm.

From this perspective of competitive analysis, it is evident that various analyticalmodels and techniques could be used during the competitive analysis process. Someauthors are of the opinion that there are hundreds of such techniques available thatcan be applied in the context of competitive and strategic analysis (Fleisher &Bensoussan 2003: xviii). Each of these analytical techniques has been developed for aspecific purpose. However, Gilad (1998: 31) notes that competitive analysis is notmerely the application of analytical techniques, but, most importantly, involves thegeneration of insight, and therefore initiating a process of competitive learning. Insightis therefore based on a true understanding of the real underlying motives of aparticular competitive force in the context of its tangible and intangible assets, asapplied in the wider context of competitive environmental realities.

According to Fahey (2000: 4), the purpose of competitive analysis is not only tolearn about competitors or the competitive forces at large, but also to promotethinking, interpretation and decision-making about these competitive forces in order

21


to eventually take action. The overriding purpose of competitive analysis is thereforeto enhance linear as well as pattern thinking about the competitive force at stake(Kahaner 1996: 96).

OBJECTIVES OF THE ARTICLE

In this article, the most important methods of competitive analysis used by globalmining firms will be evaluated to determine whether they offer sufficient insight intothe context of competitive learning. To achieve this objective, the following aspectswill be covered in this article:

. An outline of competitive analysis methods and techniques

. An identification of key characteristics for competitive analysis methods andtechniques

. The empirical findings of a study regarding competitive analysis methods andtechniques used by global mining firms

. An evaluation of the most important techniques used by global mining firms incompetitive analysis.

RESEARCH METHODOLOGY

This article is based on part of a wider study on competitive analysis and the miningindustry. In an attempt to obtain representative empirical information on the use ofcompetitive analysis by global mining firms, data were collected by means ofdescriptive research, focused upon a non-probability purposive sample of 50 of thelargest mining firms in the world, each with a market capitalisation of more thanUS$1.5 billion. A structured questionnaire, based largely upon the semanticdifferential scale and supported by unstructured questions, was used to collect thedata. Of the 50 questionnaires that were sent to respondents representing the globalmining firms included in the research sample, 23 were comprehensively completedand returned. This represents a success rate of 46% of the units of analysis included inthe research sample. Based on the views of Welman & Kruger (2001: 64), andsupported by the Bureau of Market Research at the University of South Africa (VanAardt 2004), this represents an acceptable representative statistical ratio. The datareceived from the 23 firms were subsequently captured and analysed by means of theSPSS statistical software program. Basic descriptive statistical analysis, such as meanrating, t-test, effect sizes and certain linear correlation calculations were conducted onthe empirical data submitted. The mean rating was determined for each attribute inthe various questions, and subsequently compared with the other attributes in thesame question, in order to facilitate the discussion of the research results.

The empirical findings were used to identify the four main competitive analysismethods applied by global mining firms. These methods were subsequently

22


qualitatively evaluated in terms of key characteristics of competitive analysis methods,

as identified in the literature.

COMPETITIVE ANALYSIS METHODS AND TECHNIQUES

Competitive analysis in the context of competitive learning is based primarily upon

an open enquiring mind that utilises analytical techniques as a vehicle for reaching

frontiers beyond the obvious. From an extensive review of literature in the competitive

analysis field, it was found that the following are the most applicable analytical

techniques for competitive analysis purposes (Fleisher & Bensoussan 2003: 27; Grant

1998; Fahey 1999; Ghemawat 2001, 1991):

. Analytical techniques focusing on the dynamic external environment:

Ð Porter's industry analysis model

Ð Strategic group analysis

. Analytical techniques focusing on the assets and capabilities of a competitive force:

Ð Functional capability and resource analysis

Ð Financial ratio and statement analysis

Ð Strategic funds programming

Ð Sustainable growth rate

. Analytical techniques focusing on the strategic intent of a competitive force:

Ð Boston Consulting Group's growth share portfolio matrix

Ð SWOT analysis

Ð Value chain analysis

. Analytical techniques focusing on the organisational infrastructure and manage-

ment mindset of a competitive force:

Ð Competitive behaviour profiling

. Analytical techniques focusing on the environmental relationships of a competitive

force:

Ð Competitor analysis

Ð Stakeholder analysis

. Analytical techniques focusing on the future intent of a competitive force:

Ð Scenario analysis.

23


Key characteristics of competitive analysis methods and techniques

In the context of the competitive analysis process, the delivery of actionableintelligence on which decision-makers in the organisation can make informeddecisions stands out as the pinnacle of competitive learning. This actionableintelligence should be focused upon knowledge of what the future intent of acompetitive force is or may be. In addition, it should leap beyond which analyticaltechnique is being used, what the analytical content is or which analytical process isbeing followed.

Determining the future intent of a competitive force in the context of competitivelearning should thus form the all-encompassing, overall focus of competitive analysis.Certain characteristics are critical for understanding the real intention of acompetitive force with regard to the future. These characteristics on which futureintent are based are perceived to be far more important than the content and processof analysis, as argued by Fleisher & Bensoussan (2003: 23±24). From a literaturereview, key characteristics were identified as important for performing a competitiveanalysis with respect to determining the future intent of a competitive force. Thecompetitive analysis methods or techniques used by organisations must thereforeanalyse the dimensions of a competitive force (Brummer 2005: 266±272), as discussedin the following sections.

Dynamics in the competitive environment (D)

This characteristic relates to the fact that organisations continuously find themselvesin a dynamic, uncertain and generally global environment. In order to determine thefuture intent of a competitive force, it is essential to ascertain which externalinfluences have a major influence on it and, importantly, how dynamically,proactively and rigorously it reacts to these influences that impede its stability andcompetitive advantage.

Assets (A)

Most analytical techniques that are used in competitive analysis, as well as otheranalysis disciplines, focus heavily on a quantitative analysis of an organisation'stangible assets. Although a quantitative view of the tangible assets of a competitiveforce (such as its finances and operations) is important, Fahey (1999: 62) reflects thatcompetitive analysis is much more than quantitative evaluation. However, in order todetermine the future intent of a competitive force, it is essential to determine thetangible assets of the competitive force and how it applies such assets in the context ofthe dynamic competitive environment in which it exists. In this regard, the typicaland well-documented methods of financial or operational analysis that are generallyused could play a prominent part in determining some of the options available to acompetitive force.

24


Capabilities and competencies (C)

The creation and maintenance of an organisation's competitive advantage are basedheavily on the dynamics of the way in which the organisation's resources are acquiredand managed (Moingeon, Ramanantsoa, MeÂtais & Orton 1998: 297). Apart from theapplication of its tangible assets, Haanes & Fjeldstadt (2000: 52) contend that anorganisation's intangible assets are critical drivers of its competitive advantage.Consequently, during the competitive learning process in competitive analysis, it isimportant to ascertain the intangible assets of the competitive force and how it appliesthem in the context of its dynamic competitive environment.

Strategy (S)

Henderson (1989: 139±143) perceives strategy as a deliberate search for a plan ofaction that will determine an organisation's competitive advantage, and thus itsendeavours to achieve it. The objective of the organisation with respect to strategy isthus to enlarge the scope of its advantage, which can only happen at the expense ofanother organisation. However, the critical dimension of strategy is not so much itsquality but the organisation's ability to execute it (Kaplan & Norton 2001: 1). In thecontext of competitive learning and the determination of the future intent of acompetitive force, it is essential to ascertain what the strategy of such a competitiveforce entails and how it will execute its strategy with regard to the dynamics of thecompetitive environment.

Organisational infrastructure and culture (O)

According to Fahey (1999: 402, 418), organisational infrastructure and culture are two`hidden' elements that have a major influence on the future strategies of anorganisational force. In this regard, where an organisation's tangible and intangibleassets, strategies and relationships indicate what such a force can do, it is insufficientto determine what such a force may do. Consequently, knowledge about theorganisational infrastructure and culture of a competitive force offers some insightinto why it is pursuing its current and future strategies.

Mindset of management (M)

An organisation is an interwoven constellation of tangible and intangible assets,focused upon certain activities, in its quest to acquire a competitive advantage in thecompetitive environment. Implicit in this principle is the fact that an organisationdoes not function on its own, but its quest to create a sustainable competitiveadvantage is driven by human decisions. Nel (2002: 1) emphasises this fact evenfurther when he says that the `human factor' is the single most importantdeterminant of such survival and growth. Humans thus determine which assets to

25


apply or not to apply and, consequently, when to act or not to act. In terms of suchreasoning, knowledge about the human behaviour that drives a competitive force, andin particular that of its management cadre, as well as the group dynamics of such amanagement team, could have a prominent influence on determining how such acompetitive force will approach the possible opportunities, uncertainties and threatsof the future business environment. Knowledge of such human behaviour adds a newdimension to determining the future intent of a competitive force.

Environmental relationships (E)

An organisation's networks of inter-firm linkages significantly influence its strategicflexibility and performance (Madhavan 1996: 1) and, significantly, its competitiveadvantage. Such networks also have a major influence on the future intent of acompetitive force. During the competitive analysis process, it is therefore necessary todetermine the inter-firm linkages and long-term relationships between thecompetitive force and other independent organisations (for example, strategicalliances and joint ventures), as well as less formal, semi-enduring relationships withkey suppliers, service providers and customers.

Future intent (F)

According to Gilbert (2000: 12), modern organisations operate in an environment fullof structural flux. New technologies, evolving behavioural norms and competitiveforces interact to shift industry boundaries and create a `dynamic' new economy thattranscends traditional strategic thinking. Fahey (1999: 65) concurs with this statementwhen he argues that competitive analysis all too often concentrates on documentingand understanding the current and past strategies of a competitive force. However,comparatively little attention is given to what such a competitive force may do infuture or why it may do so, or to the possible future implications. Against thisbackdrop and in the context of competitive learning, the ultimate objective of thewhole competitive analysis process should thus be to determine the future intent of acompetitive force. Determining the latter should be the evolutionary pinnacle of anycompetitive analysis process, and hence an important characteristic of any competitiveanalysis technique. In this context, the capability to develop future scenarios shouldthus be an indispensable part of a competitive analysis technique and model.

Competitive analysis methods applied by global mining firms

A research study was conducted to obtain insight into the application of competitiveanalysis by global mining firms. The meaning of the concepts `competitive analysis'and `competitive analytical methods' was clearly communicated to the respondents ofthe questionnaire. The findings (mean scores) with respect to the competitive analysis

26


BCG growth share matrix

Competitor analysis

Marketing analyis

Financial analyis

Management profiling

Network analysis

Patent analysis

Porter's five forces analysis

Porter's diamond analysis

Scenario analysis

Stakeholder analysis

Strategic funds programming

Strategic group analysis

Sustainable growth rate analysis

SWOT analysis

Value chain analysis

1 2 3 4 5 6 7

Not used at all Used continuously

Functional capability & resource analysis

Balanced Scorecard

All firms

3.04

2.65

5.57

4.74

6.52

4.39

3.04

2.39

2.30

3.74

2.43

5.48

4.26

2.35

2.52

3.43

5.39

4.04

methods that are most applied by global mining firms are indicated in Figure 1.According to Figure 1, respondents perceive financial analysis (6.52) as the mostimportant competitive analysis method. This emphasises a strong quantifiable andfinancial approach to competitive analysis in global mining firms. Important second-tier competitive analysis methods used by global mining firms include competitoranalysis (5.57), scenario analysis (5.48) and SWOT analysis (5.39). Analyticalmethods that are not frequently applied by mining firms include patent analysis(2.30), strategic funds programming (2.35), network analysis (2.39), Porter's diamondanalysis (2.43), strategic group analysis (2.52), Boston Consulting Group growth/share matrix (BCG) (2.65), the Balanced Scorecard (3.04), management profiling(3.04) and sustainable growth rate analysis (3.43). Certain analytical methods,especially those with a more resource-based view that focus primarily on theintangible issues of a competitive force, are not popular (and are probably unknown)among global mining firms (namely, network analysis and management profiling).

Figure 1: Competitive analytical methods used by global mining firms (n = 23)

27


EVALUATION OF THE MOST IMPORTANT COMPETITIVEANALYSIS METHODS APPLIED BY GLOBAL MINING FIRMS

Financial analysis

A firm's financial statements contain a vast amount of information and figures thattell a lot about the firm. However, the usefulness of individual items of informationfrom the financial statements is quite limited. Examining the relationship betweenthese items (financial ratios) provides a more meaningful analysis (Holmes & Temte2002: 64). These financial ratios are commonly used to compare the financialperformance of one firm with that of another firm, its performance against theindustry as a whole, or the firm's financial figures of one period with previousperiods.

According to Fleisher & Bensoussan (2003: 400, 403), financial ratio andstatement analysis is an excellent tool for providing critical insight into a competingfirm's financial decision-making, its financial condition and operating performance,and to a certain extent, its future competitive prospects. Financial ratios aretraditionally grouped into various categories such as activity or efficiency ratios,financial leverage or long-term solvency ratios, liquidity ratios or short-term solvencyratios, profitability ratios and market value ratios. These ratios are used to obtaininsight into key performance areas of a firm such as cash flow, financial risk, assetutilisation, financial performance, growth potential and investment performance.

Strengths of the financial analysis

In the context of competitive analysis, the interpretation and assessment value offinancial ratios improves the broader competitive analysis process in a major way.Fleisher & Bensoussan (2003: 404) emphasise this fact when they argue: ``We cannotimagine a comprehensive competitive and strategic analysis being done in theabsence of any financial ratio and statement analysis.'' Apart from being extremelyversatile, financial ratio and statement analysis also makes it possible during theanalytical process to find patterns in masses of `disjointed' information.

Weaknesses of the financial analysis

From a competitive learning perspective, mere financial ratios are not enough tomove the analytical process beyond the first obvious level of knowledge. The vastnumber of accounting malpractices experienced in recent years emphasises this fact.Accordingly, trust in accounting practices has been battered by corporate greed andthe ethical lapses of accounting firms (Koller 2003: 137; Hohhof 2003: 5).

Apart from the fact that many companies around the world currently minimisethe level of detail in their financial statements (Koller 2003: 137), Palka (2003: 7)

28


concurs that no financial metric is perfect for providing insightful competitiveanalysis. The use of financial ratios and statement analysis thus has certainlimitations. In this context, financial ratios are based mainly on historical accrual-based accounting information. By contrast, competitive analysis should be heavilyfocused on the future. An additional weakness is the fact that the use of accountinginformation permits some choice of accounting principles. This means that there isalways a potential in financial analysis for earnings manipulation (Fleisher &Bensoussan 2003: 404).

It is difficult to determine the appropriate comparison value of a ratio, becauseaccounting practices may not be compatible, especially between different countries. Incertain instances, it is also questionable whether ratios are compatible, while thevarious ratios may not give consistent readings. Another problem is whether thefinancial information and ratios were developed using the same accounting methods(Fleisher & Bensoussan 2003: 406). In this context, a common language for financialdata exchange and comparison is of critical importance.

From an asset and competitiveness perspective, an additional critical weakness offinancial ratio and statement analysis is based on the fact that financial analysis doesnot include intangible assets and the competencies of a firm. Fleisher & Bensoussan(2003: 405) confirm that these assets form a critical part of the growth opportunitiesand well-being of such a firm.

DACSOMEF evaluation of the financial analysis

If financial analysis is evaluated as a tool for competitive analysis according to theDACSOMEF method, which indicates the key characteristics of competitive analysismethods, outlined earlier, the findings are as follows:

. Dynamic competitive environment (D)Financial ratio and statement analysis is based mainly on the financial informationof a particular firm for a specific period of time. The analysis is thus based heavilyon historical information and does not take the dynamic nature of the competitiveenvironment into consideration. However, it is common practice to developestimates of what the financial prospects of the firm being analysed are. Incompetitive analysis terms, there are reservations about the model's ability tocapture the dynamic competitive environment in which a competitive force findsitself.

. Assets (A)Financial ratio and statement analysis is focused primarily on an analysis of afirm's financial well-being. In this regard, the firm's assets and liabilities, as well asthe owners' equity, receive ample attention in the firm's balance sheet. Also, thefirm's income statement summarises the results of a firm's operations. It could beargued that financial ratio and statement analysis places considerable emphasis onthe firm's tangible assets, particularly the application thereof in the context of the

29


industry averages, or in comparison with another firm or with the same firmduring a different period. However, intangible assets, which are critical to thegrowth and well-being of a firm, do not receive any attention in normalaccounting practices.

. Capabilities and competencies (C)Capabilities and competencies, like intangible assets, do not receive any attentionin financial ratio and statement analysis. It is thus important to use additionalanalytical tools in order to support financial ratio and statement analysis todevelop true insight into the future intent of a competitive force.

. Strategy (S)Competitive analysis entails identifying the strategic forces commanding theevolution and future prospects of a particular competitive force. Although it isunimaginable that comprehensive competitive and strategic analysis be conductedin the absence of any financial ratio and statement analysis, the latter has seriousshortcomings with regard to establishing the strategic perspective of such acompetitive force.

. Organisational infrastructure (O)Organisational structure, culture and the other variables included in this elementare ignored in the analysis framework.

. Management mindset (M)Although finance could be viewed as the artery of a firm and an importantindicator of management thinking, management mindset encompasses morevariables than only financial decisions. It is thus felt that a more holistic view ofthe management of the competitive force under investigation is necessary.

. Environmental relationships (E)The model addresses the firm's external links in the context of its debtors andcreditors. However, this is a rather static view of external relationships because it islinked to a specific financial period. The model also makes no provision for anyadditional qualitative analysis. Other influential external groups such asshareholders, alliances and joint venture partners receive a certain amount ofattention in financial ratio and statement analysis. Again, this is limited toquantitative information.

. Future intent (F)Financial ratio and statement analysis focuses heavily on the financialcharacteristics, operating performance and decision-making of a particular firmfor a particular period. Comprehensive financial ratio analysis in this regard covershistorical comparisons of a firm's financial well-being. It also focuses on futuregrowth estimates. However, the method, as it is currently applied, takes a ratherstatic approach to all the future scenarios of a competitive force.

30


Conclusion

In general, financial ratio and statement analysis is a critical prerequisite fordetermining a particular firm's financial characteristics, operating performance andfinancial decision-making. It also has some future orientation in the sense that itcould be used to highlight a firm's financial growth estimates. However, since theframework focuses primarily on the financial perspective of a competitive force, it hasserious limitations with regard to the qualitative demeanour of such a competitiveforce. Consequently, the combined application of financial ratio and statementanalysis with other analytical techniques that focus on the quantitative abilities andfuture intent of a competitive force could lay a much firmer foundation in competitiveanalysis in the process of determining the future intent of such a competitive force.

Competitor analysis

Porter (1980) was the first management scientist to focus on the role of competitionand a structured approach to competitive analysis. Since Porter's pioneering work(1980), various authors have addressed the concept of competitor analysis. Theseinclude Porter (1980), Fuld (1995, 1998), Grant (1998), Tyson (1998), Fahey (1999)and Fleisher & Bensoussan (2003). Central to studying the approaches of the variousauthors to competitor analysis is the fact that competitor analysis has evolved in widthand breadth since the early days of Porter. Some of the most prominent categoriesdistinguished by the different authors in the context of competitor analysis aredepicted in Table 1.

According to the foregoing summary, most of the authors cover a number of theessential competitor analytical categories. The approaches to competitive analysis andthe investigative depth of the analysis differ considerably, however. Porter's initialapproach to competitor analysis represents more of a conceptual framework. Tyson'scompetitor profile checklist (1998: 1216) develops a strong quantitative view of acompetitor, while Grant (1998: 97) elaborates on the initial Porter model. Fuld (1998)addresses a number of analytical categories, but focuses heavily on answering theissue (the key intelligence topic) that leads to the intelligence enquiry. Fleisher &Bensoussan (2003: 147), like Tyson (1998), provide a comprehensive list of issues tobe analysed during competitor analysis. These include the following three main steps:

. Map the competitive terrain

. Analyse a specific competitor at a macro level

. Analyse a competitor at a micro level.

The latter includes an analysis of a competitor's marketplace strategy, assets,capabilities and competencies, technological development, organisational infrastruc-ture, culture, assumptions about the external environment, activity/value chain,alliances and special relationships, networks and future marketplace strategies.

31


Table 1: Analytical categories applicable to competitor analysis

No. Issues Porter Tyson Fuld Grant Fahey Fleisher &Bensoussan

1 Dynamic externalenvironment

X X

2 Assets X X X X X

3 Capabilities andcompetencies

X X X X X X

4 Strategy, goalsand objectives

X X X X X

5 Organisationalinfrastructure

X X

6 Initiatives (e.g.operations,marketing)

X X X X

7 Managerialmindset

X X X X X X

8 Environmentalrelationships

X X

9 Future scenarios X X X X X

10 Other X X

Sources: Porter (1980); Tyson (1997, 1998); Fuld (1998); Grant (1997); Tyson (1998); Fahey (1999); Fleisher &

Bensoussan (2003)

Strengths of competitor analysis

According to Pearce & Robinson (2003: 69), the essence of strategy formulation is tocope with competition. Superior knowledge of the underlying sources of competitivepressure instigated by competitors thus forms a vital cornerstone on which to build acompetitive advantage. Against this backdrop, competitor analysis, if properlyexecuted, can provide the basis for competitive learning that could reveal a rival'sstrategic weaknesses that the firm may exploit, or strengths it may wish to avoid. Inaddition, the proactive stance that competitor analysis allows the home firm ensuresthat the firm may be in a far better position to anticipate the strategic intention of arival firm. Moreover, competitor analysis could also assist in anticipating the responseof rivals to the firm's planned strategies, the strategies of other competing firms andchanges in the macro-environment. This proactive knowledge will moreover providestrategic agility to the firm that conducts the analysis. Similarly, a defensive strategycan be employed more deftly in order to counter the threat of rival firms exploitingthe firm's own weaknesses (Fleisher & Bensoussan 2003: 148).

32


Weaknesses of competitor analysis

A major point of criticism with regard to competitor analysis relates to the temptationof many firms to make it the all-encompassing cornerstone of their competitivestrategy, thus creating a false impression of the firm's agility against competitiveonslaughts. Competitive analysis should be a dynamic process and not be conductedonly once a year during the strategic planning session. If competitor analysis isconducted in an ad hoc manner, it may not be able to create true competitivelearning. Consequently, it may lead to a situation in which the home firm will only beable to copy the strategic thrusts of competitors and thus remain a follower. However,this weakness is strongly linked to a firm's commitment to apply competitor analysisand develop a true competitive learning capability with respect to its competitors andthe competitive environment at large.

DACSOMEF evaluation of competitor analysis

If competitor analysis is evaluated as a technique for competitive analysis according tothe DACSOMEF method, the findings are as follows:

. Dynamic competitive environment (D)Competitor analysis makes provision for mapping the competitive terrain in orderto identify current and potential competitors competing in the same industry, aswell as competitors producing substitute products. However, a more comprehen-sive scanning of the competitive environment of the competitor underinvestigation could add a more holistic dimension to competitor analysis.

. Assets (A)The assets of a competitor are comprehensively covered in competitor analysis.This includes its tangible and intangible assets. It also makes provision fordetermining such assets' availability, specificity, sustainability, replicability andsubstitutability. In addition, assets are analysed in the context of their influence onthe competitor's current and future competitive advantage. Competitor analysisalso makes provision for analysing the activity or value chain of the competitor.

. Capabilities and competencies (C)A competitor's capabilities and competencies, like its assets, are well covered incompetitor analysis. In this regard, the origin, and more importantly, the influenceof the competitor's capabilities and competencies receive specific attention.

. Strategy (S)Capturing the essence of a competitor's marketplace strategy is central to layingthe foundation for acquiring a competitive advantage over such a competitor. Inthis regard, competitor analysis makes ample provision for determining whichproduct-customer segments the competitor is in, or wants to be in, how it

33


competes, or wants to compete, in these marketplace segments, and what itspurpose is in being in these segments. Answers to these questions give real insightinto a competitor's strategic intent in the marketplace.

. Organisational infrastructure (O)The influence of a competitor's organisational infrastructure and culture on itsstrategic intent, and of significance, any changes that stem from that, are stronglymonitored and assessed in competitor analysis.

. Management mindset (M)During competitor analysis, provision is made for determining and assessing theassumptions that a competitor has about its competitive environment and aboutitself. In addition, the influence of changes in assumptions on the competitor'sfuture marketplace strategy are also investigated. However, focused managementprofiling could add a deeper dimension to competitor analysis.

. Environmental relationships (E)The competitor's activity/value chain, alliances and networks are thoroughlyinvestigated in competitor analysis. In addition, its influence on a competitor'sfuture strategic intent is also extensively analysed.

. Future intentBased on all the information collected and analysed about a competitor,competitor analysis makes provision for constructing possible competitorscenarios. In addition, the consequences of such scenarios on the competitor'sfuture marketplace strategies are analysed, while the possible implications for thefocal firm are also determined in competitor analysis.

Conclusion

As indicated in the foregoing evaluation, competitor analysis comprehensivelyaddresses the key elements in the DACSOMEF evaluation. It is thus obvious that if afirm has the necessary discipline to apply competitor analysis in a structured anddiligent manner, it could acquire valuable insight into the future or strategic intent ofa competitor. Fleisher & Bensoussan (2003: 160) agree with the notion that ifcompetitor analysis is correctly applied, it is one of the most pervasive analytical toolsin contributing to the achievement of competitive advantage. However, it is importantfor the competitor learning created through competitor analysis to be integrated intothe home firm's strategic decision-making and implementation processes. Inconclusion, this approach to competitor analysis should ideally form the primarybasis of the wider concept of competitive analysis.

Scenario analysis

According to Fahey & Randall (1998: 5), scenarios challenge the mindset of managersby developing plausible alternatives with regard to the future. From the literature, it is

34


evident that each author approaches scenario analysis in his or her own unique way.This is especially true because of the wide range of applications of scenario analysis.Fahey & Randall (1998: 67) concur with this fact when they say that there is no singleright way to design scenarios. In this regard, different organisational cultures,different facilitation styles, and above all, different industries may dictate the use ofone or another of the approaches for settling on the basic logics of a few scenarios.This also applies to the different steps in scenario analysis. Table 2 depicts the viewsof a number of authors on the different steps in scenario analysis.

From the foregoing comparison, it is apparent that the various authors havedifferent views on the different phases in scenario analysis. However, certain commonphases are evident, namely:

. Define the scope of the analysis (scenario field)

. Scenario field analysis

. Projection

. Develop learning scenarios (building draft scenarios)

. Scenario interpretation

. Scenario transfer towards a strategic decision.

In the application of scenario analysis in the competitive analysis context, anumber of strengths and weaknesses can be highlighted.

Strengths of scenario analysis

Various strengths can be attributed to scenario analysis. In this regard, a valuableaspect of scenario development is the sensitisation of management to the importanceof adapting to the possible impact of a specific scenario field (including the evolutionof the industry, market evolution, competitive force evolution and countrydevelopments). Scenario analysis is extremely flexible in that the relative degree ofquantification/qualification or formal/informal characteristics of the scenarioapproaches taken can be tailored to the individual firm's culture and capabilities.

Furthermore, scenario analysis often incorporates forecasting techniques for rawanalytical inputs but goes one step further. Through narrative stories, scenarioanalysis starts where traditional forecasting ends. By including informal qualitativeassessments of possible future environments, scenario analysis is able to embracemany more relevant variables that are beyond the quantitative purview of establishedforecasting techniques. Scenario analysis has the unique ability to reduce anoverwhelming amount of data and information into actionable intelligence. By itsvery nature, scenario analysis is structured to help in the process of understandingfuture competitive environments (Fleisher & Bensoussan 2003: 289±290). Apart fromthe fact that scenario analysis is a powerful and versatile planning tool (Sawka 2003:51), it also offers a framework in which to manage uncertainty to a level that allows

35


Table 2: Different views of the scenario analysis process

Scenario step Fleisher

&

Bensoussan

Fahey

&

Randall

(General)

Schwartz Gilbert Sawka Fink

&

Schlake

Tessun Ilbury

&

Sunter

Kippen-

berger

Kober &

Michaeli

Define scope X X X X X X X X X X

Scenario field analysis X X X X X X X X

Identify and challenge key

environmental forces

X X X X X X X

Identify uncertainties X X X

Construct and challenge

possible scenario themes

X X X X X X X

Check for consistency and

plausibility

X X X

Develop learning scenar-

ios

X X X X X X X X X X

Identify research needs X X

Scenario interpretation X X X X X

Develop quantitative mod-

els

X

Map strategies against

scenarios

X X X

Scenario transfer towards

a strategic decision

X X X X X X X X

Sources: Fleisher & Bensoussan (2003: 291±292); Gilbert (2000: 13±19); Sawka (2003); Tessun (1997: 31±33); Fink & Schlake (2000: 37±45); Fahey & Randall (1998: 83,

231); Fahey (1999: 65); Schwartz (1991: 241±246), Kippenberger (1999: 17±19); Kober (2003); Michaeli (2003)

36

An

evalu

atio

nof

the

most

imp

orta

nt

com

petitiv

eanaly

sis

meth

od

sap

plie

db

yglo

balm

inin

gfirm

s...

the selection of various strategic intents. Consequently, scenarios also embrace

qualitative perspectives and the potential for sharp discontinuities that econometric

and other stable-state quantitative methods exclude (Fleisher & Bensoussan 2003:

295). An additional critical issue is the fact that scenarios facilitate learning of low real

and opportunity costs (Gilbert 2000: 13), and compared with other analytical

techniques, increase the likelihood of intelligence actionability. Scenario analysis also

enables the firm to build a strong early-warning foundation with regard to the

uncertain and dynamic competitive environment, while it has the ability to develop

senior management support (Sawka 1997: 86).

Scenarios serve a number of strategy-related purposes, including the following

(Fahey 2003: 7±8, 12±13; Corporate Strategy Board 1999: 9):

. Fostering preparedness and improving strategic decision-making

. Compelling management to anticipate a range of potential futures and preparing

for them before they occur

. Developing knowledge about the future (and the present) and interpreting such

knowledge into decision-making

. Allowing the firm to develop a new understanding of the present.

Weaknesses of scenario analysis

Scenarios have been designed to clarify longer-term visions without regard for

shorter-term decisions. As a result, middle and senior managers often find that time-

consuming scenario analysis efforts are distractions that provide little insight into the

crucial strategic decisions at hand. Another danger of scenario analysis is the fact that

management may relegate strategy formulation solely to scenario analysis, while the

scenario group may employ the tendency to select the scenario that best fits the firm's

current strengths. In addition, group consensus may be difficult to reach. The

significant time investment that scenario analysis demands often prevents sufficient

decision-maker participation, undermining effective use and hindering a direct link

with decision-making. Practitioners should seek to demonstrate the strategic

relevance of scenario analysis to decision-makers in order to secure the minimum

necessary level of participation. Scenario analysis users frequently have misconcep-

tions about the time horizon of the tool as regards recouping its sizable initial

investment. They therefore tend to become disillusioned when tangible evidence of

the effect of scenario analysis on strategic decisions fails to materialise quickly. In

addition, the ongoing resource intensity that scenario analysis requires, coupled with

the intangibility of results, may erode organisational support over time (Corporate

Strategy Board 1999: 18±28).

37


DACSOMEF evaluation of scenario analysis

It is evident from the foregoing discussion that scenario analysis could be applied overa wide spectrum of possible topics. The methodology relies heavily on the underlyinganalysis preparation, as well as the time and funding available for a particular project.Consequently, it could be somewhat subjective to apply the DACSOMEF evaluationmethod to the analysis methodology. However, taking into consideration the optimalunderlying analysis support available, the following findings apply to scenarioanalysis from a competitive learning perspective:

. Dynamic competitive environment (D)Scenario analysis in the context of competitive analysis is focused primarily onanticipating the influence of the various forces and activities in the competitiveenvironment. However, the depth of understanding of the dynamics in thecompetitive environment depend largely on the specific scope of the particularscenario analysis project. From the identified steps, it is evident that considerableemphasis should be placed on the analysis of the competitive environment. In thisregard, Courtney (2003: 14) views scenario analysis as the perfect tool formanagers making strategic decisions in today's highly uncertain, turbulentbusiness environments. If well applied, scenario analysis could amply assist a firmto develop better decisions today about possible alternative outcomes tomorrow.

. Assets (A)Based on the specific topic being analysed, scenario analysis does not primarilyapply a qualitative or quantitative view of a competitive force's assets. However, itwould utilise such information accrued from other analytical methodologies tonarratively describe possible future outcomes for a competitive force, based uponits assets. Of importance is the fact that in the context of competitive learning,scenario analysis would have a future-oriented view of a competitive force's assets.

. Capabilities and competencies (C)As in the case of analysing the assets of a competitive force, the primary objectiveof scenario analysis is not to provide an in-depth analysis of the capabilities andcompetencies of such a force. However, it does use information accrued from otheranalytical methodologies and sources to determine the possible future influencethereof on the future intent of such a competitive force.

. Strategy (S)Scenario analysis focuses heavily on the influence of various possible futures on afirm's future strategy. Consequently, it could be argued that the analyticalmethodology makes provision for determining the possible future strategicalternatives available to a competitive force.

. Organisational infrastructure (O)Scenario analysis does not primarily make provision for an in-depth analysis of acompetitive force's organisational infrastructure and culture. However, it does use

38


information accrued from other analytical methodologies and sources to determine

the possible future influence thereof on the future intent of a competitive force.

. Management mindset (M)Scenario analysis does not primarily make provision for an in-depth analysis of the

management mindset of a competitive force. However, if properly applied, it does

use information obtained from other analytical methodologies and sources to

determine the possible future influence thereof on the future intent of acompetitive force.

. Environmental relationships (E)

Scenario analysis does not primarily make provision for an in-depth analysis of theenvironmental relationships of a competitive force. However, if properly applied, it

does use information collected from other analytical methodologies and sources to

determine the possible future influence thereof on the future intent of a

competitive force.. Future intent (F)

Scenario analysis is focused primarily on possible alternative outcomes of a specific

part of the future. In this regard, scenario analysis is one of the leading analyticalmethodologies in endeavouring to initiate competitive and scenario learning about

the future. However, the focus in scenario analysis is not primarily to develop an

accurate picture of tomorrow, but to initiate better decisions about the future today.

Consequently, one of the major advantages of scenario analysis, if correctlyapplied, is the liberation of people's insights (Schwartz 1991: 7±9). In addition, the

final, and indeed most critical, stage in scenario analysis from a competitive

learning perspective is the determination of implications for the home firm withrespect to decisions and actions. The various phases of the scenario analysis

process are intended to help identify such implications. The emphasis and focus

should therefore shift from understanding a competitive issue or competitive force

to determining what the home firm might do and why (Fahey 1999: 81).

Conclusion

Scenario analysis focuses heavily on the alternative future outcomes of a wide array of

possible topics. It is evident from the foregoing evaluation that scenario analysiscomprehensively addresses certain key elements in the DACSOMEF scale. However,

its effectiveness is heavily dependent on supporting information sources and analysis.

An important factor with respect to the analytical methodology is its futureorientation. In this regard, the analytical methodology is not focused primarily on

developing an accurate picture of tomorrow but on initiating better decisions today

(Fleisher & Bensoussan 2003: 295).

39


SWOT analysis

One of the most general approaches that is still frequently used to analyse a firm'sstrategic position is the SWOT (strengths, weaknesses, opportunities and threats)analytical framework. Since its development in 1971, the SWOT analytical frameworkhas been used in situation analyses by many organisations around the world. Manycurrent textbooks on strategy still place considerable emphasis on the SWOTanalytical framework (Hill & Westbrook 1997: 47), and it is also applied in the contextof competitive analysis.

With a SWOT analysis, certain basic steps have to be followed, namely (Fleisher& Bensoussan 2003: 94, 98±102; Van der Heijden 2002: 142±144):

. List and evaluate strengths, weaknesses, opportunities and threats of thecompetitive force

. Identify the strategic fit of the competitive force, given its internal capabilities andexternal environment

. Evaluate alternative strategies for the competitive force under investigation

. Decide on a possible strategy for the competitive force under investigation.

Strengths of the SWOT analysis

As indicated, the SWOT analytical framework is possibly the most widely known andutilised method of situation analysis conducted by firms around the world. It hasachieved universal status, while its wide applicability has ultimately been one of itsmajor advantages. Consequently, the analytical framework can be used for analysing awide variety of issues, and its simplistic nature makes it quite effective (Fleisher &Bensoussan 2003: 97).

Research conducted by Hill & Westbrook (1997: 50) indicates that a majoradvantage of the SWOT analytical framework lies in the fact that it creates anopportunity during the analytical process for a rapid familiarisation with the variousinternal and external issues impacting on the firm being analysed. SWOT thus servesas an effective means for a quick assessment of a competitive force's core capabilities,competencies and resources. It therefore provides insight into why a particularorganisation has been successful or unsuccessful in implementing a particularstrategy. The SWOT analytical framework has the ability to summarise the key issuesfrom a complex corporate appraisal (Hussey 1998: 232). A SWOT analysis canfurthermore be applied without major financial or computer resources and providesan excellent foundation from which additional competitive analysis can be launched(Fleisher & Bensoussan 2003: 97).

Weaknesses of the SWOT analysis

In recent times, certain serious weaknesses have been detected in SWOT analysis. Inthis regard, the framework's inherent simplicity hides certain serious complexities.

40


The interpretation of vast amounts of information is based primarily on individualpreferences (Fleisher & Bensoussan 2003: 98). The SWOT analytical framework thuslends itself to possible contradictions because of its simplicity. For example, underwhat circumstances is an issue a strength or a weakness for a firm, or an opportunityor a threat (Hill & Westbrook 1997: 51; Grant 1998: 12)? The rigour of the SWOTframework has thus come under severe criticism. Hill & Westbrook (1997: 51) arguethat there is no inherent requirement in SWOT analysis to overcome any weakness inits application. The framework is also perceived to be a rather descriptive analyticalmodel based on qualitative data, which is primarily a way of organising informationand assigning probabilities to potential events. Furthermore, in most instances, onlygeneralised, self-evident, common-sense recommendations are possible from theapplication of the SWOT analysis (Fleisher & Bensoussan 2003: 97). Hill &Westbrook (1997: 50) argue that the SWOT activity and its outputs do not constituteanalysis at all because they do not go beyond general descriptions. There is also aperception that through the application of the SWOT framework, reactive rather thanproactive strategies are primarily highlighted (Fleisher & Bensoussan 2003: 98). It isalso argued that the SWOT analytical framework was developed in an era of stablemarkets. Many contemporary strategic researchers therefore feel that the SWOTanalytical framework is largely unsuited to addressing the strategic realities of acontemporary firm (Hill & Westbrook 1997: 51).

DACSOMEF evaluation of SWOT analysis

In the context of competitive learning, on which competitive analysis should ideallybe based, the following findings apply to the SWOT analytical framework:

. Dynamic competitive environment (D)The SWOT analytical framework is based primarily on a strategic fit between afirm's resources and its external environment. The framework places much,although one-dimensional, emphasis on the opportunities and threats in theexternal environment of the competitive force being investigated. Consequently,only certain elements in a competitive force's external environment are addressed.In this regard, SWOT is criticised for being simplistic and somewhat descriptive.Hill & Westbrook (1997: 51) also argue that the dynamic external environment, inwhich every firm in these modern times has to compete, does not lend itself to theinherent rationale of the SWOT approach. They are thus of the opinion that insuch a situation, the SWOT analytical framework is outmoded and can no longerbe an effective analytical tool.

. Assets (A)By focusing on the firm's strengths and weaknesses, the SWOT analyticalframework gives a holistic and descriptive view of some of the tangible andintangible assets of a firm. A comprehensive analysis of all the firm's assets does

41


not form part of a SWOT analysis. It is implicit in this principle that the SWOTanalytical framework gives a somewhat simplistic description of the firm's assets.Moreover, such a description could be based on personal preferences that couldtrigger possible subjective and contradictory views of the real strengths andweaknesses of a competitive force.

. Capabilities and competencies (C)As in the case of assets, the SWOT analytical framework gives a holistic view of thecapabilities and competencies that are perceived to be strengths and weaknesses. Acomprehensive analysis of all the capabilities and competencies of a competitiveforce does not form an integral part of a SWOT analysis. In addition, the lattercould give a rather simplistic and subjective description of the capabilities andcompetencies of a competitive force. Such a situation could trigger shallow orcontradictory views of the real strengths and weaknesses of a competitive force.

. Strategy (S)Based on a simplistic and qualitative description of the strengths and weaknessesof a competitive force and the opportunities and threats that the externalenvironment has to offer, the SWOT analytical framework constitutes certain basicalternative strategies that a competitive force may decide to follow. The majoradvantage of a SWOT analysis with regard to the strategic possibilities available toa competitive force is that it is possible to quickly determine what the strategicintent of a competitive force may be. Such strategies could be subjective, however,as they could be based on historic events in the external environment. Courtney(2001: 115) argues that SWOT merely provides a snapshot of strategicopportunities and threats. The SWOT analysis thus fails to provide a dynamicand in-depth view of the strategic realities required in the current tumultuoustimes.

. Organisational infrastructure (O)By focusing on a competitive firm's strengths and weaknesses, the SWOTanalytical framework may highlight the organisational structure or culture of sucha competitive force as being a particular strength or weakness. However, theframework does not involve a comprehensive analysis of all the factors, and acursory view of this nature lacks the in-depth focus needed to determine the realinfluence of these issues on the future intent of a competitive force.

. Management mindset (M)As in the case of the organisational infrastructure of the competitive force, theSWOT analytical framework may highlight the management approach, or partsthereof, of such a competitive force as being a strength or weakness. However,such a view may again be subjective, and certainly lacks the objectivity and in-depth focus needed to determine the real influence of such issues on the futureintent of a competitive force.

42


. Environmental relationships (E)The same scenario that applies to the management mindset of a competitive forceapplies to its environmental relationships. The SWOT analytical framework maythus highlight certain areas of the environmental relationships of a competitiveforce as being particular strengths or weaknesses. However, this view may besubjective and certainly lacks the objectivity and in-depth focus needed to fullydetermine the influence of these issues on the future intent of a competitive force.In addition, SWOT pays no attention to a formal network analysis or to its impacton the future intent of a competitive force.

. Future intentThrough the application of the SWOT analytical framework, certain basicstrategies that a competitive force may consider are identified. Based on theopportunities and threats in the external environment, these strategies mayhighlight possible future scenarios that a competitive force may consider. Asalready indicated and as emphasised by Courtney (2001: 115), SWOT providesonly a snapshot of strategic opportunities and threats and lacks the ability to fullycapture the dynamic future scenarios of the current tumultuous times. As such, theSWOT analytical framework generates precious little foresight into strategies thatwill succeed in the current and future uncertain realities.

Conclusion

Although the SWOT analytical framework has specific applications and benefits incompetitive analysis, it is evident from the foregoing evaluation that it does notcapture the full magnitude of competitive learning necessary to develop a true andcomprehensive understanding of the future intent of a competitive force.Consequently, it is important that SWOT should be applied within its limitationsand with the correct focus, for example, during the early stage of the competitiveanalysis of a competitive force. Alternatively, it should be strongly supported by morecomprehensive competitive analytical techniques.

CONCLUSION

In the empirical study, global mining firms indicated that they mostly apply financialanalysis, competitor analysis, scenario analysis and SWOT analysis as competitiveanalysis techniques. In this article, these four methods were evaluated in terms oftheir strengths and weaknesses as competitive analysis methods against keycharacteristics identified in the literature.

Financial analysis has serious limitations with regard to the qualitativedemeanour of a competitive force. Consequently, the combined application offinancial ratio and statement analysis with other analytical techniques that focus

43


upon the quantitative abilities and future intent of a competitive force could lay amuch firmer foundation for competitive analysis in the process of determining thefuture intent of a competitive force.

Competitor analysis, if it is correctly applied, it is one of the most pervasiveanalytical tools in contributing to achieving competitive advantage. However, it isimportant that competitor analysis is integrated into the firm's strategic decision-making and implementation processes. Competitor analysis should primarily formthe very basis of the wider concept of competitive analysis.

As a competitive analysis tool, scenario analysis comprehensively addresses certainkey elements. However, its effectiveness the heavily dependent on supportinginformation sources and analysis. One of its strengths is its future orientation.However, it is not focused primarily on an accurate picture of tomorrow but oninitiating better decisions today.

Although the SWOT analytical framework has specific applications and benefitsin competitive analysis, it is evident that it does not capture the full magnitude ofcompetitive learning necessary to develop a true and comprehensive understanding ofthe future intent of a competitive force. Consequently, it is important that SWOT beapplied within its limitations and with the correct focus, for example, during the earlystage of the competitive analysis of a competitive force. It should be heavily supportedby more comprehensive competitive analytical techniques.

It is not clear whether the respondents applied these methods or techniques totheir fullest potential, or only partly. However, it can be concluded that global miningfirms to some extent, if correctly applied, apply useful competitive analysis methodsor techniques. The most appropriate technique in terms of competitive analysis iscompetitor analysis. It is therefore important that global mining firms that do not yetapply this technique consider its usefulness for survival and growth in an increasinglycompetitive environment.

REFERENCES

Bloomberg (Online). 2004. Investment tools, company profile. [Online] Available at: http://bloomberg.com. Accessed: 24 March 2004.

Brummer, H.L. 2005. A dynamic competitive analysis model for global mining firms.Unpublished doctoral thesis, University of South Africa, Pretoria.

Corporate Strategy Board. 1999. Scenario Planning: Forging a Direct Link with StrategicDecision-making. August. Washington DC: Corporate Strategy Board.

Courtney, H.G. 2001. 20/20 Foresight: Creating Strategy in an Uncertain World. Boston:Harvard Business School Press.

Courtney, H.G. 2003. `Decision-driven scenarios for assessing four levels of uncertainty',Strategy and Leadership, 31(1).

Crowson, P. 2003. Astride Mining: Issues and Policies for the Minerals Industry. London: MiningJournal Books.

44


Department of Minerals and Energy. 2002/2003. South Africa's Mineral Industry: 2002/2003.Pretoria: DME.

Department of Minerals and Energy. 2003/2004. South Africa's Mineral Industry: 2002/2003.Pretoria: DME.

Econometrix Ecobulletin. 2004. Another trade surplus in excess of R2 billion is achieved inMarch, 30 April. Johannesburg: Econometrix.

Fahey, L. 1999. Outwitting, Outmanuevering and Outperforming Competitors. New York: Wiley.Fahey, L. 2000. `Competitive intelligence: get real!', Paper presented at SCIP 2000

Conference, 20 March, Atlanta, Georgia.Fahey, L. 2003. `Competitor scenarios', Strategy and Leadership, 31(1).Fahey, L. & Randall, R.M. 1998. Learning from the Future: Competitive Foresight Scenarios.

New York: Wiley.Fink, A. & Schlake, O. 2000. `Scenario management: an approach to strategic foresight',

Competitive Intelligence Review, 11(1): 37±40.Fleisher, C.S. & Bensoussan, B.E. 2003. Strategic and Competitive Analysis: Methods and

Technique for Analysing Business Competition. New Jersey: Prentice Hall.Fuld, LM. 1995. The New Competitor Intelligence: the Complete Resource for Finding,

Analysing, and Using Information about your Competitors. New York: Wiley.Fuld, LM. 1998. The Fuld War Room: the Ultimate in Competitive Intelligence Training.

Boston, MA: Fuld & Company.Ghemawat, P. 1991. Commitment: the Dynamic of Strategy. New York: Free Press.Ghemawat, P. 2001. Strategy and the Business Landscape: Core Concepts. Upper Saddle River,

NJ: Prentice-Hall.Gilad, B. 1998. `What is intelligence analysis? Part 2', Competitive Intelligence Magazine, 1(3),

OctoberDecember.Gilbert, A.L. 2000. Ùsing multiple scenario analysis to map the competitive futurescape: a

practice-based perspective', Competitive Intelligence Review, 11(2).Grant, R.M. 1998. Contemporary Strategy Analysis: Concepts, Techniques, Applications. Oxford:

Basil Blackwell.Haanes, K. & Fjeldstad, O. 2000. `Linking intangible resources and competition', European

Management Journal, 18(1).Henderson, B.D. 1989. `The origin of strategy', Harvard Business Review, November±

December.Hill, T. & Westbrook, R. 1997. `SWOT analysis: it's time for a product recall', Long Range

Planning, 30, February.Hitt, M.A., Keats, B.W. & De Marie, S.M. 1998. Navigating in the New Competitive Landscape:

Building Strategic Flexibility and Competitive Advantage in the 21st Century. Mississippi:Academy of Management Executive, Mississippi State University.

Hohhof, B. 2003. `The unbearable lightness of numbers', Competitive Intelligence Magazine,6(3), MayJune.

Holmes, A. & Temte, A. 2002. Study Notes for the 2002 CFA Exam. Schweser Study Program,New York: A Kaplan Professional Company.

Hussey, D. 1998. The Strategic Decision Challenge. New York: Wiley.

45


Institute for Futures Research. 2000. Business Futures, 2000. Stellenbosch: University ofStellenbosch.

Kahaner, L. 1996. Competitive Intelligence: from Black Ops to Boardrooms ± How BusinessesGather, Analyze, and Use Information in the Global Market Place. New York: Simons &Schuster.

Kaplan, R.S. & Norton, D.P. 2001. The Strategy-focused Organization: How Balanced ScorecardCompanies Thrive in the New Business Environment. Boston, MA: Harvard BusinessSchool Press.

Klinger, G.D. 2002. `New global realities for mining and exploration companies in today'sworld', Paper presented at PDAC 2002 conference, Toronto, 11 March.

Kippenberger, T. 1999. `Talking about scenarios', The Antidote, 22: 6±13. [Online] Availableat: www.theantidote.co.uk. Accessed: 23 October 2003.

Kober, A. 2003. `Scenario analysis and how to integrate software and design early warningsystems', Paper presented at 8th Annual European Conference of the Society ofCompetitive Intelligence Professionals. London, October.

Koller, T. 2003. `Numbers investors can trust', McKinsey Quarterly, 3.Madhavan, R. 1996. Strategic flexibility in the global steel industry: the role of interfirm

linkages. PhD thesis abstract, University of Pittsburgh, Pittsburgh.Michaeli, R. 2003. Èvidence based reasoning', Paper presented at 8th Annual European

Conference of the Society of Competitive Intelligence Professionals. London, October.Moingeon, B., Ramanantsoa, B., MeÂtais, E. & Orton, J.D. 1998. Another look at strategy-

structure relationships: the resource-based view', European Management Journal, 16(3),June.

National Research Council. 1990. Competitiveness of the US minerals and metals industry.Committee on Competitiveness of the Minerals and Metals Industry. Washington, DC:National Research Council, National Academy Press.

Nel, G.H. 2002. Competitor behavioural analysis to outwit, outmanoeuvre and outperformcompetitors. Paper presented at the University of Pretoria, Pretoria, 15 August.

Oster, S.M. 1999. Modern Competitive Analysis, 3rd edition. New York: Oxford UniversityPress.

Palka, M. 2003. `Prophets from profits: the evolution of financial competitive analysis',Competitive Intelligence Magazine, 6(3), May±June.

Pearce, J.A. & Robinson, R.B. 2003. Strategic Management: Formulation, Implementation andControl, 8th edition. New York: McGraw-Hill Irwin.

Porter, M.E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors.New York: Free Press, MacMillan.

Royal Bank of Canada. 2004. List of global mining and smelting firms. Toronto: Royal Bankof Canada.

Sawka, K. 1997. Alternative outcome analysis', Competitive Intelligence Review, 8(2).Sawka, K. 2003. `The four analytical techniques every analyst must know: a new look at

scenario analysis', Competitive Intelligence Magazine, 6(4).Schwartz, P. 1991. The Art of the Long View: Planning for the Future in an Uncertain World.

New Yor: Bantam Doubleday Dell.Skirrow, R. 2000. Anglo American, plc. London: Merrill Lynch & Co.

46


Skirrow, R., Binns, V., Albi, C. & Souza, T. 2001. Big Five Global Miners. London: MerrillLynch & Co.

Tessun, F. 1997. `Scenario analysis at Daimler-Benz Aerospace', Competitive IntelligenceReview, 8(4): 30±40.

Tyson, K.W.M. 1997. Competition in the 21st Century. St. Lucie Press.Tyson, K.W.M. 1998. The Complete Guide to Competitive Intelligence. Chicago: Kirk Tyson

International.Van Aardt, C. 2004. Personal communication.Van der Heijden, K. 2002. Scenarios: the Art of Strategic Conversation. New York: Wiley.Welman, J.C. & Kruger, S.J. 2001. Research Methodology for the Business and Administrative

Sciences, 2nd edition. Cape Town: Oxford University Press.

47


The potential impact of formal retail chains'expansion strategies on retail townshipdevelopment in South Africa


A B S T R A C T

The South African retail trade environment in townships and rural areas

has long been dominated by small, mainly informal, business traders

offering basic products to a low-income consumer market. However,

following political changes in South Africa, many African consumers

have progressed into a middle-income group, which has sparked a trend

among many African people to trade township life for urban living. This

shift in economic and demographic boundaries has, among other

factors, benefited formal retail trade performances in urban areas where

most upper- and middle-income consumer groups reside. However,

many developments at the top end of the retail market and the fact that

many traditional retailing areas are becoming saturated have caused

formal retailers to focus on market expansion strategies in emerging

markets. A significant portion of the African middle-income class still

resides in townships, presenting a huge untapped consumer market

with its own unique dynamics for formal retailers. In fact, many national

retailers have realised the potential that exists to broaden their market

within less affluent areas. This retail transformation in townships poses

many challenges, opportunities and threats, but if managed well, it

could improve choices for consumers with respect to the types of

retailers available, result in cheaper prices for local consumers and lead

to a revitalisation of the ailing economies of townships.

Keywords: retail strategies, retail township development, township supermarket growth,

township lifestyle dynamics, action implementation SWOT analysis, retail chain

expansion, African middle-income market, township consumer dynamics

INTRODUCTION

South African townships are emerging as the new market for national retailers,especially supermarket chains. The increasing movement of formal retailers into

48 Southern African Business Review Volume 10 Number 3

Prof. Tustin is a Chief Researcher heading the Behavioural and Communication Research Division at the Bureau of

Market Research, University of South Africa. Prof. Strydom is in the Department of Business Management, University of

South Africa. E-mail: [email protected]

previously untapped middle- and low-income markets has resulted in an increase inshopping centre development in townships. These developments also reflect retailers'current approach, namely building a sustainable competitive advantage and creatinggrowth opportunities that they may pursue over the medium to short term.

At the forefront of retail infrastructure development and investment in townshipareas is Futuregrowth. Up until 2005, this community property fund invested R350million in township and rural area shopping centres. Further investments wereplanned for 2006, which would increase total investments to R550 million (SundayTimes 2004). Other developers involved in retail development include Zenprop,Maponya Developments, JDA, Greenwold Property Development, GrendettonInvestments, the Development Bank of Southern Africa (DBSA), the Departmentof Trade and Industry, the City of Joburg Property Company, Old Mutual/Pareto,McCreedy Friedtande, Massprop and SA Retail (Finance Week 2005; EngineeringNews 2005). This trend confirms that retail development in townships has gatheredmomentum and is expected to continue doing so at least up to 2010. A major factorcontributing to the latter is the growing intensity of retail competition, especially inurban areas, as well as notable economic buying power in peri-urban township areas.Consequently, large retail chains are currently following an expanded market growthstrategy whereby existing retail formats are used in a new emerging market segment.These retail growth strategies are set to impact on future township community life,particularly the sustainability of the retail trading environment. Consequently, thisarticle investigates the current nature and impact of retail strategies and developmentsin previously marginalised or underdeveloped areas of South Africa.

AIMS

This article explores sustainable growth strategies of large South African retail tradechains targeted at emerging township consumers. To meet this endeavour, the articleinvestigates the nature and impact of current and potential opportunities emanatingfrom the renewed township retail growth strategy pursued among large retailsupermarket chains in South Africa. To this end, the article explores the expandingtrend of formal retail chains into townships/semi-rural areas, the nature ofsupermarket growth in townships, as well as township lifestyle dynamics. Finally,an action implementation SWOT analysis of retail township developments isconducted. This analysis focuses on the opportunities/challenges and threats/weaknesses of township retail development for government, business entrepreneursand township communities. The SWOT analysis builds on traditional models byadding a practical dimension to qualify the opportunities/challenges/threats/weaknesses of retail township development in South Africa.

49


RESEARCH METHODOLOGY

The data and trends discussed in this article are based largely on secondary dataanalysis. However, the importance of the analysis should not be regarded as inferiorto a quantitative primary study, but should rather be viewed against the backgroundthat future retail trade development and strategies will largely be confined totownship environments where the link between the first, second and third economieswould be instrumental in stimulating future economic growth and upliftingunderdeveloped and marginalised communities. Ultimately, the analysis sets thescene for a market phenomenon that is anticipated to become instrumental insustainable retail trade development and growth in South Africa in future.

The point of departure of the analysis is renewed sustainable retail growthstrategies implemented by large retail chains and targeted largely at townships areas.Market expansion strategies follow from intense retail competition, especially in cityareas and major income structural changes evident among the South Africanpopulation. Against this background, the article examines the expanding nature offormal retail trade chains in South African townships and semi-rural areas. Ananalysis of retail growth and development in township areas also requires a broaderunderstanding of township dynamics. This article provides an overview of suchdynamics. Obviously, future retail growth and development strategies would impacton the broader business and community environment of townships. Even from agovernment perspective, expanded retail growth and development strategies couldimpact on, for example, job creation, skills development and social responsibility.Consequently, the article investigates the current and potential impact of the renewedsustainable retail growth and development strategies in townships by means of amodified SWOT analysis. The expansion of supermarkets in townships is particularlyimportant for economic development and for the rural poor. These developments areoccurring in one of the most dynamic segments of the food retail market, whichdirectly connects the rural poor to markets that could enable them to buy goods morecheaply and in larger quantities (thereby achieving bulk savings) and provide themwith a large variety of options from which to choose. Although these developmentsoffer potential opportunities to suppliers to broaden their markets and increase theirincome, they pose a threat to existing small business establishments, which might beexcluded from the retail transformation process.

The SWOT analysis presented in the article does not follow the traditional routeof a SWOT analysis. In fact, the traditional SWOT analysis approach is broadened toinclude the following elements:

. How to capitalise on the strengths offered by retail township development

. How to address weaknesses embedded in retail township development

. How to maximise opportunities emanating from retail township development

. How to minimise threats posed by retail township development.

50

The potential impact of formal retail chains' expansion strategies on retail township development ...

!!

!!

STRENGTHS

. Identify strengths of retail township developments

How can government, business, thetownship community, etc. capitalise onthe strenghts offered by retail townshipdevelopment?

WEAKNESSES

. Identify weaknesses of retail township develop-ments

How can government, business, thetownship community, etc. address theweaknesses embedded in retail townshipdevelopment?

OPPORTUNITIES

. Identify opportunities emanating from retail town-ship developments

How can government, business, thetownship community, etc. maximiseopportunities emanatiang from retailtownship development?

THREATS

. Identify threats posed by retail township develop-ments

How can government, business, thetownship community, etc. minimisethreats posed by retail townshipdevelopment?

Figure 1: Action implementation SWOT analysis model

This àction plan' approach to the traditional SWOT analysis is segmented inFigure 1. Traditionally, a SWOT analysis aims only to identify strengths, weaknesses,opportunities and threats. The action implementation SWOT analysis approach addsa practical dimension from a government, business and community perspective. Priorto conducting the action implementation SWOT analysis of retail townshipdevelopment, the article first explores the nature of retail township developmentsand township dynamics. These discussions establish the background for the actionimplementation SWOT analysis.

RETAIL GROWTH STRATEGIES

A retail strategy provides the direction that retailers need to take to deal effectivelywith their environment, consumers and competitors (Levy & Weitz 2001). Given thefact that a substantial portion of South African personal and disposable income hasshifted gradually to African consumers (Van Wyk 2004), large formal retail chainshave been quick to react and redirect their retail growth strategies towards this newexpanded market. However, warnings by Levy & Weitz (2001) that market expansionstrategies will not be as effective as, for example, market penetration strategies arelargely negated when the past nature of the shopping experience and exposure toretail mall shopping in township areas is taken into account. In the past, townshipresidents had access mainly to informal retail shops with a fairly restricted product

51


RET

AIL

Exis

tin

gN

ew

range. With the development of more formal large retail chains in township areas,many township residents are about to experience convenience retail shopping close tohome for the first time. Given the improved income levels, especially among middle-income township residents, and in anticipation of an initial increase in experientialconvenience shopping followed by more regular, frequent, actual purchases close tohome, the township retail expansion growth strategies followed by retailers willwithout doubt become the major growth frontier for retail development andeconomic growth in South Africa. Against this background, various growth strategiesthat retailers could pursue are shown in Figure 2.

Existing New

Retail format development Diversification

Unrelated

Related

Market penetration Market expansion

TARGET MARKET SEGMENT

Source: Levy & Weitz (2001)

Figure 2: Retail growth strategies in formal townships

The four types of retail growth opportunities pursued by retailers, as reflected inFigure 2, include (Levy & Weitz 2001):

. A market penetration growth strategyThis involves direct investments towards existing clients using the present retailingformat and potential clients. With this strategy, retailers aim to attract newcustomers that have not previously shopped at the retailers' outlet, or to induceexisting customers to visit stores more often, or to buy more merchandise duringeach visit. Typical approaches used by retailers include, among others, attractingnew customers by opening more stores in a target market, keeping existing storesopen for longer hours and displays of merchandise to increase impulse buying.

. A market expansion growth strategyA market expansion strategy employs the existing retail format in new marketsegments. This opportunity involves entering a new geographical market segmentwith the same retail format.

52


. A retail format development growth strategyA retail format development opportunity involves offering customers a new retailformat.

. A diversification growth strategyA diversification opportunity involves a new retail format directed towards amarket segment that is not currently served. In a related diversificationopportunity, the present target market and/or retail format share something incommon with the new opportunity. This commonality might be purchasing fromthe same vendors, using the same distribution and/or management informationsystem, or advertising in the same newspapers to similar target markets. Incontrast, an unrelated diversification opportunity lacks any commonality betweenthe present business and the new business. A formal retail chain targeting adifferent market using the same retail format is a typical example of an unrelateddiversification opportunity.

Against the background of the highlighted retail growth strategies, it is clear thatlarge retail chains in South Africa are following market expansion strategies intownship areas. As mentioned, the expansive retail growth strategy follows largelyfrom market saturation and shifts in consumer income patterns that ultimatelyencourage retail chains to devote more attention to long-term strategic thinking byfocusing on new, non-traditional township markets. Of particular importance infollowing an expansive retail growth strategy is location. Location is fundamental tobuilding a sustainable competitive advantage (Levy & Weitz 2001). Furthermore,convenience of locations is particularly important over the long term for minimisingcompetitive pressure and securing higher profits. Ultimately, location provides animportant opportunity for retailers to develop sustainable competitive advantage.Currently, the peripheral areas of townships have been identified as the most suitablelocations for the development of township shopping malls, as these areas already havethe necessary infrastructural support (such as transport). In the sections that follow,the expansion of retail township growth and developments is explored in more detail.

EXPANSION OF FORMAL RETAIL CHAINS INTO SOUTH AFRICANTOWNSHIPS

For the purposes of this article, the discussion of the South African retail tradeindustry is confined largely to the food retail industry. The rationale for this is thatmost large shopping developments in townships are anchored by national groceryretail chains that offer perishable and fresh produce and convenience food items,mainly to high- and middle-income consumers. Through franchise operations, manyfood retail chains also offer fruit and vegetables, meat, confectionery, fast foods andliquor. These products are similar to some procured by small, mainly informal, retail

53


shops in townships. The advent of supermarkets in townships will thereforeundoubtedly lead to increased competition in the food retail market. Whether small,often survivalist, retail establishments will survive the onslaught from formal retailremains to be seen. Concern for small establishments in townships stems from thefact that they will now have to compete with national retail chains such as Pick 'n Pay,Shoprite Checkers and SPAR, which have large turnovers. These retail chains havealready asserted their dominance in the formal grocery and food product market. Atthe end of August 2005, Pick 'n Pay, Shoprite Checkers and SPAR commanded sharesof 38%, 37% and 19% of the grocery and food product market in South Africa(Sunday Times 2005). The dominance of these retail chains in the South Africangrocery and food product market is also evident from the number of shops owned bythese entities. Table 1 reflects the number of shops operated by these three major retailchains.

Pick 'n Pay serves emerging markets, especially via its Family FranchiseSupermarkets, Score Supermarkets and Boxer Superstores. Shoprite Holdings Ltd,through its OK franchise division, also serves emerging markets through its Sentraand Value stores, as well as its 8 'Till Late outlets. In particular, the franchise systemallows for rapid expansion and adds the marketing advantage of local familiesundertaking the entrepreneurship of expansion.

The competitive nature of the food retail industry is further notable from theexpansion of major supermarket chains into Africa (FMCG Direct 2005a, 2005c). Forexample, Shoprite has supermarkets in Namibia, Lesotho, Swaziland, Zimbabwe,Botswana, Zambia and Mozambique. SPAR has units in Namibia, Botswana,Mauritius and Zimbabwe. Pick 'n Pay is profiled as one of Africa's largest and mostsuccessful food retailers. Apart from accelerating mostly into urban areas of Africa,small supermarkets have also started to operate in poor township areas of SouthAfrica. Pick 'n Pay, SPAR and Checkers are at the forefront of such expansions/investments.

Some townships or underdeveloped areas where retail investment has occurred oris planned include (Sunday Times 2005; 2005a, 2005b; Futuregrowth Asset Management2005; Sunday Business Report 2004; Business Report 2005; Financial Mail 2005b;Finance Week 2005):

. Mkhuhlu, Polokwane (Limpopo)

. Khayelitsha, Mitchells Plain (Western Cape)

. Tembisa, Lenasia, Dobsonville, Protea Gardens, Jabulani, Protea North,Diepkloof, Orlando, Baragwanath, Orange Farm, Atteridgeville, Soweto (Gau-teng)

. Motherwell area, Mdatsane (Eastern Cape)

. Mafikeng (North West)

. Kanyamazane (Mpumalanga)

. Umlazi (KwaZulu-Natal).

54


Table 1: Number of shops owned by retail chains (2004/2005)

A. Shoprite Holdings Limited

. Shoprite Checkers supermarket group

Ð Shoprite supermarkets 327

Ð Checkers supermarkets 95

Ð Checkers Hypers 23

Ð Usave stores 84

Ð Distribution centres 15

Ð OK Furniture outlets 154

Ð House & Home stores 22

Ð Fast food outlets 57

. OK Franchise division

Ð OK MiniMark convenience stores 35

Ð OK Foods supermarkets 24

± OK Grocer stores 45

± 8 `Till Late outlets 1

Ð Megasave wholesale stores 56

Ð Sentra/Value stores 8

B. SPAR South Africa

Ð Distribution centres 6

Ð SUPERSPAR stores 113

Ð SPAR stores 464

Ð KWIKSPAR stores 185

C. Pick 'n Pay

Ð Hypermarkets 14

Ð Family Stores 20

Ð Mini Markets 37

Ð Supermarkets 125

Sources: Shoprite Holdings Ltd (2004, 2005); Enslin (2004); SPAR Group Ltd (2004); Profile Data (2005); FMCG Direct

(2005b)

The progression of retail developments from major cities to rural towns, and fromhigh-income to middle-income and finally to poorer-income segments, is similar tothat observed in Argentina and Costa Rica during the mid to late 1990s.

55


1960 1970 1980 1990 2000

Personal income Personal disposableincome

WhitesAsians

100

80

60

40

20

0

Africans Coloureds

2007 200720001990198019701960

70.4 69.2

60.7 56.247.3 43.9

8.37.9

7.4

7.4

6.25.4

7.87.4

7.0

7.1

28.933.0

40.7 43.6

23.2 23.4

2.0 2.5 3.3 3.8 4.7 4.8

30.435.7

43.5 46.8

22.422.5

2.0 2.4 3.3 3.7 4.6 4.8

6.25.2

69.467.9

59.053.1

43.940.4

The attractiveness of township retail development is multi-dimensional. Themain determinants of supermarket growth in township areas are the following:

. New investment in township retail development flows from the presidentialrenewal programme encouraging institutional investors to participate in thedevelopment of infrastructure in rural and underserviced areas.

. There is a shift in business interest towards the African consumer market. Thisshift originates largely from the increase in the spending power of Africanconsumers over the past decade.

The retail sector has been the biggest beneficiary of the emerging black

middle-income class ... (Nazmeera Moola, Merril Lynch economist, in De Vynck

2005)

Figure 3 reflects the growing personal disposable income among Africanconsumers (Van Wyk 2004).

Figure 3: Share of the respective population groups in personal and personal disposable

income in South Africa (1960±2007)

A more precise reflection of the emergence of the African middle-income group ispresented in Table 2.

56


Table 2: Growth indices of the personal income of households by population group andeight income groups (1998±2004) (1998=100)

Annual income group 1998 1999 2000 2001 2002 2003 2004 Average

growth index

(1998±2004)

Total population Total 100 103 108 112 115 117 121 111

R00 001 ± R4 799 100 96 87 73 62 48 48 73

R04 800 ± R95 999 100 97 95 93 87 78 78 90

R09 600 ± R19 199 100 95 86 83 82 78 89 88

R19 200 ± R35 999 100 95 91 95 100 103 108 99

R36 000 ± R71 999 100 101 105 105 110 111 110 106

R72 000 ± R143 999 100 105 107 109 111 111 101 106

R144 000 ± R299 999 100 106 117 123 125 133 142 121

R300 000 + 100 108 155 176 189 199 230 165

Africans Total 100 104 111 117 121 125 130 115

R00 001 - R4 799 100 97 87 72 61 47 48 73

R04 800 ± R95 999 100 98 92 94 86 76 76 89

R09 600 ± R19 199 100 96 87 84 80 77 88 87

R19 200 ± R35 999 100 95 93 92 93 95 113 97

R36 000 ± R71 999 100 109 114 121 128 130 130 119

R72 000 ± R143 999 100 113 148 160 168 180 167 148

R144 000 ± R299 999 100 137 197 234 252 310 347 225

R300 000 + 100 129 199 302 398 396 419 278

Asians Total 100 103 109 113 116 119 124 112

R00 001 ± R4 799 100 103 105 101 98 81 75 95

R04 800 ± R95 999 100 91 86 74 73 84 83 84

R09 600 ± R19 199 100 91 82 78 72 63 61 78

R19 200 ± R35 999 100 93 85 78 76 74 69 82

R36 000 ± R71 999 100 101 79 94 87 76 77 88

R72 000 ± R143 999 100 105 109 109 109 109 107 107

R144 000 ± R299 999 100 107 113 129 132 144 169 128

R300 000 + 100 121 187 270 359 437 467 277

Coloureds Total 100 103 108 113 116 119 124 112

R00 001 ± R4 799 100 102 109 113 129 108 84 106

R04 800 ± R95 999 100 98 107 119 131 142 187 126

R09 600 ± R19 199 100 105 116 128 138 140 143 124

R19 200 ± R35 999 100 98 94 90 94 99 112 98

R36 000 ± R71 999 100 98 99 103 105 116 120 106

R72 000 ± R143 999 100 119 131 128 121 125 130 122

R144 000 ± R299 999 100 118 124 128 134 134 109 121

R300 000 + 100 113 182 256 209 221 225 187

Whites Total 100 101 105 107 109 110 112 106

R00 001 ± R4 799 100 107 112 110 103 113 71 102

R04 800 ± R95 999 100 94 94 101 97 100 102 98

R09 600 ± R19 199 100 97 95 89 78 68 74 86

R19 200 ± R35 999 100 99 88 85 81 73 70 85

R36 000 ± R71 999 100 97 96 85 83 81 76 88

R72 000 ± R143 999 100 101 95 89 91 86 73 91

R144 000 ± R299 999 100 103 106 111 111 115 124 110

R300 000 + 100 108 137 151 167 179 210 150

Source: Van Wyk (2004)

57


12 000+1±500 500±899 900±1399 1400±2499 2500±3999

Monthly income

4000±6999 7000±11 999

95.896.5

94.5 93.890.7

86.9

77.6

50.4

71.5

37.0

32.2

19.016.5

% 100

90

80

70

60

50

40

30

20

10

0

82.9

89.3

55.9

The substantial increase in the African share of the middle-income categoriesfrom 2002 to 2004 is further notable from Figure 4.

Source: Moola & Moloto (2004)

Figure 4: Percentage of African population by income group

The data reflected in Table 2 (based on data collected by the Bureau of MarketResearch) and Figure 4 (based on data collected by the South African AdvertisingResearch Foundation ± SAARF) reflects an increase in the African share in themiddle-income categories. The growing buying power of the emerging Africanmiddle-income group, many of whom still reside in township areas, is benefiting theretail industry in particular. The emerging African middle-income class has strongaspirations and a high propensity to spend. This represents an attractive retail market,mainly for the following reasons:

. Townships represent an untapped market potential as residents have few shoppingalternatives.

. The massive informal market in townships/semi-rural areas further suggestsdevelopment potential for large retail chains. The informal food market alone isvalued at between R20 and R30 million per year (Business Report 2004).

. Macro-economic developments such as low interest rates have encouraged retailproperty developers to tap into the township retail market.

The burgeoning South African middle class that was so evident in the past financial year

will continue to be a key driver of growth for the Shoprite brand. (Business Day 2005)

58


The research conducted by Moola & Moloto (2004: 2±3) on the emerging Africanmiddle class supports the view that domestically focused South African companies,and especially retailers, are benefiting from the emerging African middle-income classphenomenon. More specifically, the food, clothing, furniture, motor vehicle, realestate and building material, bank, insurance, media and prepaid mobile retail sectorshave gained enormously. Moola & Moloto's research concludes that Africanconsumers are becoming increasingly important in the marketplace. This trendexplains the focus of formal retail chains on townships where approximately a fifth ofSouth Africans live (Wilson 2005). Over the medium to long term, retail townshipdevelopment is anticipated to impact, either directly or indirectly, on the lives of thesetownship residents.

TOWNSHIP DYNAMICS

Many retail and property development analysts have entered the debate on the impactof retail development in township/semi-rural areas. Communal opinion suggests thatsuccessful retail development in townships requires a thorough understanding oftownship shopping and lifestyle dynamics, which are issues that have not beeninvestigated to their fullest potential. The important dynamics that retailer analystsand property developers have outlined include the following (Radebe 2005; De Vynck2005):

. As a result of low car ownership in township/semi-rural areas, people tend toeither walk or use taxis to go shopping, which limits purchases to small quantitiesof groceries at a time.

. Similarly, because of the underdeveloped transport system, township dwellers tendto travel by taxi to shop at nearby urban retail outlets rather than at townshipshops located on the outskirts of the township.

. The concept of `shoppertainment' is not yet well developed in townships. This isthe result mainly of aspirational shopping trends, which show that townshipresidents that have moved up the social ladder prefer to shop outside theirneighbourhood in upmarket retail malls, a phenomenon better known asòutshopping'.

. Affluent township residents and fashion followers prefer to shop at classyboutiques and not at the mass-market clothing chains that anchor new townshipdevelopments.

. Township shoppers that work in urban areas frequently buy from retailers neartheir workplace.

. African consumers have a high propensity to spend because of their relatively lowdebt levels. This increases prospects for increased retail spend over the mediumterm.

59


. The bulk of retailers in townships can be classified as `necessity entrepreneurs'who do business only to fend for themselves and their households.

ACTION IMPLEMENTATION SWOT ANALYSIS OF TOWNSHIPRETAIL DEVELOPMENT

The focus of formal retail chains on middle-to-lower-income township/semi-ruralareas poses distinct opportunities, challenges and threats to the community andbusiness environment. The remainder of this article investigates these aspects in moredetail.

A SWOT analysis is an effective way of identifying strengths and weaknesses andof examining opportunities and threats. Traditionally, a SWOT analysis is conductedto collate the most important information about an organisation's strengths andweaknesses and the opportunities and threats of the environment in which it operates(Dunne & Lusch 2005; Levy & Weitz 2001; Czinkota, Kotabe & Mercer 1997;Valentine 2001). Borrowing from the conventional marketing audit approach, theSWOT analysis presented in this article concentrates on the positive (strengths andopportunities) and negative (weaknesses and strengths) aspects of sustainable retailmarket expansion growth strategies targeted at the township and semi-rural areas ofSouth Africa. However, the SWOT analysis expands beyond the conventional SWOTanalysis to an action implementation SWOT analysis by also suggesting ways inwhich the retail industry can capitalise on the strengths, address the weaknesses,maximise the opportunities and minimise the threats related to current townshipretail market expansion strategies.

As explained, an action implementation SWOT analysis, which is built on threepillars, namely government, business (for example, supermarket chains, smallbusinesses, property developers) and the community (for example, consumers,community representatives) is conducted.

The SWOT analysis presented in this article firstly investigates the followingquestions:

Strengths

. What potential advantages will supermarket strategies have for townshipsresidents?

. What potential advantages will supermarket strategies have for townships businessand development?

Weaknesses

. What are the limitations to understanding township dynamics?

60


. Which business skills inhibit effective competition between large and smallbusinesses?

. What is the level of entrepreneurial capacity in townships?

Opportunities

. What are the potential opportunities facing township communities?

. What are the potential opportunities facing township businesses?

. What are the interesting trends?

Threats

. What obstacles will township communities face?

. What obstacles will businesses face?

. Is the changing retail environment threatening existing small businesses?

Apart from identifying the strengths, weaknesses, opportunities and threats posedby retail township development in South Africa, the article further explores thefollowing:

. How to capitalise on the strengths offered by retail township development

. How to address weaknesses embedded in retail township development

. How to maximise opportunities emanating from retail township development

. How to minimise threats posed by retail township development.

The action implementation SWOT analysis of retail township development ispresented in Table 3.

The action implementation SWOT analysis clearly reflects fairly optimistic viewsof township retail developments. However, various challenges face the localgovernment, community and business environment of townships and retaildevelopers alike in the years to come.

CONCLUSION

For formal retail chains to be successful in their attempts to expand and invest intownships, a sound strategy, balancing profit gains and social community andbusiness upliftment, is essential. Township residents and business will best adjust toretail development in townships if a win±win situation is created. Central to this isthe nature of convenience shopping offered, business equity, as well as advice andsupport from both the public and private sectors. From secondary analysis, thedevelopment of smaller shopping complexes (for example, 10 000m2) located neartaxi ranks will be key to attracting township shoppers. As the trend towardsconvenience shopping continues, trading late and over weekends will be a furtherdrawcard to reach potential shoppers. Provision of business space for informal

61


businesses in shopping complex developments (such as hawkers) is also essential forsustainable upliftment, while approval of rental space should be accompanied bysound scrutiny of potential retailers. Furthermore, retail outlets are more likely to bereadily accepted in townships if they have a black empowerment component that isfinancially viable (Financial Gazette 2003). Since many township retailers will not beable to compete with large retail chains independently, it is recommended that theyjoin efforts and adopt a cooperative approach. This will improve their chances ofsurvival in an already highly competitive retail market. In Chile and Mexico(Reardon, BerdegueÂ & Farrington 2002), small farmers dropped out of businessbecause of their inability to meet the new demands that supermarkets imposed. Thisdemand could best be met by implementing group production and marketingstrategies to take advantage of the procurement system offered by formal retail chains.Apart from a cooperative approach among small entrepreneurs, advice and supportfrom the public and private sectors are also essential to retail revitalisation, benefitingsmaller, independent retailers.

Another study in Chile on small farmers' economic organisations (cooperatives)showed that many find it difficult to meet the new demands that supermarketsimpose in relation to product homogeneity, coordination of harvest, central grading,sorting, packaging and delivery (BerdegueÂ 2002). The scale of associative operationsis often not adequate to offset the cost of supermarket practices such as delayedpayments, high rates of rejected produce, as well as occasional charges of shelf fees.Similarly, small retailers working with supermarkets will have to adapt andimplement formal accounting and invoicing practices. In cases where smallholders inChile survived, such as the Purranque cooperative, they relied on public and/orprivate assistance to help with technical assistance and suppliers' input credit.

For South Africa, government will be required to provide technical and financialsupport (for example, tax waivers and licensing requirements). Together withbusiness, government should provide training in accounting, invoicing and businesspractices to promote the skills of small businesses so as to facilitate cooperativeoperations. Training should also be provided for producers to ensure quality products.Such training should relate to the management of personnel, product design andpackaging and should encourage exchange visits. Investment in producer trainingwould promote the potential of small producers capitalising on the procurementsystem offered by the main retail chains. By offering partnerships with small retailersand producers, national retail chains will become more acceptable in a broaderconsumer market. Such initiatives also offer the potential of stronger linkagesbetween the formal and informal economies. Because of the proximity of informalretail shops to residences, they are still expected to attract some of the consumerdemand in townships. However, necessity entrepreneurs are bound to lose theirmarket share if retail supermarket chains succeed in meeting the dynamics of the

62


63

D.H

.T

ustin

&J.W

.Stry

dom

Table 3: Action implementation SWOT analysis of retail township development in South Africa

Strengths Capitalise on strengths

. Increased Corporate Social Investment (CSI)

. Improved retail property development

. New infrastructural development of community shopping complexes in town-

ships

. Provision of nearby retail services and products (easy access) to middle- and

low-income groups

. Consolidation of formal and informal retail activities

. High value-added retailers

. Sustained investment in retail property development will support infrastructur-

al development and social benefits (for example, job creation, road develop-

ment, parking facilities).

. Government and the private sector need to further broaden their contributions

to society and communities as part of their corporate social responsibility

policies. This could serve to support business developmental objectives and

leverage core skills in the retail business.

. On the back of fairly low interest rates, continued infrastructural development

and investment in retail space within townships will contribute to:

Ð Generating employment opportunities

Ð Creating a retail base for community shopping

Ð Increased retail property development

Ð Generating sustainable tax revenue.

. Opportunity entrepreneurs who previously operated from home now have the

opportunity to operate from a local formal business structure located within a

community shopping mall complex.

Weaknesses Address weaknesses

. Limited knowledge of South African township dynamics

. Entrepreneurial incapacitation

. Lack of marketing experience of existing small township retailers

. Lack of managerial and other retail-specific skills of existing township retailers

. Lack of understanding of supermarket procurement systems among many

small businesses

. Townships traditionally represent areas of high unemployment and deprivation

. A trend of òutshopping' among township consumers (a preference for

upmarket malls)

. Quantitative research is required to investigate township consumer and

preference patterns in South Africa.

. Government and private companies should provide basic and retail-specific

skills and training support to necessity entrepreneurs in particular.

. Qualitative and quantitative skills audits among necessity and opportunity

entrepreneurs will support the identification of retail skills gaps.

. Retail shopping chains (for example, Pick 'n Pay, Checkers) need to improve on

the development of working relationships with retail township entrepreneurs

by allowing them an opportunity to become involved in the distribution

channels. This approach will further support a better understanding of

expected procurement requirements.

. Market impact studies are required to assess the impact of retail property

development on necessity entrepreneurs in particular.

Opportunities Maximise opportunities

. Uplifting poor and unemployed people residing in township areas

. Revitalising township economies

. Creating jobs

. Offering convenience shopping to local township residents

. The government and private sector should maximise opportunities to reduce

unemployment and promote growth and inward investment. Economic

development should therefore aim to create and retain employment and

maintain and increase the level of economic activity within township areas.

More specifically such initiatives should aim to:

64


Op

po

rtu

nit

ies

(co

nti

nu

ed

)M

axim

ise

op

po

rtu

nit

ies

(co

nti

nu

ed

)

.O

fferi

ng

franchis

eop

port

unit

ies

for

op

port

unit

yentr

ep

reneurs

.T

ransfo

rmin

gò

ut-

of-

hom

e'

to's

hop

pin

gcom

ple

x'

busin

esses

.G

enera

ting

reta

ilsp

ace

for

local/

sm

all

reta

ilte

nants

.G

enera

ting

trad

ing

sp

ace

for

info

rmal

reta

ilers

(such

as

haw

kers

)

.C

reati

ng

op

port

unit

ies

for

entr

ep

reneurs

hip

develo

pm

ent

.O

fferi

ng

op

port

unit

ies

toim

pro

ve

reta

il-s

pecif

icb

usin

ess

skills

.C

hangin

geconom

ic/b

uyin

gp

att

ern

sof

tow

nship

com

munit

ies

.T

ransfo

rmin

gto

wnship

sin

tosusta

inab

leeconom

ies

.D

evelo

pin

gd

esti

nati

on

centr

es

wit

hin

tow

nship

s

.Im

pro

vin

gre

tail

trad

eexp

end

iture

(hig

her

sp

end

clo

ser

tohom

e)

.C

reati

ng

good

pro

sp

ects

for

sm

all-s

cale

food

pro

ducers

.Pro

vid

ing

op

port

unit

ies

for

investm

ent

inir

rigati

on,

gre

enhouses,

trucks,

cooling

shed

sand

packagin

gte

chnolo

gy

.Pro

vin

gop

port

unit

ies

for

the

develo

pm

ent

of

food

pro

gra

mm

es

.Sup

port

ing

cre

ati

ve,

coop

era

tive

sm

all

busin

ess

str

ate

gie

s

.Pro

vid

ing

ap

ote

nti

alfo

rgro

wth

clu

ste

rs(s

uch

as

food

,clo

thin

g,fu

rnit

ure

,and

tele

com

sre

tailin

g)

.Pro

vid

ing

ab

asis

for

incre

ased

tax

revenue

from

busin

ess,

whic

hcould

be

channelled

tow

ard

sre

sid

ent

serv

ices

such

as

road

main

tenance,

pub

lic

work

s,

sanit

ati

on,

park

sand

recre

ati

on

facilit

ies

.Pro

vid

ing

op

port

unit

ies

for

imp

roved

reta

ilp

rop

ert

yin

vestm

ent

on

the

back

of

low

inte

rest

rate

s

ÐPro

mote

susta

ined

econom

icgro

wth

by

seekin

gto

accom

mod

ate

and

encoura

ge

the

conti

nued

pro

sp

eri

tyofexis

ting

tow

nship

firm

sand

toatt

ract

furt

her

inw

ard

investm

ent

by

en

suri

ng

that

an

ad

eq

uate

sup

ply

an

d

dis

trib

uti

on

of

quality

land

isavailab

lefo

rd

evelo

pm

ent

where

req

uir

ed

ÐSup

port

the

regenera

tion

of

tow

nship

com

munit

ies

suff

eri

ng

from

sym

p-

tom

sof

econom

icand

socia

ld

ep

rivati

on

ÐA

ssis

tin

the

econo

mic

sta

bilis

ati

on

and

pro

moti

on

of

the

lon

g-t

erm

econom

ichealt

hof

rura

lcom

munit

ies

and

the

vit

ality

and

via

bilit

yof

tow

nship

s

ÐEncoura

ge

the

gro

wth

pote

nti

al

of

passenger

traff

ic(d

evelo

pm

ents

should

be

hig

hly

accessib

leon

foot,

by

bic

ycle

and

by

pub

lic

transp

ort

)

ÐEncoura

ge

the

esta

blishm

ent

or

gro

wth

of

centr

es

of

excellence

for

train

ing

and

ed

ucati

on

of

tow

nship

entr

ep

reneurs

.

.T

he

coop

era

tion

and

coord

inati

on

of

aw

ide

range

of

pub

lic

and

pri

vate

secto

r

enti

ties

isconsid

ere

dto

be

afu

nd

am

enta

lele

ment

inad

dre

ssin

gth

eis

sues

of

econom

icd

evelo

pm

ent.

This

coop

era

tion

will

ensure

that

the

gre

ate

st

benefi

t

can

be

gain

ed

fro

mth

eid

en

tifi

cati

on

of

an

din

vestm

en

tin

tow

nsh

ip

develo

pm

ent

op

port

unit

ies.

Th

reats

Min

imis

eth

reats

.C

losin

gd

ow

nof

sm

all

corn

er

shop

reta

ilers

.D

isp

lacem

ent

of

trad

itio

nal

tow

nship

reta

ilers

such

as

sm

all

shop

sand

pub

lic

mark

ets

.Pullin

gre

tail

sale

sfr

om

sm

all

tow

ns

ad

jacent

toto

wnship

sand

conseq

uentl

y

imp

acti

ng

on

their

reta

iltr

ad

eenvir

onm

ent

.R

enta

lcost

and

dem

and

for

sp

ace

would

make

itunp

rofi

tab

le/i

mp

ossib

lefo

r

many

'would

be'

reta

iltr

ad

ers

toente

rth

em

ark

et

.Pro

cu

rem

en

tp

olicie

sfo

llow

ed

by

form

al

su

perm

ark

et

ch

ain

sw

ill

lim

it

op

port

unit

ies

for

sm

all

reta

ilers

toatt

ain

part

of

the

mark

et

share

.

.In

cre

ased

traff

icvolu

mes

toto

wnship

are

as

.C

yclicaleconom

icp

att

ern

s(f

or

exam

ple

,in

flati

on,in

tere

st

rate

sand

econom

ic

gro

wth

)p

ose

ari

sk

for

land

lord

sover

the

long

term

,alt

hough

econom

icand

concom

itant

reta

ilsale

sgro

wth

are

anti

cip

ate

dto

rem

ain

str

ong

over

the

short

tom

ed

ium

term

.

.G

overn

ment

and

the

pri

vate

secto

rneed

top

rovid

efi

nancia

land

busin

ess

sup

port

tonecessit

yentr

ep

reneurs

inp

art

icula

r.

.Busin

ess

zones

need

tob

ed

evelo

ped

for

necessit

yentr

ep

reneurs

inp

art

icula

r.

.A

ccess

totr

ansp

ort

and

safe

tyin

tow

nship

sm

ust

be

imp

roved

.

.C

urr

ent

init

iati

ves

on

èm

erg

ing

mark

et

serv

ices'

such

as

bulk

dis

counts

,

delivery

from

ware

houses,

mark

eti

ng

and

financia

lskills

train

ing,

cre

dit

or

energ

yd

evelo

pm

ent

deals

tosm

all

shop

ow

ners

should

be

bro

ad

ened

.

.Econom

icand

reta

ilsale

sgro

wth

should

conti

nue

tob

eb

acked

by

sound

bro

ad

ened

macro

-econom

icand

fiscalp

olicie

s.

retail shopping environment in townships and semi-rural areas. Small businesses willtherefore face huge challenges and the risk of exclusion from the transforming foodretail industry in particular. Small businesses and entrepreneurs have to rise to thechallenge and compete in the new markets that are developing throughout the foodeconomy. It is of the utmost importance to promote competition in the supermarketsector, and the retail sector in general, with due consideration for small business. Thesuccess and proliferation of supermarkets are most probably linked to their ability tooffer low prices, allowing them to compete with small business establishmentsoperating in townships.

REFERENCES

BerdegueÂ, J.A. 2002. Cooperating to compete: associative peasant business firms in Chile.PhD thesis, Department of Social Sciences, Communication and Innovation Studiesgroup, Wageningen University and Research Centre, Wageningen, The Netherlands.

Business Day. 2005a. `Building starts in township retail mall', 8 March.Business Day. 2005b. `Plain sailing for trade route mall', 28 July.Business Report. 2004. Independent Online (Pty) Ltd, Cape Town.Business Report. 2005. Independent Online (Pty) Ltd, Cape Town.Czinkota, M.R., Kotabe, M. & Mercer, D. 1997. Marketing Management. Oxford: Blackwell.De Vynck, D. 2005. Èmerging black middle class flexes muscles', Business Report, 10 July.Dunne, P.N. & Lusch, R.F. 2005. Retailing, 5th edition. Australia: Thomson South Western.Engineering News. 2005. `Reinvesting Soweto: Sowet's disposable income now estimated at

R12 bn a year', 22 July.Enslin, S. 2004. `SPAR to ring up 130 new stores', Business Report, 17 November.Finance Week. 2005. Òne man one mall', 22 June.Financial Gazette. 2003. `Black landowners turning into landlords', 31 July.FMCG Direct. 2005a. `SA retailers continue to make waves in Africa'. [Online] Available at:

www.fastmoving.co.za. Accessed: 30 August 2005.FMCG Direct. 2005b. `Company listings'. [Online] Available at: www.fastmoving.co.za

Accessed: 30 August 2005.FMCG Direct. 2005c. A future for African retailing'. [Online] Available at:

www.fastmoving.co.za. Accessed: 31 August 2005.Futuregrowth Asset Management. 2005. Ìnvestors set store on townships'. [Online] Available

at: www.futuregrowth.co.za. Accessed: 5 September 2005.Levy, M. & Weitz, B.A. 2001. Retail Management. Boston: McGraw-Hill.Ligthelm, A.A. 2004. Informal Markets in Tshwane: Entrepreneurial Incubators or Survivalist

Reservoirs? Research Report No. 335, Bureau of Market Research, University of SouthAfrica, Pretoria.

Moola, N. & Moloto, R. 2004. The Emerging Black Middle Class. 18 October. Johannesburg:Merrill Lynch.

Profile Data. 2005. Profile's JSE Company Information for Pick 'n Pay Stores Ltd. [Online]Available at: www.profile.co.za Accessed: 31 August 2005.

65


Radebe, S. 2005. `Township shopping It's not Sandton, doll', Financial Mail, 28 July.Reardon, T., BerdegueÂ, J.A. & Farrington, J. 2002. `Supermarkets and farming in Latin

America: pointing directions for elsewhere?', Natural Resource Perspectives, 82(Decem-ber). London: Overseas Development Institute.

Shoprite Holdings Ltd. 2004. Annual Report: Composition of the Group. Brackenfell.Shoprite Holdings Ltd. 2005. About Shoprite Holdings Ltd. [Online] Available at:

www.shoprite.co.za Brackenfell. Accessed: 9 June 2005.Sunday Business Report. 2004. `Township spazas face chop as malls move in', 26 September.Sunday Times. 2005. `Bringing township business to life', 4 July. [Online] Available at:

www.fingaz.co.za. Accessed: September 2005.SPAR Group Ltd. 2004. Annual Report. [Online] Available at: www.spar.co.za. Pinetown.

Accessed: August 2005.Van Wyk, H. de J. 2004. National Personal Income of South Africans By Population Group,

Income Group, Life Stage and Lifeplane. Research Report No. 333, Bureau of MarketResearch, University of South Africa, Pretoria.

Valentine, E.K. 2001. `SWOT analysis for a resource-based view', Journal of Marketing Theoryand Practice, 9(2)(Spring).

Wilson, N. 2005. `SA's black homeowners are sitting on billions', Business Day, 13 July.

66


The role of internal communication in servicedelivery: an assessment of the Metropolitan HealthGroup


A B S T R A C T

Internal communication can, as part of an internal marketing approach,

contribute to the establishment of a service orientation in an organisa-

tion. This is necessary for survival in an era where a total service offering

is imperative to remain competitive. This study presents the results of a

survey of the extent to which internal communication supports a service

orientation among employees at Metropolitan Health Group (MHG) Head

Office and, eventually, the quality of service delivered. It concludes that

this is not entirely the case at MHG and recommends that an internal

communication programme be developed around the desired outcomes

of strategic alignment, knowledge management/information dissemi-

nation and staff motivation within the framework provided by the Gap

Analysis Model of Parasuraman, Berry & Zeithaml (1985) to remedy the

situation.

INTRODUCTION

The contribution of internal communication to the quality of service delivery to both

internal and external customers is explored in this work. The theoretical approach to

internal communication in this study is from the service perspective, and is drawn

from marketing theory. A measurement instrument that evaluates the degree to which

internal communication contributes to service quality is discussed and its practical

implementation described. The instrument is applied to the Metropolitan Health

Group (MHG), where internal communication has been identified as an area

requiring attention since the formation of the company in 2000. Earlier assessments

that identified internal communication problems proved to be of limited value

because they highlighted aspects of communication that did not appear to be linked

to the success of MHG as a business. The measurement instrument was specifically

Ms Landman is Internal Communication Manager, Metropolitan Health Group. Prof. Angelopulo is an Associate

Professor in the Department of Communication Science, University of South Africa. E-mail: [email protected]

67

utilised to assess the degree to which internal communication detracted from orcontributed to the attainment of the specific business performance criteria related toservice delivery.

This article reviews the service perspective and its relationship with commu-nication, proceeds with an overview of MHG and its internal communication,describes the methodology used in the work and concludes with a discussion of thefindings.

THE SERVICE PERSPECTIVE AND ITS RELATIONSHIP WITHCOMMUNICATION

Changing organisational environment

In recent years, the organisational environment has changed significantly, bothexternally and internally. These changes have resulted in a re-evaluation of traditionalapproaches to areas such as marketing, organisational communication and employeerelations.

GroÈnroos (2001) suggests that all organisations find themselves in a situation ofservice competition in which the core solution, although a prerequisite for success,must be managed with a number of related solutions to offer a total service offeringthat in combination determines the organisation's success. Failure to understand thisleads to customer dissatisfaction, even if the products or services that comprise thecore solution are inherently of a high quality (GroÈnroos 2001). Even if customers aresatisfied with the product and service received from a particular supplier, loyaltytowards that supplier is not guaranteed (Durvasula, Lysonski, Mehta & Tang 2004).

Customers do not look for products or services per se, but for solutions that servetheir own value-generating processes. The latter takes place when the customerperceives value being created when using a product or service (Johnson & Schultz2004). Before this perception exists, no value has been generated.

The challenge for organisations is to use information and knowledge throughoutall organisational processes to develop more customer-oriented value-enhancingservices out of physical products or services (GroÈnroos 1998). An organisation'scompetitive advantage is contingent on accepting that it is in service competition andunderstanding its customers' value-generating processes. Failure to shift from atraditional manufacturing/supply approach to a service approach results in failure toremain globally competitive (Kapner 2004). Employees are essential in achieving aservice approach within an organisation. Goldsmith (1999) sees employees as anextension of the marketing approach, and Schneider (2004) suggests that their rolemust be accepted as strategically important for the success of an organisation. Marlow

68

The role of internal communication in service delivery ...

& Wilson (1997: 37) use the term `èmerging corporate landscape'' to describe theradical change experienced inside organisations and they identify two major causesfor this, namely:

. Upsizing (competition through acquisition) and downsizing (growth throughreduction) of organisations

. The new employee contract.

The first (upsizing and downsizing) have negative effects on morale, themanagement of expertise and complexity, and the effectiveness of communication inorganisations. The second, the new employee contract, is emerging as a result of thedramatically changed relationship between employer and employee. This newcontract represents a shift from the traditional `psychological contract', where loyalty,job security and trust characterise an almost patriarchal relationship, to anarrangement where employer and employee work as partners on an equal basis.This association is characterised by aspects such as more frequent, deliberate careermovements and a premium placed on competencies that revolve around synthesisingideas into practical implementation and the ability to integrate patterns of awarenessinto a common vision and to align individual contributions to overall organisationalgoals (Marlow & Wilson 1997).

Emergence of the service perspective as a strategic approach

In response to these changes in the organisational environment, the serviceperspective has emerged as a strategic approach (GroÈnroos 2001; Langerak 2003;Schneider 2004). Although it provides a perspective on marketing in a changingenvironment, it is essentially different from the traditional marketing approach withits origins in the manufacturing sector (Goldsmith 1999). The marketing of servicesinvolves interactivity between organisations and their markets (GroÈnroos 1998) asopposed to the predominantly one-way approach to a mass, broadly defined marketthat largely characterises the traditional marketing approach (Nowak, Cameron &Delorme 1996).

GroÈnroos (1998: 325) conceptualises the marketing process within a serviceperspective as shown in Figure 1. The figure shows the key parties in the servicemarketing process, namely the firm, resources (as opposed to a product) comprisingpersonnel, technology, knowledge and the customer's time, and of course, thecustomer. Along the sides of the triangle are the three key functions of servicemarketing: giving promises, enabling promises and keeping promises.

The focus of this study falls on one of the resources of an organisation thatenables the keeping of promises, namely personnel (referred to as employees fromhere onwards). It is the employees of an organisation that mostly create value forcustomers in a service setting through, for example, call centres, deliveries, main-

69


FIRM

Full-time marketers and sales people

Enabling promises Giving promises

Continuous development; External marketing; Sales

Internal marketing

PERSONNEL CUSTOMERS

TECHNOLOGY Keeping promises

KNOWLEDGE

CUSTOMER'S TIME

Source: GroÈnroos 1998: 325

Figure 1: The service-oriented perspective: process consumption and marketing

tenance and design of information systems. As such, most employees are involvedwith the customer as marketers ± most as `part-time marketers' if they are notemployed in marketing and sales departments. Part-time marketers often outnumberfull-time marketing and sales staff (GroÈnroos 1998). In order to be successful at part-time marketing functions, it is important that all departments, irrespective of thedegree of their direct contact with the customer, understand that they affect thekeeping of promises to customers and the quality of service delivered (Ashcraft &Stacher 2004; Auty & Long 1998; Bronn, Roberts & Breunig 2004; Chaston 1993,1995; GroÈnroos 2001).

To enable employees to fulfil their responsibilities as part-time marketers, theorganisation requires a service orientation in its business conduct and in the way inwhich it manages its employees (Schneider 2004). To this end, GroÈnroos (2001: 317±324) proposes a model for analysing and planning the service process and as aframework for establishing a service orientation among employees:

In brief, the model combines various service quality-generating sources in asystematic way. The large central block in Figure 2 illustrates the service-producingorganisation from the customer's perspective. From the service producer's point ofview, a number of different departments or functions may be involved in the process,but for the customer it is a single integrated process. The customer is located insidethe block, because of the integrated role the customer plays in the whole serviceproduction process. The line of visibility divides the organisation into two parts: onepart that is visible to the customer and one that is not. The customer's expectationsare influenced by the factors in the block at the top right. To the left is the businessmission with its corresponding service concepts, which guide the planning and

70


Business mission

Service concepts

. Personal needs and values

. Previous experiences

. company/local images

. Marketing communication

. word of mouth

. Absence of communication

Expectations

Support part

technology and systems how-how

Systems support

Managers and supervisors

Management support

support functions and support

persons Physical support

Interactive part

Systems and operational

resources

contact persons

Physical resources and

equipment

Corporate culture

Cust

om

ers

Lin

eof

vis

ibilit

y

Tota

lity

invis

ible

part

!

!

!

!

management of the service production system. At the bottom is the corporate culture,

which should be service-oriented if the organisation is to succeed in service

competition.

Source: GroÈnroos (2001: 319)

Figure 2: The service system model

The model indicates three kinds of support that need to be built into service

production, namely management support, physical support and systems support.

According to GroÈnroos (2001), the most important of these is management support,

because managers and supervisors should provide leadership, contribute to a service

orientation and ultimately to a service culture in order to succeed. Managers are key

to employees' maintenance of service-oriented attitudes and behaviour, because they

set the example, provide coaching and guidance, and motivate employees to perform.

In an analysis of the support part of a service system, it would therefore be important

to assess the impact of leadership, and for the purpose of this study particularly, the

impact of communication, on the service quality delivered by employees.

GroÈnroos's model (2001) indicates that the support and invisible part of the

organisation (from the customer's viewpoint) have an impact on what can be

accomplished in the interactive part, and eventually on the quality of service

delivered. From here stems the notion that the entire system is integrated into a

holistic service production system in which the different components affect one

another (Lovelock 1995). It is therefore important that support employees consider

the departments that they support (in all functions up to customer contact) as their

internal customers. Internal service has to be as good as the service to the external

customer, as it directly impacts on the quality of external service delivery.

71


The internal customer concept

The importance of the role of all employees in service production and qualitygeneration processes permeates the service marketing and management literature.Although organisations have always concentrated on their internal processes toimprove their performance in the market, the concept of the internal customeremerged in the service marketing and service management literature only during the1970s (Gilmore & Carson 1995).

The heightened importance attached to the internal market is driven by therealisation that an organisation must not only be managed to give and fulfil promises,but also to enable the fulfilment of promises (GroÈnroos 1996). Success in servicecompetition is dependent on the skills and attitudes of an organisation's employees(Chaston 1995). Suitable skills and attitudes require emphasis on the internaldynamics of an organisation, encompassing all internal relationships and therealisation that meeting the requirements of the internal customer is as important asmeeting those of the external customer (Chaston 1993).

It is important to realise that the focus should not be limited to customer contactemployees only, but should be on all the functional areas of GroÈnroos's service systemmodel. It is equally important that internal service delivery along the chain should befocused on the external customer's requirements (Johnson & Schultz 2004; Langerak2003). GroÈnroos (2001) refers to this as a service orientation that sets the frameworkfor intra-organisational activities that are geared to delivering service to the customeraccording to his/her requirements.

Another viewpoint on this issue is that the prevailing climate in an organisationcould significantly contribute to the quality of service delivered to the client. Becauseorganisational climate can influence employees' behaviour, it would be reasonable toassume that within a service setting, the climate should be such that employees viewclient satisfaction and service quality as a top priority (Clark 2002). Within thecontext of creating a service orientation, a main objective of internal marketing andconsequently internal communication should therefore be to contribute to such aservice-oriented climate.

The role of internal communication in creating a service orientation

Internal communication, often referred to as employee communication, has alsochanged in recent years. From describing narrow functions such as the production ofcompany newsletters, it has evolved into a broader function with outcomes directlyrelated to the achievement of overall corporate objectives (Tourish & Hargie 1998).This enhanced approach to internal communication is reflected in the practice ofinternal communication in a number of areas of organisational communication, suchas corporate communication, public relations and human resources communication.Internal communication has obtained a more strategic role, as one of its primary

72


objectives is to enable the internal market to deliver to the external market. GroÈnroos(2001) suggests that communication management is a critical part of internalmarketing. Internal communication is discussed here as it relates to the service-oriented perspective (Figure 1) and the service system model (Figure 2).

Internal marketing: maximising relationships with the internal customer

Beckett-Camarata, Camarata & Barker (1998: 76) identify five key facets of the servicemarketing concept that are central to organisational success in service competition:

. Service marketing is an overall management perspective that drives all decisionsthroughout the organisation.

. It is customer or market driven.

. It is a holistic perspective.

. It is integrally linked to quality management.

. It identifies the development of employees and reinforcement of their commitmentto organisational goals and strategies as strategic prerequisites for organisationaleffectiveness and long-term survival.

In internal marketing, the focus falls on the last point ± the employees of anorganisation, who form the internal market. It has long been recognised that there is astrong correlation between the satisfaction levels of employees and the quality ofservice delivered to customers (Drucker 1972; GroÈnroos 2001; Homburg & Stock2004; Luthans 1992; Steinmetz 2004; Thompson & Strickland 1984).

However, in the internal marketing concept, the focus is wider than traditionalmotivational and behavioural issues. It is distinguished by its emphasis on an active,market-oriented approach that has shifted from a one-dimensional internal focus tothe relationship between the internal and external market (Varey & Lewis 1998).Internal marketing has its foundation in the concepts that employees are a first,internal market for the organisation and that their positive predisposition is aprerequisite for successful marketing (GroÈnroos 2001). Internal marketing has to beintegrated with the total marketing function, as successful external marketing startswithin the organisation (GroÈnroos 1997). Internal marketing is not defined by itsactivities ± all internal activities contribute to internal marketing ± but by its purposeof gearing all internal employee-oriented processes towards internal and externalcustomer satisfaction (GroÈnroos 2001).

The internal marketing concept embraces the view that an organisation mustmaintain successful relationships with its internal audience that extend beyondperformance management and motivation (Duncan & Moriarty 1998). By directingall internal activities according to the needs of the external customer, internalmarketing enables non-marketing staff to perform their tasks in a market-orientedmanner with the ultimate aim of enhancing customer relationships (Barnes & Morris

73


2000). This corresponds with the concept of the internal customer to whom internalservices have to be provided in the same customer-oriented manner as to externalcustomers (GroÈnroos 2001).

These concepts correspond strongly with one of the fundamental principles ofintegrated marketing communication (IMC), namely the importance of creating acustomer consciousness, or as the term is used in the service marketing literature,`service orientation', among employees. If one looks at the role of communication inthe emerging relationship marketing field, it is clear that communication becomes thevehicle for building relationships and integrating marketing activities both within themarketing and human resources (HR) functions and across the business as a whole.The development of integrated marketing and integrated communication hashappened in parallel, and the two previously separate functions show intersections atvarious intervals. Indeed, communication becomes the primary integrative element inmanaging relationships. In contrast to earlier convictions, relationships (especiallythose between an organisation and its stakeholders, of whom employees form animportant part) will be founded on communication and not persuasion (Duncan &Moriarty 1998: 1).

There are a number of definitions of ìntegrated communication' found in theliterature. McGoon (1998: 15) defines integrated communication as `à strategicbusiness process used to plan, develop, execute and evaluate coordinated andmeasurable persuasive brand communication programmes over time with consumers,customers, prospects and other targeted, relevant external and internal audiences''.Barker & Du Plessis (2001: 2) define integrated communication as ``the application ofanalysis, communication and evaluation techniques to create and manage integrated,multi-faceted communication interventions combining information, collaboration,business process design, feedback and incentive systems to improve humanperformance and productivity in the workplace in order to achieve organisationalcommunication goals and objectives''.

Most definitions of IMC, for example McGoon (1998: 15), GroÈnroos (2001: 266)and Barker & Du Plessis (2001: 2), include the internal audience of an organisation(namely, its employees), who are the roleplayers in internal communication. As such,within the context of the purpose of integrated communication, as stated by Barker &Du Plessis (2001: 2), internal communication will then play a key role in ensuringthat human performance and productivity in the workplace are improved. Accordingto GroÈnroos (2001: 268), the challenge for organisations, and for MHG, is to manageall sources of messages about a firm and its resources and all communication mediaand their effects in an integrated way. If it is not successful in doing so, its customerswill receive different, possibly contradictory, messages from various sources ofcommunication.

The relevance of IMC for this study from a service perspective is that in order foran organisation to survive service competition, it needs to form and maintain

74


meaningful relationships with its various stakeholders, including employees.According to GroÈnroos (2001: 281), these meaningful relationships can only exist ifall communication, outcomes and processes are integrated and result in dialogue, anissue touched on earlier in this discussion.

IMC bears further relevance to this study if viewed in terms of the Gap AnalysisModel, which is discussed more fully in a later section. For example, the modelindicates that a gap could exist between what is promised to the customer throughmarketing communication and what is actually delivered to the customer (Gap 5) byemployees. To minimise the gap between the customer's expectations (based in parton external communication activities) and the actual service, there needs to besynergy between external and internal communication messages, a function of IMC.Within this context, it is therefore essential that internal communication inorganisations is practised in an integrated manner with other modes ofcommunication, such as marketing communication, processes and outcomes.

Internal communication from an internal marketing perspective: definitionand functions

The obvious definition of internal communication is in terms of its internalorganisational audience, the employees of an organisation. Van der Walt (2002)defines internal communication as the key component that links an organisationtogether. It is fundamental for the creation and maintenance of the organisation'sinternal environment. It is embedded in the ongoing patterns of interaction amongpeople in an organisation and is therefore an all-encompassing instrument thatconnects people and structures within an organisation. Internal communication is notlimited to formal structures and modes of communication, but includes all forms,whether they are interpersonal, small group, management or mass internalcommunication (Mersham & Skinner 2001).

Internal communication has three primary functions. The first is strategicalignment, the second combines organisational learning, knowledge managementand information dissemination, and the third is motivation.

Strategic alignment

One of the functions of internal communication is to align communication andactions with an organisation's vision, goals, values and priorities, thereby enhancingperformance and reputation in a measurable way (Moorcroft 2003). This correspondswith GroÈnroos's service system model (2001), which suggests that the company'smission, vision and accompanying service concepts form the basis for the activities ofthe organisation. It would therefore make sense to ensure that employees areinformed about these issues and that they are motivated and skilled to act in such amanner that the company's mission is fulfilled. Puth (2002) terms this ``commu-

75


nicating for strategic alignment'', implying firstly that there is a strategic line (a clearoverall strategic direction, intent and a set of desired outcomes to which alldepartments and individuals can align their actions), and secondly that everyone isaware of this strategic line and that it is sufficiently visible for alignment to take place.

Puth (2002) further points out that the key to strategic alignment iscommunication of the big picture. This corresponds with findings about employees'internal communication needs, which highlight, among other things, that themajority of employees are concerned about a lack of information about theiremploying organisations, including where the company is headed and the reasoningbehind decisions (Mersham & Skinner 2001). Therefore, to successfully execute aservice strategy, employees need to know what the strategy entails and what they aresupposed to do to execute it. Relating business and communication strategies helpsemployees understand and support the direction of an organisation.

Organisational learning, knowledge management and information dissemination

A major function of internal communication is to facilitate the related processes oforganisational learning and knowledge management (Bronn et al. 2004; Du Plooy-Cilliers 2002; Stevens 2001; Van der Walt 2002). These processes are closely related.

Organisational learning is similar to individual learning in that individuals gainnew knowledge and insights, but it occurs through shared insights, knowledge andmental models (Stata 1989). Progress is hampered unless employees learn together,come to share beliefs and goals and are committed to taking actions to fulfilorganisational goals and bring about change (Senge 1990).

Knowledge management is an integrated, systematic approach to identifying,managing and sharing all of an organisation's information assets (includingdatabases, documents, policies and procedures) and includes the unarticulatedexpertise and experience of an organisation that is available to the individual who isresponsible for using and replenishing it (Sivan 2000).

Knowledge management is the means by which knowledge as an intangible asset(Bronn et al. 2004) is managed and applied to the advantage of the organisation.Organisational learning is the process by which information is transformed intoknowledge and applied to bring about change (Hustad 1999).

Information dissemination is a key concept in both organisational learning andknowledge management, as learning only takes place and knowledge only getsgenerated if information is made available to the organisation (Gore & Gore 1999;Malhotra 1996). Internal communication plays a crucial role by ensuring thatinformation is made available to employees effectively, thereby facilitating thelearning and knowledge management processes (Yeomans 2004). An organisation'sability to learn is directly related to the way in which information and communication

76


are managed. An organisation needs to create appropriate communication channelsand a climate that facilitates learning, and to convince individuals to share and applysuch knowledge to the advantage of the organisation (Du Plooy-Cilliers 2002).

Communication is a common thread that runs through most definitions ofknowledge management (Van der Walt 2002). Successful companies have the abilityto consistently create new knowledge, disseminate it quickly and incorporate it intotheir products and services through communication. Communication becomes themechanism for the knowledge production process and is therefore key to creatingvalue (Bronn et al. 2004).

From the viewpoint of establishing a service orientation, these processes would begeared towards learning and knowledge about the needs and requirements of thecustomer, whether internal or external. Berry & Parasuraman (1997) bring theconcepts of information dissemination, knowledge management and organisationallearning into the context of service management. They state that for organisations tobe successful in service competition, they need systems to capture information abouttheir customers, competitors and employees, and to effectively use that information tosupport decision-making. Service organisations need easy access to accurate,consistent and up-to-date information to serve clients, and internal communicationshould serve this purpose (Jordan 2003).

Motivation

The relationship between employee motivation and satisfaction, the quality ofinternal and external service delivery, the creation of a service orientation and theintegral role of communication in the process of motivation are widely noted in theliterature (Schumann 2004; Tourish & Hargie 1998; Watson Wyatt Worldwide 1999).GroÈnroos (2001: 336) identifies motivation as a primary objective of internalmarketing, stating that it should ``create an internal environment and implementinternal action programs so that employees feel motivated to carry out part-timemarketing behaviour''. He identifies communication management as one of the mostimportant tools in achieving this.

The concept of employee motivation has enjoyed considerable attention in thehuman resource management literature, placing emphasis on the differentapproaches to motivation. Luthans (1992) describes the process of motivation as aninteraction between three interdependent elements, namely needs, drives andincentives. If a need exists, drives or motives are set up to alleviate the need. The cycleis complete when the need is actually alleviated, which then forms the incentive ofrestoring a balance. Robbins (1998) captures this process in his definition of staffmotivation as the willingness to exert high levels of effort towards organisationalgoals, conditioned by the degree to which the effort leads to the satisfaction of someindividual need.

77


Some of the most frequently articulated needs in organisations are those forinformation, creating meaning and the general need for interaction (Tourish &Hargie 1998; Wilson 2004). Effective communication structures, initiatives, climateand channels contribute positively to employee motivation, and in turn to a serviceorientation.

Tourish & Hargie (1998) have illustrated the relationship between internalcommunication and the satisfaction of needs. They cite the work of Arnott, whotranslated Maslow's hierarchy of needs into six employee questions related to the typeof information required to maintain satisfactory levels of motivation:

. What's my job?

. How am I doing?

. Does it matter to anybody?

. How are we (as an organisation/department) doing?

. How do we fit into the whole?

. How can I help?

In the Watson Wyatt Worldwide study (1999) on communication and thealignment of the workforce with corporate strategies, a correlation is found betweenthe effectiveness of internal communication programmes, the degree of motivationand employees' alignment to overall strategic goals. The study recommends thatinternal communication should place strong emphasis on helping employeesunderstand the business and provide information and feedback to motivate andimprove job performance.

It seems that the needs for information, meaning and feedback extend beyondorganisational boundaries. Schumann (2004: 28) states that employees ``want plaintalk that makes it easy to evaluate issues of deep importance to them. For manyemployees, the company is their only source of information on many personal topics,including career, retirement and health care.''

In summary, although not the only determinant of motivation levels,communication plays a central role in the motivation of employees by satisfyingtheir needs for information, meaning, context, feedback and general dialogue. Itmotivates them by clarifying the organisation's service objectives, by indicating howthey contribute to their attainment, by providing feedback on progress, and bymaking available channels for dialogue. These essentially encapsulate a number ofbasic human needs for communication, which, if satisfied, could lead to increasedmotivation to work towards common goals in the organisational context.

Internal communication and the Gap Analysis Model

Internal communication has hitherto been discussed in the context of internalmarketing and service delivery. On its own, this conceptualisation does not offer anoperational framework that is comprehensive enough to assess internal commu-

78


nication's contribution to service delivery. To achieve this, the Gap Analysis Model, asproposed by Parasuraman, Berry & Zeithaml (1985, in Auty & Long 1998) andGroÈnroos (2001), is utilised. Table 1 specifies the role of internal communication atthe interfaces corresponding to the point of each gap. It incorporates factors that leadto quality problems at the five interfaces along the service chain and the relationshipof internal communication to each of these.

THE DISCIPLINARY ALIGNMENT OF THE STUDY

Although this study has been undertaken with a conscious effort to avoid alignmentwith any of the specific disciplines of communication, its location within the broaderfield requires some clarification. The study falls within the intersecting areas ofinterest that are concurrently addressed in three broad areas of communication:marketing communication, and specifically integrated marketing communication(with the focus on an organisation's total communication as it relates to themarketing discipline); the related disciplines of public relations and corporatecommunication (with the focus on an organisation's communication as it relates to thegeneral governance of the corporate entity); and communication science (the directextension from `speech communication', with its focus on an organisation'scommunication as it relates most closely to the nature of communication per se).While attention has been given to aspects of internal communication that areembraced by each of these fields, this study is most closely aligned to a marketingapproach to communication, and most particularly to a service marketing approach.

METROPOLITAN HEALTH GROUP AND ITS INTERNALCOMMUNICATION

The Metropolitan Health Group (MHG) provides medical scheme administrationand managed healthcare services to the corporate and retail markets. MHG is asubsidiary of Metropolitan Holdings Limited, a company listed on the JSE withassets of R45 billion under management.

MHG as it stands today is the result of a merger between the former BankmedAdministration Division and Metropolitan Health. Since the merger in 2000, variousaudits have highlighted internal communication as a problem area. These audits havenot revealed the specific internal communication requirements of employees and therelationship of these needs to the success of the business. They have indicated thatemployees generally perceive a lack of communication in the business as a factorcontributing to low motivation levels and as an operational obstacle.

In response to the audit results, the decision was taken to establish a dedicatedinternal communications function housed within the Human Resources Department.The Internal Communications Department is tasked with facilitating internal

79


Table 1: The role of internal communication at the interfaces of the Gap Analysis Model

Gap Potential role of internalcommunication

Relevant function ofinternal communication

Gap 1: The

management

perception gap:

Management

perceives

customers' quality

expectations

incorrectly

. Bad or non-existent upward information

from the customer interface to manage-

ment

. Too many layers that stop or change

information flowing from customer con-

tact points

. Management commitment to service qual-

ity not visible

. Knowledge management


. Motivation/strategic align-

ment

Gap 2: The quality

specification gap:

Service quality

specifications are

inconsistent with

management

perceptions of

customers' quality

expectations

. Lack of clear goal-setting or lack of under-

standing of goals by members of the

organisation

. Management perceptions are not commu-

nicated or ineffectively communicated to

the business

. Lack of visible management support for

service quality planning and procedures

. Strategic alignment

. Knowledge management/

strategic alignment

. Motivation/strategic align-

ment

Gap 3: The service

delivery gap:

Quality

specifications are

not met in service

production and

delivery

. Employees have an inaccurate perception

of quality specifications or customer re-

quirements

. Employees are unsure about their roles in

the service delivery process (role ambigu-

ity)

. Employees do not understand how their

jobs contribute to the delivery of service

to the external customer

. Employees are not committed to deliver

on the required service level, whether

internal or external

. Technological support, particularly to ac-

cess information, is insufficient




. Motivation


Gap 4: The market

communication

gap: Promises given

by market

communication are

not consistent with

service delivered

. Lack of internal communication about

external marketing activities

. Lack of will or ability of the internal

market to deliver on the promises given

to the external market


. Motivation

Gap 5: The

customer service

perception gap:

Correlation between

customers' service

expectations and

perceptions of

service delivery

Not applicable (the interface falls outside

the scope of internal communication)

Not applicable (the interface

falls outside the scope of inter-

nal communication)

80


communication at corporate and departmental levels. It also forms an integral part ofvarious corporate initiatives aimed at the internal market, or employees, with theobjectives of informing staff of corporate objectives and other relevant information, aswell as motivating them to deliver on corporate objectives.

RESEARCH DESIGN AND IMPLEMENTATION

This study focuses on internal communication at the location of the interface of Gap3, the Service Delivery Gap, where the quality and nature of internal communicationmost directly affect service delivery. The effects of internal communication along theservice delivery chain are most evident here. Its desired outcomes (strategicalignment, motivation and the related factors of organisational learning, knowledgemanagement and information dissemination) play a strong role in service deliveryand act as strong indicators of a service orientation.

The items measured at Interface 3 (Service Delivery Gap)

The factors within each construct making up the specifications of Gap 3 (see Table 1)were drawn from the literature, and these were developed into the individual items ofthe measuring instrument. Table 2 indicates the subsets of factors measured perconstruct for Interface 3.

Methodology

The methodology for this study was initially used by Chaston (1995) to develop atypology for the evaluation of branch-level perceptions of internal customermanagement processes within UK clearing banks. Both studies have similartheoretical foundations (the Gap Analysis Model) and both measure employeeperceptions to identify the internal processes that contribute to service delivery. As isthe case with this study, Chaston (1995) also structured his study on the principles ofthe gap analysis models proposed by GroÈnroos (2001) and Parasurman et al. (asdiscussed in Chaston 1993, 1995; Auty & Long 1998). However, where Chastondefines specific constructs to measure employees' perceptions of internal customermanagement practices, this study focuses on employees' perceptions of internalcommunication processes in a service context. The methodology applied here is thussimilar to Chaston's, but the constructs measured are different.

The Gap Analysis Model based on the SERVQUAL system, as developed byParasuraman, Zeithaml & Berry, has been the topic of much debate regarding itsreliability and validity (Auty & Long 1998: 11). Yet, this model has made the mostsignificant contribution to the study of service marketing in recent years (Buttle 1996:158). The reliability of the gap analysis model as applied here is derived from its wideapplication in the field of service marketing, the context within which this study wasundertaken. Validity was addressed by identifying and measuring specific constructs

81


Table 2: List of constructs and their subsets

Construct Subset of factors

Availability of information on external clientneeds

. Effectiveness of information flow aboutclient needs/service specifications, in-cluding changes in specifications

. Access, storage and retrieval of informa-tion

. Quality of information (up-to-date, accu-rate, relevant)

Availability of information on internal clientneeds

. Extent to which departments communi-cate with one another about meetingclient requirements

. Effectiveness of inter-departmental com-munication

. Effect of organisational structure on inter-departmental communication

Understanding of individual roles in theservice delivery process

. Understanding of role in meeting clientneeds

. Extent and effect of communication be-tween individual and superior regardingclient needs (vertical communication)

. Feedback on performance (effect, rele-vance)

Understanding of departmental roles in theservice delivery process

. Understanding of where the departmentfits into the total service delivery process(role, priorities)

. Feedback on departmental performance(extent, effect)

Motivation levels: individual, departmental . Motivation levels of departments to deli-ver to internal clients

. Motivation levels of individuals to deliverto internal clients

. Motivational effect of management'scommitment to client satisfaction

that are indicative of internal communication. A number of these constructs havebeen identified by GroÈnroos (2001) in the Gap Analysis Model, and this set ofconstructs was expanded with others defined from the literature review.

A survey was undertaken among employees at MHG head office in Cape Town.The questionnaire was developed to measure employees' perceptions of the degree towhich internal communication supports a service orientation at Interface 3, thejuncture of service delivery. The questionnaire was designed to obtain quantitativedata on the five constructs of internal communication identified in Table 2, namely:

82


. Availability of information on external client needs

. Availability of information on internal client needs

. Understanding of individual roles in the service delivery process

. Understanding of departmental roles in the service delivery process

. Motivation levels, both individual and departmental.

The questionnaire comprised 25 statements, each relating to a specific indicatorin the subset of factors that make up each construct. Respondents were asked toexpress their degree of agreement with the 25 statements using a scale ranging from 1(strongly disagree) to 5 (strongly agree). All questions were phrased in the positive toavoid confusion among respondents whose first language was not English.

Sample

The sampling procedure was guided by three objectives:

. To obtain an overall indication of employees' perceptions of the degree to whichinternal communication at MHG supports a service orientation

. To identify possible differences between the perceptions of managerial and non-managerial staff

. To identify possible differences between the perceptions of client contact sections(employees in direct contact with clients) and support sections (employees whorender support services and are not in direct contact with the client, includingHuman Resources, Finance, Information Technology, Public Relations andBranding, Document Processing and Office Support).

To achieve the objectives, a stratified random sample was drawn as follows:

. The population comprised permanent employees at the MHG head office in CapeTown, numbering 573 employees in total.

. The accessible population was identified by eliminating all employees that werenot available as a result of long leave, maternity leave or involvement in specialprojects off site, resulting in a total accessible population of 511.

. The accessible population was divided into strata corresponding to the dataevaluation objectives, resulting in four strata, namely Management Client Contact,Non-management Client Contact, Management Support Services and Non-management Support Services. A sample of 30% (rounded up) was drawn fromeach stratum, applying a technique of random number selection. The sample sizeof 30% was selected based on the guidelines of Du Plooy (1995), which provide fora 95% confidence level and 5% error tolerance.

The detail of the sample drawn is summarised in Table 3.

83


Table 3: Summary of stratified random sample of available population

Stratum Accessiblepopulation

Sample

Management Client Contact 28 9

Non-management Client Contact 309 103

Management Support Services 30 12

Non-management Support Services 144 51

Total 511 175

Response

The questionnaire and covering letter were e-mailed to every individual in thesample. A total of 111 usable questionnaires were returned. A breakdown of responsepercentages per stratum is indicated in Table 4. The total of 111 usable responsesrepresents 63% of the sample and 22% of the accessible population.

Table 4: Summary of response rate per stratum

Stratum Sample Response Percentage

Management Client Contact 9 7 78

Non-management Client Contact 103 67 65

Management Support Services 12 9 75

Non-management Support Services 51 28 55

Total 175 111 63

FINDINGS

Results

The results obtained from the questionnaire are categorised according to the fiveinternal communication constructs identified earlier. The values attached to each ofthe responses are: Strongly disagree = 1; Disagree = 2; Neither agree nor disagree =3; Agree = 4; Strongly agree = 5. For the purpose of analysing the results, the meanscores are interpreted in the following manner:

. A score of 4 and higher would indicate that the majority of respondents agree tostrongly agree with a statement.

84


. Between 3.5 and 4 would indicate a neutral to more positive response, althoughthere would be less than general agreement on the issue in question. Such itemsshould be monitored and measures introduced to prohibit deterioration.

. Between 3 and 3.5 would indicate a neutral to negative response. These itemscould be cause for alarm, requiring future action.

. Lower than 3 would indicate that the majority of respondents disagree to stronglydisagree with a statement. It will be considered an internal communication gapwarranting immediate attention.

Internal communication that supports a service orientation is defined in terms ofthe five constructs measured. Therefore, the degree to which internal communicationat MHG supports a service orientation can be assessed in terms of the overall meanratings measured for each of the five constructs in each of the four identified strata.These ratings are indicated in Table 5.

With the exception of one construct, the understanding of individual roles in theservice delivery process, all constructs achieved an overall mean rating of below 4, theminimum score indicating general agreement among respondents. The twoconstructs that scored the lowest overall mean ratings relate to the availability ofinformation on both internal and external clients. These two areas would therefore

Table 5: Summary of overall mean ratings for each construct per stratum

Construct Mean rating on 5-point scale

Overall mean

rating

Client

Contact

Management

Client Contact

Non-manage-

ment

Support

Manage-

ment

Support

Non-man-

agement

Availability of informa-

tion on external client

needs

3.34 3.89 3.29 3.00 3.41

Availability of informa-

tion on internal client

needs

3.53 4.04 3.45 3.42 3.64

Understanding of indi-

vidual role in the ser-

vice delivery process

4.05 4.6 3.99 4.09 4.06

Understanding of de-

partmental role in ser-

vice delivery process

3.88 4.31 3.83 3.62 3.99

Motivation levels, both

individual and depart-

mental

3.91 4.52 3.86 3.91 3.89

85


require immediate attention to increase the extent to which internal communicationsupports a service orientation at MHG. Although the remaining two constructs(understanding of departmental role in the service delivery process, and individualand departmental motivation levels) were closer to the 4-point overall mean rating,there is no majority agreement on these two issues either. It would therefore be usefulto investigate these two aspects further to identify possible causes and relationshipswith the other constructs (for example, whether the lack of information orunderstanding of roles could be linked to decreased motivation levels).

In terms of differences among the four strata, the most apparent finding is thesignificantly higher mean average ratings achieved by the Client Contact Manage-ment grouping for all five constructs. This grouping indicated general agreementwith four of the five constructs. With regard to the other groupings, there is very littlevariance in ratings, and specifically no ratings where one group indicated agreementin contrast with non-agreement of other groups.

Specific areas that were identified as requiring attention (overall mean rating of3.5 or lower) are the following:

. Effective communication of client needs to the business

. Effective communication of changes in client needs to the business, particularly tothe Support sections

. Easily accessible storage of information on client needs

. Availability of up-to-date information on client needs for all groupings other thanClient Contact Management

. Accuracy of information on client needs, again for all groupings other than ClientContact Management

. Effectiveness of inter-departmental communication in ensuring that client needsare met, particularly as perceived by the Support sections

. Clarity among departments on priorities regarding client service

. Priority attached to meeting client needs by Support Management

. Motivation levels of Support Management to strive for client satisfaction.

Extent to which internal communication supports a service orienta-

tion at MHG

Table 6 indicates the following:

. The five constructs identified earlier

. Employees' perceptions of the effectiveness or ineffectiveness of each construct

. The desired functions of internal communication in supporting a serviceorientation (strategic alignment, the linked outcomes of organisational learning,knowledge management and information dissemination, and motivation).

86


Table 6: Effectiveness of internal communication functions in relation to constructsmeasured

Construct Indication of

effectiveness

Internal communication

function(s)

1 Availability of information on external client

needs

Ineffective Organisational learning/

knowledge management/

information dissemina-

tion

2 Availability of information on internal client

needs

Ineffective Organisational learning/

knowledge management/

information

dissemination

3 Understanding of individual role in the service

delivery process

Effective Strategic alignment

4 Understanding of departmental role in the

service delivery process

Ineffective Strategic alignment

5 Motivation levels, both individual and depart-

mental

Ineffective Motivation

The summary provided in Table 6 indicates that none of the desired outcomes ofinternal communication are effective in achieving the objectives of each of theconstructs. Strategic alignment is partially successful, as employees indicated generalagreement that they understand their individual roles in the service delivery process.However, the same result was not achieved for Construct 4, understanding ofdepartmental role in the service delivery process, which points to a lack of a commonunderstanding of `the bigger picture' and what needs to be done to achieve serviceobjectives throughout the company. Organisational learning/knowledge manage-ment/information dissemination and motivation are ineffective in the company atlarge.

Furthermore, a significant discrepancy exists between the management groupingof client contact departments on the one hand and the rest of the organisation on theother. If viewed against the characteristics of a service orientation, it is clear thatinternal communication at MHG head office does not support a service orientation,particularly at Interface 3, which addresses actual service delivery. A serviceorientation is characterised as follows:

. Service quality delivery and achieving customer satisfaction are viewed as toppriorities throughout the organisation, from strategic to operational levels.

. There is a realisation that the quality of service delivery to internal customersdirectly affects the quality of service delivery to external customers.

. All internal service production activities are integrated to meet the needs and/orrequirements of the external customer.

87


The internal communication functions of strategic alignment and motivationimpact on the first and second characteristics. Because both functions are ineffective,it can reasonably be argued that internal communication at MHG does not support aservice orientation in this regard. Furthermore, internal communication shouldsupport the notion of the internal customer by facilitating inter-departmentalcommunication and cooperation within the framework of meeting the needs ofexternal clients. The survey results indicate that this is not generally the case atMHG, because interdepartmental communication is not achieving the desired results,and information on the external client is not effectively disseminated to all areas ofthe business. With regard to the third characteristic of a service orientation, thediscrepancy in almost all areas between perceptions of Client Contact Managementand the rest of the business points towards a lack of integration of goals, information,knowledge and eventually communication.

Against this background, it can be concluded that internal communication atMHG does not support a service orientation, although there are certain areas ofstrength as indicated by the results of the survey.

Internal communication needs at MHG

The ultimate goal of the study is to identify internal communication needs at MHGbased on assessment of the degree to which internal communication supports aservice orientation. Based on the results of this assessment, the following internalcommunication needs are identified:

Strategic alignment

An internal communication programme needs to be developed around the objectiveof strategic alignment with the service strategy of the organisation. The followingspecific areas need attention:

. Clarity and alignment among departments on the priorities regarding clientsatisfaction

. General understanding throughout the business on corporate service strategy

. The establishment of internal service delivery and the concept of the internalcustomer

. Clarification and consensus about the role of each department in the servicedelivery chain.

Organisational learning, knowledge management and information disse-mination

It would be important for MHG to improve the flow of information from source tothe rest of the business in order to achieve success with the implementation of an

88


internal service delivery process in particular. The following are specific areas that

were highlighted for attention:

. Effective and timely distribution of external client information from source to the

rest of the organisation

. Improvement of inter-departmental communication to ensure clarity on bothinternal and external client requirements

. Accuracy of information.

Motivation

The motivation level of staff to meet organisational objectives is often a function of

the outcomes with respect to strategic alignment and organisational learning,knowledge management and information dissemination, implying that an improve-

ment in these two could lead to increased motivation levels. However, the effect of

communication by and with management (departmental and overall) is highlighted

by the survey as an area of weakness. An internal communication programme would

therefore have to address the necessity for the affirmative communication of

management support of a service orientation within the framework provided in this

study.

CONCLUSION

This study sets out to provide a meaningful framework for an internal

communication needs assessment that relates in general to the success of a business,

but more specifically to its service orientation. The approach is derived from a service

marketing perspective of internal communication, and it provides a useful instrument

for the assessment of the quality of an organisation's internal communications.

It is suggested that a service orientation among employees is a prerequisite forsuccessful marketing in an ever-changing organisational environment, and that

internal communication plays a crucial role in the establishment of a service

orientation. Using the service-marketing model proposed by GroÈnroos (2001), a

measurement instrument that evaluates the degree to which internal communication

contributes to service quality was developed and tested at the Metropolitan Health

Group.

The findings point to the fact that internal communication does not entirelysupport a service orientation at MHG, although there are areas of strength that

should be extended to the rest of the organisation. In particular, the Client Contact

Management grouping indicates a satisfactory perception of the necessity for internal

communication in establishing a service orientation, but perceptions in the support

89


areas indicate a less than satisfactory situation. Specific areas that require attentionare identified, and these provide the basis for a structured internal communication

programme.Since the conclusion of this study, MHG has embarked on a number of initiatives

that demonstrate a deliberate move in the direction of a service perspective as astrategic approach, based on the same broad principles as those conceptualised byGroÈnroos. As a first phase, MHG has launched a project called Super Service inconjunction with one of its biggest clients. The objective of Super Service is to runthe business from a member-centric perspective, meaning that interactions withindividual members will be relationship-based. In support of the Super Serviceinitiative, an extensive internal communications programme, developed according

to the principles of internal marketing (as discussed in the article), has beenlaunched. In conjunction with training and other change management initiatives, ithas achieved several significant successes ± it has served to help staff in the pilot areafocus on specific outcomes and strategic objectives; it has served as a motivational andeducational driver and a change management vehicle; and (because of its internalsuccess) it was also used as a tool to promote MHG to prospective clients. Therefore,the role of internal communication in service delivery, as applied in this study, hasprovided MHG with a competitive edge on several levels, both internal and external.

REFERENCES

Ashcraft, L. & Stacher, B. 2004. `Courting customer service: all business processes, from

accounting to assembly, affect the ability to retain customers', Gifts and Decorative

Accessories, 105(5): 16±17.

Auty, S. & Long, G. 1998. ` ``Tribal warfare'' and gaps affecting internal service quality',

International Journal of Service Industry Marketing, 10(1): 7±22.

Barnes, B.R. & Morris, D.S. 2000. `Revising quality awareness through internal marketing: an

exploratory study amongst French and English medium-sized enterprises', Total Quality

Management, 11(4/5/6): 473±483.

Beckett-Camarata, E, Camarata, M.R. & Barker, R.T. 1998. Ìntegrating internal and external

customer relationships through relationship management: a strategic response to a

changing global environment', Journal of Business Research, 41(1): 71±81.

Berry, L.L. & Parasuraman, A. 1997. `Listening to the customer: the concept of a service-

quality information system', Sloan Management Review, 38(3): 65±76.

Bronn, P.S., Roberts, H. & Breunig, K.J. 2004. Intangible Assets, Communication and

Relationships. [Online] Available at: www.bledcom.com/pdf/papers. Accessed: 28 June

2004.

Chaston, I. 1993. Ìnternal customer management and service gaps in the UK manufacturing

sector', International Journal of Operations and Production Management, 14(9): 45±56.

90


Chaston, I. 1995. A typology for evaluating branch-level perceptions of internal customermanagement processes within the UK clearing banks', Service Industries Journal, 18(3):332±349.

Clark, M. 2002. `The relationship between employees' perceptions of organizational climateand customer retention rates in a major UK retail bank', Journal of Strategic Marketing,10(2): 93±113.

Drucker, P.F. 1972. The Practice of Management. London: Pan Books.Du Plooy, G.M. 1995. Introduction to Communication ± Course Book 2: Communication

Research. Kenwyn: Juta.Du Plooy-Cilliers, F. 2002. `Paradigms and paradoxes: shifting management thinking', In

Verwey, S. & Du Plooy-Cilliers, F. (eds), Strategic Organisational Communication.Sandown: Heinemann.

Duncan, T. & Moriarty, S.E. 1998. A communication-based marketing model for managingrelationships', Journal of Marketing, 62(2): 1±13.

Durvasula, S., Lysonski, S., Mehta, S.C. & Tang, B.P. 2004. `Forging relationships withservices: the antecedents that have an impact on behavioural outcomes in the lifeinsurance industry', Journal of Financial Services Marketing, 8(4): 314±326.

Gilmore, A. & Carson, D. 1995. `Managing and marketing to internal customers', In Glynn,W.J. & Barnes, J.G. (eds), Understanding Services Management. Chicester: John Wiley &Sons.

Goldsmith, RE. 1999. `The personalised marketplace: beyond the 4Ps', Marketing Intelligence,17(4): 178±185.

Gore, C. & Gore, E. 1999. `Knowledge management: the way forward', Total QualityManagement, 10(4/5): 554±560.

GroÈnroos, C. 1996. `Relationship marketing: strategic and tactical implications', ManagementDecision, 34(3): 5±14.

GroÈnroos, C. 1997. `From marketing mix to relationship marketing ± towards a shift inmarketing', Management Decision, 35(3/4): 322±339.

GroÈnroos, C. 1998. `Marketing services: the case of the missing product', Journal of Businessand Industrial Marketing, 13(4/5): 322±338.

GroÈnroos, C. 2001. Service Management and Marketing: a Customer Relationship ManagementApproach. Chicester: John Wiley & Sons.

Homburg, C. & Stock, R.M. 2004. `The link between salespeople's job satisfaction andcustomer satisfaction in a business-to-business context', Journal of the Academy ofMarketing Science, 32(2): 144±158.

Hustad, W. 1999. Èxpectational learning in knowledge communities', Journal ofOrganizational Change Management, 12(5): 405±418.

Johnson, C.R. & Schultz, D.E. 2004. A focus on customers', Marketing Management, 13(5):20±26.

Jordan, J. 2003. `Knowledge management: from nebulous to necessary for customer service',Customer Interaction Solutions (21)10: 44±46.

Kapner, F. 2004. Ìtalian companies must make rapid structural changes to survive Europe',Financial Times, 2 June: 17.

91


Langerak, F. 2003. `The effect of market orientation on positional advantage andorganizational performance', Journal of Strategic Marketing, 11(2): 93±115.

Lovelock, C.H. 1995. `Managing services: the human factor', In Glynn, W.J. & Barnes, J.G.(eds), Understanding Services Management. Chicester: John Wiley & Sons.

Luthans, F. 1992. Organizational Behavior. New York: McGraw-Hill.Malhotra, Y. 1996. Organizational Learning and Learning Organizations: an Overview. [Online]

Available at: www.brint.com/papers/orglrng.htm. Accessed: 29 March 2004.Marlow, E. & Wilson, P. 1997. The Breakdown of Hierarchy: Communicating in the Evolving

Workplace. Newton: Butterworth-Heinemann.Mersham, G.M. & Skinner, C. 2001. New Insights into Business and Organisational

Communication. Sandown: Heinemann.Moorcroft, D. 2003. `Linking communication strategy with organizational goals', Strategic

Communication Management, 7(6): 24±27.Nowak, G.J., Cameron, G.T. & Delorme, D. 1996. `Beyond the world of packaged goods:

assessing the relevance of integrated marketing communication for retail and consumerservice marketing', Journal of Marketing Communication, 2(3): 173±190.

Parasuraman, A., Zeithaml, V.A. & Berry, L.L. 1985. A conceptual model of service qualityand its implications for future research', Journal of Marketing, 49(4)(Autumn): 41±50.

Puth, G. 2002. The Communicating Leader. Pretoria: Van Schaik.Robbins, S.P. 1998. Organizational Behavior. New Jersey: Prentice Hall.Schneider, B. 2004. `Welcome to the world of services management', Academy of Management

Executive, 18(2): 144±150.Schumann, M. 2004. `Do you need to take the spin out of employee communication?',

Communication World, 21(2): 28±32.Senge, P.M. 1990. `The leader's new work: building learning organizations', Sloan

Management Review, 32(1): 7±23.Sivan, Y. 2000. `Knowledge processes: driving organizational practices through knowledge',

WebNet Journal, 2(4): 12.Stata, R. 1989. Òrganizational learning ± the key to management innovation', Sloan

Management Review, 30(3): 63±73.Steinmetz, A. 2004. Ìnternal branding blueprint', B to B, 89(10): 9.Stevens, L. 2001. `Business-to-employee ± connecting employees to core data can be an

intelligent idea', PC Magazine, 20(13): 154±157.Thompson, A.A. & Strickland, A.J. 1984. Strategic Management: Concepts and Cases. Plano:

Business Publications.Tourish, D. & Hargie, O.D.W. 1998. `Communication between managers and staff in the

NHS: trends and prospects', British Journal of Management, 9(1): 53±71.Van der Walt, L. 2002. `Putting knowledge to work', In Verwey, S. & Du Plooy-Cilliers, F.

(eds), Strategic Organisational Communication. Sandown: Heinemann.Varey, R.J. & Lewis, B.R. 1998. A broadened concept of internal marketing', European Journal

of Marketing, 33(9/10): 926±944.Watson Wyatt Worldwide. 1999. Communications study. Linking communications with

strategy to achieve business goals. Bethesda: Watson Wyatt Worldwide/IABC.

92


Wilson, A. 2004. Ìs internal communication giving line managers the right support?',Business Communicator, 5(2): 12.

Yeomans, L. 2004. Internal Communication and Organizational Learning: an InterpretiveApproach. [Online] Available at: www.bledcom.com/pdf/papers. Accessed: 28 June 2004.

93


Stress-management strategies of firefighters: afortigenic approach


A B S T R A C T

Firefighters not only perform a firefighting function, but also render

emergency, fire prevention and rescue services, all of which are

inherently stressful. This research was undertaken to determine the

relationship between certain psychological strengths of firefighters and

the strategies they adopt to cope with stress. The measuring instru-

ments were applied to the entire sample, after which a stanine scale was

used to distinguish between individuals who achieved low and high

scores respectively with regard to psychological strengths. An interview,

based on the phenomenological paradigm, was conducted using five

firefighters from each of the low-scoring and high-scoring groups. An

analysis of the qualitative results indicates that firefighters with high

levels of psychological strengths cope differently with stress compared

with those with `weak' psychological strengths.

INTRODUCTION

Firefighters not only perform a firefighting function (as generally accepted), but alsorender a series of emergency services as well as fire-prevention and rescue functions.In the USA, firefighting is regarded as the most dangerous occupation (Hildebrand1984), and approximately 280 firefighters are injured or killed every day, while everyyear, 650 are compelled to resign as a result of occupational diseases, includingpsychological disorders (Miller 1995). Research involving 747 Australian firefightersbetween the ages of 21 and 60 showed that their occupation is regarded as morestressful than other occupations and that psychological work stress is the highestpotential type of stress (Monnier, Cameron, Hobfoll & Gribble 2002; Moran & Colless1995).

The working conditions of firefighters create a great deal of tension and anxietyamong them. In such conditions, they are subject to a double dose of stress in thesense that are supposed to save others, and in the process put their own lives on theline (Bates 1994; Britt 1994; Paton 1994; Weiss, Marmar, Metzler & Ronfeldt 1995).

94 Southern African Business Review Volume 10 Number 3

Dr Oosthuizen is a Lecturer and Prof. Koortzen is an Associate Professor in the Department of Industrial and

Organisational Psychology, University of South Africa. E-mail: [email protected]

An additional problem they have to contend with is understaffing at fire stations. Thisplaces huge pressures on the available firefighters, increases their stress levels andstretches their coping skills to the limit (Smith, Manning & Petruzzello 2001).

Antonovsky (1979) defines a stressor as a demand made on the internal orexternal environment of the organism that disturbs the homeostasis (balance), whilerestoring the balance relies on an energy consumption action that does not occurautomatically and promptly. Lazarus & Folkman (1984) define stress as continuouslychanging cognitive and behavioural endeavours to manage specific external and/orinternal demands that exceed personal resources. The way in which firefightersrespond to the demands of the situation will probably depend on certain personalitytraits and coping mechanisms or skills (StruÈmpfer 1995, 2003). Some firefightersappear to be better able than others to cope with these stressful situations.

Stress can seriously damage a person's psychological and physical health. Physicalillnesses associated with stress include high blood pressure, heart attacks, stomachulcers and infertility. The psychological effect of stress is often more subtle andinsidious. Stress-related illnesses and deviations have a cumulative and ripple effecton the individual, the organisation and the community at large. The actual andhidden cost of stress is huge, and some people maintain that it has a definite impacton an organisation's bottom line and the national economy as a whole (Dietrich &Hattingh 1993). It is clear from this background discussion that it is necessary tofocus on the skills that better enable firefighters to handle stress in their workingsituation and to identify and develop psychological strengths that can benefit andassist them.

At this point, it is necessary to pose the following question: What is a firefighterwho is able to handle these stressful situations actually like? A knowledge of thiscould add immeasurable value in the future selection and training of firefighters(StruÈmpfer 1998). There would be definite advantages for both firefighters and theorganisation concerned (in this instance, local authorities), such as increasedcommitment to the organisation, job satisfaction, job involvement and job success, aswell as a reduction in labour turnover and the elimination of unnecessary staffexpenses (Cleal 1990; Dietrich & Hattingh 1993).

If firefighters' handling of stress is studied from the perspective of Shafer's stress-management model, the emphasis is on strengths that enable individuals to cope withstress (Shafer 1996, 2000). From a salutogenic (Antonovsky 1987) or fortigenicorientation (StruÈmpfer 1995, 2003), it is necessary to determine the source of health(salutogenesis) or the source of strengths (fortigenesis). According to Antonovsky(1987), stressors such as change and huge demands occur generally among people,and in spite of them, people actually survive and remain healthy. Antonovosky (1987)contends that the presence of stress may be of less significance for a person's health,but that his or her judgement of and reaction to a stressful event is in fact the decisivefactor in his or her adaptation to the situation. Wissing & Van Eeden (1997, 2002a,

95


2006b) refer to the study of psychological strengths as psychofortology, involving thesource, nature and manifestation of psychological well-being and ways to promote it.The focus in this research was on the following psychological strengths: locus ofcontrol, sense of coherence, hardiness, self-efficacy and learned resourcefulness(Antonovsky 1987; Marais 1997). These psychological strengths were selected becausethey represent different paradigms (physical, cognitive, conative and affective) as wellas the fact that a great deal of research is currently being conducted in these areas.The presence of psychological strengths among firefighters, however, has not yet beeninvestigated.

According to StruÈmpfer (1995, 2003), sense of coherence is regarded as the mostimportant psychological strength. Ludik (1996) found that sense of coherence (as apsychological strength) plays a role in employees' handling of the process ofintegration in the South African National Defence Force. According to Marais (1997),there is a moderate to strong correlation between managers' psychological strengths(sense of coherence, locus of control, learned resourcefulness, self-efficacy andhardiness) and their ability to cope with organisational change. Firefighters' copingwith stressful situations could be influenced by psychological strengths. As far as theauthors could ascertain, the fortigenic orientation has not yet been applied todetermine firefighters' handling of stress.

The aim of this research is to determine the relationship between certainpsychological strengths of firefighters and the strategies they adopt to cope with stress.

Stress-management strategies

The literature describes the theoretical profile of people who can handle stresseffectively and ineffectively (firefighters) as follows:

. Physical behaviour. Individuals who can handle stress (effective copers) havehealthy eating habits and participate in constructive leisure and recreationalactivities and physical exercise (De Villiers 1988; Dietrich & Hattingh 1993; Elliot,Goldberg, Duncan & Kuehl 2004). People who have difficulty handling stress tendto consume alcohol, smoke and have poor eating habits. They do not put asideenough time to devote to constructive leisure and recreational activities and dovirtually no physical exercise (De Villiers 1988; Dietrich & Hattingh 1993).

. Cognitive behaviour People who cope with stress redefine stressful situations aschallenging and exciting and re-evaluate their coping skills positively (Van RheedeVan Oudtshoorn 1988). They use cognitive avoidance as a strategy; for example,they would regard people who have burnt to death as lifeless objects (Linton1995). They also employ positive cognitive talking to themselves (for example,`Ì'm trained to do this; I can handle it.'') (Holaday, Warren-Miller, Smith & Yost1995). Those who have difficulty coping redefine stressful situations asoverwhelming and threatening and see themselves as powerless and out of

96

Stress-management strategies of firefighters: a fortigenic approach

control, because of their negative reassessment of their coping skills (Dietrich &Hattingh 1993; Fullerton, McCarroll & Ursano 1992; Ursano, Norwood &Fullerton 2004b).

. Affective behaviour. People who cope effectively apply emotional self-control,affective regulation, acceptance and controlled emotional release. For example, inthe case of controlled emotional release, after a particular incident, a firefighterwill express his frustration about the events. In other instances, emotions such asfear of the unknown, rage, depression and feelings of uncertainty are largelysuppressed (Fullerton et al. 1992; Ursano, Fullerton & Norwood 2004a; Linton1995). Some people refer to this as emotional distancing. This entails the exclusionof thoughts and feeling by experiencing everything as unreal when renderingassistance and the negation of feelings (Holaday et al. 1995). By contrast,individuals who do not cope well experience feelings of guilt and helplessness(Fullerton et al. 1992), uncertainty, rage, depression, frustration and anxiety (DeVilliers 1988; Nevid, Rathus & Greene 2005).

. Conative behaviour. People who cope effectively use social support to handlestress. This applies especially when they work in pairs and support one another inremaining focused on the task (Fullerton et al. 1992; Fullerton, Ursano &Norwood 2004). They concentrate on the task at hand and avoid thoughtsrevolving around the consequences of events (Dyregrov & Mitchell 1992). They arealso extremely loyal and dedicated workers who strive to make rational purposiveefforts to solve problems (Dietrich & Hattingh 1993), and in some way to make ameaningful contribution (Alexander & Wells 1991; Raphael, Sing, Bradburg &Lambert 1983±1984). Because they render emotional and physical support toothers, they develop a sense of altruism which, in turn, appears to be an effectivestress-management technique (McCammon, Durham, Allison & Williamson1988). The following modes of behaviour, however, are characteristic of peoplewho have difficulty managing stress: emotional outbursts, negative interpersonalrelationships, over-involvement in work and a preoccupation with their personalproblems (with a concomitant lack of sympathy for others).

Personality traits that influence firefighters' stress-management

strategies

Marais (1997) defines personality traits as general dispositions or orientations that arerelevant in a variety of situations. According to some researchers, there is little or nocorrelation between personality traits and stress-coping responses (FolkmanFolkman, Lazarus, Gruen & De Langis 1986). Nevertheless, it would seem that alarge number of individuals who manage to handle stress do have a preference for acertain coping strategy and that variables linked to personality traits do in factdetermine stress-management behaviour (Folkman, Lazarus & Dunkel-Schetter

97


2000). Marais (1997) suggests that particular patterns of stress management may exist,because certain personality traits are regularly used to produce specific responses.Personality can probably influence the outcome of coping via the consequences of thebroad tendencies in stress management.

StruÈmpfer (1995, 2003) distinguishes various constructs including locus ofcontrol, sense of coherence, hardiness, self-efficacy and learned resourcefulness (self-control) for the conceptualisation of psychological wellness. These constructs areapplicable in this research, primarily because they were selected by Antonovsky (1991,2002) as part of the generalised personality orientation and were studied in relation tosuccessful stress management and fortigenic outcomes:

. Locus of control. The concept of locus of control (Rotter 1966, 1999) was based onthe belief that outcomes (reinforcements) are either attributable to personalityfactors (internal control) or caused by factors outside the individual (externalcontrol). Individuals with an internal locus of control orientation believe that thereinforcement of their behaviour depends on their achievements, abilities anddedication. However, people with an external locus of control orientation contendthat chance happenings, fate, fortune and certain significant others are responsiblefor reinforcing their behaviour.

. Sense of coherence. The key construct of the salutogenic approach is whatAntonovsky (1979, 1987) defines as sense of coherence. According to Antonovsky(1987, 2002), sense of coherence is a global orientation that expresses the scope of aperson's ongoing, sustained and dynamic feeling of self-assurance which:

Ð Makes the stimuli derived from a person's internal and external environmentsin his or her life structured, predictable and explicable

Ð Makes resources available to handle the demands made by the stimuliÐ Gives value to demands that are challenges in which one can invest and with

which one can form links.

If a person has a high sense of coherence, he or she experiences stimuli ascomprehensible, under control and meaningful. Studies show high negativecorrelations between sense of coherence and measures of negative affect such asanxiety and neuroticism (Kravetz, Drory & Florian 1993), as well as stress anddepression (Bowman 1996).

. Hardiness. Kobasa (1979) regards hardiness as a global personality construct thatmediates between stress and health relationships. Hardiness comprises threecomponents, namely connectedness (as opposed to alienation), control (asopposed to helplessness) and expectations that challenge (as opposed to threaten),as the norm in life (Maddi & Khoshaba 1994).

. Self-efficacy. Bandura (1986, 2004) defines self-efficacy as individuals' assessmentsof their ability to organise and perform certain actions that are required to

98


maintain, organise and execute promised types of performance. Self-efficacy alsorefers to a person's belief in his or her ability to mobilise motivation, cognitiveresources and certain actions necessary to control the demands posed by tasks(Bandura 1988, 2004). One could thus say that the more an individual feels that heor she is mastering a task, the more he or she observes others, the more he or she isexposed to the execution thereof and the more he or she experiences intimacy thatfacilitates performance (for example, not feeling anxious), the stronger his or herself-efficacy will be (Mataruzza, Weiss, Herd & Miller 1984).

. Learned resourcefulness (self-control). Learned resourcefulness refers to anacquired repertoire of self-controlled behaviour and skills (mostly cognitive)through which a person controls internal responses, such as emotions, pain andcognitions, that interfere with the execution of ongoing conduct (Fisher & Reason1991; Rosenbaum 1990, 2000). The concept of learned resourcefulness originatedfrom the self-control theory of Kanfer (1977) and Meichenbaum's (1985) stressinoculation training programme. The assumption is made that any endeavour tocope with stressful events includes efforts to exert self-control (Fisher & Reason1991).

Each of the these constructs focuses on another concept. Yet, the overarching endgoal is the same, namely to answer the following questions: ``How does a firefightermanage stress?''On the basis of the discussion of these constructs, the expectation isthat the firefighters' stress-management skills behaviour will differ according to highand low levels of psychological strengths.

METHOD

Research design

The research was both quantitative and qualitative. It was quantitative in the sensethat a survey design (Huysamen 1993, 1998) was used to determine whetherfirefighters in a local authority differ significantly in respect of fortological constructs.It was qualitative in the sense that interviews, based on the phenomenologicalmethod (Jones, Moore & Snyders 1988), were used to determine whether qualitativedifferences exist in respect of the stress-management strategies employed byfirefighters with high and low levels of psychological strengths.

Participants

The total population of firefighters attached to the fire station of a local authority(N = 45) was involved in the research. Thirty-nine (86.67%) of the firefighters weremale and six (13.33%) female. Sixteen (35.56%) were between the ages of 19 and 25,

99


while 15 (33.33%) were between the ages of 26 and 30. Sixteen (35.56%) wereAfrikaans speaking, 13 (28.88%) English speaking and 16 (35.56%) spoke an Africanlanguage. Nineteen (42.22%) were learner firefighters (level II), nine (20%) wereleader firefighters, and the remainder were fairly evenly scattered among the other sixranks.

Measuring instruments

Firstly, the following measuring instruments were used to determine the presence orabsence of the psychological strengths:

. Locus of Control Questionnaire (LCQ) (Schepers 1995)The Locus of Control Questionnaire was used to measure the locus of control.The three scales of this measuring instrument were subjected to an an itemanalysis, and their reliability was higher than 0.8. The reliability (alphacoefficients) of the three subscales of the LCQ was as follows (Schepers 1995):External Control: 0.80; Internal Control: 0.77; Autonomy: 0.80. All the items thushave acceptable indices of reliability (Schepers 1995). Significant correlations withvarious measuring instruments confirmed the construct validity of thequestionnaire. As far as criterion-related validity was concerned, the researchersfound that the questionnaire correlated with a composite criterion of job success(r = 0.62) (Schepers 1995).

. Life Orientation Questionnaire (LOQ) (Antonovsky 1987, 2002)The LOQ questionnaire is used to measure sense of coherence. The reliability(internal consistency) of the three scales of the LOQ ranges from 0.83 to 0.93 (inrespect of various population groups, languages and cultures). In the variousstudies conducted in relation to test-retest reliability, coefficients ranging between0.41 and 0.97 were obtained. The construct validity of the LOQ ranges from 0.38to 0.72 (Antonovsky 1993).

. Personal Views Survey (PVS) (Kobasa 1979)The PVS is used to measure hardiness. The reliability of the PVS ranges from 0.70to 0.85 (Kobasa, Maddi & Zola 1983). According to Kobasa (1982), there aresignificant correlations between stress and illness, on the one hand, andconnectedness (r = 0.85), control (r = 0.68) and challenge (r = 0.70), on theother.

. Self-efficacy Questionnaire (SEQ) (Sherer & Maddux 1982)The SEQ is used to measure self-efficacy. The reliability (internal consistency) ofthe SEQ varies between 0.71 and 0.86 (Kossuth, personal communication, 9January 1997). The SEQ also has content and construct validity (Maddux &Gosselin 2003).

. Self-control Scale (SCS) (Rosenbaum 1980, 2000)The SCS is used to measure learned resourcefulness. The test-retest reliability of

100


the SCS is 0.96 (after four weeks), while internal consistency ranges from 0.78 to0.86 (Rosenbaum & Palmon 1984). Rosenbaum & Ben-Ari (1985) indicate that theSCS is a valid instrument for measuring learned resourcefulness.

Secondly, a quantitative data collection method, namely personal interviewsbased on the phenomemological method, was used to measure the stress-copingstrategies employed by participants (Jones et al. 1988). The interviews were non-directive and conducted on the basis of the central question: ``What strategies do you,as a firefighter, use in all facets of your humanity to handle stress?'' The question wasasked consistently each time, by explaining that the term `humanity' refers tophysical, cognitive, affective and conative functioning. Each of these concepts wasbriefly explained each time. The interview was conducted in a room equipped witheasy chairs, and a tape recorder was switched on (with the participant's permission)as soon as the interview started. An effort was made to put the participant at ease assoon as he or she reported for the interview. Nondirective interviewing techniquessuch as noticeable body language, reflection, clarification, minimal encouragementand silences were used to help participants to articulate their experiences(Meulenberg-Buskens 1989).

The tape recording of the interview was transcribed verbatim by the researcher sothat the information collected could be analysed. Information analysis (Giorgi 1985)was used to analyse and interpret the research data systematically, objectively andquantitatively (Kerlinger 1986, 2000). Firstly, the universe of the contents that had tobe analysed was defined. Secondly, units of analysis, namely words and themes, weredetermined. Thirdly, superfluous data were eliminated and the meaning of theremaining units determined. Fourthly, concrete language used by the participants wasconverted to scientific language and concepts. The participants' exact words wereused as substantiation. Integration and synthesis were then performed on the basis ofthe insights gained.

The reliability of the content analysis was promoted by the coding done by theresearcher and two independent psychologists. These individuals concurred about thethemes that emerged from the interviews. Two psychologists (with backgrounds inresearch methodology) agreed that the research plan and its application wereacceptable. The researcher attempted to promote validity by spending adequate time(about 90 minutes) with each participant. Socially desirable responses were limited byusing interviewing techniques (as described). Rephrasing and repetitition ofquestions were used to obtain credible information (Krefting 1991, 2003).

Procedures

Firstly, the measuring instruments were administered to the total population, afterwhich a stanine scale was used to identify firefighters with high and low scores on the

101


fortological constructs. Secondly, interviews were conducted with ten participants(five of the 11 [25%] with the highest, and 5 of the 11 [25%] with the lowest scores onthe quantitative measuring instruments). These ten participants were purposefullyselected, because the researcher deemed that they would best be able to verbalise theirstress-management strategies.

Statistical analysis

The statistical analysis was conducted by means of the SAS program (SAS Institute1996). Since each of the five quantitative measuring instruments had different meansand standard deviations, the scores were standardised (by converting them to astanine scale) to make the measuring instruments comparable. The mean staninescore for each participant on the five measuring instruments was then determined.These scores were arranged from high to low in an attempt to identify contrast groups(11 participants [25%] with high scores and 11 [25%] with low scores in respect of thefive constructs) for interviewing purposes. As already mentioned, five participantsfrom the `high' group and five from the `low' group were purposely selected with aview to phenomenological interviews (see Table 1).

Table 1: Participants from among those with the lowest and the highest scores onpsychological strengths

Highest 25% Lowest 25%

Participant Mean sta-nine score

Standarddeviation

Participant Mean sta-nine score

Standarddeviation

8 5.63 1.09 27 3.63 3.15

3 5.72 0.88 28 4.37 2.49

5 5.76 2.26 35 4.59 1.76

44 5.80 2.84 40 4.59 1.65

34 5.87 2.27 10 4.60 2.23

The Wilcoxon test was used to determine whether there was a significant differencebetween the stanine scores of the two groups of participants (Steyn, Smit, Du Toit &Strasheim 1995). A Z-value of 2.51 was obtained, which indicated that there was astatistically significant difference (p = 0.0122) between the mean stanine scores of thecontrast groups. This difference was practically significant (large effect) (d > 0.8)(Cohen 1988).

RESULTS

The physical stress-management strategies of the two groups of firefighters areindicated in Table 2.

102


Table 2: Physical stress-coping strategies of firefighters

Low scores on psychological strengths High scores on psychological strengths

Theme Participant Theme Participant

27 28 35 40 10 8 3 5 44 34

Does physical exercise x x x Does physical exercise x x

Participates in sport x x x Participates in sport x

As regards physical stress-management strategies, it is interesting to note that threeof the participants in the group with the lowest scores for psychological strengths usedphysical exercise as a strategy for coping with stress, as opposed to two from the groupwith the highest scores for psychological strengths. Similarly, there were threeparticipants from the group with the lowest scores for psychological strengths whoparticipated in sport, as opposed to one from the group with the highest scores forpsychological strengths.

The cognitive stress-coping strategies of the two groups of firefighters are depictedin Table 3.

Table 3: : Cognitive stress-coping strategies of firefighters



27 28 35 40 10 8 3 5 44 34

Experiences work as

challenging and

exciting

x x x Experiences work as

challenging and

exciting

x x x x

Does positive re-evalua-

tion of stress-coping

strategies

x Does positive re-evalua-

tion of stress-coping

strategies

x x

Uses cognitive self-talk x Uses cognitive self-talk x

Feels in control of

matters

x x Feels in control of

matters

x x

Applies distancing x x Applies distancing x

Feels helpless and not

in control of situation

x x x Uses positive self-talk x

Experiences working

conditions as

overwhelming and

threatening

x x x Applies cognitive avoid-

ance or confrontation

x

Uses negative

imagination

x Applies positive

thinking

x x

103


As regards cognitive stress-management strategies, it would seem from Table 3 thatparticipants in the group with the lowest scores for psychological strengths to a greateror lesser degree also employed `positive' stress-management strategies. This includesregarding their work as challenging and exciting (three participants), doing a positivere-evaluation of stress-management skills (one participant), applying cognitive self-talk (one participant), feeling in control of matters (two participants) and applyingdistancing (two participants). However, three participants reported that they feltpowerless and not in control of the situation, as indicated in the following statement:``Say, for example, it is someone who has been run over, like a child. They crowdaround you. You are trying to see to the child, and you don't know when someonemight put a knife in your back. With them it works as follows: let's say that thegangsters tackle each other. You try to help one of them, and if the others don't wantyou to help him, you are in trouble.''

Three participants experienced their working conditions as overwhelming andthreatening. They articulated their feelings as follows: ``You arrive on the scene of aserious collision. The people are trapped, and you have to deal with them. You alsohave to cope with yourself. How do you handle it?'' One participant reported that heused negative imagination. He articulated this as follows: `Ì always create scenes formyself that very few people would probably think of. I do this often, for example, anaeroplane that has fallen on a shopping centre.''

By contrast, participants from the group with the highest scores for psychologicalstrengths appeared to regard their work as challenging and exciting (fourparticipants). This was evident from the following words: `Ì wasn't scared, but it'sthe adrenalin. For instance, when you drive fast and everything flashes past you, andyour heart beats, and you get all excited. Look, I've always been someone who likesaction, so I enjoy it. You know, when there's an accident, the adrenalin pumps likemad. I enjoy working there.''

Two participants reported that they do a positive re-evaluation of their copingstrategies: `Ì give them basic orders. If I come to a patient and I have alreadystabilised him, I will tell the assistant who came with me, that I want this done whileI am working with the patient. At a fire, I will tell them early on to put out so manylines to the fire and put on your protective gear and go in.''

One participant also reported using cognitive self-talk as a stress-coping strategy:` At that particular moment you can't lose your head. You can also not start panicking,because if you do, things will start going wrong; people will get hurt.''Twoparticipants reported that they felt in control of the situation. They explained it asfollows: `Ì do not experience stress in these situations. You know, you go there with afeeling of at least trying to extinguish the fire. I handle it well compared with myprevious job. I don't really have a problem seeing dead people.'' One participantreported using distancing as a coping strategy: ``We talk ± say, we come to a rescuescene, a serious rescue scene ± you know, on our shift we have a thing ± you will find


104

that the guys joke around a lot.'' One participant reported using positive self-talk tohandle stress, while another employed cognitive avoidance or confrontation: `Ì'vewanted to go for them with my fists. This is saying it straight. Honestly. I find itunacceptable and nothing is done about it. You are in a depressed state and you speakto your officers about it, and it just goes on and on.''

Two participants reported that they employed positive thinking to cope withstress. They expressed this as follows: `Ì know how good my work is. I'm realisticwith myself. All that I ask myself is: did I give everything that I could? Yes, I did. Therest is in God's hands. If I know that I just stood back and did nothing. Yes, then Iwas guilty, but I knew that I just climbed in and did everything I could.''

The affective stress-coping strategies of the two groups of firefighters are indicatedin Table 4.

Table 4: Affective stress-coping strategies of firefighters



27 28 35 40 10 8 3 5 44 34

Experiences anxiety x x x Experiences anxiety x x

Experiences rage x x Experiences rage x x

Experiences aggression x Experiences aggression x

Experiences frustration x Experiences frustration x x

Experiences feelings of

frustration and doubt

x Experiences feelings of

frustration and

insecurity

x

Applies emotional

self-control

x x Applies emotional

self-control

x x x x x

Accepts the situation x x Accepts the situation x x x x x

Experiences guilt

feelings

x x Applies affective

regulation

x x x x


depression and

unhappiness

x Uses controlled

emotional release

x x x


suspense and

impatience

x


uncertainty

x x


fear

x


105

Regarding affective stress-coping strategies, it would appear from Table 4 thatparticipants from the group with the lowest scores for psychological strengthsexperience anxiety, as indicated by the following words: ``You feel as if you are aboutto have a nervous breakdown; your hands start to sweat. The sweat starts under yourarms and runs down. I mean, you can feel it. These are experiences I have had, and Idon't want them. I saw blood in front of me. The bricks were gone. Gas bottles werelying there. Then there was still the smell ± that cyanide has an effect too. Theheadaches started that time, and my nose started bleeding. Then I saw that the guyon the roof had been shot. They said to me: you are going to take him down. Then Isaid: `Sir, I'm not going to. I don't want to go.' ''

They also felt rage: ``You feel unhappy, much of the time; then you just take offyour kit and you sit, and you are angry; then you turn away and you go home andjust try to switch off from everything.'' One participant reported experiencingaggression: ``You just try to live with it, because what else can you do, how can youhandle it differently? Will you go to the guy and argue with him? That won't work. Itwill just cause more trouble.''Another participant stated that he experiencedfrustration: `Ìt is especially frustrating when you are booked ambulance. You workfrom eight o'clock in the morning, till eight o'clock the morning of the next day,nonstop. You just ride, it is medical calls. It's flu, toe and head aches. You know youare going to ride for garbage, you are not going to ride for the stuff that you reallywant to ride for. You are going to ride for the biggest garbage going around''; whileanother experienced feelings of frustration and doubt: ``Response is just as frustratingas ambulance. You often go out on response, for things that aren't really that urgent.And what I really don't like is when you go out with the response vehicle, you speed,you put your assistant's life in danger, plus people on the road, perhaps.''

Two participants mentioned that they had guilt feelings. They expressed this asfollows: ``You can't just go and tell the woman: `Your husband and son are dead.' Thewoman is going to collapse, and then it's your fault. And then I sit with myconscience ± it was my fault the woman was in such a state.'' One participantmentioned depression and feelings of unhappiness. Another spoke of expectation andimpatience, which he articulated as follows: `Ìt gives you this rush, you get thisgenuine rush. I think most guys are genuine junkies. It gives you that boost, youcannot wait to get out there and do it. When you get there, everything just clicks, andyou do not really have to think hard about what to do next, it just happens and it is abeautiful feeling when you do something that works and it goes right.''

Two participants mentioned feelings of uncertainty: ``You are scared, you arenervous, because you don't know what is going to happen out there. You don't knowwhat to expect, you don't know what is waiting around the corner for you.'' Oneparticipant experienced fear: ``Then I fought against my will, should I go? Then I


106

said to myself: just go. Forget about the guy on the roof. Just go and get the person.Then I put the guy in the body bag, and his bladder burst. You also have to pick upand scrape off little pieces of the person. I now found him gruesome.''

All things considered, the above are not really strategies, but actually negativefeelings (as indicated). However, there were also participants from this group whoapplied `positive' stress-coping strategies. Two of them reported that they appliedemotional self-control: `Ì got hard, not rock hard, but you get hard to the situation,you are hard enough to your emotions or whatever. You learn to deal with it. I did notcry, I felt very bad, but I did not cry.'' Two participants reported that they acceptedevents.

By contrast, all the participants in the group with the highest scores forpsychological strengths seemed to apply self-control: ``You have sympathy for theperson, the work makes you very hard. You don't know how to handle the sorrow,then you get rid of it completely, it's just another dead person. You accept it. I'm ashard as stone. It doesn't bother me. I'm actually very hard.'' They accept things thathappen: ``This is my kind of work. I think that if you were soft, you wouldn't be ableto do the work. If you see a broken leg or someone's brains lying on the freeway andyou have to go and pick them up with a shovel, and you can't do the work, what areyou going to do? As time goes on, you become hard. For us it's just another piece ofmeat and another piece of bone.''

Four participants mentioned employing affective regulation as a strategy: ``Youhave to help those who are still alive, instead of feeling very much sorry for those whoare dead, because you have to do your work. If a person is badly injured and there isstill a sign of life, then I do have a feeling to help that person. I do not want to shyaway from that person.'' Three participants reported using controlled emotionalrelease: ``Two dead, one to be cut out. All that I look at at that stage is: who doeswhat? I can't become involved with the patient. As soon as I become involved withthe patient, I ignore the crew. Who will support them? If one of them steps in front ofa vehicle, I will have another patient on my hands. What are the public doing? Myjob at that stage is to ensure that no-one is injured further. Feelings of anxiety (twoparticipants), anger (two participants), aggression (one participant), frustration (twoparticipants) and frustration and insecurity (one participant) were also in factprevalent in this group.

The conative stress-coping strategies of the two groups are indicated in Table 5.As far as conative stress-coping strategies are concerned, it is clear from Table 5, that oneparticipant in the the group with the lowest score for psychological strengths wasprone to emotional outbursts. The same person also reported that he experiencedinterpersonal relationships negatively. Another participant reported that he hadsleeping problems, which probably adversely affected his motivation levels. Bycontrast, social support was of paramount importance for four participants in thisgroup: ``That is part of the job. You get used to it very quickly, and I think the best


107

Table 5: Conative stress-coping strategies on firefighters



27 28 35 40 10 8 3 5 44 34

Experiences sleeping

problems

x

Prone to emotional

outbursts

x Motivates himself and

other firefighters

x

Experiences negative

interpersonal relations

x Acts altruistically

Uses social support x x x x Uses social support x x x x

Employs problem

solving

x x Employs problem

solving

x x

Displays loyalty and

dedication

x Displays loyalty and

dedication

x x x x

way to relieve the problem, is talking to your friends after it.'' Two participantsemployed problem-solving as a strategy: ``When I feel bad and stressed and have a loton my mind, the best way I find to deal with something is I take the problem, and Itake it piece by piece, and I analyse it until I get to the source of the problem. Thesame with a call. I will analyse the call, piece by piece. I will say: `Look the callhappened, there is nothing you can do about it, accept the call happened.' ''

One participant reported that he is a loyal and dedicated worker: `Ì love thiswork. I work half my off-duty time, I work free of charge for the place. That is howmuch I am enjoying the work. I really need it. To run twice as far and twice as hardon a fire ground, is a pleasure''. By contrast, it would seem that four participants fromthe group with the highest scores for psychological strengths deemed social support tobe of vital importance. Two participants employed problem-solving as a strategy. Fourof them stated that they were loyal and dedicated workers. One participant reportedthat he behaved altruistically: ``We have to save ourselves first before we save theinjured person. If you do not, then you die before you save the injured person.'' Oneparticipant regarded motivation of himself and other firefighters as an importantstrategy.

DISCUSSION

Regarding the qualitative analysis, it seems clear that in certain respects, participantswith low scores for psychological strengths corresponded with the profile of ineffectivestress-copers, and in other respects, with the profile of effective stress-copers. At thesame time, it seems clear that in certain respects, participants with high scores for


108

psychological strengths corresponded with the profile of effective stress-copers, and inother respects with the profile of ineffective stress-copers. At the physical behaviourlevel, all five participaints with low scores for psychological strengths correspondedwith the profile of effective stress-copers, while three participants with high scores forpsychological strengths coincided with the profile of effective stress-copers.

The following is evident with regard to the cognitive behaviour level: At firstglance, it would seem that all five participants with low scores for psychologicalstrengths coincided with the profile of the effective stress-coper. At the same time, allfour of these participants appeared also to use strategies that accorded with those ofineffective stress-copers. It is interesting to note, however, that all five participantswith high scores for psychological strengths at this behaviour level (only) accordedwith the profile of an effective stress-coper.

When considering the affective behaviour level, the following is evident: Three ofthe participants with low scores for psychological strengths coincided with the profileof the effective stress-coper. At the same time, these three also seemed to employstrategies that corresponded with those of an ineffective stress-coper. The remainingtwo participants with low scores for psychological strengths coincided only with theprofile of an ineffective stress-coper. By contrast, three of the participants with highscores for psychological strengths accorded with the profile of an ineffective stress-coper. At the same time, however, all three of these participants also used strategiesthat coincide with those of effective stress-copers. The remaining two participantswith high scores for psychological strengths corresponded only with the profile of aneffective stress-coper.

The following emerges regarding the conative behaviour level: One participantwith a low score for psychological strengths coincided with the profile of anineffective stress-coper. The other four participants with low scores for psychologicalstrengths corresponded with the profile of an effective stress-coper, although one ofthem simultaneously also used a strategy that coincided with that of an ineffectivestress-coper. By contrast, all five of the participants with high scores for psychologicalstrengths only accorded with the profile of an effective stress-coper.

It would appear from the foregoing discussion that participants with high andlow scores for psychological strengths, especially in respect of the cognitive andconative behaviour levels, can be distinguished from one another. At both these levels,those with high scores for psychological strengths only coincided with the profile ofan effective stress-coper. As regards the physical behaviour level, three of theparticants with high scores for psychological strengths only also corresponded withthe profile of an effective stress-coper, but this also applied to all five participants withlow scores for psycholgocial strengths. At the affective behaviour level, the distinctionbetween the two groups was not clear. Only two particicpants with low scores for


109

psychological strengths coincided only with the profile of the ineffective stress-coper.At the same time, only two of the participants with high scores for psychologicalstrengths only coincided with the profile of an effective stress-coper.

It would appear that, despite the fact that they were selected on the basis of theirability to verbalise, the participants involved were possibly uncertain about the exactmeaning of `stress' and `physical, cognitive, affective and conative stress-managementstrategies'. This could explain why, with regard to stress-coping strategies, a clearerdistinction was not evident between participants with low and high scores onpsychological strengths.

It is recommended that stress-management programmes be presented forfirefighters. Such programmes should focus on the recognition of stress-relatedsymptoms and various stress-coping strategies. This has potential for further research.Firefighters should be encouraged to make use of social support to help them copewith stress. Attention should also be paid to avoiding or reducing the negative aspectsof the working conditions of firefighters.

REFERENCES

Alexander, P.A. & Wells, A. 1991. `Reaction of police officers to body-handling after a majordisaster: a before and after comparison', British Journal of Psychiatry, 159: 547±555.

Antonovsky, A. 1979. Health, Stress, and Coping. San Francisco, CA: Jossey-Bass.Antonovsky, A. 1987. Unravelling the Mystery of Health: how People Manage Stress and Stay

Well. San Francisco, CA: Jossey-Bass.Antonovsky, A. 1991. `The structural sources of salutogenic strengths', In Cooper, C.L &

Payne, R., Personality and Stress: Individual Differences in the Stress Process. Chichester:Wiley.

Antonovsky, A. 1993. `The structure and properties of the sense of coherence scale', SocialScience and Medicine, 36: 725±733.

Antonovsky, A. 2002. Unravelling the Mystery of Health: how People Manage Stress and StayWell. London: Sage.

Bandura, A. 1986. Social Foundations of Thought and Action: a Social Cognitive Theory.Englewood Cliffs, NJ: Prentice-Hall.

Bandura, A. 1988. `Reflections on nonability determinants of competence', In Kolligan, J. &Sternberg, R.J., Competence Considered: Perceptions of Competence and Incompetenceacross the Life Span. New Haven, CN: Yale University Press.

Bandura, A. 2004. Model of Causality in Social Learning Theory. New York: Springer.Bates, J. 1994. Attributes for success at work', Personnel Management, 26(6): 71.Bowman, B.J. 1996. `Cross-cultural validation of Antonovsky's Sense of Coherence Scale',

Journal of Clinical Psychology, 52: 547±549.Britt, P. 1994. `Personality traits can spell new employees' success', Savings and Community

Banker, 3: 59.Cohen, J. 1988. Statistical Power Analysis for the Behavioral Sciences, 2nd edition. Hillsdale,

NJ: Earlbaum.


110

Cleal, P.N. 1990. Critical incident (Report). Port Elizabeth: Fire and Emergency ServicesDepartment, Research and Development Division.

De Villiers, J.I. 1988. A study on the causes, effects, diagnoses and treatment of stress withrelevance to fire brigade personnel', Fire and Civil Defence, 16: 13±21.

Dietrich, J.K. & Hattingh, S. 1993. `Kritiese insidentstres in nooddienspersoneel', Fire, Rescueand EMS, 1: 12±17.

Dyregrov, A. & Mitchell, J.T. 1992. `Work with traumatized children: psychological effects andcoping strategies', Journal of Traumatic Stress, 5: 5±17.

Elliot, D.L., Goldberg, L., Duncan, T.E. & Kuehl, K.S. 2004. `The PHLAME Firefighters'Study: feasibility and findings', American Journal of Health Behaviour, 28(1): 13±23.

Fisher, S. & Reason, J. 1991. Handbook of Life Stress, Cognition and Health. New York: Wiley.Folkman, S. & Lazarus, R.S. 1980. An analysis of coping in a middle-aged community

sample', Journal of Health and Social Behaviour, 21: 219±239.Folkman, S., Lazarus, R.S., Gruen, R.J. & De Langis, A. 1986. Appraisal, coping, health

status and psychological symptoms', Journal of Personality and Social Psychology, 50: 571±579.

Folkman, S., Lazarus, R.S. & Dunkel-Schetter, C. 2000. Dynamics of a Stressful Encounter.Philadelphia: Psychology Press.

Fullerton, C.S., McCarroll, J.E. & Ursano, R.J. 1992. `Psychological response of rescueworkers: fire-fighters and trauma', American Journal of Orthopsychiatry, 62: 371±375.

Fullerton, C.S., Ursano, R.J. & Norwood, A.E. 2004. Planning for the Psychological Effects ofBioterrorism. Thousand Oaks, CA: Sage.

Giorgi, A. 1985. `Sketch of a psychological phenomenological method', In Giorgi, A.,Phenomenology and Psychological Research. Pittsburgh, PA: Duquesne University Press.

Hildebrand, J.F. 1984. `Stress research (Part 2)', Fire Command, 51: 55±58.Holaday, M., Warren-Miller, G., Smith, A. & Yost, T.E. 1995. A pretiming investigation of on-

the-scene coping mechanisms used by disaster workers', Journal of Mental HealthCounselling, 17(3): 347±359.

Huysamen, G.K. 1993. Metodologie vir die Sosiale en Gedragswetenskappe. Halfweghuis:Southern.

Huysamen, G.K. 1998. Descriptive Statistics for the Social and Behavioural Sciences. Pretoria:Van Schaik.

Jones, M.L., Moore, M.D. & Snyders, R.C. 1988. Inside Organizations. Newbury Park, CA:Sage.

Kanfer, F.H. 1977. `The many faces of self-control on behavior modification changes itsfocus', In Stuart, R.B., Behavioral Self-management: Strategies, Techniques and Outcomes.New York: Brunner/Mazel.

Kerlinger, F. 1986. Foundations of Behavioral Research. New York: Holt, Rinehart & Winston.Kerlinger, F. 2000. Foundations of Behavioral Research. Singapore: Wadsworth/Thomson

Learning.Kobasa, S.C. 1979. `Stressful life events, personality and health: an enquiry into hardiness',

Psychiatry, 42: 299±311.Kobasa, S.C. 1982. `The hardy personality: toward a social psychology of tress and health', In

Sanders, G.S & Suls, J., Social Psychology of Health and Illness. Hillsdale, NJ: Erlbaum.


111

Kobasa, S.C., Maddi, S.R. & Zola, M.A. 1983. `Type A and hardiness', Journal of BehavioralMedicine, 6: 41±51.

Kravetz, S., Drory, Y. & Florian, V. 1993. `Hardiness and sense of coherence and their relationto negative affect', European Journal of Personality, 7: 233±224.

Krefting, L. 1991. `Rigor in qualitative research: the assessment of trustworthiness', AmericanJournal of Occupational Therapy, 45: 214±222.

Krefting, L. 2003. `Rigor in qualitative research: the assessment of trustworthiness', AmericanJournal of Occupational Therapy, 45(3): 214±222.

Lazarus, R.S. & Folkman, S. 1984. Stress, Appraisal and Coping. New York: Springer.Linton, J.C. 1995. Acute stress management with public safety personnel: opportunities for

clinical training and pro bono community service', Professional Psychology: Research andPractice, 26(6): 566±573.

Ludik, B.E. 1996. Individuele aanpassing binne die integrasieproses van die Suid-AfrikaanseNasionale Weermag. Ongepubliseerde magisterverhandeling, Universiteit van Suid-Afrika, Pretoria.

Maddi, S.R. & Khoshaba, D.M. 1994. `Hardiness and mental health', Journal of PersonalityAssessment, 63(2): 265±274.

Maddux, J.E. & Gosselin, J.T. 2003. Self-efficacy. New York: Guilford Press.Mataruzza, J.D., Weiss, S.M., Herd, J.A. & Miller, N.E. 1984. Behavioral Health: a Handbook

of Health Enhancement and Disease Prevention. New York: Wiley.Marais, C.P. 1997. Salutogenesis as paradigm in change management. Unpublished masters

dissertation, University of South Africa, Pretoria.McCammon, S., Durham, T.W., Allison, J. Jr. & Williamson, J.E. 1988. Èmergency workers'

cognitive appraisal and coping with traumatic events', Journal of Traumatic Stress, 1:353±372.

Meichenbaum, D. 1985. Stress Inoculation Training. New York: Pergamon Press.Meulenberg-Buskens, M. 1989. Manual for the Free Attitude Interview Technique. Pretoria:

Human Sciences Research Council.Miller, L. 1995. `Tough guys: psychotherapeutic strategies with law enforcement and

emergency services personnel', Psychotherapy, 32(4): 592±600.Monnier, J., Cameron, R.P., Hobfoll, S.E. & Gribble, J.R. 2002. `The impact of resource loss

and critical incidents on psychological functioning in fire-emergency workers: a pilotstudy', International Journal of Stress Management, 9(1): 11±29.

Moran, C.C. & Colless, E. 1995. `Perceptions of work stress in Australian fire-fighters', Workand Stress, 9(4): 405±415.

Nevid, J.S., Rathus, S.A. & Greene, B. 2005. Abnormal Psychology in a Changing World Mediaand Research Update, 5th edition. Upper Sadle River, NJ: Prentice-Hall.

Paton, D. 1994. `Disaster relief work: an assessment of training effectiveness', Journal ofTraumatic Stress, 7(2): 275±288.

Raphael, B., Sing, B., Bradburg, L. & Lambert, F. 1983±1984. `Who helps the helpers? Theeffects of a disaster on the rescue workers', Omega, 14(1): 9±20.

Rosenbaum, M. 1980. `Schedule for assessing self-control behaviors: preliminary findings',Behaviour Therapy, 11: 109±121.


112

Rosenbaum, M. 1990. Learned Resourcefulness: on Coping Skills, Self-control, and AdaptiveBehavior. New York: Springer.

Rosenbaum, M. 2000. Self-regulation of Experience: Openness and Construction. London; NewYork: Taylor & Francis.

Rosenbaum, M. & Ben-Ari, K. 1985. `Learned helplessness and learned resourcefulness:Effects of non-contingent success and failure on individuals differing in self-controlskills', Journal of Personality and Social Psychology, 48: 198±215.

Rosenbaum, M. & Palmon, N. 1984. `Helplessness and resourcefulness in coping withepilepsy', Journal of Consulting and Clinical Psychology, 52: 244±253.

Rotter, J.B. 1966. `Generalized expectancies for internal versus external control ofreinforcement', Psychological Monographs, 80 (1, Whole No. 609): 1±28.

Rotter, J.B. 1999. Generalized Expectancies for Internal versus External Control ofReinforcement. Upper Saddle River, NJ: Prentice-Hall.

SAS Institute. 1996. Stat User's Guide. Release 6.03, Version 5. Cary, NC: SAS Institute Inc.Schepers, J.M. 1995. Die Lokus van Beheer-vraelys: Konstruksie en Evaluering van 'n Nuwe

Meetinstrument. Johannesburg: Randse Afrikaanse Universiteit.Shafer, W.E. 1996. Stress Management for Wellness. San Francisco, CA: Harcourt Brace College

Publishers.Shafer, W.E. 2000. Stress Management for Wellness. Fort Worth, TX: Harcourt Brace College

Publishers.Sherer, M. & Maddux, J.E. 1982. `The self-efficacy scale: construction and validation',

Psychological Reports, 51: 663±671.Smith, D.L., Manning, T.S. & Petruzzello, S.J. 2001. Èffect of strenuous drills on

cardiovascular and psychological responses of recruit firefighters', Ergonomics, 44(3):244±254.

Steyn, A.G.W., Smit, C.F., Du Toit, S.H.C. & Strasheim, C. 1995. Moderne Statistiek vir diePraktyk, 5de uitgawe. Pretoria: Van Schaik.

StruÈmpfer, D.J.W. 1995. `The origins of health and strength: from salutogenesis tofortigenesis', South African Journal of Psychology, 25(2): 81±89.

StruÈmpfer, D.J.W. 1998. `Personality dispositions and job satisfaction' South African Journal ofPsychology, 28(2): 92±100.

StruÈmpfer, D.J.W. 2003. `Resilience and burnout: a stitch that could save nine', South AfricanJournal of Psychology, 33(2): 69±79.

Ursano, R.J., Fullerton, C.S. & Norwood, A.E. 2004a. Behavioural and Mental HealthResponses to Bioterrorism: Needs for the Public's Health. New York: Cambridge.

Ursano, R.J., Norwood A.E., & Fullerton, C.S. 2004b. Bioterrorism: Psychological and PublicHealth Interventions. New York: Cambridge.

Van Rheede Van Oudtshoorn, S. 1988. `Die rol van persoonlikheidskenmerke in dieweerstand teen stres', Tydskrif vir Bedryfsielkunde, 14(1): 18±22.

Weiss, D.S., Marmar, C.R., Metzler, T.J. & Ronfeldt, H.J. 1995. `Predicting symptomaticdistress in emergency services personnel', Journal of Consulting and Clinical Psychology,63(3): 361±368.


113

Wissing, M.P. & Van Eeden, C. 1997. `Psychological well-being: a fortigenic conceptualizationand empirical clarification', Paper delivered at the 3rd Annual Congress of thePsychological Society of South Africa, Durban.

Wissing, M.P. & Van Eeden, C. 2002a. Èmpirical clarification of the nature of psychologicalwell-being', South African Journal of Psychology, 32: 32±44.

Wissing, M.P. & Van Eeden, C. 2002b. `Towards a G-factor in psychological well-being',Unpublished paper presented at the Annual Congress of the Psychological Society ofSouthern Africa, Cape Town, South Africa.


114

A critical review of the effect of accounting forfinancial instruments on the accounting framework

D. Coetsee

A B S T R A C T

The main objective of an accounting framework is to create principles

upon which standard-setters can base their accounting standards. The

effect of accounting for financial instruments by valuing the risks

included in contracts from the inception thereof has placed pressure on

the underlying accounting framework. This article demonstrates that

material amendments are required to bring the International Accounting

Standards Board (IASB) Framework in line with accounting principles

created by the accounting standards on financial instruments. This

article also identifies pertinent issues that should be addressed in the

joint framework project of the IASB and the Financial Accounting

Standards Board (FASB).

Keywords: derecognition, elements, fair value, financial instruments, framework, measure-

ment, recognition, reliability, relevance, probability, substance over form

INTRODUCTION

During October 2004, the International Accounting Standards Board (IASB) and theFinancial Accounting Standards Board (FASB) decided on a joint project to revisetheir separate accounting frameworks (Johnson 2005a: 1). The objective of the jointproject is to develop a common conceptual framework that is principle-based,complete and internally sound (FASB & IASB 2006: 1).

Current literature suggests that the main objective of an accounting framework isto assist standard setters in the development of accounting standards (Johnson 2005a:2; Blanchet 2001: 1; Gabrielle 2001: 1±2). The senior project managers of both theseBoards concur that the main objective of an accounting framework is to assiststandard setters, stating (Bullen & Crook 2005: 1):

Without the guidance provided by an agreed-upon framework, standard settingends up being based on the individual concepts developed by each member ofthe standard setting body.


Prof. Coetsee is a Professor of Accounting at the University of Johannesburg. E-mail: [email protected]

In assuming that an accounting framework serves as the foundation for standardsetting, the question of whether the principles of the IASB Framework were adheredto in the process of developing the fair value based standards on financial instrumentscould be raised. Without specifically answering this question, the article criticallyreviews the current principles of the IASB Framework by comparing these principleswith the principles included in the IASB's accounting standards on financialinstruments, IAS 32: Financial Instruments: Presentation, IAS 39: FinancialInstruments: Recognition and Measurement and IFRS 7: Financial Instruments:Disclosure.

This has been done by comparing the IASB Framework with the standard onfinancial instruments under each of the subsequent identified headings. Tentativedecisions reached by both Boards to date on changes to the existing frameworks arealso incorporated into the discussion. In this process, this article also identifies issuesthat should be addressed in the joint framework project because of the currentaccounting treatment of financial instruments.

RELEVANCE AND RELIABILITY

One of the issues to be considered in the joint framework project is the trade-offbetween relevance and reliability as a result of the movement to fair value accountingfor financial instruments. Supporters of the historical cost model advocate that,although it may not be as relevant, historical cost is more reliable (Johnson 2005b: 1).Nevertheless, the FASB and the IASB require the greater use of fair value for theaccounting of financial instruments because they perceive fair value to provide morerelevant information to users of financial statements, to better reflect the present stateof the financial position of entities and to better assess past performance and futureprospects (Johnson 2005b: 4).

The trade-off between relevance and reliability was therefore discussed by bothBoards in the first phase of the joint framework project. The tentative decisionsreached confirm that relevance is an essential qualitative characteristic, but proposethat reliability be replaced by another essential qualitative characteristic, namelyfaithful representation (FASB & IASB 2006: 5).

The Boards further agreed not to provide a hierarchy of the qualitativecharacteristics, but that a step process rather be followed, wherein each qualitativecharacteristic and its sub-characteristics form steps in a process that results indecision-useful financial reporting (FASB & IASB 2006: 6). The staff of the IASBBoard have prepared a 15-step process to assess the qualitative characteristics (IASB2005a: 2), which should result in decision-useful financial reports. In this process,relevance is considered before faithful representation. However, the process shouldnot be advanced to the next level before confirmation in respect of both thesequalitative characteristics and their sub-characteristics is obtained. Currently, the

A critical review of the effect of accounting for financial instruments on the accounting framework

116

Boards have agreed that this step process should be described as a process to be used

by standard setters, but have not yet decided whether the process should be included

in the new framework (FASB & IASB 2006: 6).

These newly proposed steps for a process-approach will hopefully be sufficiently

robust to clarify the trade-off issues, but by considering relevance before faithful

representation in the process, the question could be raised whether the Boards are not

more biased to the essential qualitative characteristic of relevance. This order and the

suggestion that the steps should not be officially available to preparers of financial

statements could trigger lengthy debates.

SUBSTANCE OVER FORM

When accounting standards that are perceived to be more rule-based, such as IAS 32

and IAS 39, are assessed, the question could be raised whether the principle of

substance over form has been applied with less prominence in these accounting

standards. However, IAS 32 (IASB 2004: par. 18) specifically states:

The substance of a financial instrument, rather than its legal form, governs its

classification on the entity's balance sheet.

It seems that the principle of substance over form could still be regarded as a

general requirement of the initial identification and classification of all transactions,

including financial instruments. This assumption is being indirectly confirmed in the

proposals of the joint framework project (FASB & IASB 2006: 5) by stating that

faithful representation is not subordinating substance to form. However, it is accepted

knowledge that International Financial Reporting Standards (IFRS) emphasise the

principle of substance over form more explicitly than US GAAP (Generally Accepted

Accounting Principles) (Baker & Hayes 2004: 768). It is essential that the role of

substance over form should be clarified in the new framework project.

Furthermore, IAS 32 determines that the components of compound financial

instruments should be classified separately as liability and equity components (IASB

2004: par. 28), based on the substance of the contractual arrangement at initial

recognition (IASB 2004: par. 15). Although substance over form is a well-established

principle of the IASB Framework (IASB 2004: par. 35), the framework does not deal

specifically with the component approach. Bradbury (2003: 395) makes a conceptual

appeal that substance should form the basis for the creation of a component

approach. The joint framework project should establish more detailed guidelines for

application in a component approach for financial instruments and other

transactions.

D. Coetsee

117

ELEMENTS OF FINANCIAL STATEMENTS

At first glance, it seems that the definitions of the elements in the IASB Frameworkare not affected by financial instruments. This is mainly due to the inclusion of theelement of `àsset'' (or ``liability'') in the definition of a financial asset (or financialliability).

The definition of an equity instrument also implies a contract that meets therequirements of the IASB Framework definition of equity (IASB 2004: IAS 32, par.11). However, additional guidelines were included in the IAS 32 definitions of``financial asset'' and ``financial liability'' during 2003 in order to classify whencontracts settled in an entity's own shares should be regarded as either financial assetsor financial liabilities and not as equity instruments (IASB 2004: par. BC5±BC15).This development should have an effect on the future definitions of the elements inthe joint framework. The issue (Bullen & Crook 2005: 14) is whether all the elementsshould be defined explicitly or whether equity could be a residual.

In their current deliberations, the Boards are considering changing the frameworkdefinitions of an asset and a liability to (IASB & FASB 2006: 7):

An asset is a present economic resource of an entity. A liability is a presenteconomic obligation of an entity.

Interestingly, the definitions of a financial asset and financial liability in IAS 32(IASB 2004: par. 11) refer to a contractual right or a contractual obligationrespectively, which creates the impression that in respect of such rights andobligations, a financial asset is the opposite of a financial liability. The definition of afinancial instrument (IASB 2004: IAS 32, par. 11) specifically confirms the effect ofopposites by referring to a contract that gives right to a financial instrument of oneentity and a financial liability or equity instrument of another entity. At first glance, itseems that the newly proposed framework definitions of assets and liabilities, asquoted, also create the notion of an opposite by replacing the word ``resource'' in theone definition with `òbligation'' in the other. However, the meaning of ``resource'' ismuch wider than the concept of ``right'', and the definition of assets thereforeincludes assets for which no corresponding liability is created by another entity. Theconceptual issue to be considered in the joint framework project is whether the word``resource'' will be sufficient to include all possible assets.

The following concepts in the IASB's Framework definitions of assets andliabilities have been omitted in the new proposed definitions: control, past event andthe inflow or outflow of future economic benefits. All these concepts that have notbeen referred to in the standards on financial instruments are discussed further insubsequent sections.


118

THE ACCRUAL BASIS

The IASB Framework (IASB 2004: par. 22) determines that transactions and events

should be recognised in terms of the accrual basis of accounting when they occur. In

contrast, IAS 39 (IASB 2004: par. 14) specifically states that a financial asset or a

financial liability should be recognised when, and only when, an entity becomes a

party to the contractual provisions of the instrument. This recognition principle in

IAS 39 is a ``movement away from the traditional exchange basis of recognition

towards a contract basis'' (Wells 2003: 277).

The conceptual issue to be considered is whether this contract basis of accounting

changes the accrual basis of accounting. One argument could be that the philosophy

behind the recognition of financial instruments at the contract date is that the

financial risks and rewards of any financial instrument originate at the moment that

an entity enters into the contract, and that the accounting of these risks and rewards

triggers the accrual basis of accounting. However, underpinning the accrual basis of

accounting is the principle of performance. For instance, a creditor is created when

goods are delivered by the counterparty on credit, and not when the contract is

entered into. Specifically, IAS 37 Provisions, Contingent Liabilities and Contingent

Assets (IASB 2004: par. 1, 3) implies that provisions should not be created for

executory contracts, being contracts under which neither party has performed their

obligation or has performed their obligations to an equal extent. Further (IASB 2004:

IAS 37, par. 3), only if a contact is onerous (in that the unavoidable cost exceeds the

economic benefits of such a contract), a provision could be recognised before the

parties have performed.

In contrast, by stating that a financial asset or a financial liability should be

recognised when an entity becomes a party to a contract, the principle of performance

is altogether ignored in the accounting of financial instruments. The author therefore

believes that this recognition principle of financial instruments, in essence, changes

the accrual basis of accounting.

One of the pertinent issues that should be resolved in the new framework project

is to decide which transactions (and more specifically, which contracts) should be

recognised on the contract basis and which on the performance basis.

CONTROL

The recognition of financial instruments on the contract basis calls into question the

control approach followed in defining assets in both frameworks. Bullen & Crook

(2005: 9) explain the issue as follows:

D. Coetsee

119

... both asset definitions hinge on control, but neither framework has provedsufficiently helpful in resolving some issues in which two parties seem to havesome control over the same asset, such as assets subject to call options or forwardpurchase contracts, or expected inflows that are not legally enforceable.

The broader issue is to establish how accounting for risks fits into the accountingframework. Bradbury (2003: 395) summarises the problem as follows:

Perhaps one of the underlying weaknesses of the CF [conceptual framework] inrelation to financial instruments is that it almost ignores risk ± one of the mainattributes of financial instruments. The CF element definitions are preoccupiedwith the measurement of assets and liabilities with a view to the determinationof income to shareholders. Assets are defined as resources from which futureeconomic benefits are expected to flow. The language of the CF focusses, almostexclusively, on expected values rather the variation about the expected values.

It is imperative that the role of the concepts of ``resource'', ``control'' and ``riskand rewards'' be clarified in the joint framework project. In the new considereddefinition of an asset, as quoted, only the concept of ``resource'' is retained ± aconcept that is not included in the FASB definition of an asset. The FABS definitionbegins with ``probable future economic benefits obtained or controlled'' (Bullen &Crook 2005: 10). Probably, the concept of `èconomic resource'', if applied in the newjoint framework, will be sufficiently explained to include future benefits obtained andcontrolled.

RECOGNITION

The application of the accrual basis in the framework has been interpreted as a three-step approach (IASB 2004: Framework, par. 83; IAS 1, par. 26):

. The identification criterion ± the application of the definitions of assets, liabilities,equity, income and expenses

. The recognition criterion of ``probability''± the probability that any future benefitassociated with the item will flow to or from the entity

. The recognition criterion of ``measurability'' ± the cost or value that can bemeasured reliably.

The initial recognition and measurement of financial instruments is essentiallyalso a three-step approach. It also starts with the identification phase ± the definitionsof financial assets, financial liabilities and equity instruments (IASB 2004: IAS 32,par. 11). The specific recognition criterion then follows ± becoming a party to the


120

financial instrument. Finally, all financial assets and liabilities are initially recognisedat fair value (IASB 2004: IAS 39, par. 43). The last step, however, is specifically not arecognition criterion.

The conceptual issues to be considered in each phase of the IASB Frameworkrecognition process are discussed individually in the following sections.

IDENTIFICATION AND THE ``PAST EVENT''

The first criterion for recognition in the IASB Framework (IASB 2004: Framework,par. 83), namely identification through definitions, differs from the identification offinancial instruments in the sense that it not only defines the nature of the element,but also provides a recognition criterion ± the ``past event''. If the ``past event'' is afterthe year-end, the transaction is a post-balance sheet event. If the ``past event'' occursbefore the year-end, the transaction is recognised, provided that the economic benefitsare probable and measurable.

In their joint article, Bullen & Crook (2005: 11) confirm that, in both the IASBand FASB Frameworks, fulfilment of the definitions of an element of financialstatements is necessary for recognition. Therefore, the conceptual issue to beconsidered in the joint framework project is whether recognition criteria should beincluded in the definitions of elements, or that definitions are for identificationpurposes only. This might be a reason why the concept of past event is omitted in thenew considered definitions.

PROBABILITY OR UNCERTAINTY

Probability or uncertainty is not included in the recognition criteria of financialinstruments. This is mainly because probability or uncertainty are regarded as part ofmeasurement and not recognition in a fair value model (Bradbury 2003: 390).

The question still remains whether probability should be a recognition criterionfor non-financial instruments, especially when a historical cost model is applied. TheFASB Framework does not include probability as a recognition criterion (Bullen &Crook 2005: 11). In releasing the exposure draft on non-financial liabilities, the IASBhas also opted to omit probability as a recognition criterion in respect of non-financialliabilities, some of the reasons being (IASB 2005b):

. The IASB Framework requires that the existence of a liability should be assessedbefore recognition (par. BC41). This again raises the question whether the ``pastevent'' should be included in the definition of an asset or a liability.

. In many cases, there is little or no uncertainty that settlement of the obligation willrequire some outflow of resources, even if there is significant uncertainty about theamount or timing (par. BC37).

D. Coetsee

121

. For liabilities containing both unconditional and conditional obligations, the

probability recognition criteria are sometimes applied to the wrong obligation ±

the conditional obligation (par. BC40).

. Conditional obligations fail to meet the definition of a liability, but unconditional

obligations associated with conditional liabilities meet the definition of a liability

and should be recognised (par. BC41).

The effect of the Exposure Draft is that probability and uncertainty should be

reflected in the measurement of the asset or liability rather than in their recognition.

With the issuing of Statement 143, Accounting for Asset Retirement Obligations (FASB

2005: 4) in 2001, the FASB has already changed the role of probability and

uncertainty from recognition to measurement.

The role that probability and uncertainty play in defining the elements and their

role in the recognition process should be clarified in the joint framework process. The

classification of a non-financial liability as either a conditional or an unconditional

liability again raises questions surrounding the component approach and substance

over form.

MEASUREMENT IN THE RECOGNITION PROCESS

The highlighted confusion regarding the role of probability in the recognition process

also places emphasis on the role, if any, of measurement in the recognition process.

Bullen & Crook (2005: 11) describe the problem as follows:

... when an item is recognized depends on whether it can be measured reliably.

It also means that the timing of recognition may depend on what attribute is

being measured: an item measured by a value attribute may be recognized

sooner, or later, than if it were measured by a cost attribute. While both

frameworks include that criterion, the issue of its effect on the timing of

recognition raises issues that may need to be reconsidered ...

The confusion is further aggravated by the fact that measurability is not regarded

as a recognition criterion in IAS 39. The 2005 exposure draft on non-financial

liabilities proposes that measurability shall be the second and final step in the

recognition process once the liability has been identified by applying the definition

(IASB 2005b: 11). This confirms the principle that measurability is a prerequisite for

the recognition of non-financial transactions. A joint framework project would not be

complete without clarifying the role of measurability, if any, in the recognition process

of both financial and non-financial transactions.

122


INITIAL MEASUREMENT

IAS 39 (IASB 2004: par. 43) states that all financial instruments should initially bemeasured at fair value. In contrast, the IASB Framework (IASB 2004: par. 100),which was created in the historical cost regime, implies that all assets and liabilitiesshould initially be measured at cost.

At first glance, it seems that IAS 39 has changed the initial measurementattribute. However, the application guidance to IAS 39 provides clarity (IASB 2004:IAS 39, par. AG64). A presumption is created that on initial recognition, the fairvalue of financial instruments is the transaction price, in turn being the equivalent ofcost. IAS 39 creates only two independent circumstances in which the fair value of afinancial instrument on initial measurement shall be estimated, namely:

. The `something other' test. This test is applied if part of the consideration given orreceived is for something other than the financial instrument (IASB 2004: IAS 39,par. AG64). In this instance, the IASB Framework concept of substance over formshould again be applied to separate the individual components.

. The so-called `day one' gain or loss. A `day one' gain and loss is identified only ifthe fair value of the financial instrument on initial recognition is established bycomparison with other observable current market transactions in the sameinstrument or by a valuation technique with variables that include only data fromobservable markets (KPMG 2005: 1). The `day one' gain should be deferred andspread over the period of the agreement (IASB 2004: par. AG76A).

The extent to which fair value rather than cost should be used in the initialmeasurement of any transaction should also be considered in the joint frameworkproject. Two options exist. Should it be the fair value of the element itself, or the fairvalue of the consideration receivable or payable? Consistency in the treatment oftransaction cost in the initial measurement of all assets and liabilities should also beconsidered (Bradbury 2003: 391). For instance, IAS 39 (IASB 2004: par. 43) prohibitsthe capitalisation of transaction cost if financial instruments are classified at fair valuethrough profit or loss.

SUBSEQUENT MEASUREMENT

Wells (2003: 276) summarises the measurement issue as follows:

Perhaps the key element in the failure of the various standard setting bodies hasbeen their inability to agree on, and embrace, a clearly articulated concept ofmeasurement.

Current practice under the various IASB standards, after the introduction of IAS39, is to subsequently measure assets and liabilities at cost (the historical cost

123

D. Coetsee

convention), amortised cost or fair value (including revaluations). The one exceptionis provisions, which are measured at the best estimate of the expenditure required tosettle the present obligation (IASB 2004: IAS 37, par. 36), an estimation that does notrepresent fair value per se. Certain assets carrying values are furthermore reducedthrough the process of depreciation and impairment.

The effect of the application of these measurement options in current accountingstandards is that the section on Measurement of Elements of Financial Statements inthe IASB Framework (IASB 2004: Framework, par. 99±101) needs redrafting. Firstly,the fair value and amortised cost options are not addressed in the IASB Framework.Secondly, the question should be asked whether the IASB Framework's measurementbasis of current cost, realisable (settlement) value and present value are indeedattributes of a fair value measurement regime and if not, whether they are stillseparate measurement bases. Thirdly, and mainly because of the accounting offinancial instruments, historical cost is no longer the measurement basis commonlyadopted in modern financial statements (Bradbury 2003: 391). Lastly, the questionshould be considered whether a single measurement attribute should be applied forinitial and subsequent measurement of assets and liabilities or for different types ofassets and liabilities (Bullen & Crook 2005: 150).

Depreciation, amortisation and impairment refer to the subsequent reduction inthe value of an asset as a result either of the usage of the asset or the reduction infuture expected benefits, and do not constitute measurement bases. Neither of theseconcepts is applied in a fair value model, the argument (IASB 2004: IAS 39, par. 58)being that the valuation of any asset or liability at fair value will consider the effect ofthese concepts.

These concepts are founded on the historical cost convention, but are notsufficiently addressed in the IASB Framework. They are, indirectly, addressed in thedefinition of an expense, namely decreases in economic benefits during theaccounting period in the form of outflows or depletion of assets (IASB 2004:Framework, par. 70). Depreciation and amortisation are referred to in the IASBFramework (IASB 2004: par. 78, 96), but impairment is not. The concept ofimpairment has only been introduced by IAS 36 Impairment of Assets (IASB 2004),which was issued after the formulation of the frameworks. The extent of inclusion ofdepreciation, amortisation or impairments in the accounting framework should beconsidered in the joint framework project.

Amortisation is used in IAS 38 (IASB 2004: par. 97) to determine the depreciableamount and in IAS 39 (IASB 2004: par. 9) to determine the interest component thatshould be recognised. One of the global presumptions of interpretation in contractlaw is that any word in a contract should have only one specific meaning (Cornelius2002: 122). This presumption should also be followed by standard setters, especiallyseeing that `àmortisation'' is used in the IASB Framework (IASB 2004: par. 96) tomean the ùsing up' of an asset.


124

RECOGNITION OF FAIR VALUE GAINS AND LOSSES

Since the IASB Framework does not currently deal with fair value accounting, noguidelines are provided to establish when fair value adjustments should be recognisedin profit, loss or equity. The IASB Framework provides only the following (IASB2004: par. 81):

The revaluation or restatement of assets and liabilities gives rise to increases ordecreases in equity. While these increases or decreases meet the definition ofincome or expenses, they are not included in the income statement under certainconcepts of capital maintenance. Instead these items are included in equity ascapital maintenance adjustments or revaluation reserves.

A full revision of the revaluation or restatement principles is needed in the light ofthe movement to fair value accounting, especially to determine when fair valueadjustments could be recognised in equity. These issues may be resolved in the long-term project on comprehensive income, but should be based on the principles in thejoint accounting framework. The underlying issue in the battle for the recognition ofincome in accounting frameworks is set out by Newberry (2003: 333):

A key problem for accounting standard setters is that the CF is incoherent, atleast partly because it conceals a long-standing and still unsettled battle overconcepts of income: the measurement of performance concept, and theenhancement of wealth concept. Worse, it is no longer clear that standard settersare fully aware of that battle or even understand the CF.

Since both Boards have confirmed that current accounting is based on thebalance sheet approach (Johnson 2004: 2), the rules of recognition and presentationof performance should be clarified once and for all in the joint framework project inconjunction with the comprehensive income project. Standards based on the incomeapproach (for instance, IAS 18 Revenue) should also be brought in line with thebalance sheet approach.

DERECOGNITION

The IASB Framework does not deal specifically with the concept of derecognition.Derecognition is implied in the definitions of gains and losses, and thus in thedefinition of income and expenses. Gains, for example, include those arising on thedisposal of non-current assets (IASB 2004: Framework, par. 76). Losses representdecreases in economic benefits and include those arising on the disposal of non-current assets (IASB 2004: Framework, par. 79±80). The principles of derecognition

D. Coetsee

125

are included in the appropriate IFRSs, where applicable. One set of principles orrules is applicable to derecognition of non-current non-financial assets and another toall financial assets.

Two separate rules generally apply to derecognition of non-current assets ± thefirst when no future benefits are expected from the asset(s) and the second on disposal(IASB 2004: IAS 16, par. 67; IAS 38, par. 112). To determine the date of disposal, theprinciples of IAS 18 Revenue should be followed (IASB 2004: IAS 16, par. 67; IAS 38,par. 114). IAS 18 provides three criteria in addition to the recognition criteria ofprobability and measurability that should all be met to recognise a sale, and thusderecognise the assets (IASB 2004: par. 14), namely:

. The transfer of significant risks and rewards

. Retention of no continuing managerial involvement

. Retention of no effective control.

IAS 18 does not rank the criteria. In fact, all the requirements should be metbefore a sale may be recognised. However, only the transfer of significant risks andrewards are further detailed in IAS 18, leaving the impression that risks and rewardsmight be the most important test.

IAS 39 also provides two separate rules for derecognising financial assets. Thefirst is when the contractual rights to cash flow expire, and the second is when thefinancial asset is transferred (IASB 2004: par. 17). IAS 39 provides a four-stepapproach to determining when a financial asset has been transferred (IASB 2004: par.18±35):

. The identification of a transfer

. The risk and rewards test

. The control test

. The assessment of continued involvement.

The derecognition principles in IAS 39 differ from the principles in IAS 18 inthat the concept of transfer is defined and, secondly, the application of the concepts of``risks and rewards'', ``retaining control'' and ``continued involvement'' are ranked.The effect is that the evaluation of the transfer of significant risks and rewards shouldprecede an evaluation of the transfer of control for all financial assets (IASB 2004: IAS39, par. BC48), and continued involvement is determined only if control is retained.

A revised framework should include the underlying principles of derecognition oftransactions, including the appropriateness of the application of the principles ofrisks, rewards and control. This is especially necessary because of the possibility thatcontrol, which was the decisive factor in the definition of an asset, could now be


126

omitted from such definition. The issue is whether derecognition should be theopposite of recognition and whether control should be included in the definition ofan asset or regarded as a recognition criterion (Bullen & Crook 2005: 15).

DISCLOSURE OF RISKS

Disclosure and presentation are discussed only in the most general terms in the IASBand FASB Frameworks (Bullen & Crook 2005: 13). Bradbury (2003: 13) states thatone of the underlying weaknesses of the IASB Framework is that it almost ignoresrisk, and he specifically declares:

Thus to understand fully asset transfers and a derecognition transaction, thefinancial statement description and risk disclosure are as essential as therecognition and measurement rules.

The issuing of IFRS 7: Financial Instruments: Disclosure (IASB 2005c) placedrenewed focus on the disclosure of risks, namely credit risks, liquidity risks andmarket risks, and the disclosure of how management controls such risks. This raisedthe question of whether the disclosure of stewardship or accountability is part of theaccounting regime. Staunton (2003: 403) states:

Obviously, àccounting' has something to do with the concept of accountability.

The Boards discussed this in their joint framework project, and a tentativedecision was reached that given the primary objective of financial statements, namelydecision-usefulness, they should include information to assess management'sstewardship (FASB & IASB 2006: 4).

CONCLUSION

This article demonstrates that the IASB Framework falls short on most of the issuesdiscussed. Fair value accounting alone cannot be blamed for such shortcomings, ascertain fundamental issues were never considered in the traditional framework(House 2005: 96; Williams 1986: 22).

Two main concerns with the current IASB Framework are that it does notspecifically cater for the accounting of risks in the form of accounting for contracts,nor does it deal specifically with fair value accounting. As a result, clarity is needed onthe application of the concepts of ``control'' and ``risk and rewards'' in the recognitionand derecognition process. The role of probability and uncertainty in theidentification, recognition and measurement process should also be clarified.

The new framework should also provide clarity on the application of the accrualbasis of accounting. Guidelines are specifically needed to determine the

D. Coetsee

127

circumstances under which contracts should be recognised under the contract basis orthe performance basis. Conceptually, the question should be considered whether theaccounting of financial instruments has indeed changed the accrual basis ofaccounting. The author believes that it has. Financial contracts could be recognisedbefore any party has performed under the contact.

A comprehensive redrafting of the separate frameworks is needed to resolve theidentified accounting issues, a process to which the IASB and FASB are jointlycommitted. It could be argued that most of these issues could be, and have been,addressed by the relevant IFRSs or US GAAP. However, these standards should be inline with the accounting framework, the foundation on which standard setters shouldbase and align accounting standards. A complete and internally sound frameworkwould result in greater consistency in drafting standards.

REFERENCES

Baker, C.R. & Hayes R. 2004. `Reflecting form over substance: the case of Enron Corp.',Critical Perspectives on Accounting, 15: 767±785

Blanchet, J. 2001. Conversations with Constitutions ± Why the Conceptual Framework isImportant. Financial Accounting Series: Status Report, No. 223±A, 31 August. FASB[Online] Available at: www.fasb.org. Accessed: 16 October 2005.

Bradbury, M.E. 2003. Ìmplications for the Conceptual Framework arising from accountingfor financial instruments', ABACUS, 3: 388.

Bullen, H.G. & Crook, K. 2005. Revisiting the Concepts: A New Conceptual Framework Project.May. [Online] Available at: www.fasb.org. Accessed: 16 October 2005.

Cornelius, S.J. 2002. Principles of the Interpretation of Contracts in South Africa. Durban:Butterworths.

FASB (Financial Accounting Standards Board). 2005. Financial Accounting Series: SelectedIssues Related to Assets and Liabilities with Uncertainties. No.1235-001, 30 September.[Online] Available at: www.fasb.org. Accessed: 16 October 2005.

FASB & IASB 2006. Projects Updates: Conceptual Framework ± Joint Project of the IASB andFASB, Latest revision, 16 May. [Online] Available at: www.fasb.org. Accessed: 23October 2006

Gabrielle, N. 2001. Conversations with Constitutions ± Why the Conceptual Framework isImportant. Financial Accounting Series: Status Report. FASB, No.223-A, 31 August.[Online] Accessed on 16/10/2005. Available at: www.fasb.org.

House, J. 2005. `Model solutions', Accountancy, April: 96±97.IASB (International Accounting Standards Board). 2005a. Ìnformation for observers:

Conceptual Framework: The process of assessing qualitative characteristics', AgendaPaper 3A, World Standards Setters meeting, September 2005, London. [Online]Available at: www.iasb.org. Accessed: 18 October 2005.

IASB. 2005b. Exposure Draft of Proposed Amendments to IAS 37 Provisions, ContingentLiabilities and Contingent Assets and IAS 19 Employee Benefits. June 2005. London:IASB.


128

IASB 2005c. IFRS 7: Financial Instruments: Disclosure. August 2005. London: IASB.IASB 2004. International Financial Reporting Standards (IFRSs), including International

Accounting Standards (IASs), and Interpretations as at 31 March 2004. London: IASB:

. Framework for the Preparation and Presentation of Financial Statements

. IAS 1: Presentation of Financial Instruments

. IAS 16: Property, Plant and Equipment

. IAS 18: Revenue

. IAS 32: Financial Instruments: Disclosure and Presentation

. IAS 36: Impairment of Assets

. IAS 37: Provisions, Contingent Liabilities and Contingent Assets

. IAS 38: Intangible Assets

. IAS 39: Financial Instruments: Recognition and Measurement

Johnson, L.T. 2004. Ùnderstanding the Conceptual Framework', The FASB Report, 28December. FASB [Online] Available at: www.fasb.org. Accessed: 16 October 2005.

Johnson, L.T. 2005a. `The project to revisit the conceptual framework', The FASB Report, 28December. FASB [Online] Available at: www.fasb.org. Accessed: 16 October 2005.

Johnson, L.T. 2005b. `Relevance and reliability', The FASB Report, 28 February. FASB[Online] Available at: www.fasb.org. Accessed: 16 October 2005.

KPMG. 2005. IFRS Briefing Sheet: Publication of Amendments to IAS 39 FinancialInstruments: Recognition and Measurement ± Transition and Initial Recognition ofFinancial Assets and Financial Liabilities, Issue 15. South Africa: KPMG IFRG Limited.

Newberry, S. 2003. `Reporting performance. Comprehensive income and its components',ABACUS, 39(3): 325.

Staunton, J. 2003. A statement of accounting concepts for level 1 of the conceptualframework?', ABACUS, 39(3): 398.

Wells, M. 2003. `Forum: The accounting conceptual framework: Introduction', ABACUS,39(3): 273.

Williams, K. 1986. `Robert N. Anthony: Creating an accounting framework', ManagementAccounting 1986±1998. May, 67, 11; ABI/INFORM Global: 22.

D. Coetsee

129

The development of a continuous improvementcapability to attain higher levels of output quality:a prescription for focused change in South Africanmanufacturing companies


A B S T R A C T

The findings of an empirical study endorse the use of the Bessant &

Caffyn (1997) continuous improvement capability (CIC) framework,

which illustrates the evolution of such capabilities in companies as the

basis for the development of a four-phased model that proposes a direct

link between the level of CIC and the attainment of higher levels of

output quality (LOQ). The study suggests that increased `sophistication'

in quality improvement initiatives is an important step in the attainment

of higher levels of quality. It confirms that by strategically investing in

such programmes and phasing them in, companies are able to sustain

and positively leverage the costs associated with the improvement

efforts. The study further contributes to the general understanding of

the concept of CIC and the link to higher levels of output quality.

Generally, South African manufacturing companies are currently

positioned between a `structured' and a `goal-oriented' CIC level, which

indicates that formal attempts are being made to create and sustain

continuous improvement (CI) through structured CI initiatives such as

setting CI targets with organisational objectives in mind. However,

opportunities exist for South African manufacturers to further evolve to

the `proactive' and `full' CIC levels. The study on which this article is

based comprised a literature review and incorporated study results on

the basis of research questionnaires and personal interviews.

INTRODUCTION

The challenges facing business over the last few decades can be summarised as thepursuit of quality, its concomitant sustainability and its subsequent continualimprovement. Research has shown that it is incumbent on companies to minimisetheir operational losses through the astute pursuit of cost reduction, waste

130

Prof. KruÈger is in of the Department of Business Management, University of South Africa. Mr Fakier is Compliance

Manager of Pharma Dynamics. E-mail: [email protected]

Southern African Business Review Volume 10 Number 3

minimisation, customer satisfaction and value adding. This has become manifest inindustry in the form of a ubiquitous quality imperative as a leading component ofany auspicious operational strategy (Pearce & Robinson 2000). However, historyshows that these strategies were not always deliberate, since success at the quality goalis still not attained by all who pursue it. The Total Quality movement showed thatpartial efforts miss the mark and result in costs to companies. The documentedfailure rate for attaining high levels of quality is a concern throughout the world(Sebastianelli & Tamimi 2003).

The study undertaken in this research looks at the dynamics of continuousimprovement (CI) as a consolidated operational view of customer qualityrequirements. It is hypothesised that quality is a continuum of output quality levelsthat interact with and stem from the CI capability of an organisation. To explore thisproposition, a four-phased model is developed based on the literature, integrating thestructural elements of CIC and quality and proposing a direct link between the levelof CIC and the attainment of higher levels of output quality (LOQ). An empiricalstudy is performed using research questionnaires and personal interviews to evaluatethe model to determine the CIC of South African manufacturing companies.

This paper explores the consequences of interactions among the structuralcharacteristics of CIC to gain an understanding of the dynamics of LOQ. A formalmodel is developed that is tightly grounded on and tested against a field study.

THEORETICAL BACKGROUND

Literature review

The concepts of continuous improvement capability, quality improvement and levelof output quality were considered. In this regard, the concept of `level of outputquality' was assessed by reviewing the literature on cost of poor quality (COPQ) andpoor quality costs (PQC).

The concept of continuous improvement capability

A keystone for the CIC concept is taken from the contemporary model oforganisational improvement, which may be either breakthrough or incremental(continuous) in nature (Harrington 1995; Slack, Chambers, Harland, Harrison &Johnston 1995; Webster 1999). The latter, continuous improvement (CI), is ofparticular relevance, however. CI is a constant, cyclical process that involveseverybody in the operation in long-term, non-drastic change (Slack et al. 1995). Jha,Noori & Michela (1996) noted the cultural and behavioural changes that supplied themain components of gradual or incremental change. The gradual nature of suchchange should, however, in no way detract from the dynamism and complexity of CI


131

(Keating, Oliva, Repenning, Rockart & Sterman 1999). Jabnoun (2001) reported onthe driving and enabling values for CI, and this is testimony to the tremendous effortrequired to make it work by the people involved in the operation. The results of CIare usually paradoxical (Keating et al. 1999) because the cost of making animprovement (indirect cost) may inadvertently exceed the actual cost benefit achievedby the improvement (cost of goods sold).

Bessant & Caffyn (1997) categorised the continuous improvement capability(CIC) concept into five stages or levels of evolution, with the highest level coincidingwith the concept of a learning organisation (Senge 1990) and at the lowest level, anatural, unmanaged happening. In a case study, Kerrin (1999) successfully used theCIC framework of Bessant & Caffyn (1997) to evaluate a manufacturing concern. Theresults of this case study formed the basis for assessing the stages of the CIC(independent variable) evolution of an operation.

The five levels of CIC evolution are defined as (1) natural CI, (2) structured CI,(3) goal-oriented CI, (4) proactive CI and (5) full CI (learning organisation). It wasfound that the level of `sophistication' of improvement initiatives increased as theoperation progressed from natural CI to full CI (the learning organisation).

The concept of quality improvement

An inherent part of the concept of `quality improvement' is the quality concept itself.In a study (Al-Darrab 2000), many definitions of quality were reviewed, and somebuilding or linking relationships with productivity, efficiency and utilisation explored.There are many views and perspectives on quality, and just as many approaches toquality improvement. The contemporary concept of quality as ``consistentconformance to customer's expectations'' (Slack et al. 1995) is extended toconsolidate the different views of quality into the following definition for thepurposes of the study:

Quality is ensuring that it is possible for everybody in operations to do the rightthing, for both internal and external customers.

The customer concept is associated with the inherent factor of focus on needs,wants and expectations and denotes satisfaction. In addition, the inclusion of `doingthe right things' in the definition implies the existence of a schema for relating qualityto costs and establishes links to value creation. The operations view of quality alsorequires the reduction of costs and the elimination of waste from the operationalprocesses. The customer, on whom quality focuses, includes the `next process' and thefinal customer or end-user, as pointed out by Schonberger & Knod (2001) andLawton (2002). Improving quality therefore has a definite point of onset, namely thecustomer's needs, wants and requirements, which also define the expectations of thecustomer (Slack et al. 1995). If the output of the operation meets the expectations of

The development of a continuous improvement capability to attain higher levels of output quality ...

132

the customer, the customer perceives it as àn offering of acceptable quality'. If theoperation delivers an offering that exceeds the customer's expectations, then thecustomer is satisfied or may even be delighted.

It may be concluded from the process view of CI, customer focus and theutilitarian view of quality (Schonberger & Knod 2001) that CI places the spotlight onincreasing satisfaction levels. Indeed, a comprehensive approach to qualityimprovement has been described as including customer focus, continuousimprovement and teamwork (Everett, Corbett, Flores, Harrison, Lee, Rho, Ribera,Samson & Westbrook 1997). From this, it follows that quality improvement lendsitself to the methodology of continuous improvement. Quality improvement thereforetakes cognisance of the customer in terms of the quality required by that customer.

The concept of level of output quality

The concept of `level of output quality' of an operation equates to the amount ofquality improvement for that operation. The key to understanding the concept oflevel of output quality is the cost of quality concept (Feigenbaum 1983; Lazlo 1997).The conception of levels of output quality is reinforced by many theories in theliterature. One indication of the hierarchical nature of quality is the reaping of the`low-hanging fruit' phenomenon (Crosby 1979), which Crosby associates in his studywith lower levels of output quality.

Another is the Quality Trilogy (Juran 1964), which suggests that managementmust perform the following functions in the order stated: quality planning, thenquality control, then quality improvement. From the platform of control, an operationmay reach breakthrough improvement in quality. In addition, the avoidance ofeconomic loss to society requires that operations systematically pursue quality bysequentially performing system design, parameter design and tolerance design(Taguchi, Elsayed & Hsiang 1989).

The prevention, appraisal and failure cost (PAF) model (Feigenbaum 1983) is notentirely appropriate for this study, since the emphasis should not be only onpreventing quality defects that the customer never sees. In other words, operations donot generally ship defects intentionally. Hence, the new proactive and process-focusedpoor quality cost (PQC) model (Moen 1998) is used in the study, as it acknowledgesthe cost of failing to attain quality at different levels.

The PQC model guided the design of the questionnaire to define the level ofoutput quality (dependent variable) at a company. The six levels of PQC (Moen1998) will define the `level of output quality' concept. These levels are: (1) directfailure costs, (2) consequence costs, (3) lack of efficiency costs, (4) customer-incurredcosts, (5) intangible costs and (6) environmental costs. Direct failure costs,consequence costs and lack of efficiency costs are associated with direct failuresand are used to define the manufactured quality level or low output quality. Similarly,


133

Doing rightthings

Doing rightthings

Value adding

Cost avoidance

customer-incurred costs, intangible costs and environmental costs are associated withindirect failures, and these are used to define the perceived quality level or highoutput quality.

RESEARCH DESIGN AND METHODOLOGY

Research objectives

The primary research objective of the study was to look at the relationship betweenCIC and the level of output quality. The aim was to gain an understanding of theassociation between CIC and different levels of output quality. A secondary objectiveof the study was to investigate whether operations should recognise different levels ofoutput quality. Overarching these objectives, the study aimed to gain insight into theSouth African experience with quality and continuous improvement.

H1: The perception exists that higher CIC is required to attain higher levels ofquality.

This postulate is presented as a model (see Figure 1). The practical relevance ofthis outcome is the development of CIC in association with level of output quality thepractitioner is targeting. It is expected that hypothesis H1 will hold, since mostcompanies focus on quality improvement goals (cost reduction) as a measure ofperformance rather than the plan or methods designed to meet those goals.

High

LOQ

Low

Low High

CIC

Note: LOQ ± levels of output quality; CIC ± continuous improvement capability

Figure 1: The CIC-LOQ matrix

134


H2: Different levels of output quality exist.

The practical relevance of this outcome is that practitioners can use this `peckingorder' to address quality improvement in a systematic manner. This will allowleveraging of the CIC of the operation to optimise output quality. It is expected thathypothesis H2 will hold, because the costs associated with different quality levels arehierarchical in nature in the minds of practitioners.

H3: The CIC of South African companies does not follow world trends.

The practical relevance of this outcome is that South African operationspractitioners will better understand the strengths and weaknesses of our experiencewith the CI process. It is expected that hypothesis H3 will not hold. It is expected thatthe South African experience with CI will not exactly follow trends in other parts ofthe world, however, because of cultural differences and diversity, even thoughcorporate adherence to foreign company policies may be a very influential factor.

Research design

Companies adopt a wide range of approaches to quality improvement, makingquantitative research on one or two individual approaches difficult. It is alsoimpossible to arrange a planned intervention in the form of increasing CIC (theindependent variable). Furthermore, companies cannot be randomly assigned to acertain stage of CIC evolution.

Therefore, the research specifically examined the relationship between CIC andLOQ (the dependent variable) by means of non-experimental hypothesis testing. Theresearch had the following basic structure:

. Through the literature review, the identification of a model/framework thatillustrates the developmental phases of CIC

. Testing of the relevance of the proposed model with practitioners by means of aresearch questionnaire and personal interviews

. Further exploration of the CIC and LOQ relationship, after the analysis andinterpretation of the quantitative data obtained from the measuring instruments.

. Investigation of South African manufacturing companies' experience with CICand quality improvement.

Research population

Population validity is extremely important for non-experimental research. The studyhopes to generalise results to all quality and operations practitioners. Theexperimentally accessible population was made up of functional managers. Questionsderived from the organisational context helped control nuisance variables.


135

Data collection methods

Methods and measuring instruments used in the study included a literature surveysupported by a research questionnaire and personal interviews.

Administration and sampling

The proposed research questionnaire was pre-tested with three companies for contentaccuracy and understandability via electronic mail. The responses were used as aguide in improving the questionnaire in order to make it more reliable. Using non-probability purposive sampling, the data collection plan selected 50 manufacturingfirms, from as broad a spectrum as possible, that operate within the borders of SouthAfrica. These companies also received the research questionnaire by means ofelectronic mail. Data gathering was mainly by reply electronic mail. Of the 50companies sampled, 14 companies returned the questionnaire and two of therespondents were interviewed.

Research questionnaire

The measuring instrument was developed on the basis of information obtained fromthe literature. The various sections of the questionnaire (see Tables 1±6) measuredthe following data variables or constructs: (1) the organisational context of thecompany, (2) the CIC of the company, including the CI tools in use at the company,(3) the LOQ attained at the company and (4) the link between CIC and LOQ at thecompany.

Personal interviews

Personal interviews probed and explored the questions contained in the researchquestionnaire even further. A small and a large company were sampled on that basisfrom among the respondents and contacted by telephone to arrange a personalinterview. The rationale for the selection was determined by the constraints ofsampling and the need to gain as wide a spectrum of response from the populationunder the circumstances. The research questionnaire served as the interview scheduleand clarified the subjective and opinion-based responses to the questions on theproposed model.

Characteristics of the sampled companies

The largest proportion of respondents (44%) was from the pharmaceutical andprocessing industries. The next largest group of respondents was from the food andcandy industries, which made up 28% of the responses. The remaining respondentswere from the plastics, fish processing, dairy, adhesives, automotive and munitionsindustries. Forty-two per cent of the responses were from food-related industries. For


136

the personal interviews, the small company was from the plastics industry and thelarge company from the processing industry. Both companies were running activecontinuous improvement programmes.

Analytical procedures

Statistical testing and inference are not applicable for the correlation of CIC andLOQ, as the model does not directly suggest that CIC (independent variable) causesLOQ (dependent variable) at a company. Furthermore, the model was tested bymeans of opinion-based responses, and surrogate measurements were usedextensively in the questionnaire. Exploratory research and non-experimentalhypothesis testing investigated the validity of the model. Therefore, a minimum of`neither agree nor disagree' options on a Likert scale was regarded as acceptable forthe proposed model.

RESEARCH RESULTS

Responses to the questionnaire

The organisational context variable data are summarised in Table 1. By definition,64% of the companies were considered large manufacturers and 36% of thecompanies were small manufacturers. There was a balanced representation of localand global companies from the industrial and consumer sectors. Two-thirds of therespondents were quality practitioners, and the remainder were operationspractitioners.

The continuous improvement capabilities of the responding companies are listedin Table 2. It is evident that the majority of South African manufacturing companiesthat responded felt that they do not perform CI in a random fashion, which meansthat a more structured or formal approach is preferred.

No significant difference exists between the CIC of small to medium and largecompanies, as illustrated by Table 3 and Figure 2. Most companies that responded arebeyond the `natural or background' stage of the CIC evolution framework (Bessant &Caffyn 1997). The results suggest that, in general, South African manufacturingcompanies have a CIC that lies between the `structured' and the `goal oriented' stagesof the evolution framework. This means that in South Africa, quality improvementhas emerged as a planned process and focuses on meeting improvement goals linkedto organisational objectives. The histogram plots depicted in Figure 2 show a bimodalprofile for both large and small companies. Evidently, a structured idea managementsystem and a recognition system were not as prominent as the other characteristics ofthe CIC stages of the evolution framework (Bessant & Caffyn 1997). Without thesedata points, the histogram profile is a single peak with a maximum stretching from


137

Table 1: Results of the determination of the organisational context of the respondingcompany

Section 1 Questions Number Percentage

1.1 This company is best described by the following character-istics:

Small (<100 persons) 1 7

Medium (100 to 300 persons) 4 29

Large (>300 persons) 9 64

Production and operations environment (POM) 14 100

Domestic operation 10 71

Exporting operation 8 57

International or global operation 7 50

ISO 9000 or ISO 14000 accredited 9 64

Producer of consumer goods 7 50

Producer of industrial goods 8 57

1.2 At this company, my primary role is in the process of:

Production 4 29

Quality assurance 10 71

Other 2 14

Table 2: Results of the determination of the CI capability of the responding company

Section 2 Questions Average Range

2.1 At this company, the characteristics of continuous improve-ment are:

Random problem-solving 2 3

Specialist personnel are the dominant mode of problem-solving 3 3

A formal problem-solving process 4 3

Training in basic CI tools 4 4

A structured idea management system 3 3

A recognition system 4 4

Monitoring and measurement against strategic goals 4 4

Integrated with operations or production 4 3

A high level of experimentation 3 4

Automatic capture and sharing of learning 4 4

`structured' to `goal oriented' CIC. This corresponds to only half the distance that hasto be covered before the `learning organisation' stage is reached (Bessant & Caffyn1997). It appears that the evolution framework worked successfully in the study, justas it did in a case study (Kerrin 1999).


138

Stru

cture

d

Stru

cture

d

Nat

ura

l/Bac

kgro

und

Stru

cture

d

Goal

Orien

ted

Full

CI

Proac

tive

CI capability continuum

Fre

qu

en

cy

Large firms

Small firms

Table 3: Comparison of CI capability between small to medium and large companies

Agreements (responses 5 3)

Small Large

Random problem solving 1 2

Specialist personnel are the dominant mode of problem-solving

4 6

A formal problem-solving process 5 8

Training in basic CI tools 3 8

A structured idea management system 2 7

A recognition system 4 7

Monitoring and measurement against strategic goals 5 8

Integrated with operations or production 4 8

A high level of experimentation 4 5

Automatic capture and sharing of learning 4 6

Figure 2: Similarity in CIC stage of small and large South Africanmanufacturing companies


139

Table 4 summarises how the CI tools and practices applied serve as an indicationof the general CIC of the responding company. The results show evidence that SouthAfrican manufacturers employ the full spectrum of CI tools available to the modernpractitioner. This is supported by the 43% value for the òther' tools option and thetraining of CI tools to all levels of the organisation. The latter goes some way towardsdemonstrating evidence of management commitment through the promotion of theCI enablers (Jabnoun 2001).

Table 4: Results of the determination of the manifestation of CI at the responding company


3.1 Continuous improvement projects at this com-pany include the application of the followingtools:

Plan-Do-Check-Act (PDCA) cycles 6 43

Activity based costing (ABC) ± quality costs infinancial reporting

10 71

Quality function deployment (QFD) 2 14

Benchmarking (across industries) 13 93

Partnering and teaming 10 71

Statistical process control (SPC) 10 71

Cause and effect analysis 11 79

Flowcharts 12 86

Pareto analysis 6 43

Standardisation and simplification 9 64

Suggestion box 9 64

Others 6 43

3.2 Continuous improvement tools at this companyinvolve:

Training that includes the shop floor level 13 93

Implementation to the top management level 13 93

Only 43% of the respondents indicated that they use Pareto analysis, which is the80/20 principle, and is evidence of a potential lack of problem identification skillsamong respondents. The relatively lower prominence of problem identification asopposed to problem-solving reflects the perception among practitioners that theirproblem-solving efforts are tantamount to CI. This occurrence coincides with thequality trilogy model (Juran 1964).


140

There is quite a high level of `sophistication' with CI among South Africanmanufacturing companies. The trend line in Figure 3 indicates that there is atendency towards the more sophisticated tools, which supports the observation of theCIC levels as measured in Table 4. In other words, highly sophisticated tools such asthe Plan-Do-Check-Cycle (PDCA) methodology and Hoshin Planning (Shiba,Pursch & Stasey 1995), which are not frequently used at present (43%), are requiredto reach the `pro-active' and `full' CIC levels. Table 5 summarises the findings onwhether all the responding companies believe they are able to address all the levels ofquality.

Note: PDCA ± Plan-Do-Check-Act cycles; ABC ± Activity based costing;

SPC- Statistical process control

Figure 3: The components of the CI toolbox atSouth African manufacturing companies

Since there is the potential for acquiescence in these responses, the range of theresponses was used to further interpret these data. The range is a simple indicator ofthe variation or uncertainty inherent in the replies to each question. Investigation ofthe range values made it apparent that the least uncertainty was associated with the`rework; scrap; inspection costs; visible internal (before shipment) and external (after


141

Table 5: Results of the determination of the level of output quality attained at theresponding company

Section 4 Questions Number Percentage Average Range

4.1 The operation function at this com-pany demonstrates the capability todeal with direct failures such as:

Rework, scrap, inspection costs, visi-ble internal (before shipment) andexternal (after shipment) failures

4 1

Hidden expenses, including chronic,routine problems

4 3

Lack of process efficiency 4 4

4.2 The operation function at this com-pany demonstrates the capability todeal with indirect failures such as:

Losses incurred by customers 4 4

Intangible failures ± customer dissa-tisfaction and loss-of-reputation

4 3

Short- and long-term environmentalfailures of the product

4 4

4.3 The operation function at this com-pany has the capability to continu-ously improve:

Manufacturing processes 14 100

Non-manufacturing processes 13 93

shipment) failures' level. This direct defect level equates to the lowest quality level oroutput quality level, according to the study. Figure 4 indicates that, in general, directdefects, such as rework, scrap, visible internal (before shipment) and external (aftershipment) failures are the most easily addressed by companies. This observation isexplained as the `low-hanging fruit' phenomenon (Crosby 1979). It supports theallocation of direct failures to coincide with the lowest quality level.

Table 6 summarises the survey with respect to the proposed model. There was ahigh level of acceptance of the model. Fifty-seven per cent of respondents felt that costavoidance (cost reduction) is achievable with low CIC. Seventy-one per cent felt thatcost avoidance addresses direct failures, and 79% felt that addressing indirect failuresis a way of adding value. The low agreement on the CIC required to attain costreduction was further probed in interviews. Sixty-four per cent agreed that costavoidance, doing things right, value addition and doing the right things represent afour-phased approach to quality improvement.


142

Likert response

Range

Trendine

Ran

ge

Resp

on

se

Vis

ible

inte

rnaland

exte

rnalfa

ilure

s

Quality Level

Hid

den

exp

enses

Lack

of

pro

cess

eff

icie

ncy

Losses

incurr

ed

by

custo

mers

Inta

ngib

lefa

ilure

Envir

onm

enta

lp

rod

uct

failure

s

Figure 4: The nature of the output quality at South

African manufacturing companies

Table 6: Results of testing the proposed model with respondents


5.1 Cost avoidance (cost reduction) is achievable with lowor minimal CI capability

8 57

5.2 Doing things right (efficiency) coincides with aninternal focus on the bottom line

14 100

5.3 Value add coincides with an external focus oncustomer satisfaction

13 93

5.4 Doing the right things (effectivity) for the customer isachievable with high levels of CI capability

13 93

5.5 Cost avoidance addresses direct failures 10 71

5.6 Value add addresses indirect failures (customerperception)

11 79

5.7 The sequence of the shaded blocks from left to rightrepresents a phased and sustainable approach toquality improvement

9 64


143

Responses to the personal interviews

The questions pertaining to the proposed model in the research questionnaire wereconfirmed in a semi-structured interview using the questionnaire as the interviewschedule. The interview appeared to lend itself better to the topic being researched.

Discussion of hypotheses

Proposed model

The four-phased model depicted in Figure 1 is proposed as an appropriate frameworkfor directly linking CIC to LOQ. It enhances understanding of how to sustain qualityimprovement by allowing the practitioner to leverage the direct costs of improvement.Each phase must be based on prevention rather than detection if subsequent phasesare to be reached. In other words, the operation must be able to hold on to the gainsmade in each phase if the model is to be practicable. Since the proposed model inFigure 1 was well received by practitioners, it was not further refined. H1 is accepted,as Figure 1 provides the framework that demonstrates that the perception exists thathigher CIC is required to attain higher levels of quality. The practical and theoreticalimplications of using this framework to embark on quality improvement areconsidered next.

Phase 1: Cost avoidance

This phase is suitable for a command-and-control management style. Hence,employee participation is not essential, and it is appropriate for the operation to adopta `convergent' thinking style that permeates an internal focus on the bottom line.Quality improvement entails avoiding unnecessary costs during manufacturing, andinvolves the elimination and reduction of the costs incurred when direct defects occur.Included in this phase are the reduction of expenses and the elimination of waste asprominent approaches to quality improvement. The effort that goes into this phasewill be reflected in the financial results, particularly in the company's profit and lossstatement. This phase requires low sophistication or `natural' CI capability (Bessant &Caffyn 1997). The kinds of CI tools that are used include brainstorming, flowcharts,simplification and standardisation. The benefits gained from this phase are typicallydescribed as `picking the low-hanging fruit' (Crosby 1979).

Phase 2: Doing things right

After the previous phase of cost avoidance, which focused on cost reduction and wasteminimisation, the model indicates that the next stage in the operation would be topursue `doing things right'. The quality issues pertaining to this level are now visible


144

from the platform of cost and quality control. This phase is also suitable for acommand-and-control management style. Hence, it is characterised by an internalfocus on the bottom line and it employs formal and hard science approaches such asstatistical process control (SPC), failure modes and effects analysis (FMEA) andcapability analysis (CA). Phase 2 therefore looks at addressing `hidden factory' aspects(Feigenbaum 1983). This phase requires `structured' to `goal-oriented' CIC, as itrequires more sophistication (Bessant & Caffyn 1997). The benefits of this phaseendorse the sentiment that `quality is free, but is not a gift' (Crosby 1979). As withphase 1, input into phase 2 is also reflected in the company's profit and lossstatement.

Phase 3: Value adding

Once an operation has passed through phases 1 and 2, it will soon reach an importantstage in its CIC evolution and the LOQ it is targeting. This phase is usually triggeredby management fatigue as a result of the current capability not delivering and the lackof confidence in CI tools because the gains achieved during the previous phases havereached a plateau (Keating et al. 1999). At this plateau and after the attainment ofsustainable manufactured quality, the operation is ready to proceed and add value forthe customer. In other words, the customer quality level is now in sight, and theoperations view of quality switches from an internal to an external focus.

In terms of the quality level, the focus is on indirect defects that are critical to thecustomer. The operation focuses on the intangible costs associated with defects in thefield that pertain to customer dissatisfaction with the product. In addition, thecompany may suffer losses of reputation because of unhappiness with products. Theideas emerging in this phase are used in subsequent product designs to producequality improvements. This practice incorporates the issue of èconomic loss tosociety' (Taguchi et al. 1989).

In terms of CIC, management adopts a participative management style thatincorporates a divergent thinking style down to the shop floor, with the focus on themaximisation of customer satisfaction. This phase requires even more sophisticationand `proactive' CI capability (Bessant & Caffyn 1997). The types of tools requiredinclude benchmarking and customer surveys that take the competitive nature ofbusiness into consideration.

Phase 4: Doing the right things

Following the previous phase of adding value, the operation should be ready for theelimination of customer and employee confusion about what is really important. Theobjective is doing the right things for the customer, and it entails minimising the costsassociated with the short- and long-term defects in the product. This phase needshigh CIC `sophistication' or `full' CI activities typically found in the `learning


145

organisation'. The types of tools required here are tools such as PDCA (Plan-Do-Check-Act) reviews, which strategise according to the quality needs of the customer.The benefits of the efforts of phase 4 are also reflected in the balance sheet of thecompany.

The hierarchical nature of quality

It is evident that quality, when thought of in terms of the cost to the business bypractitioners, is hierarchical in nature. The closer the product or market offering getsto the final customer along the supply chain, the more difficult the costs associatedwith the control and the improvement of quality become for practitioners to manage.There is thus a manufactured quality level that can be distinguished from thecustomer quality level, with the former being controllable from within themanufacturing facility. The manufactured quality level entails all the direct defectsof manufacture, such as non-conforming product, hidden expenses and processinefficiencies. The customer quality level entails controlling all the indirect defects inorder to meet customer expectations and is associated with the moving target ofcustomer requirements. H2 is therefore accepted, as there is evidence that quality hasa hierarchical nature.

Experiences of South African companies with CI

A relatively high level of `sophistication' is associated with South Africanmanufacturing companies' experience of CI. There are also similarities with otherparts of the world regarding the application of CI, as there is evidence in South Africaof an observed trend towards the adoption of quantitative data-based decision-making (Ograjenek & Thyregod 2004). The study was, however, unable to identifyany practices that are unique to South Africa. H3 therefore does not hold, because ofthe widespread combination and integration of the positive elements and ideas fromother demonstrated best practices. Whereas the rest of the CIC-experienced world iseither in revert or revolution phase, South Africa, inadvertently because of its historyand auspiciously because of its capacity, is being enticed to follow an evolutionaryapproach. With this perspective, South Africa may still excel with respect to worldtrends if it manages to overcome the hurdle of low numeracy skill levels in order toattain higher levels of output quality.

CONCLUSIONS

The major limitation of the study was the very real possibility of low generalisability.Although the response rate was moderately high at 28% of the 50 sampled companies,the ultimate number of observations of 14 was rather low. Taken in conjunction withthe opinion-based responses of the participating companies, the results can, however,


146

be considered sufficient for exploratory purposes. While it cannot be claimed thatsampling was extensive, there was an attempt to provide a sufficiently representativesample of South African companies within an empirically and logically derivedscheme.

An area for further research encompasses the need to investigate how more`sophisticated' CI initiatives should be implemented, given a particular company'scurrent CIC profile, industry environment and stage of the industry's maturity andproduct lifecycles. While it is generally accepted that the benefits of CI outweigh thecosts, the targeted quality improvement initiative may be altogether inappropriate forthe circumstances in which the company finds itself.

REFERENCES

Al-Darrab, I.A. 2000. `Relationships between productivity, efficiency, utilisation, and quality',Work Study, 49(3): 97±103.

Bessant, J. & Caffyn, S. 1997. `High involvement in innovation through continuousimprovement', International Journal of Technology Management, 14(1): 7±28.

Crosby, P.B. 1979. Quality is Free: the Art of Making Quality Certain. New York: McGraw-Hill.Everett, E.A., Corbett, L.M., Flores, B.E., Harrison, N.J., Lee, T.S., Rho, B., Ribera, J.,

Samson, D. & Westbrook, R. 1997. An international study of quality improvementapproach and firm performance', International Journal of Operations & ProductionManagement, 17(9): 842±873.

Feigenbaum, A.V. 1983. Total Quality Control, 3rd edition. New York: McGraw-Hill.Harrington, H.J. 1995. `Continuous versus breakthrough improvement', Business Process Re-

engineering and Management Journal, 1(3): 31±49.Jabnoun, N. 2001. `Values underlying continuous improvement', The TQM Magazine, 13(6):

381±387.Jha, S., Noori, H. & Michela, J.L. 1996. `Dynamics of continuous improvement', International

Journal of Quality Science, 62(1): 19±47.Juran, J.M. 1964. Managerial Breakthrough, 1st edition. New York: McGraw-Hill.Keating, E.K, Oliva, R., Repenning, N.P., Rockart, S. & Sterman, J.D. 1999. Òvercoming the

improvement paradox', European Management Journal, 17(2): 120±134.Kerrin, M. 1999. `Continuous improvement capability: assessment within one case study

organisation', International Journal of Operations and Production Management 19(11):1154±1167.

Lawton, R. 2002. Creating total customer satisfaction: A service quality strategy that will workfor you. [Online] Available at: imtc3.com/servicequality2.html. Accessed: 12 March2002.

Lazlo, G.P. 1997. `The role of quality costs in TQM', TQM Magazine, 9(6): 410±413.Moen, R.M. 1998. `New quality cost model used as top management tool', TQM Magazine,

10(5): 334±341.Ograjenek, I. & Thyregod, P. 2004. `Qualitative vs quantitative methods', Quality Progress,

37(1): 82±85.


147

Pearce, J.A. & Robinson, R.B. 2000. Strategic Management: Formulation, Implementation, andControl, 7th edition. Singapore: McGraw-Hill.

Schonberger, R.J. & Knod, E.M. 2001. Operations Management: Customer Focused Principles,6th edition. Boston, MA: Irwin.

Sebastianelli, R. & Tamimi, N. 2003. Ùnderstanding the obstacles to TQM success', QualityManagement Journal, 10(3): 45±56.

Senge, P.M. 1990. The Fifth Discipline. New York: Doubleday Currency.Slack, N., Chambers, S., Harland, C., Harrison, A. & Johnston, R. 1995. Operations

Management, 2nd edition: London: Pitman.Shiba, S., Pursch, T. & Stasey, R. 1995. Ìntroduction to Hoshin management: achieving

alignment at analog devices and Teradyne', Center for Quality of Management Journal,4(3): 22±33.

Taguchi, G., Elsayed, E.A. & Hsiang, T. 1989. Quality Engineering in Production Systems. NewYork: McGraw-Hill.

Webster, A. 1999. `Continuous improvement improved', Work Study, 48(4): 142±146.


148

Relationship marketing: the effect of relationshipbanking on customer loyalty in the retail businessbanking industry in South Africa


A B S T R A C T

Relationship banking, as exemplified by retail banks, is a valuable

relationship-marketing enabling strategy that promotes competitive-

ness and provides sustainable success. South Africa has only recently

started to optimise relationship marketing. The authors investigated the

effect of relationship banking on customer loyalty in one of the four

main South African retail banks. The primary data were collected using a

questionnaire by means of an electronic mail survey. The sampling

frame was drawn from one of the four major banks in South Africa. The

research findings indicate that having a relationship-banking offering as

part of the relationship-marketing strategy enhances customer loyalty.

Keywords: business customers, market, relationship marketing, relationship banking

INTRODUCTION

Relationship banking is a valuable enabling strategy that promotes competitivenessand provides sustainable success for banks (Abratt & Russell 1999). The utilisation ofrelationship banking as a business strategy for increasing customer retention, creatingcustomer loyalty and ultimately increasing long-term profits is a relatively new tacticthat originated in the 1980s and gathered pace during the 1990s (Levitt 1981, 1983;Rauch 1993; Cheese 1994). The correct application of a relationship-banking offeringcould impact the bottom line of banks favourably over the long term (Gummesson1998; Iniesta & SaÂnchez 2002).

The retail banking industry in South Africa is a complex and very competitiveenvironment, which is dominated by the big four banks: Amalgamated Banks ofSouth Africa (ABSA), First National Bank (FNB), Nedbank and Standard Bank(Metcalfe 2003; South African Reserve Bank 2003). Based on the nature of thefinancial industry, which deals with products and services that are complicated, risky


Prof. Ackermann is at the Graduate School of Business Leadership, University of South Africa and Mr van Ravesteyn is

an alumnus of the Graduate School. E-mail: [email protected]

and of a long-term nature, customers are in a high involvement relationship withtheir financial service providers (Howcroft, Hewer & Durkin 2003). Operating insuch a dynamic environment requires banks to fully understand all the factors ofrelationship banking that affect their success and market share. Levitt (1983) deemsthe most valuable asset of a company to be its relationship with its customers. Thefocus must be on building mutually beneficial relationships between the bank and itscustomers (Fournier, Dobscha & Mick 1998).

One of the challenges for banks is how to differentiate themselves from theircompetitors. Differentiation based on price and cost strategies is gnerally shortlived,and the only real way to differentiate is through relationships and service propositions(Ghemawat 1999; Fournier et al. 1998). The responsibility of the marketing functionincludes the notion of making the most of existing customers, which is essential forlong-term profitability. ``The challenge to the banks is to own the relationship withthe client and use this as a competitive advantage over other banks'' (Abratt & Russell1999: 5). To establish and maintain a competitive advantage, banks need to retaincustomers through strong relationships (Barnes & Howlett 1998).

Feasibility and costs restrict companies from having a one-to-one relationshipwith each and every customer (Bennett & Durkin 2002). They need to make use ofrelationship marketing and management at segment or market level to identify thetarget market they intend pursuing (Stewart 1995). In the past, relationship bankinghas focused mainly on corporate and commercial banking rather than retail banking(Howcroft et al. 2003). However, the focus has changed, and the value of buildingcloser relationships with retail-banking business customers has increased in recentyears.

A good standard for measuring the quality of a relationship is loyalty (Reichheld1996, 2001). True loyalty is based on a partnership that is founded on mutual interestand shared goals. Loyalty ensures that the relationship is retained during the best oftimes as well as the worst. ``For loyalty, it is not only how satisfied you keep yourcustomers, but how many satisfied customers you keep'' (Reichheld 2001: 127). Oneof the objectives of the relationship-banking strategy has been to establish a high levelof customer loyalty. Customer loyalty results in numerous benefits, which includeincreased profits and customer retention (Abratt & Russell 1999; Iniesta & SaÂnchez2002; Bennett & Durkin 2002).

Cognisance should also be taken of the perception of some customers that allbanks are the same, and that one is as good or bad as the next (Cheese 1994).Defection is low, but this may be the result of customer inertia rather than truecustomer loyalty. The effort required for a customer to transfer the relationship toanother bank is often seen as being too cumbersome, compared with the benefits ofmaking the transfer. Situations in which there is no close relationship will always bein danger when more attractive alternatives are presented to customers. However,customers who value the banking relationship over the long term and do not seek to

Relationship marketing: the effect of relationship banking on customer loyalty ...

150

exploit the bank are most desirable (Gibbs 1985). In the past, different views existedon the relevance and importance of relationship banking as part of the relationshipmarketing strategy. The old view was that customers only used their banks fortransactions and viewed the bank as a ùtility'. The new view is that over and abovethe transactional aspect of banking, there is a relationship aspect that fulfils certainneeds of the customer (GroÈnroos 1997; Cram 2001). Relationship banking is anexpensive sales and service approach, however, and it is critical that it achieve thepurpose for management that it sets out to do, with one of the aims being to enhancecustomer loyalty (Murray 2004).

Relationship banking as part of marketing strategies is an imperative in the highlycompetitive banking industry. Management needs to understand the economic valueof building long-term relationships with high-value customers. Customer retention ofprofitable customers is not negotiable, as all institutions and niche banks want thisprofitable share of the market. Banks need to own the relationship with the client anduse this as a competitive advantage over other banks (Abratt & Russell 1999).Management needs to realise the effects of customer loyalty on business growth andprofits.

OBJECTIVE

The objective of the study was to investigate the effect of relationship banking on theloyalty of business customers from one of the four main South African retail banks.

The relationship-banking offering, as part of a bank's relationship-marketingstrategy, aims to strengthen the customer relationship, increase customer satisfaction,support customer retention and increase customer loyalty. Loyal customers tend tobuy more, share their market knowledge with their bankers and refer new customers;they are less price sensitive and become cheaper to serve over time (Christopher,Payne & Ballantyne 1991; Bhote 1996; Reichheld 1996; Duffy 1998; Reichheld 2001;Iniesta & SaÂnchez 2002; Ferreira 2004). The management of retail banks shouldtherefore place a much higher value on the phenomenon of customer loyalty. Wherefeasible, they should also focus their attention on the appropriate application ofrelationship banking as a value-creating strategy.

However, opposing views exist on the existence of customer loyalty (Rayner 1996;East, Lomax & Freeman 2002; Reinartz & Kumar 2002; Ambler 2003). The studyaims to shed light on whether business customers who receive a relationship-bankingoffering, or who have a relationship banker, are more loyal to their banks thanbusiness customers who do not receive a relationship-banking offering or do not havea relationship banker. These opposing views form the rationale for the hypothesis thatis tested in this study.


151

CONCEPTUAL FRAMEWORK

Relationship marketing

Harker (1999), Bennett & Durkin (2002) and Howcroft et al. (2003) believe that thebest definition of relationship marketing is the following one by GroÈnroos (1990;1994a), covering all the underlying conceptualisations: ``to establish, maintain andenhance relationships with customers and other partners, at a profit, so that theobjectives of all parties are met. This is done by mutual exchange and fulfilment ofpromises'' GroÈnroos 1990: 138).

The challenge for most companies today is to thrive in a relationship economy(Cap Gemini Ernst & Young 2005). Competition for the most profitable customerrelationships is extremely tough, and companies need to know who their customersare. This includes aspects such as their preferences, habits and experiences withcompanies and, most importantly, their values. Customers have become verydemanding, and their expectations have increased to new heights. The environmenthas evolved into a complex landscape, which has resulted in the high value placed onrelationship marketing today.

Relationship marketing has evolved from a primary focus on consumer goods inthe 1950s, industrial marketing in the 1960s, non-profit and societal marketing in the1970s, services marketing in the 1980s and finally, relationship marketing in the 1990s(Christopher et al. 1991). GroÈnroos (1994a) states that a paradigm shift is evolving inmarketing from the focus on the four Ps of marketing ± product, price, place andpromotion ± to a new approach based on building and managing relationships.Relationship-building can be regarded as the cornerstone of marketing (GroÈnroos1994b). Relationship marketing has focused on customer retention, service, productbenefits, a long-term scale, service emphasis, high customer commitment, customercontact, quality and finally, customer loyalty (Cheese 1994; Gummesson 1998; Abratt& Russell 1999). The focus of relationship marketing is to move customers up theladder of loyalty (Voss & Voss 1997). The relationship marketing strategy also seeks tochange the market demands in favour of a particular company by providing uniquevalue, which must be sustainable over time. The key relationship is based on therelationship between the supplier and the customer. This discussion reflects thenotion that the centre of the relationship marketing philosophy is to retain and makethe most of existing customers to enable the company to make long-term profits.Relationship marketing addresses the importance of gaining customers, but also,more importantly, retaining customers and building ongoing relationships (Rayner1996). However, it is not always possible for companies with large customer bases tohave close relationships with all their customers (Bennett & Durkin 2002). Not all


152

relationships need to be at the same level of intimacy. An appropriate relationship-marketing strategy will ensure that customers are managed by market or segmentlevel.

Relationship banking

Relationship banking can be defined as `à long-term, intimate and relatively openrelationship that is established between a corporation and its bank. Banks oftensupply a range of tailor made services rather than once-off services''(Life Style Extra2005). In the early 1980s, Levitt (1981) referred to a banking relationship as theprocess of becoming the designated supplier, which requires a successful passagethrough several consecutive stages in the sales process. Companies try to developstronger bonds and loyalty with their customers (Kotler, Armstrong, Brown & Adam1998). Most bankers recognise the need to build and maintain a close relationshipwith customers (Rauch 1993). The goal for banks is to òwn' the relationship with thecustomer and use the relationship as a competitive advantage (Abratt & Russell 1999).However, most banks have been unsuccessful in implementing relationship-bankingstrategies, as they have been unable to make the shift to a relationship-based salesculture (Schneider 2003).

Cheese (1994) relates the importance of relationship banking directly to thebusiness growth and profit potential of companies. This is based on the effects ofrelationship banking and long-term relationships, which lead to customer retention,loyalty and lifetime customer value (Iniesta & SaÂnchez 2002). The focus must be onthe customer, by building long-term relationships through providing them with theright mix of product, channel of access and service attributes. The underlyingprinciples of any personal relationship are based on trust, shared values and mutualbenefits as the foundation of a long-lasting relationship. The individual responsiblefor building the relationship with the customer is called the relationship manager(Wetzels, De Ruyter & Van Birgelen 1998), relationship banker, account manager(Gibbs 1985), customer relationship specialist/customer services manager (Cheese1994), account executive or portfolio manager. The relationship refers to one-to-onecontact by the relationship banker with the customer (Ellis 2004). Banks are morelikely to retain customers who have a personal relationship with a relationship banker(Abratt & Russell 1999).

Customer loyalty

``Customer loyalty means that customers are so delighted with a company's productor service that they become enthusiastic word-of-mouth advertisers'' (Bhote 1996: 31).Loyalty can also be defined as ``the willingness of someone ± a customer, anemployee, a friend ± to make an investment or personal sacrifice in order tostrengthen a relationship'' (Reichheld 2003: 48). Loyalty is much more than repeat


153

purchases, as inertia, circumstances or exit barriers erected by the bank may trapcustomers who buy again and again. Loyalty has a far wider connotation than justcustomer behaviour. Rayner (1996) describes two dimensions of loyalty: one referringto the emotional aspect, for example, faithfulness and allegiance, and the other basedon the behavioural aspect such as being constant, for example, frequently occurringbehaviour. He defines customer loyalty as ``the commitment that a customer has to aparticular supplier'' (Rayner 1996: 126). Doyle (2000) emphasises that customerloyalty is the most important determinant of profit margins and long-term growth.Loyalty is built by earning customers' enthusiastic commitment to a relationship thatwill improve their lives over the long term (Iniesta & SaÂnchez 2002). Rayner (1996)considers that loyalty can be applied as a long-term strategy in order to build long-term customer relationships. Loyalty marketing is based on the recognition that it ischeaper to generate more business from existing relationships than to create newrelationships or win new customers.

There are opposing views on the existence of customer loyalty, however (Rayner1996). In general, society dismisses the relevance of loyalty in business, and maintainsthat loyalty should only have a place in life's finer institutions namely, family, church,school and community. Experts claim that loyalty is dead and that some statisticsconfirm this view. Ambler (2003) states that none of the pro-loyalty supporters haveproved their views empirically. East et al. (2002), for example, challenged theincreased customer gains from referrals and found that it was relevant only in certainindustries, one of which was banking, which is the base industry of this study.Reinartz & Kumar (2002) felt that the loyalty supporter theories are mostly``bunkum''. Their research found a far weaker relationship between loyalty andprofitability than the supporters of loyalty programmes claim. Some customers alsoindicated that they resent companies that try to benefit from loyalty. However, theyagreed that certain customers are more valuable than others and that companies needto measure the relationship between loyalty and profitability so as to focus theirmarketing strategies on profitable customers.

Figure 1 illustrates the link between relationship marketing, relationship bankingand customer loyalty. The first important aspect to understand is the concept ofrelationship marketing. Relationship marketing involves the dimensions of inter-relationships, consumer behaviour, segmentation, measurement, customer relation-ship management (CRM), relationship-based selling and top management support.The inter-relationship revolves around the bank, employee and customer interactions.It is critical that the bank understand all aspects of consumer behaviour, includingbuying behaviours. Next, banks need to segment their market according to variousdemographic criteria and value propositions, considering both bank and customerrequirements. A supporting activity for the segmentation process is the measurementof customer profitability, as value propositions must be financially feasible for thebank. CRM is part and parcel of relationship marketing and must be appropriately


154

Relationship-

banking offeringCustomer

loyalty

Employee Customer

Bank

+ =

!

!

!

! !

!

! ! !

applied in the distribution network of banks. Technology, for example CRM systems,must be used as a support function for the parties involved in the inter-relationshiptriangle. The principles of relationship-based selling are core to the relationship-banking offering that must be implemented. Lastly, the support of top management iscritical for any implementation of strategy.

Relationship marketing

± Inter-relationships

± Consumer behaviour

± Segmentation

± Measurement (MIS)

± CRM and technology

± Relationship-based selling

± Top management support

Critical factors and aspects

± Value proposition

± Service and quality

± Employee competency

± Price

± Reward and recognition

± Communication

Benefits

± Retention

± Satisfaction and trust

± Word of mouth

± Cost reduction

± Cross-sales

± Profitability (relation-

ship lifetime value)

± Competitiveness

Figure 1: Conceptual framework for linking relationship banking and customer loyalty

The second aspect of the conceptual framework involves the relationship bankingoffering itself. The critical factors include the value proposition, service and quality,employee competency (relationship banker), price, reward and recognition, andcommunication. Relationship marketing and the relationship-banking offering areintegrated, and relationship banking develops and flows from relationship marketing.

The value proposition encapsulates the relationship offering or value-added tothe customer in totality, including the aspects of one-to-one contact, reliableperformance, trust, accessibility, education, individuality, service, quality, assistance,communication, recognition and preferential treatment. The relationship bankerplays a critical role in the relationship-banking offering as the relationship developsbetween customer and banker. The relationship banker must be competent,


155

experienced, knowledgeable, qualified, customer-orientated, service-orientated andmotivated.

The last part of the conceptual framework concludes the principle of customerloyalty and its benefits. One of the main objectives of the relationship-bankingoffering is to create a higher level of customer loyalty and develop this loyalty overtime. The benefits include retention of customers and staff, customer satisfaction,trust, word of mouth referrals and growth, cost reduction, cross-sales, profitability(relationship lifetime value RLV) and enhanced competitive advantage for the bank.

HYPOTHESIS DEVELOPMENT

The competition between retail banks in South Africa has become fierce, and banksrealise that they need to protect their existing customer base. Customer retention hasbecome a business imperative, and banks realise that customer lifetime valueidentifies the real value of a long-term relationship. They also realise that there aremajor financial benefits in mining the existing customer base through cross-selling ofproducts and services. As part of their relationship marketing strategies, commercialbanks have started to extend the relationship-banking offering, which was previouslyoffered only to corporate customers, to their high value business customers in theretail banking environment. One of the aims of the relationship banking strategy is toestablish a high level of customer loyalty. Opposing views exist, however, on theexistence and value of customer loyalty in the business environment. Some believethat customer loyalty could lead to increased profits and customer retention, whileothers believe that customers are interested only in the transactional value, price orservice received. The relationship banking offering is a very expensive sales andservice approach, and it is critical that it achieve its intended purpose ± to enhancecustomer loyalty ± and that it justify the financial outlay or cost.

Management thus needs to know and understand the benefits of following arelationship-banking strategy. They must also determine whether customer loyaltyexists in their business environment and whether this is enhanced by relationshipbanking. Banks need to ensure that they own the relationship with their customersand use it as a competitive advantage over other banks. The relationship bankingoffering, as part of a bank's relationship marketing strategy, aims to strengthen thecustomer relationship, increase customer satisfaction, support customer retention andincrease customer loyalty. Loyal customers tend to buy more, share their marketknowledge with their bankers and refer new customers; they are less price sensitiveand become cheaper to serve over time. The management of retail banks shouldtherefore place much higher value on the phenomenon of customer loyalty. Wherefeasible, they should also focus their attention on the appropriate application ofrelationship banking as a value-creating strategy.


156

The null hypothesis is therefore:

Ho: There is no difference in customer loyalty between business customers whoreceive a relationship banking offering or have a relationship banker, andbusiness customers who do not receive a relationship-banking offering or have arelationship banker.

The alternative hypothesis is:

Ha: Business customers who receive a relationship-banking offering or have arelationship banker are more loyal to their bank than business customers who donot receive a relationship-banking offering or do not have a relationship banker.

METHODOLOGY

Measurement instrument

The research instrument that was used was the Loyalty Acid Test Survey developedby Reichheld (2001), who refers to it as the acid test for measuring customer loyaltyand the building of lasting relationships. It is a relationship report card specificallydesigned to assist companies in evaluating and strengthening key relationships.Customers are asked to grade their relationship against the dimensions that driveloyalty, which include satisfaction, trust and commitment. The questionnaire focusesmainly on how well customers understand the bank's core principles, theirconsistency with the rules of loyalty, grading the bank's efforts in putting theseprinciples into practice, and finally asking what must be done to be more worthy oftheir loyalty.

Reichheld (2001) developed the measurement tool for measuring customer loyaltyto companies situated mainly in the United States of America (Bain & Company2005). The validity and reliability aspects were addressed and justified by Reicheld'sprevious research on customer loyalty. The tool is further accredited through themanagement and support received from the reputable research company, SatmerixSystems Inc. in the United States. The researchers are therefore satisfied with thevalidity and reliability of the measurement tool.

Data collection method

The primary data were collected by means of an electronic mail survey using aquestionnaire. The main driver for this method was that of cost, as it is one of themost affordable research methods. Accessibility is another benefit of this type ofmethod, as the sample elements generally have electronic mail facilities. Convenienceis also an important factor, as the sample elements can undertake the survey in theirown time, whenever convenient. However, the disadvantages include low response


157

rates, absence of interviewer intervention, inability to seek clarification, the need foraccurate mailing lists and the fact that the questionnaire cannot be long orcomplicated.

Sample

In the current retail banking environment, the relationship banking offering is foundmainly in the upper business market band, namely the commercial banking, businessbanking or business customer market segments. However, the main banks differ intheir segmentation criteria, and cognisance must be taken that the relationshipbanking offering is not restricted only to the upper business customer segment.Certain banks use additional criteria to segment their customers and include them inthe relationship banking offering, including contribution bands and industry orsector.

The samples for this study were restricted to:

. Eighty business customers who receive a relationship-banking offering and have apersonal relationship banker dealing with their accounts (sample 1). The sampleframe for this sample consisted of 900 business customers of one of the four majorbanks in South Africa. Simple random sampling was used.

. Eighty business customers who do not receive a relationship-banking offering anddo not have a personal relationship banker dealing with their accounts (sample 2).The sample frame for this sample consisted of business customers from eightbranches of the same bank and the same geographic area as sample 1. Tenbusiness customers were drawn from each of the eight branches by means ofsimple random sampling.

The samples of business customers are similar in respect of annual turnover band,which is in the R3 million to R50 million category. This turnover band selectionensures that the samples' elements will be similar.

Statistical test

The one-tailed t-test for independent groups was used to test the hypothesis. Thedesired level of significance used was 0.05.

RESULTS

A summary of the survey responses is presented in Table 1. A total of 160questionnaires were mailed, 80 to business customers that had a relationship banker(sample 1) and 80 to business customers that did not have a relationship banker(sample 2). A total of only 51 questionnaires were returned, which included 33business customers with a relationship banker and 18 without a relationship banker.


158

The number of responses received totalled 32% of those distributed, with the bestresponse rate coming from the customers with a relationship banker (41%). The lowresponse rate is in line with response trends experienced with the e-mail datacollection method (Cooper & Schindler 2006). The lower response rate (23%) fromsample 2 is possibly an indication of the low level of the relationship with the bank.The standard deviation for sample 1 (1.52) was slightly lower (17%) than for sample 2(1.83), which reveals that the variability of sample 1 is lower and more consistent. Themean for sample 1 was 7.65, which is a significantly higher rating than the mean forsample 2 of 5.07. The results reflect a higher level of agreement and a morefavourable attitude among sample 1 towards the loyalty aspects and dimensionsrelated to the bank. The mean for sample 2 indicates that this group is generally moreneutral towards the loyalty aspects and dimensions related to the bank. The one-tailed t-test for independent groups was used to test the hypothesis. The objective ofthe statistical tool was to determine whether a statistically significant difference existsbetween the two groups. The desired level of significance used was 0.05. The resultsof the t-test are presented in Table 2.

Table 1: Summary of survey responses

Category of respondents Sample

size

Number of

respondents

Percentage of

respondents

Average

or mean

Standard

deviation

Sample 1 ± Business customers

with a relationship banker

80 33 41 7.65 1.52

Sample 2 ± Business customers

without a relationship banker

80 18 23 5.07 1.83

Total business customers 160 51 32 6.74 2.07

Table 2: T-test to determine whether a statistically significant difference exists between thesample with a relationship banker and the sample without

Sample 1

With a relation-

ship banker

Sample 2

Without a rela-

tionship banker

Mean 7.65 5.07

Variance 0.43 0.72

Observations/Question 17.00 17.00

Pooled variance 0.58

Calculated value 9.92

Critical test value (one-tailed) 1.68


159

The results indicate that the calculated value is larger than the critical value andthat there is a significant difference in the results from the business customers with arelationship banker or personal banking relationship, as opposed to businesscustomers with no relationship banker or personal relationship with their bank. Thenull hypothesis is thus rejected and the alternative hypothesis supported. This is anindication that a relationship banking offering by retail banks does influencecustomer loyalty.

DISCUSSION OF RESULTS

. The results of the survey, as reflected in Table 1 as well as the previous studiesdiscussed, support the view that relationship marketing, or in this case relationshipbanking, enhances customer loyalty (Cheese 1994; Gummesson 1998; Abratt &Russell 1999; Cram 2001; Iniesta & SaÂnchez 2002; Rigby, Reichheld & Dawson2003). This indicates that there is a significant difference in the results frombusiness customers with a relationship banker or personal banking relationship,compared to business customers with no relationship banker or personalrelationship with their bank. This is an indication that a relationship bankingoffering by retail banks does influence customer loyalty positively.

. Somewhat contradictory to the generally positive findings from sample 1, theexperience of both groups was that the bank places short-term profits beforepeople and relationships. This aspect received the lowest and most negativeratings. The recent òutrage' at high bank fees, the excellent financial performanceof banks and exuberant emoluments of directors is considered to be the mainreason for this perception. Some respondents indicated that pricing is too high, orthat the bank must price according to their loyalty.

. Sample 1 believes that the bank deserves their loyalty and indicates that theirloyalty has grown over the last year. This confirms that the objective of therelationship offering is achieved, while the opposite is evident for sample 2customers. The objective of relationship banking is to enhance and develop theloyalty of customers over the long term (Rayner 1996; Abratt & Russell 1999;Reichheld 2003). Respondents indicated that the bank should return their loyaltyand that their bank's loyalty is important to them.

. Sample 1 business customers felt that the bank really cared about building arelationship with them, while sample 2 customers had an adverse perception of thebank's intention to build a relationship. This indicates, firstly, that the relationshipbanking value proposition is working with respect to high-value customers andachieving the objective set by the bank, and secondly, that there is a gap in therelationship offering to the next level of customers.

. The role of the relationship banker is a critical aspect in determining whetherrelationship banking is successful or not (Murray 2004). The relationship banker is


160

responsible for delivering the relationship value proposition to the customer. Themain roles of the relationship banker include service delivery, and developing andbuilding a relationship with the customer. Customers prefer face-to-faceinteractions with their bank when purchasing complex and specialised services(Howcroft et al. 2003). Sample 1 again rated their relationship banker morepositively than business customers in sample 2. Both samples indicated that theywant a single point of contact, specialised advice and regular interaction. Thebusiness customers from sample 1 consistently pointed out the importance of theirrelationship banker in their dealings with the bank. Some respondents indicatedthat they want the bank or relationship banker to understand their business.

. The research indicated the importance of communication in any relationship(Bhote 1996; Cram 2001; Perreault & McCarthy 2002). Sample 1 customers werevery positive and satisfied with the communication and flow of information,which is one of the key aspects of the relationship banking offering. Sample 2customers, however, experienced the communication very negatively. Thequalitative responses of customers supported the view that regular contact mustbe maintained.

. Neither of the samples considered that the bank valued them or rewarded themappropriately. Although sample 1 was marginally positive, the responses to thisquestion were nevertheless their second lowest rating overall, which indicates thatcustomers in general do not believe that they are appropriately valued andrewarded. Customers want to feel valued, treated in a unique manner andrewarded or recognised (Barnes & Howlett 1998; Gummesson 1998; Abratt Cram2001; Gray & Byun 2003). This raises the question of the success of loyaltyprogrammes and whether they are valued by customers.

. The survey results indicate that both samples have a high probability of remainingwith their current banker and continuing to use the products and services. Bothsamples are also fairly positive that they would support the same bank if they hadto decide again. This aligns with Levitt's (1981) statement that banking allows noroom for `divorce' and that a banking relationship is similar to the process ofbecoming a designated supplier. Where the nature or service is complicated, suchas financial services, retention is also higher. The financial services demanded andproducts used by business customers are generally more complex than those usedby individuals, which also confirms the high probability of remaining with theirbanker. The higher average of sample 1 is in line with research by Cheese (1994),which indicates that where involvement is high, customers are more conversionresistant. His research also shows that where close relationships exist, customersare more willing to forgive and not change bankers if problems or complaintsarise. However, customer inertia could also be a reason for not defecting (Cheese


161

1994). Many customers do not move because of the `hassle factor', `laziness' and`lack of differentiation', which could be reasons why sample 2 customers arewilling to continue supporting their current bank (Howcroft et al. 2003).

. The survey results indicate that customers who receive a relationship bankingoffering are more willing to refer other businesses to their banker. According toReichheld (2003) and Vinocur (2004), referring others to a company is the bestsign of customer loyalty and sacrifice. If a customer is willing to put his/herreputation on the line, he/she is willing to go beyond indicating satisfaction orreceiving good economic value, and this will indicate an ìntensely' loyal customer.The conclusion can thus be made that, based on this principle, relationshipbanking leads to customer loyalty.

. The research reflects that relationship banking customers experience a higher levelof customer satisfaction. This supports the relationship banking offering, as its aimis to provide a higher level of service and value offering to the customer. However,customers who are satisfied are not necessarily loyal (Novo 2004).

. The importance of trust and integrity in a relationship is clearly reflected in theresearch results, which indicate that where a close relationship exists, customersperceive the trust and integrity of their banker to be much higher than customersthat do not enjoy a close relationship. Customers who share the values of a bankand trust it will recognise the mutual benefits of extended product use within arelationship (Cheese 1994; Howcroft et al. 2003). Sample 1 customers alsoconsidered their bank to have a winning strategy, which supports their trust intheir banker. Trust is an important part of any relationship and is critical todeveloping loyalty (Christopher et al. 1991; GroÈnroos 1994b; Reichheld 1996;Barnes & Howlett 1998; Duffy 1998; Wetzels et al. 1998; Cram 2001).

. The opportunity for cross-sales increases as the relationship develops and loyalty isvested (Cheese 1994; GroÈnroos 1997). Cross-sales support `locking-in' customersto improve retention. Long-term customers who are loyal are able to reduce theircosts, as they become very efficient buyers once they get to know the business andits products or services (Reichheld 1996). Costs will similarly reduce for the bank,as customers will not have to refer to them for routine purchases and informationthat has become known to them.

. By building meaningful relationships with customers, a bank can increase marketshare and improve its bottom line by reducing costs and increasing revenues. Thevalue of the relationship grows over time through extended product and serviceuse, cross-selling and word-of-mouth referrals. Related research supports thefindings and indicates that loyal customers are also more profitable (Bhote 1996;Reichheld 1996; Novo 2004). Loyal customers tend to purchase more frequentlyand spend more (Rayner 1996). Finally, the relationship banking offering and thedevelopment of customer loyalty strengthens the bank's competitive advantage(Christopher et al. 1991; Reichheld 1996; Duffy 1998; Gummesson 1998; Abbratt& Russell 1999; Ambler 2003; Reichheld 2003).


162

CONCLUSION

. The aspects of relationship banking that are important in creating customer loyaltyinclude relationship banking value proposition, service and quality, relationshipbanker competency, price, reward and recognition, and communication. Thebenefits of relationship banking include the retention of customers and staff,customer satisfaction, trust, word of mouth referrals and growth, cost reduction,cross-sales, profitability (relationship lifetime value), and enhancement of thebank's competitive advantage.

. From the research, it is clear that relationship banking enhances business customerloyalty, which has numerous advantages and benefits for retail banks in SouthAfrica. This includes that for retail banks to achieve sustainable success, theyrequire a relationship banking model that considers the importance of customerloyalty. The researchers conclude, from the research conducted, that relationshipbanking is applicable and indeed a business imperative in the retail bankingindustry. Relationship banking also affects customer loyalty positively.

RECOMMENDATIONS

. Retail banks need to develop relationship strategies for all levels of customers.While the intention is to retain all customers and provide them with some level ofa relationship offering, respondents did not experience the relationship offering atlower levels. A possible remedy is that banks should consider a relationshipstrategy based on different levels of relationship offerings: high-touch, medium-touch and low-touch. These different value propositions should represent themutual requirements of the bank and the customer, as well as being financiallyfeasible for banks. To support relationship strategies, banks need to understand thebehaviour of their customers and their buying habits. Market segmentation is acritical aspect of relationship marketing, and the segmentation of businesscustomers must be in line with the different levels of relationship offerings.Segmentation should be according to customer value or customer profitability, thecomplexity of financial demands, annual turnover and industry. Segmentationwould allow banks to provide the correct relationship banking offering to the rightcustomer. To support the segmentation process, banks need to be able to determineindividual customer profitability. Management information systems should bedeveloped and used to determine the profitability of the customer. Once thesegmentation has been concluded, banks should implement and use applicableCRM strategies and CRM systems to complement the relationship bankingoffering. This entails that they should know their customers well enough todetermine the kind of relationship they would like to have. Banks should also try


163

to extend their CRM strategy across all customers. Support from top managementand understanding of the relationship banking offering is critical, as a lack ofsupport can derail the success.

. All retail banks should align their interaction with their business customers with arelationship banking model that includes a high-touch, medium-touch and a low-touch offering. Such offerings would be aligned with the segmentation of customervalue, as it is not cost prudent or economically viable to provide a one-to-oneoffering to all business customers.

LIMITATIONS

The survey had several limitations:

. The samples were restricted to customers of only one of the four major banks inSouth Africa. If the assumption is made, however, that in measuring the impact ofrelationship banking on customer loyalty, no difference exists with respect tobusiness customers' attitudes and perceptions between the various retail banks, thegeneralisation of customers' attitudes and perceptions across different banks couldbe defended.

. There were only 51 respondents out of a total of 160 questionnaires distributed. Ofthe 51 respondents, 33 were from the sample that included customers who have arelationship banker or a close relationship with their banker, and the remaining 18respondents were from the sample of customers with no relationship banker or noclose relationship with their banker. There were thus differences in the number ofrespondents per sample, which influenced comparability.

. The confidentiality policies of banks as regards customer information limited thecollection of demographic data. All customer demographic data were withheld,and the research therefore focused only on feedback on aspects relating torelationship banking and customer loyalty. This limits the value of the research, asthe availability of demographic information might reveal additional findings.

. The study did not focus on brand loyalty, loyalty programmes, customer rewardsand incentives. Although these aspects could influence the banking relationshipand customer loyalty, they are considered research fields in their own right. Theresearchers limited the study to the specific research objectives.

SUGGESTIONS FOR FUTURE RESEARCH

Future research could focus on the following:

. The calculation of relationship lifetime value

. A model for appropriate market segmentation of business banking customers inSouth Africa


164

. The importance of reward and recognition strategies, and loyalty programmes tovalued customers

. Key characteristics of relationship bankers.

GLOSSARY

Business customers are business account holders at retail banks and include anycommercial small and medium enterprises, companies, close corporations, firms,trusts and partnerships. Such customers are generally represented by individualsor small groups of owners. These people are usually also the decision-makersand management teams.

The market represents a group of potential customers with similar needs who arewilling to exchange something of value with sellers offering various products orservices that satisfy their needs.

Relationship marketing is aimed at establishing, maintaining and enhancingrelationships with customers and other partners, at a profit, so that the objectivesof all parties are met. This is achieved by mutual exchange and the fulfilment ofpromises.

Relationship banking can be defined as a long-term, intimate and relatively openrelationship between a corporation and its banks.

REFERENCES

Abratt, R. & Russell, J. 1999: `Relationship marketing in private banking in South Africa',International Journal of Bank Marketing, 17(1): 5±19.

Ambler, T. 2003. Marketing and the Bottom Line, 2nd edition. London: Prentice HallFinancial Times.

Bain & Company. 2005. Loyalty Rules. [Online] Available at: www.loyaltyeffect.com Accessed:18 May 2005.

Barnes, J.G. & Howlett, D.M. 1998. `Predictors of equity in relationships between financialservices providers and retail customers', International Journal of Bank Marketing, 16(1).15±23.

Bennett, H. & Durkin, M.G. 2002. `Developing relationship-led cultures: a case study in retailbanking', International Journal of Bank Marketing, 20(5): 200±211.

Bhote, K.R. 1996. Beyond Customer Satisfaction to Customer Loyalty. The Key to GreaterProfitability. New York: AMA Membership Publications Division.

Cheese, J. 1994. Till Death us do Part. The Why, What and How of Managing CustomerRelationships. Dublin: Lafferty Publications.

Cap Gemini Ernst & Young. 2005. European CRM Index. Winning in the RelationshipEconomy. [Online] Available at: www.cgey.com/crm. Accessed: 30 August 2005.

Christopher, M., Payne, A. & Ballantyne, D. 1991. Relationship Marketing. Bringing Quality,Customer Service and Marketing together. Oxford: Butterworth-Heinemann.


165

Cooper, D.R. & Schindler, P.S. 2006. Business Research Methods, 9th edition. New York:McGraw-Hill.

Cram, T. 2001. Customers that Count. London: Financial Times/Prentice Hall.Doyle, P. 2000. Value-Based Marketing. New York: Wiley.Duffy, D.L. 1998. `Customer loyalty strategies', Journal of Consumer Marketing, 15(5): 435±

448.East, R., Lomax, W. & Freeman, E. 2002. `Lip service: variables associated with

recommendation', Proceedings of the Academy of Marketing. Nottingham, UK, July.Ellis, D. 2004. `Getting personal with relationship marketing', Catalog Age, November: 57.Ferreira, T.W. 2004. A model for maximising customer value and loyalty through relationship

banking in the South African retail banking industry (in press). Available from:[email protected].

Fournier, S., Dobscha, S. & Mick, D.G. 1998. `Preventing the premature death of relationshipmarketing', Harvard Business Review, 76(1): 42±51.

Ghemawat, P. 1999. Strategy and the Business Landscape. Boston: Addison-Wesley.Gibbs, M.L. 1985. Buyer behaviour of corporate customers in banking. Unpublished MBA

research report, University of the Witwatersrand, Johannesburg.Gray, P. & Byun, J. 2003. `Customer relationship management Part II', International Journal

of Customer Relationship Management, June/July: 41±50.GroÈnroos, C. 1990. Service Management and Marketing Managing. Managing the Moments of

Truth in Service Competition. Lexington, MA: Free Press/Lexington Books.GroÈnroos, C. 1994a. `Quo vadis, marketing? Toward a relationship marketing paradigm',

Journal of Marketing Management, 10(5): 347±360.GroÈnroos, C. 1994b. `From marketing mix to relationship marketing: towards a paradigm

shift in marketing', Management Decision, 32(2): 420.GroÈnroos, C. 1997. `From marketing mix to relationship marketing ± towards a paradigm

shift in marketing', Management Decision, 35(4): 322±339.Gummesson, E. 1998. `Productivity, quality and relationship marketing in service operations',

International Journal of Contemporary Hospitality Management, 10(1): 4±15.Harker, M.J. 1999. `Relationship marketing defined? An examination of current relationship

marketing definitions', Marketing Intelligence and Planning, 17(1): 1320.Howcroft, B., Hewer, P. & Durkin, M. 2003. `Banker±customer interactions in financial

services', Journal of Marketing Management, 19: 1001±1020.Iniesta, M.A. & SaÂnchez, M. 2002. `Retail-consumer commitment and market segmentation',

International Review of Retail, Distribution and Consumer Research, 12(3): 261±279.Kotler, P., Armstrong, G., Brown, L. & Adam, S. 1998. Marketing, 4th edition. Sydney:

Prentice Hall.Levitt, T. 1981. `Marketing intangible products and products intangibles', Harvard Business

Review, MayJune: 94±102.Levitt, T. 1983. After the sale is over', Harvard Business Review, SeptemberOctober: 87±93.Life Style Extra. 2005. Finance Glossary. [Online] Available at: www.Ise.co.uk/financeglossary.

Accessed: 30 March 2005.Metcalfe, B. 2003. Strategic and Emerging Issues in South African Banking 2003. Johannesburg:

PricewaterhouseCoopers.


166

Murray, S. 2004. `Transforming the performance of client relationship management teams',Bank Marketing International, February: 14±15.

Novo, J. 2004. `Drilling down. Turning customer data into profits with a spreadsheet'.[Online] Available at: www.jimnovo.com/html. Accessed: 17 March 2005.

Perreault ,W.D. & McCarthy, E. 2002. Basic Marketing, 14th edition. New York: McGraw-Hill.Rauch, K. 1993. `Developing a relationship-based sales culture', The Bankers Magazine,

September/October: 49±54.Rayner, S. 1996. Consumer Loyalty Schemes. London: Financial Times.Reichheld, F.F. 1996. The Loyalty Effect. Boston: Harvard Business School Press.Reichheld, F.F. 2001. Loyalty Rules! Boston: Harvard Business School Press.Reichheld, F.F. 2003. `The one number you need to grow,' Harvard Business Review,

December: 46±54.Reinartz, W. & Kumar, V. 2002. `The mismanagement of customer loyalty', Harvard Business

Review, July: 86±94.Rigby, D.K., Reichheld, F.F. & Dawson, C. 2003. `Winning customer loyalty is the key to a

winning CRM strategy', Ivey Business Journal Online, March/April. Available at:www.iveybusinessjournal.com/. Accessed: 25 March 2005.

Schneider, H. 2003. `Selling now builds on relationships', Mortgage Banking, December: 89.South African Reserve Bank. 2003. Annual Report. [Online] Available at: www.resbank.co.za.

Accessed: 16 April 2005.Stewart, K. 1995. An exploration of customer exit, with empirical findings from the retail

banking sector in Northern Ireland. Unpublished PhD thesis, National University ofIreland.

Vinocur, M.R. 2004. Would your customers recommend you? American Printer, 1 April.[Online] Available at: www.loyaltyeffect.com/bainweb/publications/. Accessed: 18March 2005.

Voss, G.B. & Voss, Z.G. 1997. Ìmplementing a relationship marketing program. a case studyand managerial implications', Journal of Services Marketing, 11(4), 278±298.

Wetzels, M., De Ruyter, K. & Van Birgelen, M. 1998. `Marketing service relationships. the roleof commitment', Journal of Business and Industrial Marketing, 13(4/5), 406±423.


167

Guidelines for contributors to theSouthern African Business Review

The Southern African Business Review is the research journalof the College of Economic and Management Sciences of theUniversity of South Africa.

Mission

The aim of the Southern African Business Review is to serve asa vehicle for the publication and dissemination of research ofa high standard in the fields of the economic and manage-ment sciences, including accountancy and related subjects.

Nature of contributions

Research contributions should conform to acceptable aca-demic standards with regard to content, methodology andreference technique. Contributions may be on any of thefollowing types of research:

. Empirical studies, using any acceptable research strate-gies (such as survey, case study, experiment, archivalanalysis or history)

. Theoretical studies aimed at advancing current theory oradapting theory to local conditions

. Theoretical studies aimed at reviewing and/or synthe-sising existing theory.

Note that only material that has not been published elsewherewill be considered for publication.

Guidelines for manuscripts

1. Every proposed article should address at least thefollowing:

(i) Introduction(ii) Conceptualisation/theoretically well founded(iii) Purpose/objectives of the article(iv) Hypothesis/problem investigated(v) Research methodology followed (where applicable)(vi) Results (where applicable)(vii) Recommendations/conclusion

2. Articles should preferably not exceed 7 500 words or 25A4 pages typed, using the font Times New Roman (12point) and 1.5 line spacing. Authors should ensure thatthe contents of very short articles are substantial enoughto warrant publication.

3. Tables, illustrations and figures should be placed onseparate sheets and not included in the text. The editorreserves the right to refuse publication of any submissionfor which the artwork is not of an acceptable standard.The approximate position of tables, illustrations andfigures should be clearly indicated in the manuscript, forexample:

Place Figure 1 approximately here

4. Since the Southern African Business Review follows apolicy of blind peer review, the first page of the text

proper should carry the title of the article, but not thename(s) of the author(s).

5. A separate page should carry the title of the article, itsauthor(s) and relevant biographical information, includ-ing full name, academic title, current position andinstitution (where appropriate). Postal and e-mailaddresses should also be provided.

6. The article should be preceded by a single paragraphabstract of the article, not exceeding 200 words. Theabstract should not form part of the text.

7. The reference technique should be according to theHarvard method. For a practical example, see a recentissue of the Southern African Business Review. Referencesin the main text should take the form of (Smith 1999:145).

Submission and review process

1. Manuscripts for the review process should be submittedby e-mail in MS Word.

2. Manuscripts will be submitted to independent reviewers.A policy of double blind peer review is followed. Theeditor will make the final decision whether to publish anarticle.

3. If approved subject to revision, the manuscript will bereturned to the author(s), who will make the necessaryalternations/corrections. The final copy of the manuscriptwill then be returned to the editors. This copy should besubmitted in MS Word by e-mail to the address below.

4. It is required that all authors have their draft articlesreviewed for language proficiency before submittingthem to the editors. Sometimes excellent submissionshave to be drastically amended or even rejected becauseof linguistic ineptitude. The editors reserve the right tomake minor editorial adjustments without consulting theauthor. The use of abbreviations should be avoided as faras possible.

5. Footnotes should be avoided. Endnotes may be used, andshould be consecutively numbered and listed at the endof the text, before the list of references.

6. Page fees of R100 (excluding tax) per page are payable onacceptance of the article. A non-refundable submissionfee for 15 pages is payable on acceptance of articles. Theauthor(s) will receive written acknowledgement ofacceptance accompanied by an invoice for page fees.

7. Please supply a list of as many keywords as possible forcataloguing purposes.

Submissions and correspondence to

The Editor: Southern African Business ReviewMs Erna KoekemoerBureau of Market ResearchP.O. Box 392Unisa 0003 South AfricaTel: +27 12 429-3228Fax: +27 12 429-3170 (Please do not fax yoursubmission to the editor)E-mail: [email protected]: www.unisa.ac.za/sabusinessreview

169

Documents

Sauth African Business Review 3A