ISSN 0265-2323Volume 26 Number 1 2008 Bank Marketing For the financial services sector The future of retail banking Guest Editor: Kent Eriksson International Journal of www.emeraldinsight.com International Journal of Bank Marketing For the financial services sector ISSN 0265-2323 Volume 26 Number 1 2008 The future of retail banking Guest Editor Kent Eriksson Access this journal online ______________________________ Editorial advisory board ________________________________ Guest editorial ___________________________________________ Population ageing: opportunities and challenges for retail banking Jessica Lindbergh, Ruth-Aı ¨da Nahum and Sofia Sandgren _____________ 2 3 4 CONTENTS 6 Basic values and objectives regarding money: implications for the management of customer relationships Margit Raich __________________________________________________ 25 Industry-embedded financial decision making: the case of a fashion firm Sara Jonsson __________________________________________________ 42 Collaboration to improve local business services: ¨ lje Project’’ in Sweden the ‘‘Norrta Amy Rader Olsson _____________________________________________ 57 Access this journal electronically The current and past volumes of this journal are available at: www.emeraldinsight.com/0265-2323.htm You can also search more than 175 additional Emerald journals in Emerald Management Xtra (www.emeraldinsight.com) See page following contents for full details of what your access includes. www.emeraldinsight.com/ijbm.htm As a subscriber to this journal, you can benefit from instant, electronic access to this title via Emerald Management Xtra. Your access includes a variety of features that increase the value of your journal subscription. Structured abstracts Emerald structured abstracts provide consistent, clear and informative summaries of the content of the articles, allowing faster evaluation of papers. How to access this journal electronically To benefit from electronic access to this journal, please contact
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[email protected] Web www.emeraldinsight.com/customercharter Tel +44 (0) 1274 785278 Fax +44 (0) 1274 785201 UK Professor Jean-Charles Chebat HEC Montreal School of Business. Barnes Memorial University of Newfoundland. Sweden Editorial advisory board 3 International Journal of Bank Marketing Vol. UK G. 3 # Emerald Group Publishing Limited 0265-2323 . UK Professor Barry Howcroft Loughborough University. Lynn Shostack Joyce International Inc. UK Dr Mohammed Almossawi University of Bahrain. Bloemer Professor Dr Jose University of Nijmegen. UK Dr Ugur Yavas East Tennessee State University. UK Professor Christine Ennew University of Nottingham Business School. The Netherlands Mark Colgate University of Auckland. USA Dr Frank B. UK Dr Trevor Watkins Head of Education and CPD. Canada Professor Leslie de Chernatony The Birmingham Business School. Lewis Manchester School of Management.EDITORIAL ADVISORY BOARD Russell Abratt Nova Southeastern University. The Actuarial Profession. UK Professor Stephen Worthington Monash University. Banerjee Indian Institute of Management. USA Dr Mosad Zineldin Va ¨ xjo ¨ University. Tansu Barker Brock University. Australia Professor Mike Wright University of Nottingham. UK Dr Barbara R. UK Professor Luiz Moutinho University of Glasgow Business School. Cowell University of Central England. USA Dr Kate Stewart University of Ulster at Jordanstown. 26 No. Abramson Relationship Consulting Group Ltd. Easingwood Manchester Business School. UK Professor Ashish K. 2008 p. UK Professor Christopher J. Northern Ireland. Canada Professor James G. 1. India Professor A. Canada ´ M. Bahrain Professor Michael Baker Westburn Publishers Ltd..M. UK Professor Arthur Meidan Sheffield University. New Zealand Professor Donald W. Sweden. The major determinant for the future of banking is the customer. and new actors will greatly influence the outcome. The article by Raich in this Special Issue shows a structured method for exploring customer attitudes and behaviour. and make transactions. Journal of Business Research. Management International Review . as has been shown by the Dell’s build-to-order system. This is especially relevant with regard to small and medium-sized The author thanks Swedbank and the Swedish Savings Banks Academy for financial support.kth. The reasons for these problems are very evident in the banking industry. However. only one third of customer relationship management processes are successful. 2008 pp. 26 No. mass market customization typically fails because of differences in managing and organizing production so that the customer meets one firm interface. . International Business Review. Customers’ preferences. 4-5 q Emerald Group Publishing Limited 0265-2323 The future of retail banking Ever since Henry Ford’s methods of mass-producing standardized products were replaced by more differentiated product ranges. changes in technology. they do it through multiple channels. It is one example of the way marketers can work to find a steady course in the future of retail banking. However. and how they create value. The benefits can be huge. and has also published in such scholarly journals as the Strategic Management Journal.se 4 International Journal of Bank Marketing Vol. The article in this Special Issue by Lindbergh. and in particular the composition of the customer base. Dr Eriksson has published in the International Journal of Bank Marketing and Journal of International Business Studies. Nahum and Sandgren shows the drastic effect of demographic changes in banks’ customer markets. Banks have a long history of conservatism in their business practices. as The Economist (2001) points out. He is particularly interested in how banks and customers behave when they interact. banks attempt to be their clients’ partner in solving their financial needs. Today. borrow. regulation and general economic conditions have transformed the industry. He is Vice Director and Head of Research at Cefin. it is very likely that changes will be considerable. and that future bank customer behaviour and attitudes are important for the future of retail banking. which makes production more efficient and the product more customized. 1. their acceptance of the new technology. His research covers retail banking and firm growth. Journal of International Business Studies.1 Guest editorial About the Guest Editor Dr Kent Eriksson is Professor of Retail Banking at the Centre for Banking and Finance (CeFin) at the Royal Institute of Technology (KTH) in Stockholm. firms have increasingly tried to customise their offering to customers. Kent Eriksson can be contacted at: kent. and with many different combinations of products. where a large range of more or less standard services have been offered through branches. Another approach to the future of retail banking is to ask what business banks currently miss. While it is difficult to predict the outcome on customer markets.IJBM 26. etc. Even though customers still need to save. Research on customer behavior has shown that there is considerable inertia to how much and how quickly customers are willing and able to learn. for the past decade. how they perceive their exchange. For example. yet little is known about how this learning works.eriksson@infra. but there is a need to develop knowledge. such as exchange in communities. despite the fact in order to offer value to each other. The bank’s resources are its service offer and its ability to meet individual customer needs through customized services. Retail banking can transform societies if it works well. The Economist. Kent Eriksson Guest Editor References Binks. 24 No. European Commission. Jonsson’s article in this Special Issue studies a case where a small start-up firm chose alternative funding. “Creating an entrepreneurial Europe: the activities of the European Union for small and medium-sized enterprises (SMEs)”.. Numerous good government investigations have pointed out that banks’ SME customers do not utilize financial services as efficiently as they could. UK Competition Commission (2003). Brussels.enterprises (SMEs). 2006. and that the reason for this to a large extent is the exchange in the bank-SME relationship (Binks et al. The future of retail banking is promising. Vols 1-4. Together with other important actors banks can create a supporting network that promotes local growth in a community. European Commission. the bank and the SME should be aware of each other’s unique resources. 346-55. UK Competition Commission. Guest editorial 5 . Understanding the bank’s service offer thus often involves understanding the organization. Second Round Table of Bankers and SMEs: Final Report. the bank engages its employees. In meeting these needs. but rarely tend to use that position for the benefit of their customers. London. M. methods and applicable frameworks to better seize the opportunities that lie ahead. The article in this Special Issue by Rader Olsson suggests that there are no major hindrances for banks to take a more active part in the development of local networks supporting small firm development. encourage banks to take greater initiative locally. European Commission. COM (2003) 26. pp. external board members and in particular small firms themselves. so much so that the 2006 Nobel peace price was awarded to Dr Mohammad Yunus for his work with Grameen Bank. It is seen as important that banks emerge from their shells and take part in emerging networks. C. Report on the Supply of Banking Services by Clearing Banks to Small and Medium-Sized Enterprises within the UK. Vol. In fact. and sometimes also their suppliers and partners. including auditors. 2003). 14 July. and Mowlah. 2003. thereby helping it to combine its vast array of sources into one service offering. UK Competition Commission. future research areas should focus on new ways of exchanging with customers. all other actors. Adding value to the bank could therefore be done by using more of the expertise in the organization. As a consequence. International Journal of Bank Marketing. Brussels. 5. European Commission (2003). Customers have to be the central focus of attention because their way of living determines the needs that banks have to match. Banks have always been great observers on the local scene. The SME’s resources can thus be understood in terms of its customer relationships and supplier relationships. “Special report on mass customization”. (2006). “The relationship between private businesses and their banks”. Commission Staff Working Paper.. A. (The) Economist (2001). European Commission (1996). 1996. Ennew. who apply their problem-solving expertise from a vast array of sources inside and outside the firm. local government. 6-24 q Emerald Group Publishing Limited 0265-2323 DOI 10. Banks can participate in financial education and consequently increase households’ motivation to save more and in better ways.e. light is shed on potential scenarios that banks may encounter. Personal finance. while evidence shows that population ageing exposes individuals to greater risks.htm IJBM 26.The current issue and full text archive of this journal is available at www. childcare.com/0265-2323. Design/methodology/approach – The paper uses demographic forecasts made by the United Nations Population Division. Royal Institute of Technology (KTH). while almost 50 per cent will be dependent (i. and within 20 years.1 Population ageing: opportunities and challenges for retail banking ¨da Nahum and Sofia Sandgren Jessica Lindbergh. and to Kent Eriksson for helpful discussions and Financial support from Swedbank is gratefully acknowledged. 1. This transition will of course have great implications for many areas within societies: labour markets. Since much of individuals’ behaviour regarding spending. Other life cycle behaviour models point out that individuals’ risk aversion increases with age. borrowing and saving is determined according to where they are within their life cycles. Increasing life expectancy. Risk management. Keywords Savings. Demographics. Consumer demand encountered by banks is shifting from credit products to savings products. appear in alphabetical order and have contributed equally to the paper. Older consumers. This increases the need for households to appropriately diversify and manage the risks they face. only slightly more than 50 per cent of the population in today’s richest countries will be of working age. Based on the findings.1108/02652320810847084 The authors grateful for Finance. The proportion of elderly people is getting larger. Originality/value – The paper proposes that banks can contribute to creating financial stability. Banking Paper type General review 6 Received 29 April 2007 Revised 18 October 2007 Accepted 24 October 2007 Introduction There is an extensive global demographic transition taking place. 2008 pp. The investment packages currently offered by banks need to adapt to changing needs: combined annuity and life insurance packages are one option. to suggestions. in an ageing population. Findings – The life cycle models predict a higher overall asset accumulation level and a higher savings level. to which are applied established economic models on life cycle behaviour. They are valuable comments from seminar participants at the Centre for Banking and the anonymous reviewer. and encourages the development of products that are better tailored to these growing needs. This opens a window of opportunity for the banking sector to adjust its services so as to meet these changes and reap the benefit of demographic changes. coupled with an increasing old age dependency ratio has implications for the demand for financial services. either too young or too old to work). an altered age structure will have consequences for the demand for financial International Journal of Bank Marketing Vol. Stockholm. Sweden Abstract Purpose – This paper seeks to shed light on the challenges and opportunities demographic transitions bring about to the banking sector. but also financial markets.emeraldinsight. 26 No. . to name a few. albeit fulfilled to varying degrees in different countries. elderly care and healthcare. Ruth-Aı Centre for Banking and Finance. at least initially. the fertility rates are higher than in Japan and Spain. but also strong laws and regulations prohibiting discrimination against women and “parents”. and thereby contribute to making the transition a smooth one. countries where the costs of staying at home with children may be higher in terms of career. it will be of benefit to society if individuals entering retirement do so with the funds necessary to live through it. Given that the need for and the reality of financial innovation changes over time. in countries where women can return to work after childbearing without losing too much status and/or income. Given the growing competition in the banking sector and in light of the demographic challenges this sector faces. and from this try to shed light on potential scenarios that banks will encounter.services encountered by banks. In particular. without needing to resort to social welfare institutions. fertility is often higher. These developments often interact – as countries become richer and healthier. With the world population growing older. there are major challenges and opportunities for the banking sector to adjust to these changing demographics. then goes on to describe theories about saving and spending behaviour over a lifetime. as shown by Allen and Santomero (2001). Since there will be relatively few individuals working and paying taxes in the future. We use demographic forecasts made by the United Nations Population Division. Population ageing 7 . Furthermore. leading to an increased level of accumulated wealth. In poorer countries. The demographic transition The world’s population is getting older because of longer life expectancy and lower fertility rates in most countries. apply established economic models about life cycle behaviour. The future winners in banking markets will be those who are first to reap the commercial benefit of demographic changes. their inhabitants live longer. asset accumulation in anticipation of retirement is of increasing importance to consumers as a result of higher life expectancy and the increasing proportion of the population nearing retirement. policy and infrastructure also have their implications. annuities. in wealthier countries where women tend to have more career options. two countries with long allowances for maternity leave. For example. This paper starts out with a brief illustration of what kind of demographic transition we are facing. children have traditionally been seen as investments. they also seem less willing to spend too much time away from the labour market taking care of children. Allen and Santomero (2001) show how demand for such activities has recently grown significantly. banks need constantly to revise the intermediary role they have in society and adapt continuously to these new needs by restructuring their businesses in order to prosper and maintain their positions in the market. They are instead shifting to other forms of fee-producing intermediary activities such as trusts. while in richer countries it is rather the case that they. the consumer demand encountered by banks is shifting from credit products to savings products. at an individual level. and finally touches upon what challenges all this implies for the retail banks. mutual funds. insurance brokerage and transaction services. Of course. mortgage banking. but also give birth to fewer children. in Norway and Sweden. banks have been forced to become entrepreneurial and are thus changing their activities away from the traditional intermediation business of taking deposits and making loans. Hence. This trend is apparent in most industrialised countries. require investment. and there is a large break in the data to the next group of countries. Canada. . . . Figure 1 shows the life expectancy of the inhabitants in these 18 countries. 2003). Finland. New Zealand. Globally.1 8 In this section. As mentioned above. respectively.IJBM 26. Furthermore.000 in 1985. . we not only live longer. the lowest and highest life expectancies were 72 and 76. These countries had per-adult incomes above $US10. It is a fairly steep and linear increase. going from less than 74 years in 1975 to more than 82 years in 2025. also where the banking sector is obviously well developed. . . We focus here on the richest industrialised countries. . while the following 20 are projections.1 children per woman. Denmark. and how marginally it is expected to increase in the near future. in Austria and Iceland. The countries are: . Figure 2 shows the average fertility rate for these countries. they are still much short of the replacement rate of 2. In 1975. . using a longer window to illustrate how much fertility has actually decreased. we also tend to give birth to significantly fewer children than before. Italy. . France.000 is an appropriate cut-off level (Beaudry and Collard. thus. indicating that $US10.2 (in Denmark and the USA) and 86 years (in Japan). the projected life expectancies vary between 80. . Austria. Sweden. 73 countries or areas may well have fertility levels below the replacement rate and 45 of them are in more developed regions. We generally chose a window of 50 years. The data stem from the United Nations Population Division (2005). . . Switzerland. the UK. . Germany. Belgium. Despite the predicted increase in fertility rates. we give some illustrations of demographic development in the most developed countries. Norway. . in 2005-2010. The Netherlands. countries with fertility rates below replacement levels are likely to account for approximately 43 per cent of the world’s population (World Population . Japan. . from 1975 to 2025. The variation within this group of countries is not large. the first 30 years shown are estimates. Iceland. and .3 years. the USA. Australia. In 2025. . 15 per cent. 1. Fertility rate Prospects.19 per cent. and (3) Slovenia. Life expectancy Figure 2. 2007).Population ageing 9 Figure 1. (2) Slovakia. Figure 3 depicts the average old-age dependency ratio for these countries. In combination with roughly constant retirement ages. The three countries with the lowest fertility rates are all former members of the Eastern bloc: (1) Ukraine. As can be seen. 1. these two effects (increased longevity and decreased fertility rates) will result in an increased old-age dependency ratio (the proportion of those old to those of working age in a population).21 per cent. 1. within 20 years. the number of workers is likely to be only twice as many as the . where few adolescents enter the labour market before the age of 20. there is no reason to believe that the old-age dependency ratio will decrease within the foreseeable future. i. This is not completely accurate in many developed countries. which is not very likely to occur in most developed countries.IJBM 26. if we calculate the Figure 4. It is notable that for both Figure 3 and Figure 4. A decrease in the old-age dependency ratio requires increased fertility rates. Furthermore.e. with this conventional meaning of “working age”. since life expectancy will continue to increase. Old-age dependency ratio: 100 £ ð60y=15 2 59yÞ number of potential retirees. or increased immigration of adults. Dependency ratio: 100 £ (15 2 59y/total population) . instead. For example.1 10 Figure 3. the old-age dependency ratio is 40 per cent in Sweden for the year 2005. between 15 and 59 years of age. we used the conventional meaning of working age. This fact is likely to affect the way many people think about saving for old age. which follows increased longevity (Groome et al. pioneered by Modigliani and Brumberg (1954). . works for j years and enjoys consumption in every period of their life (c1. . or starting to leave. Finally. As time progresses. Many countries experienced greatly increased fertility rates following the Second World War. many countries have gone from pay-as-you-go pension plans to fully funded systems. Theoretical considerations The life cycle model Demographic changes – and specifically the ageing of the world population – can affect economic dynamics in various ways. Apart from the cash the elderly receive in pensions. 2006). in Figure 4. consumption. The savings rate is among the most studied of economic aggregates. Where this is the case. . the old-age dependency ratio might not be of the same importance. although it will still be important. 2. ð2Þ . Lately. and thereby also their consumption levels during their working years.. they will also need more income for retirement spending.ratio with the working age being between 20 and 59 years of age. causing a shortage of labour in many of these countries. for all years i ¼ 1. cJ)[1]. they will have to lower their standards of living substantially during retirement. Individuals maximise their lifetime utility. The effect of increased longevity and decreased fertility is slightly accentuated in the near future because of Baby Boomers reaching retirement age. etc. Following these trends of more elderly people and fewer people of working age. . These demographic changes will therefore have far-reaching consequences for banking systems. as can be seen in Figure 2. they are still dependent on many other aspects of the welfare system. How much society chooses to save today has important implications for the future welfare of the elderly. In its simplest form. The most frequently used tool to model demographic changes on the economy is the life cycle model of savings. j. . c2. the real income y that the individual receives increases at a constant growth rate g: yi ¼ ð1 þ gÞi21 y. the life cycle model of savings assumes that an individual lives for J years. . the ratio is 45 per cent. we can see that only slightly more than half of the population is expected to be of working age in 2025. These generations are now leaving. economic growth. Retirement age is also a flexible concept. such as healthcare and other services provided by the public sector. The increased need for higher savings is partly because of the increased time in retirement. Since individuals in the future will have more years in retirement. . given by: J X i ¼1 Population ageing 11 ð1Þ b i21 uðci Þ. there will be fewer workers to support those who have already retired. even though there has only been a marginal change in the actual retirement age across the developed world. as long as the retirement age is not altered. the labour market. otherwise. . reflecting its importance in understanding a wide range of economic phenomena. but also because of the increased risk of healthcare spending. we can no longer depict . however. A permanent decrease in the fertility rate. The standard life cycle model predicts an increase in individual and thus aggregate asset accumulation and savings in response to an increase in life expectancy. Based on the basic life cycle model and using a simple simulation analysis.1 where b is the time discount factor that measures the degree of impatience of the individual. A change in the real interest rate r. savings rates should follow a life cycle pattern. Households are assumed to be able to borrow. increasing the retirement age j increases consumption in all periods. The resulting optimal consumption rule states[2]: j 1þg 1 2 1þr r c ¼ c1 ¼ c2 ¼ ::: ¼ cJ ¼ y : ð4Þ r 2 g 1 2 ð1 þ r Þ2J Several straightforward implications follow from this optimal consumption rule. An increase in life expectancy. investment and capital flows. For a given retirement age j and a given income y. as can be seen in Figure 6 [3]. as individuals run down their assets to fund consumption. has ambiguous effects on lifetime consumption. Given that the objective of an individual’s consumption-saving decisions is to smooth consumption over time to maximise overall lifetime utility.g.IJBM 26. This is intuitive given that a given income has to be stretched over a longer lifetime horizon. and u(ci) denotes the period utility function and is assumed to be increasing and strictly concave. changes in the age structure by definition influence aggregate savings. This implies a profile of wealth that rises until retirement and subsequently falls. The individual chooses consumption to maximise the above lifetime utility given the budget constraint: J X i¼1 12 X ci yi ¼ . we may easily infer aggregate behaviour. For a given income profile and retirement age. Figure 5 shows stylised life cycle profiles of labour income. A change in the fertility rate has different short. requiring greater savings for retirement. we are able to make straightforward predictions on how population ageing (e. lend and save at the fixed common real net interest rate r. As the individual in the life cycle model is a representative agent. The implications of an increase in life expectancy on aggregate savings are clear-cut. i21 ð1 þ r Þ ð 1 þ r Þi 21 i¼1 j ð3Þ where the present value of lifetime consumption equals the present value of lifetime income. consumption. To illustrate this in a graph. for a given life expectancy J and income y. in terms of fertility decline and longevity) affects future asset accumulation and savings. Given that consumption as a fraction of income varies with age. An increase in income y increases consumption in all periods of the individual’s life. Similarly. increasing a person’s life expectancy J decreases consumption in all periods. For a given level of income.and long-term implications. a higher income growth rate g implies an increased consumption in all periods. savings and accumulated savings (assets) based on Krueger’s (2004) basic life cycle model. Individuals desire a flat lifetime consumption path. consumption per period declines and savings increase in all periods of an individual’s life. Increase in life expectancy . assets and saving in the basic life cycle model Figure 6. Income.Population ageing 13 Figure 5. consumption. Change in aggregate savings and assets following a slowdown in fertility . as shown in Figure 7. As the large older cohorts (arising from previous higher population growth) go from being savers to dis-savers. Consequently. per capita asset holding would increase and per capita savings would decrease. aggregate savings first increase and then decline. When introducing a change in fertility rate. has sparked speculation on the consequences this will have for capital markets. Given that asset accumulation is higher and the savings rate lower among older cohorts (if retired). In the short term. steady state level is attained. this will trigger a so-called asset-price meltdown. a permanent decline in the population growth rate entails a larger fraction of the population in older cohorts[4]. It has Figure 7.1 14 a representative individual’s lifetime consumption and savings pattern. the dynamics change over time. however. In the long term.IJBM 26. as this no longer illustrates aggregate behaviour as in the previous example in Figures 5 and 6. The share of the various age groups in the total population changes over time until a new equilibrium results. which enables predictions of aggregate consumption and savings. The long-term implications are straightforward as the shares of the various age groups stabilise. as aggregate asset accumulation is the accumulation/stock of savings. as shown in Figure 7. higher. as is the case in the USA and European countries. Some studies suggest that when this Baby Boomer generation enters retirement age and starts selling off assets to smaller cohorts of workers. Asset-price meltdown The pending or ongoing entrance of the Baby Boomer generation into retirement age. it therefore increases over time until a new. as shown in Figure 7. the effect is ambiguous. Many Baby Boomers have bought assets such as bonds and shares to fund their retirement. the demand for financial assets increases with age. or in the timing of the Baby Boomer generation. while that for housing decreases. A possible threat to this movement is eventual protectionism movements in both the industrialised and the developing world. an individual will put relatively more savings into housing during the first part of the life cycle. In particular. Ceteris paribus.been argued that these purchases have driven up prices over a couple of decades. Thus. and that in turn obliges the ageing individual to put an increasing proportion of savings into financial assets. With fewer pay checks in the future. (2006) examined the macroeconomic implications of trade policy changes and showed that a protectionist surge would lower global growth.and low-income countries. When allocating savings between financial assets and housing. leaving global imbalances unresolved[5]. Life cycle risk behaviour While the life cycle hypothesis focuses on overall household asset demand. the individual has probably acquired sufficient housing and at the same time. Given the differences in age structure across countries. Even though the overall trend in demographic transition is going in the same direction across industrialised countries. which might prevent free capital flows and slow down the rate of growth. Empirical evidence shows that an individual’s asset mix changes with the life cycle. individuals spend most of their limited savings on housing. However. At a young and family-building age. The openness of capital markets is a potential determining factor in this respect. Many studies argue that these effects will be relatively minor given that other mechanisms are at work. the individual becomes more risk-averse with age. There is. and shorter duration assets such as bonds being more relevant for older workers. with long-duration assets such as equities being more appropriate for young workers saving for pension claims far in the future. As life expectancy continues to increase and the lifetime remaining becomes more uncertain. Capital flows from countries whose populations are relatively old can mitigate declines in returns to capital in these countries and boost wages in recipient countries with relatively young populations. This creates a need to invest for retirement. steady life expectancy increases because of medical advances make it more necessary than ever to invest for retirement. both across industrialised countries and more specifically across high. empirical evidence also suggests that households’ desire for portfolios of specific asset classes varies with age. Population ageing 15 . Faruqee et al. little consensus on this hypothesis. there is still a difference in the rate of change of the age structure across countries. One aspect is that individuals’ risk aversion increases with age. however. free capital flows can mitigate a potential asset price meltdown. the need to cope with the uncertainty of remaining lifetime income becomes important. Changes in the population age structure can thus have an important effect on the financial structure as well. Similarly. the duration of assets would appropriately change over the life cycle. the sale of these assets could lead to a decrease in prices given that there are too few people in the smaller generations that follow the Baby Boomers to buy the assets at today’s prices. one may be less willing to take on much financial risk since there will be fewer opportunities to use labour income to cover potential losses. with age. there is a strong correlation between age and health expenditure. whereas others may also be provided by institutional . For instance. Individuals thus face larger health-related risks and expenses as they grow older. which place larger risk and responsibility on individuals and households. Second. more and more countries are cutting back on publicly provided benefits. increased health expenses are not only the result of increased medical needs on behalf of the elderly. Whatever the underlying reason.1 16 Population ageing exposes individuals and households to greater risk The ongoing trend as we see it today is that. The fact that individuals. even though the risk of dying at any given age is lower than before. 2006). Opportunities and challenges with an ageing population Relevance for retail banking The demographic changes that will occur for an extensive period create opportunities for retail banking. The shift involves a transition from defined benefit pension plans to defined contribution plans. However. individuals and households are exposed to various types of risks to a greater extent than earlier. the additional years gained through this increase in life expectancy are also associated with greater health risks. The difference can be explained neither by individual characteristics nor by age discrimination from financial institutions. as a direct or indirect consequence of demographic changes. (2006) point out. but also a result of costly improvements in medical care. Some measures can only be accomplished by governments. developments in medical science have contributed to dramatic increases in life expectancy over the past century. They found strong evidence that old and young individuals tend to pay higher fees and face higher interest rates than the middle aged. in interaction with what we know about life cycle behaviour. and encourages the development of products that are better tailored to the growing needs of individuals. The fact that there will be an ongoing increase in the old-age dependency ratio across the world has opened up a need for households to bear a greater responsibility for managing the financial obligations that ageing represents. the share of the population that is likely to make more financial mistakes would tend to increase in an ageing population. there will be a greater demand for financial products and services to compensate for this shift in liability. a number of measures necessary to create an innovative environment for financial products and services. whereas the old have a lot of experience but declining cognitive skills. there is life cycle behaviour in the financial mistakes individuals make. The developments in demography. This behaviour is hypothesised as being a consequence of the interaction between experience and cognitive decline. However.IJBM 26. First. and in particular financial retail institutions. are exposed to larger risks while they at the same time become more risk-averse with age increases the need for households to diversify appropriately and manage the risks they face. such as state-funded pensions and health care (Groome et al. the scope to address these future trends. There are. as Agarwal et al. a shift in the design of pension plans is evident across developed countries. On the aggregate level. The young have high cognitive abilities but little experience. especially in old age. Third. Thus. however. give financial institutions.. For instance. such as banks and insurance companies. Besides the importance of increasing financial literacy. However. (2006). 2006). create opportunities for new products for individuals’ saving needs (Groome et al. The financial challenges created by an increase in the old-age dependency ratio are thus increased long-term savings and investments and knowledge regarding how to manage long-term risks and obligations. 2006). One issue that inhibits development of new financial products and solutions is the Population ageing 17 . Hence. Increased financial literacy should improve the efficiency of financial intermediation and. Other measures affecting the financial environment are tax rules. there should be an interest in creating personal investment solutions/portfolios that complement rather than compete with each other. because of a tendency to reallocate savings rather than increase overall savings. As such. According to Groome et al. but to a large degree only reallocate savings (Organization for Economic Co-operation and Development. Tax rules can be used to encourage long-term savings and risk management such as tax deductibility for interest payments on long-term bonds and other long-term saving solutions. studies have shown that tax incentives do not really enhance overall savings. or if we retire too early and/or spend too much too fast when retired.. as such. Improving households’ financial education would in turn motivate households to save more. As for institutional actors. the risk of being “non-solvent” is eliminated. requiring pension funds to have a funding ratio above 100 per cent at almost all times. 2004). Financial education. This is possible if our savings are insufficient. employer-sponsored seminars are positively connected to employees’ participation rates in pension plans (Groome et al. Emphasising risk management may in turn encourage retirees and older people close to retirement to invest. precautionary behaviour can be stimulated by allowing tax deductibility on additional funding despite a funding ratio above 100 per cent (or whatever the minimum funding ratio requirement) (Groome et al. For individuals already actively saving for retirement. this encourages pension funds to adapt a greater asset-liability management focus. For instance. 2006). 2006). Many of these actions are by no means new or unique in financial markets across countries. However. Creating an innovative environment Regulatory frameworks. and one reason for this could be lack of financial knowledge. We now offer a few examples of measures creating an environment focusing on risk management and long-term savings. However.. financial education can create new possibilities for financial actors since it may increase the number of clients who are interested in their financial situation.and long-term savings. while they otherwise might be less inclined towards investment funds because of a sense of high-level risk. Lack of age-related information. one way of coping with longevity risk is to use regulatory frameworks. and in better ways. The fact that we live longer today creates worries that individuals may outlive their wealth.actors. we can assume that interest in different types of pension fund will increase. a significant problem for many countries dealing with an ageing population is that their populations are under-saving. it is important to improve the quality of information on age-related matters. common to these measures is the need to highlight risk management and encourage long-term savings (Groome et al... However. Since an increase in individuals’ liability towards retirement funding is likely. generally designed to give preferential treatment to retirement savings. personal saving portfolios may not be clearly divided into short. The longevity index is a standardised measure of expected average lifetime for general populations based on publicly available statistics. Case et al. mortality information and house price movements (Groome et al. Residence and other real estate is the largest asset for many households. The figures are based on both reported public statistics and surveys distributed to households in these countries (Davies et al.. Interestingly. Both historical and future estimates are included in the index. tradable market in longevity risk” (Business Wire. One bank that has discovered a new way of ´ dit Suisse First Boston (CSFB).. Apparently.IJBM 26. it would be easier for financial actors to price and trade risks associated with age-related products. Figure 8 illustrates asset composition. real property. This is due to a lack of availability. “the index will help spur the development of a liquid. Figure 8. increased housing value is perceived as a more permanent wealth increase than an increase in the value of the stock portfolio. Managing Director and Global Head of CSFB’s Structuring Group. financial assets and debts in selected countries in the year 2000[7]. with its dealing with longevity risk market is Cre longevity index[6].1 18 difficulty of estimating individuals’ ageing-related risks. we can consider housing as a very important asset for a great deal of near-retirees and retirees in the future. In general. studies have shown that households tend to spend more on consumption if their housing increases in value rather than their stock portfolio (Berg. Protecting the value of real estate is therefore of importance. The bank’s intention is to enable structuring and settlement of longevity risk transfer instruments. Today’s market and future markets Housing market. By improving the availability and reliability of data. 2005). 2006). Asset composition in selected countries . such as longevity swaps and structured notes. 2006. reliability and updated data on health care. 2005). 2006). According to Jeremy Bennet.. 1989). suggesting that people focus more on the risk of dying rather than worrying about outliving their assets (Brown et al. however. while the younger cohorts are less in number. where they have been quite popular (Mitchell et al. The private insurance market will probably increase in importance as Western countries’ populations age. Annuity products are typical insurance against outliving one’s assets. and in general. life insurance that covers death could be used to hedge risk associated with annuity products. A concern put forward involving the house market is that housing prices will decline quite drastically when Baby Boomers’ housing demand is reduced because of old age. 2006). However. the property might be worth less than the sales price. 2001).. home appreciation (both general and specific). 2002. market growth for annuities has not been very large. However. For the insurer. that of people living too long. apart from in the US and UK markets. 2006). Another option to lower longevity risk is to let the annuities run for a period of ten to 15 years instead of a lifetime and at the end of each period. Creighton et al. The protection against a health shock when Baby Boomers are in need of care may increase the interest of insuring against long-term care costs. interest rates. By enhancing the reverse mortgage market. it can benefit from natural hedging (Cox and Lin. This crossover point is a function of longevity.. Studies have shown. other studies show that age has an insignificant or positive effect on housing prices. Because of longevity problems. It is already possible to find Population ageing 19 . Hence.. However. and expenses (Mitchell et al. 2005. McCarthy and Mitchell. the problem or risk lies in the difficulty of estimating longevity and consequently putting a competitive price on the product. 2002) – sometimes referred to as an adverse selection – and this is a common problem for annuity products. households that are asset-rich but lack cash can therefore borrow against the equity in their residence without having to sell it (McCarthy et al. The risk of reverse mortgages is that when the loan becomes due. 2006). to complicate matters further.Home equity release products such as reverse mortgages can provide households with a continuous stream of income after retirement.. Long-term health care markets. that if the insurer can offer both life insurance and annuity products. the pressure for private market solutions concerning healthcare and costs for nursing home and long-term care have not been a major source of concern to date. evaluate the possibility of prolonging the annuity. 2005). buyers of voluntary annuities tend to live longer than the general population (McCarthy and Mitchell. 2007). So far. The possible positive outcome is due to the effect that income and education have on housing demands. The reasons for the slow growth of annuities derive from both the potential insurer and insured. In countries where public programs for health care are more extensive. The market for annuity products. Baby Boomers have good incomes and educations (for an overview.. see Mitchell et al. Life insurance seem to be more popular than annuities. many governments have reformed their pension plans and have placed greater responsibility on the individual to save for their retirement.. and hence a large number of properties will be up for sale (Mankiw and Weil. Estimating how long a person will live is difficult and. the pressure on these governments’ age-related costs will probably facilitate the market for healthcare insurance. the reverse mortgage market is not without risks for any of the involved parties. An annuity guarantees a lifelong stream of payments. 2003.. a major risk for sellers of annuities. however. Misinformation on public programs and their coverage may contribute to a reduction in the purchase of individual insurance. Germany. Apart from the uncertainty of how public programs will be designed. lack of information on today’s design may indeed negatively impact the development of a healthcare insurance market. Increasing life expectancy and low fertility rates are the main ingredients of this demographic change. 2001. in the USA. at least initially. Mitchell et al. Monthly payments provided by the annuity product would be raised if the person insured is disabled. Finkelstein and McGarry. or such help may at least be desirable.IJBM 26. but are now open to private market alternatives. 2002. 2006). For instance. Researchers have proposed an arrangement of combining private long-term care insurance with annuity products (Warshawsky et al. (2001) believe that such a solution would limit the adverse selection of annuity product buyers. However. The demand for long-term care will be based on society’s attitudes on how best to care for the elderly and how in practice the elderly will be cared for.. An alternative such as home care may become more or less important.. creating an underdeveloped healthcare insurance market. taking different options such as home care or institutional care under consideration may contribute to a new set of products appealing to different groups. Such misinformation may act as a brake. Hence. some care requires help from medical professionals. 2006). leaving a large number of people believing that their costs will be covered (Doerpinghaus and Gustavson. it is possible to assume that within a household there may be someone able to care for the individual at home. Mitchell et al. public programs such as Medicare and Medicaid assist individuals with healthcare coverage. such as Australia. Other life cycle behaviour models point out that we are also becoming more risk-averse as we age. we must also save more money during our years in the workforce. even if the elderly are cared for at home. We have suggested here a few alternative ways of handling the changing needs of bank customers as their age-structure evolves over time. The wealthy. Murtaugh et al.1 20 countries that traditionally have let the public sector provide for long-term care. At the core is the fact that since we can expect a much longer time in retirement than was earlier the case. but these programs are based on income. in an ageing population. tend to self-insure. while evidence shows that at the same time we are increasingly exposed to age-related risks. Sweden and the UK. leaving the middle class and the wealthy outside the program. Brown et al. Such uncertainty about future demands may indeed hamper the market. The uncertainty that the future brings concerning the development of technological aid. changing public programs and health improvement contributes to the difficulties of developing a private healthcare insurance market.. Since the population in general is getting healthier. but the middle class seems to be misinformed regarding eligibility. else we will have . Such a two-in-one product solution may attract a larger public than if each product were sold separately. The adverse selection risk is that buyers tend to be healthier and have lower mortality than the public in general. Concluding discussion Population ageing is a fact. The life cycle models clearly predict a higher overall asset accumulation level and a higher savings level. leaving less room and need for institutional care. 2002. Japan.3 years. Ireland and Poland have seen lower retirement ages between 1996 and 2004. as discussed in the introduction. changes in the age structure can strain the financial markets. coupled with low inflation rates (see Dahlberg and Nahum. One alternative option is. and make use of the fact that countries have different age structures and thus market structures. then we might not have a problem. With an increase in demand for funds to be available after retirement. there will also be an increase in demand for different investment options while there still is an income stream. The large Baby Boomer generation that is slowly entering retirement age has had the advantage of high lifetime earnings because of good macroeconomic times. Thus. These are indications that this group does not have strong economic incentives to postpone retirement age. combined annuity and life insurance packages might be one option. A report from the Swedish Social Insurance Board (Fo 2006) shows that there has been a slight trend towards postponing retirement in many OECD countries. while it was 59. the average retirement age in 1996 was 59. This is a realistic option. although not in all. there is no clear-cut evidence in the literature of retirement age being postponed. Iceland. This is one area where banks can contribute. Banks can contribute to creating financial stability in their role as intermediaries. a growth of only 0. that we all work longer and postpone retirement. although with new tasks.2 years over a period of eight years. of course. However. Moreover. The future winner on the banking market is the one that is the first to restructure and adapt to these demographic challenges and reap additional commercial benefit. banks can revise/improve the different alternatives offered. we believe that it is in everyone’s interest – banks. If people postpone their retirement sufficiently to compensate for the prolonged time in “old age” due to increased life expectancies. or for that matter of retirement being ¨ rsa ¨ kringskassan. With the Baby Boomer generation reaching retirement age and selling off their assets.to lower our standards of living substantially during the last part of our lives. individuals and society at large – that these institutions work well. especially if based on longevity indices[8]. they have also had generous pensions plans and advantageous loan opportunities. 2003). As mentioned earlier. Secondly. As mentioned earlier. will society as a whole reap the benefits? Our belief is that the latter is the case. Individuals will then still be able to support themselves until the end of their lives. in Italy. They can contribute to the openness of capital markets and increase capital flows across countries. is this all a zero-sum game? Is the only consequence of a potentially increased savings rate among retirees-to-be that they will consume less during middle age and more during retirement than what would otherwise be the case? Alternatively. Finally. It is not easy to predict how the current middle-aged generation will adjust its retirement age. the stress on the welfare system will diminish and more resources will be available for other areas of the public sector. Firstly.5 years in 2004. set earlier. For example. However. Investment packages currently offered by banks need to adapt to changing needs. Population ageing 21 . banks can potentially cushion an eventual “asset price meltdown”. the delayed retirement trend is not very strong. If the infrastructure to facilitate a prosperous retirement is in place. it might be a good idea to offer widespread information on how best to invest according to expected longevity and willingness to take risks. IJBM 26.doc Brown. This applies to the European market. as the Securities Exchange Act of 1934 in the USA limits banks from engaging in insurance markets. in this particular case. X. “Longevity insurance: a missing market”. H. (2005). P. (2005). for example. 8. pp. Cambridge. Piggott. 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The data do not provide information on all 18 wealthiest countries used earlier in this study..M. Scandinavian Journal of Economics. Vol. manuscript. References Agarwal. L. For now. We here assume that bð1 þ rÞ ¼ 1. D. 4. 72 No. 105 No. Vol. (2001). Vol. “Cre 12 December. Recent examples are opposition to purchases of US firms by companies from China and Dubai. as the share of borrowers in the population equals the share of lenders.se/Grupp/Ekonomi/_Dokument/Konstillg. The analysis here follows Krueger (2004).C. “Financial mistakes over the lifecycle”.. R. the aggregate savings in the economy thus equals zero. Creighton. Journal of Risk and Insurance. Y.. Jin. 2. 3. M. 2. . (2006). The Role of Annuity Markets in Financing Retirement. pp. Cambridge. 25 No. 1.scb.S. J. J. Depending on the structure of the pension system. K. The Singapore Economic Review. and Laibson. MA. 6. J. “Konsumtion och tillga available at: www. 50 No.. Business Wire (2005). Poterba. In the final stage.. 3.html). Allen. (2003).uschina. pp. and Shiller. J. assuming that increased longevity is coupled with good health. ˚ ngspriser – stabilt samband?”.R. 7. E. 441-63. Berg.A. and Warshawsky. MA. pp. Journal of Banking & Finance. J. we have chosen to display a limited number of countries since the basic idea is to only illustrate how assets are composed in some of the wealthiest countries. Quigley. 5. See. and Collard. (2001). Advances in Macroeconomics. Vol. “Securitisation of mortality risks in life annuities”. “Recent technological and economic change among industrialized countries: insights from population growth”. data are only available on the US population. pp. Hence.M. F. as well as rising protectionist signs in China (see the US-China Business Council report at www.. Vol. Mitchell. which allows us not to make a specific assumption about the form of the utility function. O.H. 1-34. Cox.1 22 Notes 1. S. “Comparing wealth effects: the stock market versus housing market”. S. the baby bust. 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Modigliani. pp. Reserve Bank of Australia Conference Volume. Working Paper No.. Center for Financial Studies. 38-54. 3. New Jersey.-A. “Population ageing. T. Mitchell. and McGarry. S. A. Regional Science and Urban Economics. 68 No. Riding the Age Waves: Responses to Ageing in Advanced Industrial States.. (Eds)..edu /research /2006-2007/2006-2007-1/wider-wdhw-launch-5-12-2006/wider-wdhw-report-5-12-2006. Cambridge. Center for Financial Studies Conference. M. Cambridge. (2007).I. in Kurihara. (2002). the structure of financial markets and policy implications”. pp. Blancher. P. O.S.S. O. Reserve Bank of Australia. Population ageing 23 . 1 No.N. Cambridge. MIT Press.W. Uppsala University. and Brumberg. Spillman. Murtaugh. National Bureau of Economic Research. McCarthy.. National Bureau of Economic Research. pp. and Mitchell. (2003). O.S. 2. Vol. Vol. K. Mankiw. 9957. Economic Development and Funded Pension Systems. “Utility analysis and the consumption function: an interpretation of cross-section data”. Helsinki. and Gauthier. Fo ¨ rsa ¨ kringskassan. Ogawa. “Asset rich and cash poor in Singapore? Retirement provision in a national defined contribution pension fund”. A. (Ed. and Yow. “Private information and its effect on market equilibrium: new evidence from long-term care insurance”. R. Finkelstein. and the housing market”. “Would protectionism defuse global imbalances and spur economic activity? A scenario analysis”. (2006). ¨ m. S. “In sickness and in health: an annuity approach to financing long-term care and retirement”. evidence.kth. Uppsala University.emeraldinsight. demography and health. Hammond. Royal Institute of Technology. (Eds).. Sweden.IJBM 26. Organization for Economic Co-operation and Development. Her research areas are microeconomics. “Tax favoured retirement savings plans: a review of budgetary implications and policy issues”. She is currently a researcher at the Centre for Banking and Finance at the Royal Institute of Technology. She has been affiliated to the Institute of Future Studies and been a visiting scientist at the Harvard School of Public Health.. human capital and education. in Mitchell.M. and Murtaugh.. Sofia Sandgren received her PhD from the Department for Infrastructure.com/reprints . PA. Working Paper No.com Or visit our web site for further details: www.J. Economics Department. C. “Integrating life annuities and long-term care insurance: theory. practice. the Norwegian Institute of Science and Technology.S. About the authors Jessica Lindbergh received her PhD from the Department of Business Studies.B. P. The University of Pennsylvania Press. Innovations in Retirement Financing. (2002). M. Uppsala University. Paris. Ruth-Aı Sweden.se ¨da Nahum received her PhD from the Department of Economics. and small and medium-sized enterprises’ business development.C. Sweden. Warshawsky. and policy”. and Zeldes. Bodie. savings.1 24 Organization for Economic Co-operation and Development (2004). To purchase reprints of this article please e-mail: reprints@emeraldinsight. Her research areas are demography. She is currently a researcher at the Centre for Banking and Finance at the Royal Institute of Technology. She has since held a visiting appointment at the Department of Economics. 1 on Macro-Economic and Structural Policy Analysis. banking. Spillman. Her research areas are macroeconomics. O. B. 198-221. Z. Philadelphia. Royal Institute of Technology and at the Department of Economics. S. and is currently a researcher at the Centre for Banking and Finance. pp. Uppsala University. She is the corresponding author and can be contacted at: jelindbe@infra. The current issue and full text archive of this journal is available at www.emeraldinsight.com/0265-2323.htm Basic values and objectives regarding money Implications for the management of customer relationships Margit Raich Department of Strategic Management, Marketing and Tourism, University of Innsbruck, Innsbruck, Austria Abstract Purpose – The study seeks to identify basic values and objectives from different bank retailing customers by asking them about their views on topics that deal responsibly with money. Based on their experiences, perceptions and expectations, those values and objectives that are of utmost relevance for them regarding their money life are identified. Design/methodology/approach – The study is of a qualitative nature, using a total of 60 surveys with open-ended questions to acquire data that are evaluated by the qualitative rule-based method ¨ ltigung von Komplexita ¨ t), a tool for analysing textual qualitative data. GABEKw (GAnzheitliche BEwa Findings – The results show a holistic picture of people’s views concerning money and the role of retail banks. Three main topics are identified: banks’ and customers’ responsibilities; trustworthiness; and support service. These issues are discussed based on the basic values and objectives discovered in the context of customer relations. Research limitations/implications – The study adds to the discussion of customer relationship management. A more detailed analysis of the results will bring additional illuminating information concerning the main topics identified. The use of a representative sample would allow a precise comparison of sub-categories. Practical implications – Alternative research approaches can be useful in identifying the value systems of customers that can be transformed into a company’s strategy and its marketing activities. Originality/value – In a descriptive account of customers’ values and objectives concerning money the study shows how this can help us to gain new insights for the management of continuing customer relationships. Keywords Banking, Money, Qualitative research, Customer service management, Relationship marketing Paper type Research paper Management of customer relationships 25 Received 27 April 2007 Revised 4 October 2007 Accepted 10 October 2007 Introduction Those companies that provide their customers with superior value obtain a competitive advantage. Because of growing competition in the financial services industry, quality has become an essential issue. The management of service quality can be seen as one of the major challenges for banks. In this regard, relationship marketing is able to focus on value concepts and to consider how value is added to ¨ nroos, 1996; Zineldin, 2005; Roig et al., 2006). customer needs (Ravald and Gro Molina et al. (2007) stated the relevance of integrating the consumer perspective in the analysis of relationships. Customers are not primarily connected to the broader service system, but rather to the people in the service organisation (Aldlaigan and Buttle, 2005). Retail banks’ success depends on the way employees respond to customers’ expectations International Journal of Bank Marketing Vol. 26 No. 1, 2008 pp. 25-41 q Emerald Group Publishing Limited 0265-2323 DOI 10.1108/02652320810847093 IJBM 26,1 26 and needs. Kaynak and Harcar (2005) also emphasise the importance of bank employees because customers usually evaluate the bank based on their experiences with its staff. In this regard, attributes like friendliness, competence, know-how, courtesy, empathy, etc. support perceptions of a positive employee attitude to customers (Kaynak and Harcar, 2005; Gill et al., 2006; Roberts and Campbell, 2007; Baumann et al., 2007). For this reason it is important to develop strategies concerning relationship management that best meet customers’ needs. Organisations should know what the customer wants, and expect to give value to their chosen set of customers. But which one can offer customers the most value? Value is the result of individual judgments of customers concerning the bank and its services and products (Huber et al., 2001). Knowledge about customers’ values is the basis upon which retail banks can guarantee a unique service. In service industries, discussion of customer values is more difficult ¨ nroos, 1984; because they are mostly intangible, complex and multidimensional (Gro Parasuraman et al., 1991; Levesque and McDougall, 1996). Additionally, customers perceive financial services as a high-risk purchase (Babakus et al., 2004). The concern for customers’ own money is the result of the need for security. In this context the aim of the study is to identify the basic values and objectives from customers of different retail banks by asking them about their views regarding dealing responsibly with money. Based on their experiences, perceptions and expectations, the most relevant basic values and objectives about money life are identified. The results show a holistic picture of peoples’ views concerning money and retail banks’ role in this context. After a short introduction, the design of the study, the research methodology and the results of the various analysis steps are presented. In the following section, the main findings and further research activities are discussed. The paper ends with managerial conclusions. Study This study was carried out in collaboration with an Austrian retail bank founded in 1822 as a savings bank. Because of expansion strategies in the 1980s and 1990s, the retail bank lost its common understanding of its core business, which has led to the abandonment of its regional focus. The investigation was carried out during a one-year brand strategy project with the aim of repositioning to concentrate on the broader public in a rather small, clearly specified area of Austria with a particular range of products adapted to the target group. The objective for the bank in participating in the project was to gain knowledge about how to enforce the relationships and emotional closeness to retail banking customers in order to better meet customers’ needs in the future. From the scientific point of view the interest was in identifying the customer value systems concerning the topic of dealing responsibly with money, and in this context, to analyse the role of retail banks. In this investigation an interpretative approach was used in understanding the reasons behind retail bank customer behaviour by asking customers about their experiences, intentions, attitudes and desires. Because of the main topic – i.e. dealing responsibly with money – seven specific open questions were posed including: (1) How have the interviewees learned to handle money? (2) Who supports them in financial questions? (3) How the bank is supporting them? (4) What will happen if they inherit a lot of money. (5) Do they believe that their handling of money will change in the future? Two other questions were included because of their relevance to the topic of responsibility. The interviewees were asked to give an example in which someone was irresponsible in dealing with money and what they would recommend if a friend asked how to raise a larger sum of money for investments in housing space or to buy a car. Finally, the people were asked if they wanted to add other aspects. In total, 60 Austrians holding an account at any retail bank were interviewed. The sample was separated into 18 oral interviews and 42 written questionnaires, both with the same open-ended questions. The founder of the qualitative method GABEKw recommends executing about 20 oral interviews. Based on his experiences and the experiences of other researchers using GABEKw, more oral interviews do not provide a surplus value in gaining additional knowledge. The use of 42 extra written questionnaires was applied to summarise the results of the oral interviews. The sample of the investigation is presented in Table I. In qualitative research, the composition of a sample is usually based on the criteria of adequateness for the problem. In agreement with the Austrian retail bank the sample was primarily chosen because of the composition of the retail banks’ target groups (19-29 years, 30-59 years, more than 60 years). The decision for a sub-division of female and male retail banking customers was based on the decision to obtain a balanced proportion of men and women. Finally, the classification was undertaken in urban and rural areas because of the retail banks’ branches, which are distributed in urban as well as in rural areas. It should be pointed out that the respondents of the written surveys, although they were asked to answer in whole sentences, sometimes only answered in keywords. This must be taken into consideration in the analysis process, because the basis of the evaluation is full sentences. About 40 per cent of the written data was not applicable for the analysis. For this reason, the results are based on the whole dataset. In a next step, the text from the written portion and the transcribed text from the ¨ ltigung von oral interviews were evaluated by GABEKw (GAnzheitliche BEwa Number Gender Female Male Total Age 19-29 years 30-59 years More than 60 years Total Residential area Urban area Rural area Total 28 32 60 19 24 17 60 30 30 60 Management of customer relationships 27 Table I. The sample psychology. The process of analysing data is carried out through the development of a rule-based network of data. The coding process of notions.1 28 ¨ t). whereby only those results are extracted that point out essential topics concerning money. More than 100 projects in different disciplines (e.IJBM 26. Researchers using this method are interested in gaining new insights into and a new understanding of the situations and processes investigated. If someone is only interested in people’s evaluations. negative and ambivalent evaluations resulting in an evaluation profile (Zelger and Oberprantacher. causal assumptions presented in the form of cause/effect graphs. sociology) have been realised with the qualitative GABEKw method. each line or each arrow . For this research project all forms of representation were applied.g. education and political science. The computer implementation WinRelan (Windows Relationen Analysis) supports the analysis of the unstructured qualitative data. . . For example. Renate Buber (2000) was interested in the attitudes and evaluations of leaders concerning internal marketing. is the basis for all other analysis steps. knowledge and expressed perceptions of participants that provide a comprehensive view of the individual aspects of the particular situation investigated (Zelger. Margit Raich (2006) analysed the leadership culture of two companies with the aim of improving leader-employee interactions. It is based on the theory of “Wahrnehmungsgestalten” (perceptive appearances) by Stumpf (1939). such as: . Finally. 1999a). Josef Zelger (1999b) supported DaimlerChrysler (formerly DaimlerBenz) in finding a solution for conflict due to the implementation of new working time models in the research department. which takes both syntax and semantics into account (Zelger. GABEKw allows a transparent organisation of knowledge based on the natural language processing of individual statements. assessments as a result of extracting and converting positive. To this end it is necessary to structure the experiences. the researcher – after coding the notions – will primarily focus on the development of an evaluation profile. Developed by Josef Zelger. responsibility and retail banks. conceptual structures to analyse notions within a social context and for the development of mind maps in the form of association graphs based on verbal information. It must be mentioned that each single statement of the results presented. Study findings For the representation of linguistic knowledge different forms can be used. information technology. 2002). linguistic Gestalten as a result of meaningful text groups containing three to nine text units that are coherent and fulfil syntactic and semantic rules – the final result is the Gestalten tree which shows a hierarchical order of Gestalten. some short descriptions of the methodological procedures are also presented. management. GABEKw is a tool for analysing textual Komplexita qualitative data. and . illustrated in the form of association graphs. The unordered knowledge of the interviewees is collected and systematised by different procedures operated by the researcher. which has been transferred to a theory of linguistic Gestalten by Zelger (1999a). 2000). For a better understanding of the findings. Banks want to make a profit from the products and services they offer. In this context – from the people’s point of view – credit was often granted too easily. The association graph is the result of notional conjunctions used in different situations. Colleagues and other people also play an important role in the information process and consulting regarding financial questions. the researcher has the possibility to develop Gestalten trees. The Gestalten tree presents the most important topics named Management of customer relationships 29 Figure 1. a first overview of the most important associations concerning “Bank” is presented. Associations of “Bank” At the beginning of the evaluation. especially in the case of young people who are not in a position to repay the money. The representation takes place with the help of an association graph that expresses the interviewee’s association with a phenomenon. Gestalten tree for “ Bank” After the development of conceptual structures. It shows linkages between these terms as a result of interviewee systematisations.in the figures. The characteristics associated with the term “Bank” are presented in Figure 1. or each number in the lists presented can be documented by original statements. Association graph for “Bank” . People connect the term “Bank” with consultation on financial matters and credit that is granted by a bank. It is the customers’ own fault if they raise credit. In this step of the analysis process those characteristics or topics are filtered from the interview texts that are connected much more frequently compared to other selected terms. Each linkage of the term is occupied in the interviews by at least nine texts. but the bank also takes partial responsibility. In the following. the topics that are of great relevance from the participants’ point of view. 1999a. It is the result of a cluster analysis using method D2. The process is carried out as long as the rules are complied with (Zelger. It will mainly be the fault of the people. each sentence has to contain at least three concepts that also occur in other sentences of the same group. All concepts and meanings given on the highest level are used within more complex details on the lower ones. they are no longer in a position to repay the sum). With the support of the WinRelan software. at the left-hand side. 2000). In the group. we get summaries of summaries. As a result. Each result can be sourced from the original answers on the lower levels. In a formal structure. The concept in building Gestalten trees . Also. It shows. first Hypergestalten and next Hyperhypergestalten (see Figure 2). The second summary refers to “Trust”. the Gestalten tree for “Bank” shows those topics that are of relevance in the eyes of a retail-banking customer (see Figure 3). This shows the role of the retail bank as well of that of individuals concerning the topic of dealing responsibly with money. These are sentences where the expressions connected occur frequently (Zelger. which has been identified as being relevant in the creation of good customer relationships. in a descriptive way. Furthermore. On the highest level. As a result. Bank employees must develop a certain intuition in discovering customers dealing irresponsibly with money.IJBM 26. first the summary “Responsibility” is described. and especially young people. Responsibility. And finally.e. The Gestalt building process is done again on the next levels. the Gestalten tree is developed. the banks earn money because of the interest Figure 2.1 30 by the people interviewed. The connections between the sentences arise from at least one expression that they all have in common. the most strongly connected statements could be emphasised. b). we find the most general results. if they raise credit and then find themselves in financial difficulty (i. the banks also have to take responsibility. the summary “Support service” is presented because financial services require a substantial amount of explanatory support. However. sentences are presented as a quantity of lexical expressions. The Gestalten tree .Management of customer relationships 31 Figure 3. Especially in the case of credit. Trustworthiness. while unfavourable influences are represented as arrows with broken lines. Banks can be very helpful. Satisfied customers define successful consultants as persons who are helpful as well as honest and sensitive. Customers will trust a bank if its staff is engaged in the effort of personal care. Cause-effect relations for “Confidant” and “Trust” Cause/effect relations are the results of experiences over time or of discussions of people. 2002). The bank must check when someone wants to buy a car or finance an apartment. the interpersonal and emotional levels play an important role. Banks should have more restrictions in allowing credit. the objective “Confidant” (Figure 5) and the basic value “Trust” (Figure 6) are presented as examples. A variable can lead to an increase or a decrease in an influenced variable (Zelger and Oberprantacher.IJBM 26. the researcher has the possibility to generate causal network graphics with WinRelan. Because of their interest in earning money. people will organise themselves. favourable influences are represented as arrows with continuous lines.1 32 acquired from people in debt. On the basis of the coding of causal relations. and white is used for other criteria. banks have to take responsibility and should inform people in detail. A trustful environment is guaranteed because of sympathy. A confidant is a person who provides advice to customers in all questions regarding money. But finally. because of investments in shares. darker grey for higher and lower objectives. Customer consultants should address the issues of customers and give the impression that they know their field well. Good consulting is guaranteed by professional competence and by supplying information to the customer by giving helpful tips and passing necessary data. many people have lost money. The variables influenced are represented as arrows. Captions for the causal and value coding processes . Because of the research interest. then the assumed influence is listed. Also. There is the demand for sympathy. the variables are assigned specific colours: black for a value. In daily customer-bank interactions. individual supervision and the enlightenment of the customers. With the help of colour coding. Engagement is not given if a customer consultant is only interested in the conclusion of contracts. The captions in Figure 4 should help to elucidate the causal net graphics. each customer should gather enough information for the decision process. which is expressed Figure 4. a causal opinion is identified. sometimes they neglect customers’ needs. light grey for measures. If. in the text. If trust is not given. Support service. The coding process leads to the description of complex cause-effect relations. The confidant is engaged in finding the best solutions for customer problems. Causal net graphic for “Confidant” .Management of customer relationships 33 Figure 5. IJBM 26.1 34 Figure 6. Causal net graphic for “Trust” . If someone were to say “I was very satisfied with my previous well-known customer adviser.g. Otherwise. In Table II. “Trust” has been identified as basic value. i. At this point. Finally. “Honesty”. the researcher has identified a value. “Trust” was named 25 times. Customer consultants have to prove themselves because of their know-how. Management of customer relationships 35 . it does not act as cause for effects to other variables. whereas “ 2 new customer adviser” indicates something bad. this is evaluated negatively. There will be no need to change bank if trust is guaranteed. Sometimes the confidant is a good friend. In the case of lower objectives. Finally. Trust is also the result of professional competence. and if the managers responsible receive large salaries. The basic values and objectives are the result of two analysis steps. Trustful relationships are not guaranteed if there is the feeling that a bank earns a lot of money. For example. especially as regards what would be desirable or what should be avoided. In this case. can be carried out. For example. because of the rules it has been identified that the variable “Trust” is only influenced by effects.e. but he retired this year and a new customer adviser was referred to me that I’m not happy with”. For example. In the case of failures in transactions and retried errors. the causes and effects are balanced. This is how the evaluation coding is done. “Be assistant”. the basic values presented are listed in sequence of frequency (see numbers in parentheses). The customer who trusts the bank and its employees is not used to always having to control the organisation’s activities. First. The evaluation profile for the present situation is shown in Table II. as well as house banks.by showing interest and by addressing customers as individuals. the colour coding process (see also Figure 4). each term is described by one original statement. Trust and the relationship with the bank is the result of several aspects that are presented in Figure 5. private bank institutions. “Personal care”. “Engagement”. this would mean that the person consulted reserves “ þ previous well-known customer adviser” for something good. Basic value and objectives of retail banking customers Because of the research focus on value systems. Second. all basic values are evaluated positively by the respondents. the causal net graphic for “Trust” is presented. a trustful relationship cannot be guaranteed. if they have to inform themselves about reductions in interest rates). A close personal contact and the feeling of knowing someone well is the basis for a trustworthy relationship. the chance to drift from the bank increases. a slow rapprochement is needed to restore confidence. which results in a list of all the criteria evaluated. which depends on the number and direction of causes and effects. Some of the basic values are attributed directly to the bank (“Trust”. The media sometimes support this impression. in the interview text of all respondents. In comparison to the objectives (see Table III). Because of the colour coding process. “Sympathy”. Higher objectives are influenced by many effects and from the variable itself only a very small number of effects go to other variables. “Openness”. all individual evaluations are added together. create good trustful environments for the customers. If customers always believe that they have to fight for their rights (e. All other basic values have also been developed by this procedure. Several aspects are responsible for the decline of trust in the sense that customers have to take an active part in the relationship. the evaluation process reflects the value judgments of people. the basic values (Table II) and objectives (Table III) of the people interviewed are selected. then they should take me aside and talk to me about my situation” “I have a friend who is working in the bank. I also think people should not be attached to material things. because you commit money to a bank. It is important for me that I can have a good life” “The charisma of a person. I go to my bank. But this joy is not only connected with material things. You have to spend the money to please yourself” “When I was young. They go to great lengths to help me” “The bank should not only look out for their self-interest. e. they talk with me about where I can save money in my daily life” “I am looking forward that my money handling is done friendly. but for the customer’s good. e. The people try to make the best out of my money. this is not likeable” “My parents had a modest life. If you work hard. Sometimes it happens that they do not greet. e. because of a transaction. The have to inform them about all the advantages and disadvantages.g.g. of the different financing possibilities. Independence and freedom.g. and that they inform you if you will overreach because of the amount of credit. is very important for me. this is for me a matter of trust” “I bought a bicycle with my first saved money. Positive basic values Pleasantness (5) “For money issues. on an idea. There was not the need to earn more money. There exist differences between the banks” . I had so much fun with it.g. When I got more money I also was satisfied. It is also not the case today. People have to express feelings for others. on an employer. you are not in the position to repay credit. I did not have much money. e. No wealth was expected in our small world. Then you are not dependent on other people.g. persons who are likeable. quickly. they get to the bottom of the problem. and he knows me and my needs well. it is very personal. They also help me regarding dealing responsibly with money. And if I am in trouble. that makes the difference. I have a close relationship. he is a competent friend. For me it is important that someone shows interest and pays attention to me” “In general in my bank the staff are very helpful and act customer-orientated. than you should indulge something sometimes. You are in a position to say I won’t do it.1 Trust (25) 36 Joy (16) Be satisfied with the things people have (10) Sympathy (10) Modesty (9) Freedom (8) Engagement (7) Openness (7) and honesty (3) Personal care (6) Be assistant (6) Table II. Freedom refers to certain mobility” “The employees in the bank try to bring out the best regarding my money situation and do not offer me the usual standard products. clearly and trouble-free. do not listen and do not talk. Social competence is more important for me than the professional experience. I hope that I will never have that much money that I am under pressure. e.IJBM 26. to go up to a person. The personal component. I am a frugal person” “I would like to have that much money that I don’t worry and I don’t need a bank to finance my whole life. on a company or anything else. In life you should have fun with the smaller things. When I have a request with money. The same process is carried out with the objectives. The attributions were taken because of the composition of the Gestalten tree.g. Discussion and implications The purpose of this paper has been to identify the basic values and objectives of customers as regards the topic of dealing responsibly with money. Also in this case. and some to the retail bank (e.Positive objectives Enough money to repay (25) Create reserves (24) Saving (24) Security (15) Plan unforeseen events (15) Compare offers (13) Buy an apartment (13) Vacation (13) Confidant (12) Self-organisation (12) Know someone well (11) Do not spend more money than available (11) Do not begrudge (10) Functional thinking (9) Wait for purchasing (9) Work hard for money (8) Property (8) Professional competence (7) Spend money on meaningful things (7) Partial spending and partial saving (7) Negative objectives Buy a car with credit (11) Live over the standard (11) Spend money without thinking (10) Status symbol thinking (9) Spend too much (8) Allow credit easily (7) Blow money (7) Overdrawing an account (6) Temptation consumption (6) Other suspect financial service provider (5) Gambler (5) Contact with the bank (5) Over-check an account (5) Run into debt (4) Bank and rip-off (4) Credit (4) Always buy something new (4) Risk (3) Disinterest (3) Calculate optimistically (3) Management of customer relationships 37 Table III. A small number of objectives – for example “Confidant”. most are attributed to retail banking customers (e. “Live over the standard”). “Self-organisation”. “Modesty” and “Freedom”). Positive and negative objectives “Pleasantness”). Table III shows the frequency of the first 20 named positive and negative evaluated expressions for the present situation. “Enough money to repay”. Some basic values can only be realised by the people themselves (“Joy”. In particular. while a few of them are categorised to “Support service”. the basic values and objective systems were associated with three identified relevant themes: . The people interviewed expressed their experiences and wishes relating to their own behaviour as well as their requests to retail banks. “Be satisfied with the things people have”.g. because each basic value is recovered in one of the lower levels of the Gestalten tree. “Professional competence”. and the second group is part of the Hyperhypergestalt “Responsibility”. “Allow credit easily”. In comparison to the basic values. “Plan unforeseen events”. “Know someone well” or “Other suspect financial service provider” – can be categorised to the Hyperhypergestalt “Support service”. The first group of values can be categorised in large part to the Hyperhypergestalt “Trustworthiness”. most positive and negative evaluated objectives can be categorised – in using the same system of assignment – to the Hyperhypergestalt “Responsibility”. and in this context the role of banks. “Risks”). Molina et al. the relevant tasks of retail banks are seen as first the creation of securities and second the prevention of financial troubles. empathy.IJBM 26. Zineldin (2005) argues that banks do not sell products. as result of the objectives. Liang and Wang (2007) identified a positive correlation between investments in relationship management and customer satisfaction: a continuously satisfied exchange process supports the rise of customer trust. Customers’ commitment also depends on the way in which these attributes.e. reliability. 2006). In summary. The basic values have shown the importance of trust. a high priority towards personal orientation produces a feeling of exclusiveness for the customer. (2) the basic values of the retail-banking customers are mainly reflected in the demand of a bank’s trustworthiness. In financial services relationships are one of the major factors in customer satisfaction and customer loyalty (Leverin and Liljander. 2002. Dealing responsibly with money is attributed to the individual as well as to the retail bank. Buttle and Burton.. they sell their reputation with every customer relationship. the human element in service delivery plays an important role and refers to different attributes like moments of truth. Retail banks have to create a feeling of security for their customers concerning their money transactions. Individuals have to handle their own money life carefully and should avoid getting into financial difficulties. 1994. (2) trustworthiness. If a retail bank follows this principle. are exercised by staff (Morgan and Hunt. but the retail banks also have to pay attention to this topic in the context of customer behaviour (retail bank responsibility). The retail banks’ responsibility mainly refers to the careful granting of loans. i. a stronger commitment from customers can be obtained. They should try to maximise customers’ funds and at the same time protect them from risks and damage. 2003). From this point of view. An interesting finding is the emphasis of a confidant. etc. (1991) mentioned. 2007). As Parasuraman et al. Trustworthiness Money transactions are a business of personal relationships. but they should also avoid activities that give the impression of only wanting to make as much profit as possible by selling as many products and services as possible. a 38 . Responsibility The issue of “Responsibility” is mostly expressed by objectives. the following valuable implications can be derived from the basic values and objectives. The findings can be summarised under three headings: (1) From the respondents’ point of view. responsiveness.1 (1) responsibility. these affective and emotional components. which is the result of long-term relationships based on personal as well as economically successful relations (Harrison. and (3) the basic values of retail banking customers also refers to individual responsibility in the daily handling of money (customer responsibility). Finally. Also. and (3) support service. not only do customers take responsibility for their financial transactions (customer responsibility). The research has shown that an alternative questioning method contributes to delivering important information for future retail bank strategies. because of the basic values and objectives identified that are linked to retail banks’ responsibilities.person representing at the same time a friend and expert in one person. 349-59. (2005). Vol. The findings also deliver valuable implications for public relations activities in supporting image campaigns and can be used for training measures in teaching employees in the frontline to rethink and improve their interactions with customers by developing a certain feeling for essential customer needs. Eroglu. U. 1998). the standardisation of products and services will contribute to a guarantee of an ongoing performance level. The named attributes lead to less control and allow more free space for all participating parties in the customer relationships. such positive affective attitudes are significantly connected with the behavioural intentions of customers. In context with the confidant. Management of customer relationships 39 . “Beyond satisfaction: customer attachment to retail banks”. E. the respondents mentioned trust. openness. pp. “Modeling consumers’ choice behavior: an application in banking”. and pleasantness. Babakus. 23 No. 4.. As Baumann et al. engagement. 462-70. References Aldlaigan. (2004). A.g. 6. Vol. Finally. i. Chen et al. information about interest rates) has a positive impact on customer satisfaction. as well as facilitating decision processes for the customers and employees of the retail bank. honesty. (2007) stated. personal care.. sympathy. but also on the customers’ evaluation of the service quality as well as on customer loyalty (Zemke and Schaaf. For this reason. that the customers can expect a service level without undesired questioning by the service providers (Sasser and Fulmer. services and products must be transparent and understandable in their composition and handling. In the case of the Austrian retail bank the knowledge was integrated in a new brand strategy and in the formulation of brand principles as well as in the creation of guidelines for future interaction with customers. Bloemer et al. S. 18 No. and Buttle. but also the provision of information concerning finances (e. 1990. customer consultants have to act as competent managers of information and provide relevant data to customers. This topic was chosen to support banks switching from thinking in terms of products to thinking in terms of customer relationships and corporate social responsibility.e. International Journal of Bank Marketing. 1990). Managerial implications The results suggest a number of practical implications for retail banks and their management of relationships. F. customer consultants have to encourage responsible behaviour in their customers. perceptions and expectations regarding dealing responsibly with money refers to customers’ need for security relating to their money life. As a consequence of the findings. and Yavas. Journal of Service Marketing. Such kinds of organisational behaviour have a strong impact on the image and goodwill of the organisation. Support service “Support service” primarily refers to retail banks’ consulting activities. (2005) argue that not only a friendly interaction with customers improve the service empathy. Because financial services are intangible. helpfulness. pp. An investigation of experiences. 253-71. and Zelger. Vol. G. (1998). 273-91. International Journal of Bank Marketing. Innsbruck/Wien. Journal of Consumer Marketing. Sloan Management Review. Berry. (2003). A. 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About the author Margit Raich is a Research Assistant and Lecturer in the Department of Strategic Management. pp. Zelger. (Eds). (1939). in Bowen. International Journal of Bank Marketing. 25 No.H. Gabler Verlag.E.. Her major research areas are leadership. Innsbruck/Wien. W. 4. M. Her work is based on cooperation with companies of different industries. (1990). p.R. J. She currently teaches strategic management and organisational behaviour and has published several articles. 1. 329-44. B. (1994). (Eds). J. “An assessment of the relationship between service quality and customer satisfaction in the formation of consumers’ purchase intentions”. H. “Processing of verbal data and knowledge representation by GABEK-WinRelan”. Austria. Further reading Taylor. 17 No. organisational behaviour and qualitative research methods.com Or visit our web site for further details: www.A. Sasser.. She holds a PhD in Management Studies. She has also presented her work at international conferences.raich@uibk. pp. J. San Francisco. Roig.ac.C.S. 163-78. Service Management Effectiveness.. J. Margit Raich can be contacted at: margit. C. S. GABEK. pp. (Eds).C. and Monzonis.emeraldinsight. J. M. Jossey-Bass. Marketing and Tourism in the Unit for Strategic Management and Leadership at the University of Innsbruck. Journal of Retailing. Die Simulation von Gespra durch GABEK”. J. 213-33.E. E. Band 1. (1999a). and ¨ hrung. Vol. Forum: Qualitative Social Research. Tena. (2006). T. Stumpf. ¨rfnissen durch Zelger. in Buber. Matzler. “Customer perceived value in banking services”. and Zelger. She is co-organiser of the International Working Seminar on Production Economics. K. Zineldin. International Journal of Bank Marketing.L. Studienverlag. R. “Quality and customer relationship management (CRM) as competitive strategy in the Swedish banking industry”. Chase. A. pp. R. and Fulmer. and Oberprantacher. Kundenorientierte Unternehmensfu pp. D. and Baker. and Cummings.at Management of customer relationships 41 To purchase reprints of this article please e-mail: reprints@emeraldinsight. in Hinterhuber. CA. Johann Ambrosius Barth. The TQM Magazine. R.B. “Creating personalized service delivery systems”. Innsbruck/Wien. pp. Vol.und Kundenbedu GABEK anhand eines Beispiels bei DaimlerBenz”. Vol. and Schaaf. Leipzig. “Being new-customer friendly: determinants of service perceptions in retail banking”. (Eds).Roberts. J. the GABEKw Symposium and the Entrepreneurial Leadership Symposium. pp. 5. 31-91. 3. The firm prefers equity to debt financing. Denis. Banks could also increase their marketability to SMEs by acting as mediators to other organisations. authorities and consultants. while experiencing a distance to the bank. 42-56 q Emerald Group Publishing Limited 0265-2323 DOI 10. 2001). School of Architecture and the Built Environment. 99 per cent of which have fewer than 250 employees. 2004). thus constituting an interesting case of deviation from the pecking order theory of finance.com/0265-2323.htm IJBM 26. The notion of perceived similarities with the investor seems to set expectations of access to private information. which in turn influences the firm’s financial decision-making process. 2008 pp. A central concern for these firms is the capital structure problem: What mix of securities and financing sources should be used to finance the business? Loan financing is the most important source of external financing for most European enterprises.The current issue and full text archive of this journal is available at www. Small to medium-sized enterprises Paper type Research paper 42 Received 29 April 2007 Reviewed 13 September 2007 Revised 20 October 2007 Accepted 24 October 2007 International Journal of Bank Marketing Vol. It has found that when the bank is embedded in the social structure of the SME and there is a strong bank-firm relationship. Decision making.g. both the SME . Fashion industry. Royal Institute of Technology (KTH). It has been recognised that access to loan financing depends on the closeness of the relationship between enterprises and banks (European Commission.1108/02652320810847101 Introduction Small to medium-sized enterprises (SMEs) and new businesses have become increasingly important for economic development (e. single case study of a fashion firm. The notion of belonging to the same identity field as the supplier of equity finance. 26 No. such as industry organisations. The present paper investigates the rationale behind the firm’s financial decision making. The embedded finance literature is a promising new line of research that addresses this issue. Design/methodology/approach – The study is conducted as a longitudinal. Findings – The findings suggest that identity field embeddedness is relevant in the firm’s financial decision-making process because field identification facilitates the formation of embedded relationships between the SME and the financier. Stockholm. 1. Keywords Financing. Banks.1 Industry-embedded financial decision making The case of a fashion firm Sara Jonsson Centre for Banking and Finance. Originality/value – The study contributes to the literature on how social relations affect SMEs’ financial decision making and the bank-firm relationship. Sweden Abstract Purpose – The purpose of this paper is to study organisational characteristics and formations that are important to the establishment of a strong embedded relationship between the small to medium-sized enterprise (SME) and the financier. Research limitations/implications – Banks need to increase their knowledge about different industries and systematically process and store such knowledge to alleviate what SME customers may perceive as a distance to the bank. motivates the firm to prefer the more costly equity financing to bank financing.emeraldinsight. 2006).g. Uzzi and Gillespie (1998) showed that social structure and relationships based on trust play an important role in Industryembedded decision making 43 . which in turn may affect the SMEs’ choices of financiers. which suggests that firms follow a pecking order from most to least preferred – internal funds. including an enhanced ability to reduce the costs associated with writing loan contracts. The findings presented in this article contribute to an increased understanding of firm financial decision-making and thus provide new insights into the capital structure problem. Smitka. 1997). This article presents a new framework for thinking about how SMEs make financial decisions. Financing has been found to be an urgent problem for fashion firms (Sundberg. friends and family. this article addresses a question that has not been discussed previously: are there specific organisational formations or characteristics that are of importance to the establishment of embedded firm-financier relationships? How do such characteristics affect the formation of embedded ties to financiers. SMEs that have embedded ties with bankers can overcome information problems and accumulate social capital that can be used to access capital at prices that make bank financing more attractive to firms. Madill et al. Although past studies in different lines of research have generated knowledge regarding the importance of banking relationships. In contrast to the pecking order theory of finance. some questions need further investigation. 2006). such as what factors may be important to the establishment of relationships between SMEs and financiers. Adapting an embedded perspective on financial decision-making. embedded relationships shift actors’ motivations away from the pursuit of immediate economic gains towards the enrichment of relationships through trust and reciprocity (Powell. To illustrate the framework. Uzzi. Myers and Majluf. and how does they affect the rationale behind the SME’s financial decision making? Because there is little previous knowledge about this subject. bank and equity markets (Myers. 2002. taking into account the firm’s organisational identity. 2006.. Ennew and Binks. The findings and framework suggested in this article also provide clues as to how banks could market themselves to start-up firms. exploratory research is needed. Gill et al. 1990. 1984) – this study offers an alternative explanation to how firms may hierarchically order their dependence on different sources of financial capital. I present a longitudinal study of a jewellery design firm that follows its financial decision-making process. Background Strong. 2005). which motivates further investigation of the financial decision-making process for fashion SMEs. Proenc ¸ a and de Castro.g. The importance of establishing trust (or confidence) in the bank-firm relationship has been discussed in the bank marketing literature (e. The firm is categorised as a fashion design firm. embedded relationship with their SME customers. Managerial practices and organisational patterns that are typically observed in fashion industries are frequently at odds with our established views of managing organisations. By establishing a strong. The importance of developing and maintaining the bank-firm customer relationship has been emphasised in the bank-marketing literature (e. The main difference is that in these organisations identity contains contradictory elements: normative artistry and utilitarian economics coexist. 1984. and to decommodify financial capital (Uzzi and Gillespie. banks also receive many benefits.and the bank benefit. 1996. 1991). to retain clients.. 1998. Hawke and Heffernan. in the aggregate.. Previous research has shown that the quality of firm-financier relationships affects the financial behaviour of SMEs (Uzzi and Gillespie. it is possible that identity fields may influence the financial decision making of SMEs. I conclude with a discussion of the SME’s financial decision making and the effects on the capital structure and suggest implications for banks. 1990. have common practices or share a certain focus of attention. such as a market. DiMaggio and Powell (1983) define organisational fields as “those organizations that. Because current knowledge only takes us this far. They determined that the quality of the relationship between an organisation and its lender affects the SME’s financial decision making. Firms will alter their level of borrowing if the bank-firm relationship is rich in trust and reciprocity. Exchange of thicker. which in turn enables the bank to offer capital at prices that are more competitive than would have been possible in the absence of an embedded relationship. exploratory research is necessary. regulatory agencies. I then suggest a framework for thinking about how identity fields may affect the SME’s financial decision making. Therefore. profit margins and production know-how is transferred through embedded ties. Porac et al. Dutton et al. 1993). According to DiMaggio and Powell (1983). Methodology The study was conducted as longitudinal.IJBM 26. Larson. information is unlikely in the absence of trust because information could be used opportunistically (Helper. Dutton. Larson (1992) and Helper (1990) reported that “thicker information” on strategy. 1998). the bank can lower its monitoring costs.1 44 the capital structure of SMEs and the bank-firm relationship. Institutional theorists have used the term “field” to denote the grouping of organisations that are similar. Research has shown that identity is also an important component in the formation of relationships and social structure because it assigns value to the transaction and enriches the exchange of social capital between partners in the network (Portes and Sensbrenner. I describe the financial decision-making process of a jewellery design firm. The purest form of a longitudinal field study.g. resource and product consumers. Organisational identity is a key intangible aspect of any organisation.. and other organizations that produce similar services or products”. there is reason to believe that identity fields may have an impact on the formation of embedded relationships. Based on previous research. affect the construction of an organisation’s resources and core capabilities (Hunt et al. It affects not only how organisations define themselves but also how problems are defined and resolved (e. (1999) define identity construction as an explicit claim that the organisation is of a particular type. The rationale for this is that if the bank trusts the firm. sets of actors clustered around “socially constructed identities”. noting how relationships with the bank and an investor are affected by the firm’s identity and how the firm relates firm identity to the perceived identity of the financiers. was not . Next. 1997) refers to such information as fine-grained information. Discrete identity fields. 2003). or fine-grained. In subsequent sections. 1997). an issue that has not previously been addressed. constitute a recognized area of institutional life: key suppliers. 1992). daily participant observation. 1994). single embedded case study (Yin. I first describe the exploratory approach used to illustrate the issue. 1994. mutual information processing within a group of organisations is a vital sign of field formation. Uzzi (1996. Interviews averaged from one to two hours in duration. The rationale for conducting a single case study was that the firm constituted a case of deviation from the pecking order (Yin. a longitudinal study involving a series of multiple interviews about recent events offered the obvious benefits of proxy in time to current events. 1990). and how this influenced their decision to offer financing to the firm. Although individual cases cannot prove a theory. including meetings with Industryembedded decision making 45 . mission. Unstructured data collection. I conducted seven semi-structured interviews with the two designers and two separate interviews with their two bankers. were tape-recorded and transcribed within 24 hours with my own reflections added. Data collection For a period of 13 months. The time frame of this study covered the critical period beginning when the firm recognised the need for external finance and continuing through the decision-making process. I gathered data addressing archival sources through both semi-structured and unstructured methods. and when the focus is on a contemporary phenomenon within some real-life context. According to Siggelkow (2007). However. A case study methodology is a preferred method when “how” or “why” questions are being posed. as well as insights into future goals and visions of the business. Time sets a frame of reference for what changes are seen and how those changes are explained. The interviews conducted with the bankers were intended to provide insight into how the bankers perceived the designers and their business. when the investigator has little control over events. I could visit the research site only once or sometimes twice a week. The framework may focus on major social dramas or breakpoints in a firm’s history. some data were obtained through retrospective reports gathered shortly after events occurred. Public information about the firm was reviewed. Data collection from interviews with the designers provided a sequence of events for the history of the firm. Therefore. Whereas multiple retrospective studies increase the external validity of a research design. Semi-structured data collection included a number of semi-structured interview sessions with the designers and their bankers. it is often desirable to choose a particular organisation precisely because it allows one to gain certain insights that other organisations would not be able to provide. during which I followed the firm in their financial decision-making process.feasible. 1990). which indicate the beginning of periods of continuity and change (Pettigrew.g. 1985). Unstructured data collection included notes taken as part of observations at the firm during its daily operations. they can sufficiently point to possible omissions in the theory. The objective of these interviews was to understand why certain decisions and choices were made and how these decisions were related to the designers’ description of their business. 2003). thereby increasing the likelihood that I could determine the sequence and nature of events accurately. The researcher’s theoretical framework suggests justifications for the beginning and ending of data collection (Pettigrew. and objectives. a longitudinal. including press accounts and material generated by the firm (e. real-time study can increase internal validity by enabling the researcher to track cause and effect (Leonard-Barton. insights into how they had reasoned during past decisions concerning the financing of the business and how they reasoned during the time period when I studied the firm. Archival sources. Semi-structured data collection. promotional material). following the product life cycle of the fashion industry”. the designers decided to apply for bank financing: “He told us we needed financing to grow”. To finance their first collection.1 46 partners. The chronology of the financial decision-making process is described in Figure 1. that should be reimbursed in two years.000) when they opened their shop. in newspapers. Observations were also made during meetings between the firm and the bank. transcribed and complemented by my own reflections. also expressed a different set of claims about the identity of their firm. With their rhetoric. economic consultants. A compilation of the interviews and observations are presented in Table I. In a newspaper article. The firm’s description of its business and its need for finance According to one of the two designers. For example. they launched their first collection in an art gallery to “demonstrate their artistic ambition”. Thus. Their spouses covered their private expenses. however. such as artistic talent. where it was portrayed as an example of the recent hype and success of Swedish fashion design.000. . they expressed their vision in the following way: “By founding a profitable company we are trying to create our own space in the commercial market”. The objective of these observations was to gain an understanding of the identity of the firm and how this influenced decisions about and relations with the bank. the firm’s financial decision-making process is analysed. and commensurate with their identity claims. they defined core capabilities in terms of intangibles. External financing would be needed to achieve this goal.000 and a family member granted the firm a loan of SEK 40. This mentor gave them a small loan (SEK 20. they were aware of the necessity to negotiate a balance between an idealistic. and craft. The designers. The objective for setting up the business was to “be able to freely express their artistic visions”. In addition to the two founders of the firm. the designers claimed their artistic identity whilst downplaying their economic identity. artistic-vision driven perspective and the revenue-driven realistic view. they each made a private investment of SEK 10. art. The case In this section. the actors involved in this process included the two bankers representing the bank where the firm is a customer and the investor who entered after the firm was granted debt financing and offered equity financing. Encouraged by their mentor. I conducted interviews with the designers to investigate their reasoning and perceptions of the meetings. The designers’ rhetoric invoked their alignment with the artistic world. After the firm’s meetings with the bank. and to launch two collections a year. the firm received a great deal of attention in the media. The university where they had studied assigned a mentor to the firm. their business idea was “to create high qualitative jewellery.IJBM 26. The designers expressed an intention for the firm to grow “and to cover markets in New York and Tokyo”. with interest. with a mix of fashion. and their mentor. in magazines and on television. These observations allowed an encompassing view of the dynamics of business-financier relationships and aimed to capture the interplay between the firm and the bank. which was “to generate profits”. The observations of meetings between the bank and the firm were tape-recorded. Early on. Observations at the firm normally lasted from one to three hours. Compilation of interviews and observations . two observations of daily operation. Banker 2 The designers The designers Banker 2 The designers 2006/05/22 2006/06/28 2006/07/03 2006/08/16 2006/08/21 2006/08/23-2006/10/04 2006/10/11 2006/10/11-2006/12/05 The designers The designers 2007/0/1/22 2007/04/18 Semi-structured interview at the firm Semi-structured interview at the firm Industryembedded decision making 47 Table I. one observation of a meeting with the firm’s economic consultant Semi-structured interview at the firm Eight observations at the firm. observation of daily operation Observation of bank meeting taking place at the firm Three observations at the firm. observation of daily operation Semi-structured interview at the firm Nine observations at the firm.Date The designers The designers Semi-structured interview at the firm Actors Interview Observation 2006/03/09 2006/03/16-2006/04/10 2006/04/13-2006/04/19 Banker 1. observation of daily operation Semi-structured interview at the bank Observation of bank meeting at the bank Semi-structured interview at the firm One observation at the firm. observation of daily operation Two observations at the firm. observation of daily operation Semi-structured interview at the bank Seven observations at the firm. the designers The designers The designers Semi-structured interview at the firm 2006/04/19 Six observations at the firm. observation of daily operation 2006/04/20 2006/04/27-2006/05/05 2006/05/09 2006/05/15-2006/06/21 Banker 1 Banker 1. One designer commented that “We mention[ed] our appearance in magazines and the attention our design has achieved. most important collection. . Their intention had been to communicate their intangible artistic core capabilities. the designers wanted to extend the bank overdraft and apply for a larger bank loan. and in this week the winner of the previously mentioned award would be announced. However.000. The show would take place during Fashion Week in August. In these meetings. they believed these artistic capabilities were not acknowledged as key or unique resources by the bankers. hence. they also voiced a problem they faced in their business: they needed to find a suitable supplier because the supplier they were currently using was too costly. At a later stage. The designers did describe the bankers as professional and as having good intentions: “We do think they want us to succeed”. Because of an increased demand from stores. The designers accepted the overdraft but decided to postpone the bank loan because of perceived unfavourable interest rates.IJBM 26. This application was rejected. These tactics seemed to imply manifestations of firm identity and an intention to emphasise success in the design community. place a large order with their supplier for which they needed financing to make a required advance payment.1 48 Figure 1. The designers also mentioned that the firm was one of three nominees for a prestigious fashion award. The designers also wanted a “small financial buffer”. Financing was needed to arrange the upcoming fashion show that would launch their third and.000 and a bank loan of SEK 150. but the bankers are more interested in the figures”. the designers emphasised how their artistically driven core capabilities were perceived by other actors and expressed the firm’s capabilities in terms of intangibles: the design and artistic edge. so far. In conversations with the bankers. Chronology of the financial decision-making process (figures are in SEK) The firm’s perception of the meetings with the bank The firm initially applied for and was granted a bank overdraft of SEK 50. however. The bankers were informed of recent events and activities such as participation in magazine and TV interviews. the initial bank loan offer and bank overdraft remained. they also wanted to build up a stock and. However. The designers explained their business situation and stated what they saw as their most urgent problem: “To obtain external finance in order to invest in growth-promoting activities. and it had no security in terms of fixed assets. The representative from the auction house declared that his firm admired the firm’s artistic qualities. high quality. where it emphasised its need for financing and business expertise. “The bank had already stretched the criteria for what would normally be accepted as grounds for a positive finance decision”. the firm received a one-page article in the top Swedish business newspaper. hence. but the problem of finding a suitable supplier remained. They described the meetings as open and transparent: “The firm brought their business plan and budgets and shared information. it had not been in business long enough to show satisfying sales figures. “The designers show economic thinking. the jury explained. The designers explained that large fluctuations in cash flow are common in the fashion industry. “I do not know much about the firm’s market but from the bank’s perspective it is the people behind the start-up that are the most important when evaluating a company”. This is important when establishing trust in a firm. Commensurate with the contradictory identity elements of fashion firms. In the article. The bankers emphasised that normally the bank would not grant an overdraft or a loan to a business like the firm because it had not yet generated a profit. one of the bankers stated. One of the bankers stated. Another banker explained. and they cautioned that artistic talent alone would not overcome economic issues: “cash flow was the most important factor”. for example on their strategy and profit margins”. both national and international. in terms of being careful with their scarce resources. the firm won the award. “The firm is appointed the newcomer of the year because they have in a short period of time managed to balance unique design. one of the designers commented that “We are looking for a partner with experience and finance that wants to grow with us into a profitable company”. Financial decision making takes a new turn – enter the investor Shortly after the firm was denied the extended bank overdraft and bank loan. the firm received two large orders from two department stores. such as participating in international trade shows and being able to make the advance payment to the supplier”. The bankers defined the core capabilities and resources of the firm in different terms to those used by the designers. For example. Besides being capable of running a business they are skilful in PR and marketing”. Shortly after winning the award. The reason for not extending the bank overdraft and bank loan was that the bankers were concerned about the uneven cash flow. The firm and the auction house set up a meeting to discuss possible forms of cooperation. They also needed to find a suitable supplier who was less costly but who could maintain satisfactory quality.The bank’s perception of meetings with the firm The bankers’ perception of the firm was that the designers acted “very professionally”. The award meant increased interest from the press. an auction house specialising in high-quality jewellery. After learning that the firm had won the award. Their rhetoric invoked utilitarian economic resources. The award resulted in an increase in sales volume and an increased number of retailers. the bankers decided that the existing line of credit and the size of the bank loan would remain fixed. and a distinguished business thinking”. contacted the firm. he voiced what the Industryembedded decision making 49 . Weber (1946) used the term “sphere” to distinguish different groups of actors. It should be noted that the initial loan offer and bank overdraft would have covered the expenses for the show and advance supplier payments. which is characterised by the importance put on aesthetic value. which makes it easier to understand each other. which may explain the perceived distance from the banker. The auction house’s main objective was to become a private investor in the firm. the auction house focused on the firm’s design capabilities and what the firm identified as its core capability – its artistic talent. however. The designers described their decision as motivated by a perception of sharing similar values. Instead. It can be anticipated that when actors cluster around “socially constructed identities”. Another factor that had influenced their financial decision was the notion of being dissimilar to the bank: “In contrast [to the auction house]. alluding to artistic identity attributes legitimized the private investor in the minds of the designers. the designers observed that “We are in the same business. Fashion designers may be considered members of what Weber referred to as the “aesthetic” sphere.1 firm had portrayed as their core capability. For the firm. of sharing identity attributes and values. the rationale for preferring equity instead of bank financing is explained by the notion of being “closer” or more “similar” to the investor than to the bankers and the bank. the firm chose not to accept the bank’s offer. on the other hand. such as “the appreciation of high-quality design”. such as finding suitable suppliers.. we do not feel that we have much in common with the bankers”. whereas the bankers were not. he admitted that he was not able to give the firm the name of a specific supplier right away. the perception of closeness or similarity is derived from the notion of belonging to the same “field”. 2006). whereas the banker was perceived as dissimilar. the firm accepted the investor’s offer and was content with the terms of the agreement. According to Weber. Thus. Theory development – identity field-embedded financial decision In this study. in exchange for a 30 per cent share of the company. The bank only seemed interested in how much we sell each day or month”. One of the designers explained that “Even though they could not recommend a supplier immediately. Furthermore.IJBM 26.000 and help the firm in its operations and in expanding its business. In contrast to the bank. Applying bank marketing terminology. there is a “void” between groups of actors. could be considered as a member of the same sphere. it has been found that perceived similarities between customers and bankers do play an important role in building an initial relationship and can contribute towards the establishment of trust (Gill et al. The investor was perceived to be embedded in the same aesthetic sphere. Another rationale for the financial decision was that the auction house might be able to assist the firm in its operations and in finding solutions to market-oriented problems. Weber was one of the first to write about the clashes between the economic and aesthetic spheres. The firm’s financial decision The bank overdraft and the bank loan would have covered the expenses and investments for which the firm needed external financing. In the bank marketing literature. it was willing to give the firm SEK 200. However. 50 . the firm perceived the investor to be similar. The investor. they would probably know how to find a supplier because of their experience in the business”. the firm considered the bank to be a member of the economic sphere. g. 2007). that the investor could consider the firm from a more holistic perspective than the bank could. In parallel to Glynn (2000). that the perception of belonging to the same identity field sets expectations of trust and transfer of private information between the newly introduced parties.. 1996). Discussion According to financial economics. The notion that customers of financial bank services make their choice of service supplier based on factors other than price has also been recognised in the bank marketing literature (e. Applying the notion of institutional distance to the concept of identity fields may help identify a quantifiable measure of the distance between different fields. “isomorphic” or consistent with institutions operating in that environment (Meyer and Rowan. the investor could address other problems. this study indicated that the notion of belonging to the same identity field conveyed the perception that the investor could provide the firm with valuable information. however. Similar identities also convey a perception. Kostova (1996) investigated the effect of a country’s specific institutional environment on organisational practices. Such information is time-saving because educating potential investors takes time. 1983). field identification facilitates the formation of embedded relationships between the SME and the investor. I found that information processing. First. structures and practices that are socially legitimate – that is. on the part of the firm. For example. Organisations operating in different countries may experience institutional distance as a consequence of the difference/similarity between countries’ institutional environments. the designers expressed an expectation that the investor would be able to suggest a supplier to suit the firm’s specific requirements. the lenders require a lower rate of return than ordinary shareholders because Industryembedded decision making 51 . The notion of sharing the same identity attributes seems to promote not only actual but also perceived components of embeddedness. this quantifiable measure can verify that firms operating within the same institutional environment or field form embedded ties more easily than firms operating in different institutional environments. Furthermore. Therefore. Molina et al. Hence. 1981). The evidence from this study suggests. field formation and perception of similarity are mutually reinforced through social interactions and the language of the professions. energy and money (Stiglitz and Weiss. debts convey less transaction costs than equity.Organisations tend to incorporate organisational forms. This institutional distance between countries can be identified by a set of quantifiable measures. organisational practices reflect the institutional environment of the country where they have been developed and established. 1977. The fact that the firm and the investor are in the same industry facilitated communication between the parties because the social relationships permeated information with meaning beyond its face value. This notion could also be expressed as a higher degree of what Seal (1998) refers to as competence trust in the investor than in the bankers in relation to the ability to assist the firm in its business development. DiMaggio and Powell. In addition to providing the firm with external financing. The findings made in this study suggest that other factors in addition to purely monetary ones need to be considered in the context of SMEs’ financial decision making. Previous research has found that embedded ties develop primarily from third-party referrals and previous personal relationships (Uzzi. Hence. one argument for preferring private investors to bank financing could be to avoid the requirement to pay interest to the bank regardless of the cash flow of the business. 1992). which in turn affected the firm’s financial decision making. especially long-term investment capital. however. Applying the cost of capital as a rationale for preferring one certain source of financing to another. 1996). banks usually consider firms without fixed assets and satisfying cash flow to be too risky. Binks et al. 2005). Ennew and Binks. 1998). The perceived similarity of identity fields was an important prerequisite for the establishment of embedded relationships between the SME and the financier. factors other than the cost of capital or loss of control may affect the firm’s financial decision making and influence the SME towards equity rather than debt financing. In parallel to the embedded finance literature. research has indicated that this order of preference can be revisited as a consequence of a strong embedded bank-firm tie that conveys debt financing at lower prices than in the absence of embedded bank-firm relationships.. In this study. security is often provided. In addition to the risks of losing property or control of the firm. firms generally prefer retained earnings to debt finance.g. in terms of what factors may influence the bank-firm relationship. Another argument in favour of a private investor could be access to the private investor’s business network . the transaction cost associated with raising and servicing debts is generally less than for ordinary shares. As evidenced in this study.g. I have focused on the demand side of finance. the rationale for preferring debt to equity is primarily motivated by a notion of losing control of the firm (e. which made the investor a more adequate financier than the bank. As confirmed in this study.1 52 debts financial securities present a lower risk than shares for the finance providers because they have prior claims on annual income and in liquidation. various studies have shown that the availability and cost of financing. in the way the firm had the opportunity to choose which supplier of finance to employ.IJBM 26. business angels or private investors are often the only sources of early stage capital for businesses that have exhausted personal and family sources. Addressing the supply side of capital to SMEs. The case presented in this article is unique. thus making the firm more prone to debt financing (Uzzi and Gillespie. Why did the firm in this article prefer equity financing to debt financing? Did the bank fail in its marketing efforts in this case? Relationship marketing has become a prominent theory in research focusing on the marketing of financial services to both retail and business markets (e. However. Normally. For SMEs. are some of the most important constraints on the formation and development of SMEs (e. The analysis put forth in the present paper suggests that the perception of belonging to the same identity field as the investor induced an embedded relationship and set expectations of trust and fine-grained information transfer. I offer an alternative explanation to financial theory.g. Second. It also offers insights into the bank marketing perspective. suggesting that the quality of the relationship between an organisation and the supplier of capital affects the pecking order of SMEs. Sogorb-Mira. The framework offers a complement to the embedded finance literature by proposing a way of thinking about the context in which embedded relationships between SMEs and suppliers of equity are formed. the firm would not be in a position to make a financial decision based on its own preferences. The framework presented in this paper offers an alternative and complementary explanation for the SME’s financing structure. Therefore. In addition. However. The framework suggested in this article indicates that the process of searching for solutions to financing problems may affect. Clearly. Banks could also make organisational changes and allow some bankers to become “industry specialists”. such as cultural capital generated by embeddedness in an identity field. rather than equity being viewed as expensive. and therefore do not separate problems posed to their business. 1963. For example. and thereby reduce the firm’s perceived distance to the bank. Cyert and March. by cooperating with the Swedish Fashion Council or the Swedish Trade Council. The fashion industry specialist should interact with fashion industry representatives and attend certain events. however. 1983). needs further investigation. (2007) found that for start-up firms. however. The designers’ rationale was explained by expectations of fine-grained. such as industry organisations. Furthermore. and thus to be a mediator to other actors that may be important to the SME’s business development. The goal of this study was to outline a new framework for explaining the financial decision-making process of SMEs and to use an in-depth case analysis as an illustration. In the case presented in this article. Banks could benefit by developing new Industryembedded decision making 53 . authorities or consultancies. such as Fashion Week.and entrepreneurial experience. the search for non-financing information. A question that needs to be addressed. This implies a need for the bank to increase its knowledge about different industries and to process and store such knowledge systematically. such as finding suitable suppliers. Paul et al. would enable the bank to offer its SME customers information and resources in addition to financial resources. The bank’s actual and potential SME customers naturally operate in a variety of different industries and display a variety of different characteristics. it may not be feasible for every individual banker to have complete knowledge of every industry. Consequently. private information transfer. It has been suggested in this article that this distance or dissimilarity may partly be caused by what the firm perceives as the bank’s lack of knowledge about the firm’s context. There are numerous studies on how firms search for solutions to problems (e. closer cooperation with other organisations and institutions. it is viewed as good value because a well-chosen investor can add business skills and social capital in the form of commercial contacts and access to relevant networks.g. the fashion industry specialist could be a link to the aesthetic sphere. Such expectations may be explained by the fact that the owners of small firms often control all firm activities. the firm was promised neither private information nor network connections. this specialist could be a valuable resource for the bank in its credit decisions regarding fashion firms. trade organisations. For example. Managerial implications The creative industries are a growing market segment and there is a potential for banks to create profitable relationships with firms in this segment. the correlation between financial and non-financial benefits. The benefit would be that the SME’s perception of the bank-firm relationship would improve. In this way. holistic. is how bank-firm relationships can be created with an SME that perceives the bank to be “distant” or “dissimilar”. and hence a lack of what Seal (1998) refers to as competence trust regarding the firm’s business context. and be affected by. more empirical work needs to be done to discover how embeddedness affects the financial decision-making process of SMEs. the bank presented in this article might have been able to address the firm’s supplier problem. DiMaggio and Powell. Gill. and Snow. “Entrepreneurial finance: an overview of the issues and the evidence”. Administrative Science Quarterly. and Heffernan. (1996).IJBM 26. R.H. Johnston.A. Vol. 248-66. 19. in Zuhr. “Organizational images and member identification”. T. S.G. Cyert. 1. A. Dutton. Vol. J. Vol. Commission Staff Working Paper.A. pp. (1992). M. and Haines. European Commission. (1990). “Information asymmetries and the provision of finance to small firms”. D. Dutton. Administrative Science Quarterly. 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W. 295-336. (1998). Myers. and Weiss. N. Vol. Administrative Science Quarterly. Amsterdam. Yin. (1998). London. About the author Sara Jonsson is a PhD student at the Centre for Banking and Finance. M. (1946). Case Study Research: Design and Methods. Thousand Oaks.IJBM 26. 107-26.com/reprints .K. Sociology of Organizations. 16.1 Uzzi. R. Vol. Stockholm. Sweden. J. pp. Her research focuses on banks’ relationships to small and medium-sized firms (SME) and more specifically the role of the bank in the growth of fashion firms.com Or visit our web site for further details: www. (2003). From Max Weber: Essays in Sociology. B. Routledge. and Gillespie.se 56 To purchase reprints of this article please e-mail:
[email protected]@infra. Sage Publications. Weber. She also studies the internationalisation of SME networks. “Interfirm relationships and the organization of a firm’s financial capital structure: the case of the middle market”.kth. Sara Jonsson can be contacted at: sara. CA.emeraldinsight.J. Royal Institute of Technology. and identifies a potential conflict in normative collaboration theory between inclusiveness/diversity and a “higher level” institutional focus.1108/02652320810847110 . Design/methodology/approach – The paper employs a case study involving collaboration using both an interpersonal network structure and an inter-organizational project structure. Research limitations/implications – The research agenda for collaborative planning should include studying institutional factors that can hinder some actors such as small businesses from participating.emeraldinsight. but also suggests that the institutions developed for collaboration. Keywords Community development. based on a case in Norrta Sweden. 2008 pp. School of Architecture and the Built Environment. The local retail bank is often a small firm’s main interface with larger financial systems. Originality/value – The paper provides practical experience of banks as community development actors. Banks. as well as “higher level” institutional focus. Small. may impose prohibitively high costs on some participants. Small businesses in small communities Local retail banks could provide an institutional link between small businesses and local business services and would likely profit from doing so. 57-72 q Emerald Group Publishing Limited 0265-2323 DOI 10. The case provides support for the innovative potential of collaborative dialogue across a diverse group of actors. 1. Findings – the paper finds that collaboration mobilizes local resources to fill structural and relational gaps in the local institutional environment for SMEs. Royal Institute of Technology (KTH). International Journal of Bank Marketing Vol. Sweden Abstract Purpose – The purpose of this paper is to test the effectiveness of collaborative dialogue to support small business development in small communities. This can hinder the very diversity and inclusiveness that define collaboration.The current issue and full text archive of this journal is available at www.htm Collaboration to improve local business services ¨ lje Project” in Sweden The “Norrta Amy Rader Olsson Centre for Banking and Finance. Stockholm. Small to medium-sized enterprises. local institutional environment for small businesses. The paper analyses collaborative dialogue as a strategy for improving the ¨ lje. Sweden Paper type Research paper Collaboration to improve services 57 Received 29 April 2007 Revised 4 October 2007 Accepted 10 October 2007 Introduction This paper discusses how banks can collaborate with other actors to develop local economies.com/0265-2323. 26 No. close-knit communities can engender closer bank relationships with small and medium-sized ¨ ran Collert Foundation for its generous support for this The author would like to thank the Go research. long-term relationships in interpersonal networks. 2003). but seldom the resources or expertise to give each business the tailored. accounting. norms and procedures. SMEs may expect their local retail bank to compensate for the gaps in the local financial infrastructure (such as risk capital) or provide services such as business consulting. or strategy advice (European Commission. with their local knowledge and experience. the meeting between a bank representative and a small business owner is a meeting between disparate institutional and organizational structures (Silver. and organizational cultures of banks and SMEs. recent studies show that most retail banks maintain a neutral and reactive stance in SME relationships (European Commission. programs and resources necessary to support small businesses. 2006). 1996). are nimble.IJBM 26. For the purposes of this article. They trade on their uniqueness and utilize informal. However. Bank representatives operate within large. The bank-SME relationship also reflects an institutional “mismatch”. SMEs account for two thirds of employment and almost 60 per cent of added value in the European Union. Banks have the potential to develop SMEs. by contrast. centralized organizations. Start-ups and ventures. long-term support it needs (Gibb. decentralized organizations. 1993). Therefore. and because growing individual firms offer increased opportunities to sell financial services. despite any number of programs and research devoted to improving the preconditions for small business development. Silver’s (2006) ¨ lje. critical to local economic development. However. However. Transforming the local institutional environment: a theoretical framework To examine this issue more closely. could both offer a wider and more tailored portfolio of products and services to small businesses and even broker connections to other businesses and business services. retail banks are generally not in the business of providing the risk capital or tailored business strategy advice required by these firms. 1996). Small businesses. are also important potential clients for local banks. and a “mismatch” in the norms. Bank services are standardized and difficult to tailor profitably. Small communities in particular may lack the diversity of services. Municipalities often have programs to support small businesses. 2003). hindered by their respective institutional structures. SMEs seem to be under-serviced (European Commission. codes of conduct. Banks could then profit from a growing local market. Similar findings suggest that this phenomenon is not limited to Sweden (European Commission. inflexible. UK Competition Commission. 1996. but do not seem to take advantage of this profit opportunity. Infrastructure gaps and institutional mismatch Why don’t more banks act as institutional intermediaries for small businesses? Two possible reasons are gaps in the local service infrastructure for small businesses.1 58 enterprises (SMEs) (Howorth and Moro. retail banks rarely act in this capacity. Indeed. This suggests that banks. we must distinguish between infrastructure and institutions. 2006). study of relationships between banks and SMEs in the Municipality of Norrta Sweden finds evidence of unexploited gains from a closer bank-SME relationship. the infrastructure for small business development refers both to the to the facilities and resources available to small . Change comes slowly and decisions are highly restricted by rules. pp. local. 1993. from national regulations and cultural norms to regional. 1994). or for which results are uncertain (Senge. institutions governing personal relationships such as trust may be as important to small business development as those structuring professional interactions such as contract provisions (Gibb. 4-5). Following North’s (1990) definition. 1990. Forester. Below this level are several nested levels of formal and informal rules and regulations. In a small community. Collaborative dialogue for improving local institutional capacity Collaboration theorists argue that an exploratory arena for common learning and discourse can improve institutions that support development. Institutions may structure relationships among organizations as well as interpersonal relationships. but of the capacity of institutions structuring its relationships (a social/relational perspective) and interactions (a structural/organizational perspective). or branch-specific rules and norms. this distinguishes institutions from organizations: organizations are political. Innes and Booher (2003b) argue that “the Collaboration to improve services 59 Figure 1. Organizations and individual behavior are structured in response to these institutions and can change quickly (Williamson. This concept is well developed within community planning theory and has also been given empirical support in business situations (Saxenian. small business access to and efficient use of resources is a function not only of the potential and capacity of the business itself. 2006. we can argue that communities seeking to improve the conditions for small business development should examine both the resources available to small businesses as well as the formal and informal institutions that affect access to resources. 1990. social or educational bodies characterized as “groups of individuals bound by some common purpose to achieve objectives” (North. Howorth and Moro. Eriksson. 2006). The relationship between infrastructure and institutions affecting SME development . 2007). as well as the structures governing relationships among individuals or firms (Figure 1). norms and codes of conduct that govern access to or use of resources. Organizations act within the rule frameworks set by institutions.business (services. Similarly. Institutions are often described as being manifest at several nested and interacting scales. 1998). capital or information) and the institutional environment. In sum. At a societal scale are deeply embedded and slowly changing norms and values. with a speed of institutional change related to scale. Institutions are rules. we can conceptualize relations among individuals or organizations at various institutional levels (Healey. It is argued to be particularly applicable in situations requiring an innovative approach. 1999). These may be slow to change or may change more quickly. Using this framework. economic. 1999).IJBM 26. In this article. Left side adapted from Williamson (1998).1 60 central way to assess long term collaborative planning is in terms of the degree to which it helps to build capacity of an organization or governance system to be self-organizing. Collaborative dialogue builds relationships among stakeholders and in doing so Figure 2. Collaborative dialogue has been argued to improve the capacity of institutions to mobilize and maintain supportive conditions for households and firms (Cars et al. right side adapted from Healey (2007) . 2007). Over time. a richer and more broadly based understanding and awareness of locality relations and conflicts can develop. 2002). intelligent.. Collaborative planning is defined by its emphasis on common exploratory learning achieved through dialogue among diverse and interdependent actors (Innes and Booher. through which collective approaches to resolving conflicts may emerge” (Healey. 10-11). In other words. collaboration is analyzed in terms of its ability to build capacity of the institutional environment for small businesses. 2003a). and to help develop innovative solutions to development issues (Healey. 2003a). The role of collaborative dialogue in transforming institutions affecting small business development. Collaborations build networks that help participants quickly identify partners and form coalitions that can facilitate collective action. collaborative dialogue builds new institutions among participating partners that can help them adapt to changing situations creatively (Innes and Booher. innovative and adaptive to changing conditions” (pp. collaboration can help raise the level of analysis to focus on those institutions that structure specific situations. Collaboration may help diverse stakeholders move beyond individual or organizational interaction or conflict to focus on the institutions that structure relationships: “through learning how to collaborate. Figure 2 describes how collaborative dialogue can transform institutions. 2003. For example. 2007). strategic sharing of information. 1999). it typically builds trust. The first is an agreement among participants to engage in “authentic dialogue”. see Innes and Booher. collaboration raises the level of dialogue from a dyadic bank-SME relationship to a level representing the local institutional environment for SMEs. This increases the capacity of these stakeholder relationships to address current issues and also meet future challenges. The literature on collaborative dialogue suggests some criteria for success (for a review.directly transforms social/relational institutions. In this sense. Collaboration among stakeholders can therefore help identify both relational and structural issues. 1999. Collaborative dialogue focuses on finding areas of commonality as well as difference between specific banks and small businesses but also among these actor types in general. Collaborative planning theory suggests that we will find evidence of social or inter-organizational network development leading to innovative practices and initiatives. 2003a). For example. but also providing financial and business services that complement those offered by retail banks. Collaborative dialogue for SME development? The literature on collaborative dialogue suggests that banks. collaborative dialogue can transform the structural aspects of institutions and the resulting institutional arrangements (such as organizations) that develop to facilitate interactions among stakeholders. Case study methodology Flyvbjerg (2006) argues that even a single. suggest solutions. Moreover. representing various and perhaps conflicting interests but with a common acceptance that problems require a collective resolution approach. This often requires a facilitator judged by participants to be impartial and objective. Collaboration to improve services 61 . collaboration has improved the operational situations in which SMEs and banks interact. SMEs and community leaders could create new institutions for identifying common goals and developing new initiatives to improve the institutional environment for SMEs. collaborations often create (and are embedded in) interpersonal or inter-organizational networks. small businesses may not be aware of the support programs available to them. This includes promoting better bank-SME communication. Forester. context-specific case study can be an ¨ lje case fits important analytical tool for testing social science hypotheses. and in some cases even implement change directly (Healey. Collaborative dialogue can also identify structural gaps that hinder access to resources. and other misleading or manipulating tactics. Participants must be diverse and inter-dependent. The agenda for the collaboration must be open-ended without predefined rules other than a commonly determined goal. as free as possible from positioning. This study examines a case in which collaboration was pursued among a number of local stakeholders with a common interest in improving the local institutional capacity to support small business development. 2003. for example. Institutional theory suggests that by raising the level of analysis to focus on the institutional environment for small businesses. and is therefore a good candidate for a “critical case” used to test the robustness of current theories of collaborative dialogue and its role in transforming institutions. a common sense of problems and a common vision of goals (Healey. The Norrta the general criteria for collaborative dialogue well. The literature suggests two working hypotheses to test. Materials reviewed include analyses. The social networks continued to provide a structure for interaction among key individuals.000 in the city center and the rest in several smaller centers. and the results of the collaboration. such as where and when many meetings occurred or which actors attended them. and time to participate in volunteer or other initiatives. while the coordinated initiative had the character of a project designed . Finally. In 2005. and partly because the identification of information-rich key informants provided insights into the personal and professional links that develop and sustain collaborative dialogue. The municipality is average ¨ lje is fairly stable and prosperous for Sweden in size and industrial structure. and local businesses to promote small ¨ lje Project has actually only operated as a formally business development. The Norrta coordinated project since 2005. 1990). Particular emphasis was placed on understanding motivations for participating in the collaboration. Between 2002 and 2005 it can more accurately be described as self-organized and interlinked social networks representing issue areas. memoranda and project proposals. Therefore. local retail banks.000 active small businesses with 2-15 employees. Respondents were selected based on their participation in the collaboration effort and their role in the region’s development in general.500 one-man businesses. it also underscores the thickness and embeddedness of institutional and personal ties among participants. milestones. There are at least 2. Respondents were asked to estimate their commitment to the project and the value of its results. These range from service firms and shops to innovation firms in the electronics industry. Silver and Vegholm. The area is also a popular summer recreation area and in recent decades many professionals have decided to retire there or commute to Stockholm. Specific names were generated using a snowball sampling strategy. open-ended discussions based on a common series of general questions. and as many as 4. academics. network links among participants. This has increased the local market for services and has also added a base of residents with secure retirement or other incomes.000) with about 17. wherein one respondent generates proposals for further interviews (Patton. existing documentation of interviews and analysis from 60 interviews with small businesses and bank representatives was reviewed to understand the particular ¨ lje (Silver. interview notes were used to reconstruct events. Interviews were in-depth. Norrta due to its diverse economic base and proximity to Stockholm.1 62 A total of 17 interviews were conducted during the period October 2006-March 2007 with follow-up interviews in selected cases in September 2007. and their experience working with it.IJBM 26. respondents were asked to speculate on the future of the collaboration efforts. This method was chosen partly due the lack of project documentation. their understanding of project goals. 50. 2006. ¨ lje Project was initiated in 2002 to improve cooperation among municipal The Norrta representatives. Respondents identified different key actors. challenges to bank-SME relations in Norrta ¨lje Project Case study: the Norrta ¨ lje. Although this makes the analysis of the case more difficult. a strong interest in improving the community. Sweden is located about one hour north of Stockholm The municipality of Norrta and has a small population (ca. 2006). Respondents described their own background. these networks were coordinated under a new institute for applied financial studies. There is little documentation of several aspects of the project. and priority issues in the project’s inception and development. Finally. A researcher studying the potential for such a cluster on behalf of the municipality and the Swedish Agency for Economic and Regional Growth (NUTEK) introduced the issue of risk capital for innovative firms. the Centre for Banking and Finance (CEFIN) began studying the ¨ lje (documented in Silver.to promote interaction among organizations. Therefore. Feedback from the ongoing research and interviews provided structure to these discussions. Norrta Case description Network phase 2002-2005: self-organized interpersonal networks ¨ lje traces its origins to The collaboration for small business development in Norrta several simultaneous processes. In each case. Another researcher. Respondents tended to describe this phase in terms of individuals and the importance of their many roles and network ties (professional and social) in moving the project forward. eventually incorporated as RoAF (Roslagens ¨ rsa ¨ nglar). this article refers to “the collaboration” when describing results. became convinced that the plot should be redeveloped as a competence park called “Campus Roslagen”. relationship between banks and SMEs in Norrta Meanwhile. Collaboration to improve services 63 . the new angel company had begun to recruit investors and to build interest in risk capital development as an issue. and was an avenue for initiating between CEFIN and Norrta discussions with local banks. it cemented (informal) ties ¨ lje municipality. The discussion section analyses the structure of the network versus the project more closely and attempts to tease out the relative merits and constraints of both for the collaborative process in ¨ lje. 2006). Affa Around 2002. there are several results that are arguably the result of the collaboration when taken as a whole. Although the proposal was not funded. including a local electronics entrepreneur. The municipality (including a municipally owned real estate development company) and some key local individuals. in 2003 the municipality sought funds from the European Commission to study how financial actors could become more active participants in SME development. This dual structure makes it virtually impossible to ascribe results to the network versus the project (as defined by the institute KAFI). Also. himself a long-time champion of small business issues. this article will refer to a “network structure” and a “project structure” to denote this dual and at times simultaneously operating structure. where academic institutions and related education and technology companies could benefit from cluster-type synergies. the involvement of university researchers was seen as providing legitimacy and fostering a platform for innovative experiments in collaboration among diverse community actors. discussing the campus redevelopment and the role of banks as an engine for community development. However. The first was the closing of a local military base that had been a major local employer and had also held a significant plot of land. In sum. between 2002 and 2005 networks of individuals interlinked by personal and professional ties had formed. invested significant personal time and effort into engaging key individuals in informal discussions about how to mobilize resources for a project initiative. Therefore. This led to a venture capital course and the recruiting of select investors to a new angel company. courses and conferences on the subject of local economic and financial services and their impact on community development. support the Institute during its first years of operation. However. not the Norrta However. Therefore the future of KAFI is uncertain. Discussions with the major universities led to the creation of several such experiments. the Swedish agency NUTEK announced it would support experiments in improving relationships between universities and business. The Institute (KAFI) would produce research.e. The cooperation agreement and associated funding for this “experiment” expires in December 2007. Many prefer to devote their energies to those coalitions and organizations closest to their own interests rather than to the collaboration group as a whole. the social network continued to function during the project period. respondents tend to speak in terms of positions. new networks representing specific issue areas have coalesced or matured. This cooperation agreement was to fund and ¨ lje Project per se. and the municipal Administrative Development Board. Several of the key individuals with an interest in all of the issue areas (and developing synergies among them) are either less involved. and produce seminars. However. the County ¨ lje. development and education owned by the university KTH’s holding company and linked to the research at CEFIN. However. The ongoing ¨ lje was seen as an important first project for such an institute collaboration in Norrta ¨ lje’s banks and and NUTEK support was conditioned on matching funds from Norrta Campus Roslagen. these new entities also create competition for individual actors’ time. the municipality of Norrta real estate development company responsible for Campus Roslagen. individuals as representatives of organizations with roles in the project.1 64 Project phase 2005-2007: from network to project. the relationships among individual actors seem to be developed enough to ensure ongoing contact even in the absence of a coordinating group. Respondents are strongly in support of some form of continued collaboration and information clearinghouse – as long as someone else will pay for it. offer consulting services. In this sense KAFI as an experiment can be said to have acted as a catalyst for developing some inter-organizational relationships that may be self-sustaining. the new organizations created are developing norms. Respondents report that the collaboration’s various interest areas are becoming more fragmented. from individuals to organizations In 2004. the collaboration project has been and continues to be KAFI’s primary focus. . nine partners signed a three-year cooperation agreement which included commitments of funding from three banks. In February 2005. rules and structures and seem to have stable constituencies. Currently: networks and project in “competition” KAFI’s coordination helped to identify and facilitate new relationships among participants and foster a common understanding of the issues facing small businesses. In addition. Moreover. Several reported that they now feel confident that they could initiate new initiatives with other actors without the structuring support of KAFI or another formal group. the creation of KAFI also marked the development of the collaboration from a network structure comprised of individuals to a project structure comprised of organizational representatives. i.IJBM 26. one of which was a new institute for applied financial research. When describing the project period. energies and funds. not more integrated. or are due to retire. In this sense. In this sense. of which 22 are men. offer SMEs an objective analysis of their business. Banks expect that the mentor network and the business consultant association will help SMEs better clarify their financial service needs and opportunities. the mentors have no such incentive. themselves often one-man businesses. they mobilized existing resources and provided a hitherto missing link between these resources and small businesses. Rather. It also helped to structure interactions among the interpersonal networks and associated organizations. The organization currently comprises 23 mentors.or late-career executives with enough personal capital to be able to afford offering ten free consulting hours. Most are retired or semi-retired professionals and many have experience owning small businesses. often mid. of which 16 are women. personalized service tailored for each business. KAFI also created new organizations offering professional services to small businesses and then invited participants from each to participate in KAFI’s “action group”. facilitating their relationship with banks. a tourism company. Finally. Participating mentors offer ten free hours of advice to small businesses. Business consultants. additional services may be arranged for a fee. However.000 (ca. including an automobile service station. a bee farmer. Mentors. rather. The mentor organization has also helped the municipality and local banks identify consultants for other projects. e110). mentors have incentives Collaboration to improve services 65 . The formal organization of KAFI under the university’s holding company served several purposes. more flexible long-term partner relationship they miss from the banks. One was a non-profit mentor organization called Roslagsmentorer (RM). but identified the Institute as part of the academic community. Several small businesses have been in contact with the mentors. the organization does not monitor how many small business clients have taken advantage of the free services or have commissioned paid services. “Business Competence in Roslagen” (FKR) now has 19 members. the creation of KAFI helped coordinate research initiatives and researchers within CEFIN. the new organizations provide SMEs with the closer.Results: a structural/organizational perspective New organizations The collaboration can be credited with forming a new institute (KAFI) and directly affecting the formation of two professional organizations: a mentor organization (RM) and a business service provider organization (FKR) These organizations did not create new resources. The municipality funds the first few hours of FKR member services to small businesses through a voucher worth SEK 1. are professionally trained to help build small businesses and offer flexible. It had some autonomy from the university’s financial structure and regulations. Whereas small business owners report being wary that banks will sell them products and services that may not be suited to them. FKR reports that 36 companies have utilized the voucher as of mid-2007 and that a total of about 100 hours in additional assignments to those small businesses utilizing the voucher have been commissioned through the professional network. and a fish farmer. Meanwhile. they represent intermediary actors that can bridge the institutional gap between banks and SMEs. Formalization of the collaboration as an institute helped secure outside funding from banks and municipal and national public sector administrations and authorities. A KAFI course in small business service provision attracted 19 certified accountants of which 17 were encouraged by KAFI to form a professional organization. banks and the municipality into closer contact. An individual described by many as a “pillar of the community” was a key recruiter of collaboration participants. His standing was considered by most respondents to be important. Although there is considerable overlap in these interests. The growth loan offered by the savings bank is modest but significant. all three banks note that the angel venture development company and an offshoot investment company called North Star have helped create new companies that will. FKR refers clients to the mentor network RM and vice versa. three growth Norrta loans have been issued. The banks and the municipality produce common small business forums and congresses. The difference is that these tend to link organizations rather than individuals. coordination responsibility for the campus development group was officially transferred to the municipality. RoAF’s commitment to invest its own capital was also a signal that investment objects had potential. North Star and the growth loan have the provision that the company be located in the ¨ lje region or be willing to relocate there. According to interviewed representatives from KAFI and RoAF. the project also provides a forum for developing new network relationships among participants such as bilateral.IJBM 26. a collateral-free ”growth loan” offered by the local savings bank. The savings bank can reduce the substantial risk in offering a growth loan by exploiting RoAF’s risk assessment expertise.000). need a variety of banking and financial management services. up to three million Swedish kronor (ca. Recently. Recently. The bank has a stated interest in community development but had previously not offered security-free loans to start-ups. New financial services The project structure brought angel investment representatives (RoAF). Networks within networks Although the project structure has been described as competing for individual and organizational energies with the interpersonal networks. Results: a social-relational perspective Recruitment to networks and to the project Most participants had been recruited to collaborate by a community or business leader they respected. e325. RoAF. ad hoc or informal initiatives. the savings bank became an investor in RoAF itself. contacts through the project led to the creation of a new financial instrument. Most actors are primarily focused on one or more of three issue areas: developing small business services risk capital and knowledge industry support. and do. In addition. “I knew that (KL) wouldn’t encourage me to be part of 66 . and the development of Campus Roslagen. in practice the first tends to focus on small or one-man firms in conventional industries while the latter two are concerned with attracting and developing growth firms in innovation industries. The municipality includes information about the new services and organizations for small businesses on its home page and other communications channels. At the time of writing. The banks have therefore been able to utilize RoAF’s analyses and support of innovation start-ups to build and tailor new services that so far appear to be profitable.1 to build viable companies that may then invite them to serve on their boards of directors or buy additional consulting from them. titled. noted one respondent. and positions assigned to individuals in KAFI. However. Some of political and community leaders in Norrta these individuals. Groups were established. Most of the cost and task of administering meetings. many respondents felt that since the institute’s primary interest was in the collaboration activities in ¨ lje. However. a ¨ lje is what actor(s) or organization(s) could bear the responsibility key issue in Norrta and/or cost for continuing to steward the collaboration and further developing common products such as information portals or brochures. These included a Board of Directors.. however. Participation patterns In the “network phase”. has been borne by KAFI. an analysis and research group. Within a short period. In the 2005-2006 period Collaboration to improve services 67 . Meanwhile. and an Action Group comprising all other actors and acting as the main collaborative forum. None of the actors interviewed reported knowing all or even most of the other collaboration participants previously. staffing KAFI meant staffing the project. both the ¨ lje are under future of KAFI as an institute and continued collaboration in Norrta ¨ lje to model CEFIN’s partnership discussion. These were working groups for the institute. However. one or more individuals took the personal responsibility to initiate meetings and recruit new network members. Roles among actors When the collaboration was structured as several self-organized social networks. Now that this initial funding period is coming to a close. gathering background information. the development director of Sweden’s National Agency for Higher Education ¨ gskoleverket) had ties to funding sources at other state agencies as well as to (Ho ¨ lje and to the academic community. not the project per se. these roles had not been assigned. norms for participation developed over time. Many collaboration participants had served in a variety of different capacities. these groups and individual/organizational assignments changed frequently over the course of the project. some defining roles were evident. In each group. There are currently two groups with regular meetings: the Board of Directors. For instance. A KTH researcher helped to frame the issues and structure the meetings. meetings and conferences. in turn. Notably. The municipal director of the department of business development took on the responsibility for planning meeting agendas.something that he didn’t believe in himself”. and recruited other participants from their professional and political networks. KAFI is using insights gained from Norrta with other Swedish communities and is moving its base to Stockholm. When the collaboration was formalized under KAFI. meetings were ad hoc and informal. Actors were also recruited by professional associates. nor were they formally compensated. all had prior connections with one or more of the organizations involved. recruited members of their own professional networks. This confusion is now creating Norrta difficulties as KAFI has taken on other projects and the initial funding period is soon ending (in December 2007). some external to the group. etc. there were no clearly defined roles for participants. Many interviewed participants noted that having a university figure take on this role gave the group an aura of legitimacy and neutrality. the project required the establishment of positions filled by organizational representatives. Once KAFI established a project structure. and working groups for various issue areas (closely matching the networks). 05/01). at another as a representative of KAFI. interviews indicate that the problem was apparent far earlier.1 68 there was significant focus on building a common vision among the many diverse participants. protokoll Nr. exited.IJBM 26. In other words. rather that many members preferred to work in smaller topic-specific groups or network informally with other members. the angel venture development company (RoAF) and the mentor organization RM. Figure 3. However. both large and small businesses found the project too “academic” in character with little relevance to their practical concerns. Several small businesses had been interviewed and/or participated in early discussions about SME issues. An analysis of meeting notes from this phase shows that both the number and diversity of participants grew but then started to decrease by late 2006. ¨ lje Project are Currently the small business representatives involved in the Norrta representatives for the small business consultant organization (FKR). Committees were formed. June Norrta 2005-June 2007 . Titles were not used with any consistency. small companies had little time to spare to attend exploratory meetings. and were invited to participate in KAFI. Working groups were merged and/or encouraged to hold common meetings. and at a third representing the angel company RoAF. Available meeting protocols underscore the fluidity with which key individuals entered. The same individual might appear in one meeting protocol as a representative of KTH. Even the benefit of networking with high profile figures in the community or other businesses was considered too insufficient to rationalize their continued participation. FKR and RM were ¨ lje Project. Moreover. and shifted roles within the project (see Figure 3). and RoAF was linked to the project as a condition created within the Norrta of public and bank foundation funding. However. small business owners participate only as representatives of larger organizations. Number and diversity of participants in the ¨ lje Project. renamed or merged. This was discussed as a problem in mid-2005 (KAFI Styrelse-och strategigrupp. Interviews suggest that this did not indicate a tapering off of interest. In other words. Collaboration to improve services 69 . matured into a project linking organizations. In addition. are more is despite the fact that small business owners in Norrta diverse in age. The agenda for the collaboration group was open-ended. We also expected that the collaboration would identify structural gaps that hinder small businesses from accessing either social institutions (such as networks) or resources (such as credit). organizations and a considerable organizational network are impressive. These are discussed below. and new initiatives. authority or influence to transform local institutions single-handedly. Every respondent interviewed described the collaboration process as informal. participating in several meetings. A diverse set of actors representing banks. This ¨ lje. participating when the group was discussing a topic of specific interest. organizational relationships and inter-organizational initiatives. it might also reflect institutional factors beyond simple boundary (entry or exit) rules. However. and can currently be described as a project that develops organizations. Discussion ¨ lje collaboration would seem to fit reasonably well the criteria set by Innes The Norrta and Booher (2003a) for collaborative dialogue. experiments. Structural/organizational perspective We expected that the collaboration would develop interpersonal and inter-organizational networks. The collaboration first developed as a network of individuals. courses and a few meeting materials kept conversations focused on creating a common understanding of problems rather than the allocation of common resources. open and fair. it exhibits a dynamic network structure linking both individuals and organizations. and academics was actively recruited and encouraged to participate. gender (male). the results of the collaboration in the form of new financial instruments. With that in mind. This could be a classic example of diversity-accepting micromotives translating into homogeneous macrobehavior (Schelling. some actors started coming only to smaller working group meetings with a more specific topic. During the “middle phase” of the project. as elsewhere. About six other participants were active. with a free exchange of views and ideas that approximates Innes and Booher’s (2003a) definition of “authentic dialogue” The fact that the group had no budget other than in kind contributions of time and a small budget for administration. An inclusive entry rule does not therefore necessarily translate into a diverse group of participants. small businesses in particular were difficult to retain. municipal representatives. the core group of collaborators is in fact a fairly homogeneous in terms of age (over 55). Actors were motivated to act collectively because no actor had the resources. when the project coordinator encouraged larger general meetings with a high diversity of participants.A core group of about nine individuals has been involved throughout the project once it became coordinated under KAFI. gender and ethnicity. Some participants moved in and out of the group. and ethnicity (Caucasian). 1978). Though a diverse group of individuals was recruited. New ideas could be brought up at any juncture by any participant and often resulted in informal working groups. SMEs (representing both growth industries and more traditional firms). while at least 20 more attended once or sporadically. Just as important. “help them speak in a language that banks can understand”. both small business owners and collaborating bank managers were reluctant to claim that meetings between a small business owner and her bank representative have improved. banks and municipalities can easily assign someone with a . A bank representative also reported that her understanding of small business issues had been deepened as a result of the presence of the mentors and the business consultants in the project. Collaboration relies on raising the level of analysis from the operational to the strategic level. For example. The effects on the bank-SME relationship are less clear. Nevertheless. mentors and advisors can help SMEs create better strategic plans. The mentoring and service organizations may help small business owners adapt better to banking institutions. As one bank manager noted. this suggests a direction for future research on collaboration as a relational strategy. Bank representatives in the collaboration also report having a greater sensitivity to SME challenges. many of whom are retired or semi-retired and willing to volunteer several hours. “It may just be too soon to tell”. share information and define a common agenda for change. thereby improving small business access to consulting services. When accountants received training offered by KAFI and created a professional organization. Finally. Social-relational perspective Based on the literature. The benefits of filling these gaps are already evidenced. we conjectured that by raising the level of analysis to focus on the institutional environment for small businesses. he represents both operational and strategic functions within an organization. KAFI formed to structure and coordinate the collaboration. we expected to find evidence of social or inter-organizational network development resulting in a higher propensity to cooperate to develop innovative initiatives. As the social networks developed and participants began to complain about the plethora of fragmented and ad hoc groups. such as banks and the angel venture development company. This new structure created new links among participants that had been only very weakly associated previously. Respondents specifically noted the importance of these organizations in mobilizing a “slumbering resource” represented by mentors. Here we find all interviewed respondents claiming increased personal awareness of small business concerns and that the collaboration has helped to build trust.IJBM 26. However. Participating banks are actively referring small company clients to these organizations for help in structuring business plans that can hopefully provide the basis for a more effective portfolio of banking services. the collaboration would improve the operational situations in which SMEs and banks interact. However. they could accept municipal vouchers. The social-relational perspective on the institutional environment for small businesses focuses on the relationships among stakeholders in the collaboration including small businesses themselves. associations or institutes: these disappeared in the project phase. the project structure proved less efficient for many individuals and small companies not affiliated with larger companies. but also on its inclusion of all key stakeholders.1 70 The collaboration also proved successful in identifying and reducing structural gaps by creating the mentor and business consultant organizations. the collaboration’s own institutions show a capacity to adapt to changing situations. When a stakeholder is a one-man business. and as one consultant put it. due to increased trust and a common understanding of issues. 12 No. Entrepreneurship and Regional Development.och finansmarknader. Qualitative Inquiry. Planning Theory. Brussels. and shaping places”. Commission Staff Working Paper. It could be argued that the interpersonal networks built up trust and common understanding over the first several years (2002-2005) that the inter-organizational project under KAFI could be used to mobilize organizational resources and create organizational links. B. pp. Eriksson. pp. “Key factors in the design of policy support for the small and medium enterprise (SME) development process: an overview”. “Collaborative planning in perspective”. 2.A. Lund. J. A. European Commission. However. References ˜ es.. Second Round Table of Bankers and SMEs: Final Report. P. As one bank respondent noted. The collaboration forged new relationships among a broad group of actors that developed trust. Vol. 1-24. 101-23. 5 No. communicative planning. “Creating an entrepreneurial Europe: the activities of the European Union for small and medium-sized enterprises (SMEs)”. MIT Press. C. Utveckling av kundrelationer inom bank. pp. Vol. Forester. MA. pp. Once mature. Vol. (1999). “Five misunderstandings about case study research”. These relational institutions helped to actively fill structural gaps hindering stakeholders from interacting by creating new organizations. European Commission (2003). 2 No. (2006). COM(2003) 26. Urban Governance. A. 19. Healey. Gibb. G. Journal of Planning Education and Research. Concluding remarks This case supports the notion that collaboration can improve local institutional capacity to support small business development. Flyvbjerg. and also created its own structures for continued collaboration. (Ed.) (2006). the case also suggests that the research agenda for the study of collaboration should include studying institutional factors that can exclude some actors such as small businesses from participating. Studentlitteratur. Healey. 111-21. accountants trained as business consultants). This is evidenced by the fact that organizational ties persisted despite the exit of some individuals and the entry of new ones due to career changes. and de Maghalha Institutional Capacity and Social Milieux. (1999). Cars. Healey. The collaboration even resulted in new resources (a new financial instrument) and more efficient use of existing local resources (retired professionals. (Eds) (2002). a common understanding of issues. K. 219-45. “Institutionalist analysis. (2003).. Cambridge. a strategic focus may be difficult to combine with a goal of inclusiveness and stakeholder diversity. and an interest in finding solutions. Vol. 2. these inter-organizational ties may persist without the coordinating energies of the project or KAFI. Madanipour. Collaboration to improve services 71 . 1. (1993).strategic function to a collaboration group. P. P. Therefore. European Commission (1996). European Commission. Ashgate. The Deliberative Practitioner: Encouraging Participatory Planning Processes. “I got the impression from my previous colleague that this project was prioritized within the bank”. Aldershot. Brussels. NY. ¨ ter stor: na ¨ r den lilla fo ¨ retagen mo ¨ ter den stora Silver. K. P. D. pp. L. Howorth. D. A. (2003b). Deliberative Policy Analysis: Understanding Governance in the Network Society. L.Q. (2006). Elsevier. Cambridge. MA.emeraldinsight. (2003a).). and Booher. Innes. University of California at Berkeley. “Trust within entrepreneur bank relationships: insights from Italy”. and Moro.com/reprints . 495-517.E. ˚ fo ¨ retagaren och lokalsamha ¨ llet”. and Vegholm. N. H. Williamson. Royal Institute of Technology. (2006). Her research interests include institutions for collaborative and communicative policy planning and the governance of metropolitan regions. Institutions.olsson@infra. J.com Or visit our web site for further details: www. Stockholm. Studentlitteratur. About the author Amy Rader Olsson is a public policy analyst and regional development planner with over 15 years of professional experience in the USA. Regional Advantage: Culture and Competition in Silicon Valley and Route 128. Amsterdam. Stockholm. 33-59. (2006). North. D. (Ed. 146.. Lund. J. (1994). Patton.E.E. Vol. 4. P. Entrepreneurship Theory and Practice. (Eds). Senge.och finansmarknader. (Ed. Utveckling av kundrelationer inom bank. Saxenian. (1990). “The impact of collaborative planning on governance capacity”. Amy Rader Olsson can be contacted at: amy. where it is headed”. New York. (1990). 61-91. De Economist.IJBM 26.). A. and Wagenaar. Sage Publications. Cambridge University Press. 30 No. She is currently a doctoral candidate at the Centre for Banking and Finance. City and Regional Planning Working Paper 2003-03. Qualitative Evaluation and Research Methods. Thousand Oaks. Institutional Change and Economic Performance. CA. “The new institutionalism and the transformative goals of planning”. and Booher. Berkeley. Currency Doubleday. and a consultant with WSP Analysis and Strategy. Institutions and Planning. research report. in Verma. “Liten mo banken”. pp. CA. Europe and Asia. pp. The Fifth Discipline: The Art and Practice of the Learning Organization. M. Innes.kth. Royal Institute of Technology. “Sma Finance. in Hajer. 23-58. 2nd ed. Harvard University Press. in Eriksson. Cambridge University Press. “Collaborative policymaking: governance through dialogue”. (2007). pp.M. (1990). Centre for Banking and Silver. F. Cambridge.se To purchase reprints of this article please e-mail: reprints@emeraldinsight. M. C. Cambridge.1 72 Healey. (1998). Vol. “Transaction cost economics: how it works.E. Sweden. O.