Authors: Theresa A. Kirchner Edward P. Markowski John B. Ford Old Dominion University

Authors:

Theresa A. KirchnerEdward P. MarkowskiJohn B. Ford

Old Dominion UniversityNorfolk, VA, USA February 17, 2006

Relationships Among Levels of Government Support, Marketing Activities,

and Financial HealthOf Performing Arts Organizations

(Publication forthcoming in the International Journal of

Nonprofit and Voluntary Sector Marketing, 2006)

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

Presentation Outline

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 for-profit 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)

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)

Why is research on this topic relevant ? (cont.)

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:‒ 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

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

Research of arts org CEOs on org factors that influence marketing; 554 question-naires; 217 responses

Fundraising and sales are driven by total marketing effort, but fundraising is not positively affected by the implementation of direct marketing.

McDonald & Harrison (2002) Intlernational Journal of NVSM

In most Western countries, govern-ment support for arts organizations is falling and/or coming with strings attached (e.g. proof of viability).

Interviews with marketing managers of 12 performing arts presenters in 2 Australian states

Australian government began requiring verification of marketing concept know-ledge and marketing plans as criteria for obtaining government support in 1994.

Fillis (2002), International Journal of NVSM

Recent government stakeholder focus has been on the need to develop creative competencies (e.g. marketing) as part of the growing knowledge economy.

Literature review; summary of recent arts marketing literature

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.

Rentschler et al. (2002), Intl Journal of NVSM

Government reports outlined policy principles and recommended strategies aimed at building audience-based recognition.

Presents theoretical loyalty ladder model / marketing objectives mathematical model

Presents model of transactional / relationship / loyalty marketing, in terms of a goal of funder loyalty. Lobbying funding bodies may be necessary.

Rentschler & Wood (2001), Services Marketing Quarterly

Government and corporate funders are demanding greater accountability for funding and requiring marketing orientation.

Literature review and theoretical analysis proposing a cause-related marketing approach

Cause related marketing enables arts organizations to team with private sector organizations for mutual promotion and enhanced financial viability.

File & Prince (1998), Journal of Business Ethics

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.

Snowball sample methodology, pre-called; 478 questionnaires mailed to CEOs in NY, NJ, CT (USA); 478 usable questionnaires returned

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 sponsor-ships, to increase corporate support.

Scheff & Kotler (1996), California Management Review

Since the 1980s, the nonprofit arts industry has faced declining contributed support due to recession, changing philanthropic priorities, and increased competition.

Statistical analysis; surveys mailed to 8,000 patrons of 4 performing arts organizations in San Francisco

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.

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 framework to arts marketing design and promotion

Theoretical analysis Segmentation of the arts market / audience based on differential experiences sought can help marketers to position arts offerings and refine their targeting strategies.

Gainer & Padanyl (2002), International Journal of NVSM

Application of the marketing concept to cultural organizations, examining the effect of market-driven activities

10-page, 146-question survey of Toronto / Montreal arts / cultural organizations; 138 responses

Market-oriented activities → market-oriented culture → satisfaction, reputation → growth in resources.

Kolb (2002), International Journal of NVSM

Analysis of arts attendance motivation and its role in increasing audience size and diverse audience attendance

Analysis of government-compiled 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

Importance of direct marketing for non-profits; selection of effective direct marketing methods; research of 18 direct marketing methods

600 questionnaires mailed to arts organization CEOs; 204 responses

The use of interactive direct marketing is positively related to sales and fund-raising performance; newer techniques are the most effective.

Johnson & Garbarino (2001), International Journal of NVSM

2 studies of performing arts customers subscriber (relational) / non-subscriber (transactional) differences

Questionnaires mailed to 1000 patrons of 1 nonprofit NY Off-Broadway theater company; 401 responses; factor/ cluster analysis

Subscribers have higher levels of satisfaction, trust, commitment, and intentions of donating to arts organizations than non-subscribers.

Desai, Fletcher, & Wright (2000), The Services Industries Journal

Database marketing is a means of achieving comparative advantage; explores correlation with marketing, information orientation

Questionnaires using 2 scales mailed to large arts organizations in the U.K.

Arts industry shows low level use of marketing orientation, relatively high % use of database marketing; an information orientation is critical.

Garbarino & Johnson (1999), Journal of Marketing

Study of relationships of satisfaction, trust, and commitmen,t to satisfaction attitudes and future intentions

Questionnaires mailed to 1000 patrons of 1 nonprofit NY Off-Broadway theater company; 401 responses; SEM analysis

Systematic differences in relationalism of customer groups result in different evaluations and resulting future intentions.

Scheff (1999), Intl Journal of Arts Management

Erosion in frequency of attendance at performing arts programs; decrease in subscriptions

Surveys mailed to 8000 patrons of 4 performing arts organizations in SF, CA; analysis of computed %s

Patrons have little sensitivity to price increases; decreases in frequency of attendance are due to other factors.

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)

Premises Developed From The Literature

Hypothesized Correlations

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.

Conceptual Argument / Hypotheses

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.

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.


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.


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.


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.


Theoretical Path Flow Model (H4)

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.


Empirically Suggested Path Flow Model

Variables

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

Data

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)

Correlation Results

* p < .05. ** p < .01.

Granger Causality Test Results

Correlation Results, Large Orchestras

* p < .05. ** p < .01.

Granger Causality Test Results, Large Orchestras

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.

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

Contributions 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?

Limitations of This Analysis

Neither government support nor marketing expenditures have achieved optimal financial results; better utilization of marketing resources is needed.

Managers should establish clear financial and non-financial 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.

Managerial / Public Policy Implications

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

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.

Questions

and

Feedback . . .

Authors: Theresa A. Kirchner Edward P. Markowski John B. Ford Old Dominion University

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