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Relationships Among Levels of Government Support, Marketing Activities, and Financial Health Of Performing Arts Organizations (Publication forthcoming in the International Journal of Nonprofit and Voluntary Sector Marketing, 2006) Authors: Theresa A. Kirchner Edward P. Markowski John B. Ford Old Dominion University Norfolk, VA, USA February 17, 2006 Presentation Outline Why is research on this topic relevant? Why is this research relevant? Review of literature on the topic Premises developed from the literature Model, conceptual arguments, and hypotheses Variables and data Methodology Results of empirical analysis Contributions of this analysis Limitations of this analysis Managerial / public policy implications Opportunities for future research Page 2 Why is research on this topic relevant ? Arts organizations often have difficulty surviving even in good economic conditions; significant numbers fail. (Kotler & Scheff 1997) Non-profit performing arts organizations are unique from an economic / artistic standpoint. They are dependent on government support and traditionally have been less motivated than forprofit organizations to leverage marketing activities and achieve financial health. (Baumol & Bowen 1966, Baumol 1995, Stone 1995, Scheff & Kotler 1996) Government support at all levels is declining from a recipient perspective. (Arnold & Tapp 2003) There is increasing linkage of government support to recipient effectiveness and economic viability, including effective use of marketing strategies and plans. (McDonald & Harrison 2002) Page 3 Why is research on this topic relevant ? (cont.) A focus on current marketing concepts and strategies is important for growth of both audiences and donations, and, in some cases, for survival. (Yavas 1996) Little previous empirical research has been published in major academic journals on relationships between, and effects of: – – – the effects of financial levels of government support the effects of that support on the types of marketing tools and techniques employed the effects of both government support and marketing activities on financial health (Fillis 2002, Arnold & Tapp 2003) Previous cultural research has generally concentrated on studies of single organizations or groups of organizations within a single geographic area. (Garcia et al. 2003) Page 4 Why is this research relevant? This research provides a broad review of literature on non-profit performing arts organizations. It examines relationships among levels of government support, marketing activities and financial health of these organizations from an empirical standpoint at a U.S. national level. The research has practical implications and uses for: ‒ ‒ ‒ Page 5 government agencies academic researchers arts organization managers, boards of directors, and donors Literature Review Builds on 2 prior literature reviews: – Thomas and Cutler (1993), Journal of Professional Services Marketing Literature review of 31 articles on performing arts marketing in major marketing journals over the prior 20 years; showed low level of empirical research – Rentschler (2002, 1998), Journal of Arts Management, Law & Society 2 literature reviews of 171 marketing-related articles in 7 selected international journals over the prior 25 years; categorized into 3 chronological periods (Foundation, Professionalization, and Discovery) and 3 thematic classifications (Marketing as Culture, Strategy, and Tactics) Linked to “Cultural Economics” – Seminal work (“Performing Arts – The Economic Dilemma,” Baumol & Bowen 1966) and recent literature Outlines contributions in 3 areas: – – – The economic nature of the industry and the role of government support Government support implications for marketing The evolution of performing arts organization marketing strategies and tools Page 6 Recent Literature – Cultural Economics Author(s) / Source Topic Type of Study / Methodology Conclusions Dempster (2002), Harmony-Symphony Orchestra Institute Reviews and extends the Symphony Orchestra Institute Wolf Report (1992), examining economic challenges facing the U.S. orc hestra industry then and 10 years later. Analyz es the differences between centraliz ed / federal and democratic / authoritarian states. Crowding theory is used to examine how artistic creativity is fostered. Maintains that market failure is not a useful concept to understand and explain government policy; it fails to explain international variations. Survey of 625 U.S. professional orchestras; 190 responses (30.4%) Exam ines tax-based indirect aid to the arts in the context of tax law functions, focusing on diverse examples of indirect aid m echanisms. Severe declines in government funding and c ontributed support and constant rising operating c osts challenge arts organiz ations. Cultural achievements can be attained and benefit the public only with assistance from the public sector. Reviews accounting standards on valuation of assets for non-profit arts organizations; surveyed current practices of large arts institututions. Exam ines museum behavior and problems in the context of the economic model of human behavior. Explores art storage as a capital stock. 6 case studies: Chile, Australia, Romania, Ireland, U.S., W. Germany Sourc ebook of marketing philosophies, m ethods and strategies Interview; update summarizing previous research Questionnaire survey of 67 institutions; 32 responses (47.8%) Theoretical analysis Orchestra annual expenditures doubled over 10 years. The % of total expenditures covered by earned inc ome increased. Orchestras have been able to pass along increased costs through higher ticket pric es (70% over 10 yrs). The extent and type of public support and its effects depend on type of political state. Personal creativity results from intrinsic motivation, whic h may be crowded out / in by different types of public support. Historic al / institutional arrangements and the role of non-state influenc es / players in the formation of cultural policies are not taken into account in explaining governm ent policy; calls for a neo-institutionalist perspective. Tax-based indirect aid requires more comparative / analytic research to identify and analyze types and forms of aid; updates 6 propositions from 1987 research. Overgrowth of the industry, inability to ac hieve artistic productivity increases, smaller audienc e sizes and other financial issues require a marketing approac h that increas es demand. Without government support, there m ay be less art, and the nature of arts may c hange. Frey (1999), Journal of Cultural Ec onomics Zimmer & Toepler (1999), Journal of Cultural Ec onomics Schuster (1999), Journal of Cultural Econom ics Kotler & Scheff (1997), Standing Room Only: Strategies for Mktg the Performing Arts Baum ol (1995), Challenge Carnegie & Wolniz er (1995), Australian Accounting Review Frey (1994), Scottish Journal of Political Economy Page 7 Theoretical analysis Cross-national (France, Sweden, U.S.), c omparative historical analys is The paper dem onstrated that it is not technically proper to recognize c ultural, heritage and scientific assets for financial reporting purposes. Legal, governmental, administrative, and financial constraints affect arts decisions and staff behavior. Flexibility, dynamism, and creativity can res ult in better use of art. Recent Literature – Government Support and Implications for Marketing Authors / Source Topic Type of Study / Methodology Conclusions Arnold & Tapp (2003), Journal of Services Marketing Declining government funding and competition for leisure time result in new challenges for non-profit arts organizations In most Western countries, government support for arts organizations is falling and/or coming with strings attached (e.g. proof of viability). Recent government stakeholder focus has been on the need to develop creative competencies (e.g. marketing) as part of the growing knowledge economy. Government reports outlined policy principles and recommended strategies aimed at building audiencebased recognition. Government and corporate funders are demanding greater accountability for funding and requiring marketing orientation. With decreasing government support of nonprofits, new sources of funding are being sought. Understanding the motives of funders enables development professionals to be more effective. Since the 1980s, the nonprofit arts industry has faced declining contributed support due to recession, changing philanthropic priorities, and increased competition. Research of arts org CEOs on org factors that influence marketing; 554 questionnaires; 217 responses Interviews with marketing managers of 12 performing arts presenters in 2 Australian states Literature review; summary of recent arts marketing literature Fundraising and sales are driven by total marketing effort, but fundraising is not positively affected by the implementation of direct marketing. Australian government began requiring verification of marketing concept knowledge and marketing plans as criteria for obtaining government support in 1994. Traditional marketing is not appropriate for arts marketing; it must be creative and entrepreneurial. Non-linearity, focus on change, and non-traditional research methodologies are needed. Presents model of transactional / relationship / loyalty marketing, in terms of a goal of funder loyalty. Lobbying funding bodies may be necessary. Cause related marketing enables arts organizations to team with private sector organizations for mutual promotion and enhanced financial viability. Marketing motivations are more prevalent than philanthropic; CEOs give to enhance their organization’s image/products and community tradition. Cause related marketing is proposed, e.g. with sponsorships, to increase corporate support. Government agencies and foundations are increasingly restricting their grants for specific purposes; less funding is available for general operating support. Arts organizations must adapt to changing needs and priorities of donors. McDonald & Harrison (2002) Intlernational Journal of NVSM Fillis (2002), International Journal of NVSM Rentschler et al. (2002), Intl Journal of NVSM Rentschler & Wood (2001), Services Marketing Quarterly File & Prince (1998), Journal of Business Ethics Scheff & Kotler (1996), California Management Review Page 8 Presents theoretical loyalty ladder model / marketing objectives mathematical model Literature review and theoretical analysis proposing a cause-related marketing approach Snowball sample methodology, pre-called; 478 questionnaires mailed to CEOs in NY, NJ, CT (USA); 478 usable questionnaires returned Statistical analysis; surveys mailed to 8,000 patrons of 4 performing arts organizations in San Francisco Recent Literature – Performing Arts Organization Marketing Strategies / Tools Source Topic Type of Study / Methodology Conclusions Petkus (2004), International Journal of NVSM Application of the Pine & Gilmore experiential marketing fram ework to arts marketing design and promotion Theoretical analysis Gainer & Padanyl (2002), International Journal of NVSM Kolb (2002), International Journal of NVSM Application of the marketing conc ept to cultural organiz ations, examining the effect of m arket-driven activities 10-page, 146-question survey of Toronto / Montreal arts / cultural organizations; 138 responses Segm entation of the arts m arket / audience based on differential experiences sought c an help marketers to position arts offerings and refine their targeting strategies. Market-oriented activities → m arketoriented culture → satisfaction, reputation → growth in resources. Analysis of governm entcompiled data – NEA (U.S.) and ACE (U.K.) research data The social aspects of an arts event are an important motivator for attendance, especially for ethnic groups. Arnold & Tapp (2001), Journal of Interactive Marketing Johnson & Garbarino (2001), International Journal of NVSM Analysis of arts attendance motivation and its role in increas ing audience size and diverse audience attendance Im portance of direct marketing for non-profits; selection of effective direct marketing m ethods; res earch of 18 direct marketing methods 2 studies of performing arts customers subscriber (relational) / non-subscriber (transactional) differences 600 questionnaires mailed to arts organiz ation CEOs; 204 responses The use of interactive direct marketing is positively related to sales and fundraising performanc e; newer techniques are the most effective. Subscribers have higher levels of satisfaction, trust, commitment, and intentions of donating to arts organizations than non-s ubscribers. Desai, Fletc her, & Wright (2000), The Services Industries Journal Garbarino & Johnson (1999), Journal of Marketing Scheff (1999), Intl Journal of Arts Managem ent Databas e marketing is a means of achieving com parative advantage; explores correlation with marketing, information orientation Study of relationships of satisfaction, trust, and commitmen,t to satisfaction attitudes and future intentions Erosion in frequency of attendance at performing arts programs; decrease in subscriptions Page 9 Questionnaires mailed to 1000 patrons of 1 nonprofit NY OffBroadway theater company; 401 responses; factor/ cluster analysis Questionnaires using 2 scales mailed to large arts organizations in the U.K. Questionnaires mailed to 1000 patrons of 1 nonprofit NY OffBroadway theater company; 401 responses; SEM analys is Surveys mailed to 8000 patrons of 4 performing arts organizations in SF, CA; analysis of com puted %s Arts industry shows low level use of marketing orientation, relatively high % use of database m arketing; an information orientation is critical. System atic differenc es in relationalism of customer groups result in different evaluations and res ulting future intentions. Patrons have little sensitivity to price increases; decreases in frequenc y of attendance are due to other factors. Premises Developed From The Literature Performing arts organizations typically require and receive some level of government support. (Baumol 1995) Marketing and donor development efforts of performing arts organizations contribute to the financial health of those organizations. Marketing and donor development efforts of performing arts organizations have traditionally concentrated on advertising and public relations activities and neglected the wider range of marketing tools and activities. The level of support from both public and private sources is increasingly dependent on the financial health of recipient performing arts organizations. (McDonald & Harrison 2002) Public and private donors increasingly demand responsible financial government support as a criterion for support. (Stone 1995) Page 10 Figure 1 Hypothesized Correlations Hypothesized Correlations Financial Level of Government H1a Support (G) Financial Level of Marketing Activities (M) H2a Page 11 H3a Financial Level of Financial Health (FH) Conceptual Argument / Hypotheses Based on the literature, it is reasonable to assume that there is a significant relationship between government support and marketing activities, given increasing government requirements for marketing plans. (Rentschler et al. 2002, McDonald & Harrison 2002) H1a: There is a significant relationship between the level of marketing activities of performing arts organizations and the level of government support. Page 12 Conceptual Argument / Hypotheses (cont.) Government support may leave a non-profit performing arts organization less motivated to develop and implement additional marketing activities. (Stone 1995) In that case, a negative relationship would exist between level of government support and level of marketing activities. H1b: There is a significant negative relationship between the level of marketing activities of performing arts organizations and the level of government support. Page 13 Conceptual Argument / Hypotheses (cont.) Based on the literature, it is reasonable to assume that government support, examined independently of the level of marketing activities, should have a significant relationship with the financial health of the performing arts organization. (Baumol 1995, Kotler & Scheff 1997) H2a: There is a significant relationship between the level of government support and the financial health of performing arts organizations. Page 14 Conceptual Argument / Hypotheses (cont.) Government support, examined independently of level of marketing activities, should directly result in the increased financial health of a non-profit performing arts organization. (NEA 2000, Arts Council of England 1998) Hence, a positive relationship should exist between government support and financial health. H2b: There is a significant positive relationship between the level of government support and the financial health of performing arts organizations. Page 15 Conceptual Argument / Hypotheses (cont.) Based on the literature, it is reasonable to assume that the level of marketing activity, examined independently of the level of government support, should have a significant relationship with the financial health of the performing arts organization. (Gainer & Padanyi 2002, Kotler & Andreasen 1987) H3a: There is a significant relationship between the financial health of performing arts organizations and the level of marketing activity. Page 16 Conceptual Argument / Hypotheses (cont.) A higher level of marketing activities, viewed independently of the influence of government support, should result in the increased financial health of a non-profit performing arts organization. (Arnold & Tapp 2003, Gainer & Padanyl 2002) Hence, a positive relationship should exist between levels of marketing activities and financial health. H3b: There is a significant positive relationship between the financial health of performing arts organizations and the level of marketing activity. Page 17 Theoretical Path Flow Model (H4) Theoretical Path Flow Model (H4) Financial Level of Government Support (G) - Financial Level of Marketing Activities (M) + + Page 18 + Level of Financial Health (FH) Conceptual Argument / Hypotheses (cont.) Once the various relationships are established in hypotheses 1-3, the complete set of relationships can be tested using a more complex methodology. H4: The amount of government support will have a direct negative effect upon the level of marketing activities undertaken by a performing arts organization, which will, in turn, have a direct positive effect upon financial health of the organization, which, in turn, will have a positive direct effect upon the level of government support. It is also hypothesized that the level of government support will have a direct positive effect upon the level of financial health of the performing arts organization. Page 19 Empirically Suggested Path Flow Model Empirically Suggested Path Flow Model Financial Level of Government + Support (G) Financial Level of Marketing Activities (M) Page 20 - Level of Financial Health (FH) Table 4 Variables Variables Variables Measured as: Related Data Fields: Level of Government Support Government support as a percentage of total unrestricted operating income - Government Support: (Federal, State, Local) - Total Unrestricted Operating Income Level of Marketing Activities Total marketing effort as a percentage of total expenses (Total marketing effort: marketing / promotion + development / fundraising activity expenditures) - Marketing / Promotion Expense - Development / Fundraising Expense - Total Expenses Level of Financial Health Accrued surplus / deficit (over 4-year period) as a percentage of total unrestricted operating income (Surplus / deficit: total unrestricted operating income – total expenses) - Total Expenses - Total Unrestricted Operating Income Page 21 Data Secondary data American Symphony Orchestra League (ASOL) Annual Statistical Survey 20 seasons (years) of data for 63 U.S. professional orchestras which responded to the annual ASOL survey for each of those time periods Data set comprised of a panel of relevant variables for each orchestra, with each panel containing a 20-period time series Page 22 Methodology Approach (Adapted from Brooks 1999): Analysis with longitudinal data over time to assess any time lag effects. (Dawes 2000) Simple correlational analysis Granger Causality test – regresses each variable on lagged values of other variables and itself, followed by restricted F tests (Granger 1969) Page 23 CORRELATION RESULTS Correlation Results M G1 .082** G2 .091** G3 .107** G4 .098** G M1 .068* M2 .081** M3 .082** M4 .065* FH G1 -.116** G2 -.089** G3 -.080** G4 -.084** G FH1 -.129** FH2 -.144** FH3 -.147** FH4 -.159** FH M1 -.071* M2 -.068* M3 -.054 M4 -.045 M FH1 -.079** FH2 -.088** FH3 -.091** FH4 -.100** Page 24 * p < .05. ** p < .01. GRANGER CAUSALITY TEST Test RESULTS Granger Causality Results HYPOTHESIS F P-VALUE G “causes” M 1.064 .373 NS + M “causes” G 1.520 .1941 NS G “causes” FH 1.461 .2122 NS FH “causes” G .082 .978 NS M “causes” FH .725 .575 NS FH “causes” M .813 .517 NS + NS means Not Significant Page 25 SIGNIFICANCE CORRELATION RESULTS Correlation Results, Large Orchestras M G1 .085 G2 .142* G3 .185** G4 .207** G M1 .095 M2 .156* M3 .192** M4 .219** FH G1 -.414** G2 -.366** G3 -.293** G4 -.256** G FH1 -.501** FH2 -.571** FH3 -.621** FH4 -.646** FH M1 .167* M2 .167* M3 .174* M4 .166* M FH1 .157* FH2 .159* FH3 .160* FH4 .164* Page 26 * p < .05. ** p < .01. TABLE 6 Granger Causality Test Results, GRANGER CAUSALITY TEST RESULTS Large Orchestras HYPOTHESIS F P-VALUE G “causes” M .879 .477 NS + M “causes” G .513 .726 NS G “causes” FH 6.69 .000 FH “causes” G 18.29 .000 M “causes” FH 1.280 .280 FH “causes” M 5.62 .000 + NS means Not Significant Page 27 SIGNIFICANCE NS Results The study was able to find significant correlations among the constructs in question: – – – The higher the level of marketing activities, the higher the level of government support. The higher the level of government support, the poorer the financial performance of the performing arts organization. Better financial health is associated with lower levels of marketing activity. Causal analyses were not conclusive for orchestras in general. However, significant causal relationships were found for large orchestras. Page 28 Contributions of This Analysis First to focus on an empirical assessment of relationships among levels of government support, marketing activities, and financial health of non-profit performing arts organizations Measures level of financial health with a bottom-line statistic – Accumulated Operating Surplus / Deficit (Wolf 1992, Dempster 2002) Utilizes a measurement of marketing activities in quantifiable terms Results eliminate purely financial explanations of financial health Page 29 Limitations of This Analysis To draw inferences about the industry requires extrapolation from self-selecting respondents to the entire range of U.S. professional orchestras. The model does not specifically incorporate non-financial factors such as the concept of artistic excellence / vibrancy and the degree to which it affects level of support and income from public and private sources. Issue: How to measure non-financial factors – e.g. artistic excellence / vibrancy? Page 30 Managerial / Public Policy Implications Neither government support nor marketing expenditures have achieved optimal financial results; better utilization of marketing resources is needed. Managers should establish clear financial and nonfinancial objectives for marketing and evaluate the effectiveness of marketing activities in those terms Government support agencies and managers should evaluate the effectiveness of use of government funding in terms of both government and organizational goals. Performing arts organizations might be better served, from a financial health standpoint, when they promote working relationships with marketing directors as partners and functional co-equals with artistic directors. Page 31 Potential Future Research Conduct future research to determine antecedents of financial health of nonprofit performing arts organizations. – – Further segmentation and analysis of financial data Analysis of non-financial data (e.g. governance, management, vibrancy, and artistic excellence) Examine root theoretical foundations that may assist in explaining the interactions of government support, marketing activities, and financial health of non-profit performing arts organizations: – – – Cultural economics Marketing orientation Theories of leadership, strategy, structure, path dependency, motivation, and resource dependence Page 32 Potential Future Research (cont.) Identify and incorporate alternative and improved composite measures of financial health of nonprofit arts organizations, e.g.: ▬ ▬ Addition of balance sheet (Current Ratio) and cash measures (Wilson & Kattelus 2002) Use / adaptation of financial ratios such as Altman’s 4-variable Z-score model for non-manufacturers (2003) To develop a global perspective, expand the scope of study in two phases: (1) Examine professional symphony orchestras of Australia, the U.K., Canada. (2) Examine professional symphony orchestras worldwide. Page 33 Questions and Feedback . . . Page 34