Hardeep 

Chahal · Jeevan Jyoti 
Jochen Wirtz   Editors

Understanding
the Role of
Business
Analytics
Some Applications
Understanding the Role of Business Analytics
Hardeep Chahal Jeevan Jyoti Jochen Wirtz
• •

Editors

Understanding the Role

of Business Analytics
Some Applications

123
Editors
Hardeep Chahal Jochen Wirtz
Department of Commerce Department of Marketing
University of Jammu National University of Singapore
Jammu, India Singapore, Singapore

Jeevan Jyoti
Department of Commerce
University of Jammu
Jammu, India

ISBN 978-981-13-1333-2 ISBN 978-981-13-1334-9 (eBook)

https://doi.org/10.1007/978-981-13-1334-9

Library of Congress Control Number: 2018949885

© Springer Nature Singapore Pte Ltd. 2019, corrected publication 2019

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Foreword

Changes in business environment have created many opportunities as well as

uncertainties, which make the role of business research more important for the
decision-makers. Since managers have to make quick but accurate decisions in
order to sustain the competition, business and service firms require knowledge of
advanced research techniques besides the routine projections and trend analyses.
Recent research studies have highlighted the growing need for the application of
advanced techniques in the business decision-making process as business analytical
techniques provide managers with more confidence in dealing with uncertainty
despite a flood of available data. In this context, the book edited by Dr. Chahal, Dr.
Jyoti, and Dr. Wirtz is an excellent initiative to present the work of eminent
researchers from various parts of the world including USA, UK, France, Singapore,
Iran, UAE, and India. I have gone through the manuscripts of the contributors. The
authors have analysed the data with the help of various analytical techniques like
exploratory and confirmatory factor analysis, regression modelling, forecasting,
structural equation modelling for better information of managers to take better
quality decisions. The book will equip the stakeholders including managers,
practitioners, entrepreneurs, researchers, and individuals working in the extant,
complex, and uncertain environment with empowered knowledge and skills to use
and interpret statistical techniques for attaining sustainable, competitive advantage.
I wish success and best of luck to all who have contributed in making this
initiative successful.

Greater Noida, India Prof. R. D. Sharma

Vice-Chancellor
Noida International University

Jammu, India Former Vice-Chancellor

University of Jammu

v
Preface

To sustain competition in current business environment, managers have to be more

decisive to offer high-quality goods/services at cost-effective rates. In addition to
the routine projections and trend analyses, they require the knowledge of advanced
research techniques to make quick and accurate decisions.
Data in its raw form is usually useless, and the driving force behind any
data-driven organization is insights and conclusions drawn from the data, which can
suggest a new course of action. In order to draw insights and reach conclusions,
managers need analytical tools and techniques to interpret data from various sources
and use the results for better decision-making. Further, business analytical tools also
help the researchers and academicians in better theory development. Many
researchers have claimed that the availability of business analytics has played a
great role in converting organizations into high-performance work systems.
Companies using these techniques in their decision-making process are in a better
position to compete and sustain competitive advantage by minimizing risk,
investing in accurate innovations, and above all providing a better picture of what is
practically viable and non-viable.
The significance of the analytical needs can be judged from the fact that a
significant proportion of high-performance companies have high analytical skills
among their personnel. And companies employing data analytical methods and
techniques in their decision-making process are in a better position to compete and
sustain competitive advantage. Among the various statistical techniques, structural
equation models (SEMs), including confirmatory factor analysis, help in both
theory building and predictive analysis, and their roles have become more crucial
with the advent of big data. Carrying out predictive modelling on large data sets has
the potential to generate fresh insights for business practitioners and drive new
theories for management researchers. Addressing this need, our efforts in this
context are to fill the extant gap and help managers and entrepreneurs in
knowledge-based decision-making.

vii
viii Preface

This edited book is a collection of ten chapters covering diverse data analytics
topics including a conceptual chapter on big data (Chap. 2) and eleven empirical
chapters on various functional areas like finance (Chaps. 3–6), marketing (Chaps. 7
–8), and HR/OB (Chaps. 9–10). The contributors have used basic techniques like
correlation, forecasting, and trend analysis and advanced higher order modelling
techniques like a gravity model and a panel data quantile-regression, structural
equation modelling, mediation analysis, moderation analysis etc. These chapters are
going to be very useful to the researchers and practitioners in the application of
analytical tools and techniques for better strategic decision-making.

Jammu, India Hardeep Chahal

Jammu, India Jeevan Jyoti
Singapore, Singapore Jochen Wirtz
Acknowledgements

We acknowledge all those people who were involved and helped in completing this
project. At the outset, we would like to thank the authors who have contributed to
this book in terms of their time and expertise. We also wish to acknowledge the
valuable contributions of the reviewers regarding the improvement of quality,
coherence, and content presentation of chapters. We also appreciate the referees for
reviewing the chapters, and scholars for editing and organizing the chapters.

Hardeep Chahal
Jeevan Jyoti
Jochen Wirtz

ix
Contents

1 Business Analytics: Concept and Applications . . . . . . . . . . . . . . . . 1

Hardeep Chahal, Jeevan Jyoti and Jochen Wirtz
2 Big Data Analytics: The Underlying Technologies Used
by Organizations for Value Generation . . . . . . . . . . . . . . . . . . . . . 9
Bhavna Arora
3 Application of Panel Quantile Regression and Gravity Models
in Exploring the Determinants of Turkish Automotive Export
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Ibrahim Huseyni, Ali Kemal Çelik and Miraç Eren
4 Impact of Macroeconomic and Bank-Specific Indicators on Net
Interest Margin: An Empirical Analysis . . . . . . . . . . . . . . . . . . . . . 45
Arif Ahmad Wani, S. M. Imamul Haque and Shahid Hamid Raina
5 A Trend Analysis of Reforms in the Indian Bond Market . . . . . . . 65
Rahul Rangotra
6 Demand Forecasting of the Short-Lifecycle Dairy Products . . . . . . 87
Rahul S. Mor, Swatantra Kumar Jaiswal, Sarbjit Singh
and Arvind Bhardwaj
7 Customer Experience and Its Marketing Outcomes in Financial
Services: A Multivariate Approach . . . . . . . . . . . . . . . . . . . . . . . . . 119
Swati Raina, Hardeep Chahal and Kamani Dutta
8 Re-investigating Market Orientation and Environmental
Turbulence in Marketing Capability and Business Performance
Linkage: A Structural Approach . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Jagmeet Kaur, Hardeep Chahal and Mahesh Gupta

xi
xii Contents

9 Examining the Impact of Cultural Intelligence on Knowledge

Sharing: Role of Moderating and Mediating Variables . . . . . . . . . . 169
Jeevan Jyoti, Vijay Pereira and Sumeet Kour
10 Employer Branding Analytics and Retention Strategies for
Sustainable Growth of Organizations . . . . . . . . . . . . . . . . . . . . . . . 189
Ravindra Sharma, S. P. Singh and Geeta Rana
Correction to: Customer Experience and Its Marketing Outcomes
in Financial Services: A Multivariate Approach . . . . . . . . . . . . . . . . . . . E1
Swati Raina, Hardeep Chahal and Kamani Dutta
Editors and Contributors

About the Editors

Dr. Hardeep Chahal is Professor in the Department of Commerce, University of

Jammu, India. Her research interests focus on services marketing with an emphasis
on consumer satisfaction and loyalty, service quality, brand equity, and market
orientation. Her work has been published in refereed international journals like
Managing Service Quality, International Journal of Health Care Quality
Assurance, International Journal of Bank Marketing, Journal of Relationship
Marketing, Journal of Health Management, Management Research Review, Total
Quality Management and Business Excellence, Corporate Governance, Global
Business Review. She has also co-edited books such as “Sustainable Competitive
Advantage: A Road to Success” (Excel India Publishers, New Delhi, 2015),
“Research Methodology in Commerce and Management” (Anmol Publications,
New Delhi, 2004), and “Strategic Service Management” (Excel Books, New Delhi,
2010). She currently serves on the editorial boards of the International Journal of
Health Care Quality Assurance (Emerald) and Journal of Service Research (IIMT,
India). She was Visiting Fellow at the Loughborough University, UK, under
Commonwealth Fellowship Scheme (British Academy Award) and also at Gandhi
Institute of Business and Technology, Jakarta, Indonesia.
Dr. Jeevan Jyoti is Assistant Professor in the Department of Commerce,
University of Jammu, India, and has rich experience in teaching and research in
business education. Her areas of interest are strategic human resource management,
organizational behaviour, and entrepreneurship. She has publications in reputed
international refereed journals such as Personnel Review, Cross Cultural
Management: An International Journal, International Journal of Management
Concepts and Philosophy, International Journal of Educational Management,

xiii
xiv Editors and Contributors

IIMB Management Review, Total Quality Management and Business Excellence,

Metamorphosis: A Journal of Management Research, Vision: The Journal of
Business Perspective, Global Business Review, SAGE Open. She has, to her credit,
one edited book and 17 chapters in edited books.
Jochen Wirtz is Vice Dean, Graduate Studies, and Professor of marketing at the
NUS Business School, National University of Singapore. He has published over
200 academic articles, chapters, and industry reports, including five features in
Harvard Business Review. He has more than 10 books including “Services
Marketing: People, Technology, Strategy” (World Scientific, eighth edition, 2016),
“Essentials of Services Marketing” (Pearson Education, third edition, 2018), and
“Winning in Service Markets” (World Scientific, 2017).

Contributors

Bhavna Arora Department of Computer Science & IT, Central University of

Jammu, Jammu, J&K, India
Arvind Bhardwaj Department of Industrial & Production Engineering, National
Institute of Technology, Jalandhar, Punjab, India
Ali Kemal Çelik Ardahan University, Ardahan, Turkey
Hardeep Chahal Department of Commerce, University of Jammu, Jammu,
Jammu and Kashmir, India
Kamani Dutta University of Jammu, Jammu, India
Miraç Eren Ondokuz Mayıs University, Samsun, Turkey
Mahesh Gupta University of Louisville, Louisville, USA
S. M. Imamul Haque Department of Commerce, Aligarh Muslim University,
Aligarh, UP, India
Ibrahim Huseyni Şırnak University, Şırnak, Turkey
Swatantra Kumar Jaiswal Department of Industrial & Production Engineering,
National Institute of Technology, Jalandhar, Punjab, India
Jeevan Jyoti Department of Commerce, University of Jammu, Jammu, Jammu
and Kashmir, India
Jagmeet Kaur Government General Zorawar Singh Memorial Degree College,
Reasi, India
Sumeet Kour Department of Commerce, University of Jammu, Jammu, Jammu
and Kashmir, India
Editors and Contributors xv

Rahul S. Mor Department of Industrial & Production Engineering, National

Institute of Technology, Jalandhar, Punjab, India
Vijay Pereira University of Wollongong, Dubai Campus, Dubai, United Arab
Emirates
Shahid Hamid Raina Department of Economics, Central University of Jammu,
Jammu, India
Swati Raina Lovely Professional University, Phagwara, Punjab, India
Geeta Rana Swami Rama Himalayan University, Dehradun, India
Rahul Rangotra Department of Management Studies, Central University of
Kashmir, Srinagar, Jammu and Kashmir, India
Ravindra Sharma Uttarakhand Technical University, Dehradun, India; Swami
Rama Himalayan University, Dehradun, India
Sarbjit Singh Department of Industrial & Production Engineering, National
Institute of Technology, Jalandhar, Punjab, India
S. P. Singh Gurukul Kangri Vishwavidyalaya, Haridwar, India
Arif Ahmad Wani Department of Commerce, Aligarh Muslim University,
Aligarh, UP, India
Jochen Wirtz National University of Singapore, Singapore, Singapore
Chapter 1
Business Analytics: Concept
and Applications

Hardeep Chahal, Jeevan Jyoti and Jochen Wirtz

Abstract The word business analytics has become a buzzword in the present era of
experience economy. Primarily, the proliferation of the Internet and information
technology has made business analytics a robust application area. On the other
hand, it is equally impossible to deny its significant impact on the fields of infor-
mation technology, quantitative methods and the decision sciences (Cegielski and
Jones-Farmer 2016). Both industry and academia seek to hire talent in these areas
with the hope of developing organizational competencies to sustain competitive
advantage. Hopkins et al. (2007) and Hair et al. (2003) assert that adequate
knowledge on business analytics techniques enables the analysts—practitioners,
managers, etc—with capabilities that enable them to take quick and smart decisions
and provide stable leadership to the organization to compete in the market effec-
tively. On the other hand, it provides a platform for the researchers and academi-
cians to lay down path for the theory development. However, Hawley (2016)
pointed that business analytics focuses more on understanding the organizational
culture than mere technology. Thus, for successful implementation and harnessing
the benefits of business analytics the knowledge of an organization’s motivation,
strengths and weaknesses is necessary (Hawley 2016).

Keywords Business analytics Decision making
Statistical techniques


Quantitative analysis Business applications

H. Chahal
J. Jyoti (&)

Department of Commerce, University of Jammu, Jammu, J&K, India
e-mail: [email protected]
H. Chahal
e-mail: [email protected]
J. Wirtz
National University of Singapore, Singapore, Singapore

© Springer Nature Singapore Pte Ltd. 2019 1

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_1
2 H. Chahal et al.

1.1 Introduction

The word business analytics has become a buzzword in the present era of experi-
ence economy. Primarily, the proliferation of the Internet and information tech-
nology has made business analytics a robust application area. On the other hand, it
is equally impossible to deny its significant impact on the fields of information
technology, quantitative methods and the decision sciences (Cegielski and
Jones-Farmer 2016). Both industry and academia seek to hire talent in these areas
with the hope of developing organizational competencies to sustain competitive
advantage. Hopkins et al. (2007) and Hair et al. (2003) assert that adequate
knowledge on business analytics techniques enables the analysts—practitioners,
managers etc—with capabilities that enable them to take quick and smart decisions
and provide stable leadership to the organization to compete in the market effec-
tively. On the other hand, it provides a platform for the researchers and academi-
cians to lay down path for the theory development. However, Hawley (2016)
pointed that business analytics focuses more on understanding the organizational
culture than mere technology. Thus, for successful implementation and harnessing
the benefits of business analytics the knowledge of an organization’s motivation,
strengths and weaknesses is necessary (Hawley 2016).
Business analytics comprises techniques and processes, namely statistical anal-
ysis; forecasting; predictive analysis and optimization, which maintain and sustain
business performance (Davenport and Harris 2006; Hopkins et al. 2007). It is

Information Optimisation

Prescri ve Analytics –
How it can happen again?

Predi ve Analy cs –
When it can happen?

Diagnos c Analy cs –
Why it happened?
Business Value

Descriptive Analytics
– What happened?

Information

Level of Analytics

Fig. 1.1 Business analytics stages

1 Business Analytics: Concept and Applications 3

spread across four stages—descriptive analytics, diagnostic analytics, predictive

analytics and prescriptive analytics (Fig. 1.1). Each stage helps the practitioners in
harnessing business value depending upon the nature of importance and business
objectives. Accordingly, business analytics has a wide range of application in
varied business areas that include customer relationship management, human
resource management, financial management, marketing, supply chain management
across all sectors. Its application facilitates and equips business and service orga-
nizations with better understanding of primary and secondary data for decision-
making. The effective application of business analytics can help the business and
service organizations to improve profitability, increase market share and revenue
and provide better return to a shareholder.

1.2 Business Analytics: Its Applications

Research, in the last few decades, highlights on the growing need of application of
advanced techniques in the business decision-making for managers (Evermann and
Tate 2016). The role of business analytics has become paramount due to complex
business problems, limited ability to analyse the available solutions and shortage of
time for decision-making (Davenport and Harris 2006). They claim that business
analytical techniques provide managers with more confidence in dealing with
uncertainty in spite of the availability of huge data. Besides, these techniques are of
great interest and utility to behavioural and social scientists also, who continually
struggle with complex phenomenon, to detect pattern buried in complex quantita-
tive data. Hopkins et al. (2007) and Hair et al. (2003) assert that adequate
knowledge on business analytics techniques enables the analysts—practitioners,
managers, etc—with capabilities that enable them to take quick and smart decisions
and provide stable leadership to the organization to compete in the market
effectively. On the other hand, it provides a platform for the researchers and
academicians to lay down path for the theory development.
While highlighting on the significance of the analytical needs, Davenport and
Harris (2006) claimed that most of the high-performance work systems/
organizations have employees with high analytical capabilities. And companies
using such techniques in their decision-making process are in a better position to
compete and sustain competitive advantage. Among the various statistical tech-
niques, structural equation models (SEMs), including confirmatory factor analysis,
help in both theory building and predictive analysis and their role has become more
crucial with the advent of big data. The predictive modelling enables managers and
the researchers to have fresh insights for their future endeavours (Shmueli and
Koppius 2011). Addressing this need, our efforts in this context will fill the extant
gap and will help managers and entrepreneurs in a knowledge-based decision-
making (Hair Jr. et al. 2011).
This edited book is a collection of ten research papers including a conceptual
paper on big data (Chap. 2) and nine empirical papers in the areas of finance
4 H. Chahal et al.

(Chaps. 3–6), marketing (Chaps. 7–9) and HR/OB (Chap. 10) that can help the
researchers and practitioners in the application of analytical tools and techniques for
strategic decision-making.
The second chapter on big data analytics delves upon the underlying tech-
nologies used by organizations for value generation. The author has discussed the
challenges faced by business organizations in monitoring the data that has grown
from terabytes to exabytes and petabytes. Further, the compounded rate of data is
further growing much fast. The deluge of data generated, which is both valuable
and challenging, along with emerging technologies and techniques that are used to
handle it is referred to as the evolution and era of “big data”. She further expressed
that to leverage the large volume of data for driving the business enterprises, timely
and accurate insights derived out of the big data are a big challenge. Further,
handling and analysis of big data are a challenge for all types of organizations with
respect to its storage and technical expertise. The chapter highlights big data
characteristics like volume, value, variety, velocity, veracity and variability and its
analysis through exploratory, confirmatory and qualitative data analyses. Further,
technologies like Hadoop and Apache Spark in handling big data have also been
discussed.
The following section of the chapter discusses in brief the contribution of the
papers in the three functional areas: finance; marketing and HR/OB.

1.3 Finance

Nowadays, macroeconomic models are being used to forecast the future of the
economy. Modern economics and business management are using econometric
applications for extensive training of its personnel. Managers are using econometric
applications for devising optimal economic strategies for better insight, superior
value, optimized solutions and sustain competition. Econometric applications
provide organizations with a potent set of tools to unlock the power of information
for effective decision-making (Kolluru and Mishra 2012). In this context, Huseyni,
Celik and Eren (Chap. 3) used a gravity model approach to analyse the primary
factors that influence Turkey’s vehicle (car, minibus, bus, van and truck) exports to
its major trading partners over the period of 2005–2015. For this purpose, a gravity
model and a panel data quantile regression approaches have been performed by the
bootstrap method for empirical results. The results revealed that the population of
importer country and the amount of per capita income are positively correlated with
the amount of Turkish automotive exports. Additionally, when the distance between
importer country and the capital of Turkey increases, the amount of Turkish
automotive industry exports was more likely to have a decreasing behaviour.
Further, exporting to an EU member country has a statistically significant
increasing impact on the amount of automotive industry exports. The estimation
results also indicated that the real exchange rate was not a statistically significant
determinant of the amount of automotive industry exports during the sample
1 Business Analytics: Concept and Applications 5

period. The authors concluded that Turkey cannot exactly succeed to use the
competitive advantage of the possible declines on real exchange rates due to higher
costs of imports in the automotive industry.
The authors of fourth chapter, Wani, Haque and Raina, empirically proved the
positive correlation of gross domestic product (GDP), inflation, lending interest rate
(LIR) and capital-to-risk weighted assets ratio (CRAR) with the net interest margin
(NIM) in the banking industry. The study established that a favourable macroe-
conomic environment proves to be a main driver for encouraging NIM with a
prudent control over CRAR along with NPLs. The study suggested installing the
latest advances and practices of risk management especially on the credit front,
which will also help the banks to utilize excessive capital rather than accumulating
it unnecessarily.
In fifth chapter, Rangotra analysed the impact of various reforms undertaken by
the Government of India to improve liquidity, transparency and security in the
Indian bond market. It considers reforms initiated by the Government of India since
1992 that include introduction of system of primary dealers, establishment of
Clearing Corporation of Indian Limited as a clearing house, introduction of
screen-based trading in government securities through Negotiated Dealing
System-Order Matching (NDS-OM), trading of bonds through stock exchanges,
introduction of delivery versus payment system. The impact of reforms on the
Indian bond market has been examined by analysing the combined gross borrowing
of centre and state government through government securities (increased by around
8900% from 1991–92 to 2016–17), secondary market transactions in government
securities (increased by around 430,000% from September 1994 to September
2017), net corporate debt outstanding (increased by around 225% from June 2010
to September 2017), total trade in corporate bond market (increased by around
1450% from 2007–08 to 2016–17) and other variables related to the liquidity and
size of Indian bond market. The impact of reforms is found to be positive for all the
dimensions but has a significant impact only on the size and liquidity of the Indian
bond market. Mor, Jaiswal, Singh and Bhardwaj (Chap. 6) have focused on demand
forecasting of the short lifecycle dairy products. They have compared the perfor-
mances between different forecasting models for the prediction of group of dairy
products. Authors compared the moving average, regression, multiple regression
and Holt-Winters models based on MAPE, MAD, MSE and RMSE for the demand
forecasting of a time series formed by a group of dairy products.

1.4 Marketing

Contemporary business organizations use business intelligence and analytics to

solve the magnitude and impact of data-related problems (Chen et al. 2012). It is
creating an exemplary change in the way data are being used, and the marketing and
sales department is no exception to this. It is pivotal that marketing professionals
should become tech savvy and use technology to harness the importance of
6 H. Chahal et al.

business analytics (Proschoolonline 2017). In the context of marketing, business

analytics integrates market and customer-related data, technology, quantitative
analysis and computer-based models to provide managers with various relevant
prospective for better and optimal decision-making. Among varied areas in mar-
keting, relationship management with customers and employees is a pivotal area in
the service economy that demands continuous monitoring by service firms to
sustain competitive advantage.
In this context, three papers are based on primary data that encompass
customers’ and employees’ perspectives and are analysed using advanced structural
equation modelling technique to understand how it helps in decision-making for
enhancing organizational performance. Raina, Klaus, Dutta and Chahal have
studied the impact of customer experience on marketing outcomes in financial
services. The study establishes customer experience as multidimensional construct
comprising brand experience, service experience and post-purchase experience. The
study has used systematic data analytical process that includes exploratory factor
analysis, item analysis and confirmatory factor for construct validation. The authors
have also established the relationship between customer experience and marketing
outcomes (customer satisfaction, behavioural loyalty intentions, word of mouth and
service value) using structural equation modelling. The result revealed that moment
of truth is the most important factor that has to be considered by financial services
for creating favourable customer experience quality followed by outcome focus,
peace of mind and product experience. Further, product experience has low
association with customer satisfaction, behavioural loyalty intentions, word of
mouth and service value. The relatively weak association with all marketing out-
comes suggests that customer awareness about competitive services has increased
and they no more accept every type of services from the same service provider
because of varied customers’ choices and their ability to compare offerings with
different service providers.
The study by Kaur, Chahal and Gupta (Chap. 8) has used advanced structural
equation modelling and moderation techniques to re-investigate the role of market
orientation and environmental turbulence in marketing capabilities and business
performance. The paper has explored and established marketing capabilities as
multidimensional scale using three-stage process—EFA, item analysis and CFA—
that consist of: outside in, inside out and spanning dimensions and market orien-
tation as a function of four factors relating to intelligence generation I (customers
needs), intelligence generation II (customers satisfaction), intelligence dissemina-
tion and responsiveness, both of which play significant role in enhancing organi-
zational performance. The authors used advanced marketing analytics to establish
positive relationship of marketing capabilities with market orientation and organi-
zational performance. Further using SEM-based mediation modelling approach,
authors also found that marketing capabilities act as a mediating variable between
market orientation and marketing capabilities and market orientation and financial
performance relationships. Further using SEM-based multigroup analysis, Gupta
et al. have established the moderating role of environment turbulence in marketing
capabilities and market orientation relationship.
1 Business Analytics: Concept and Applications 7

1.5 Human Resources/OB

Understanding organization and its people have gained immense attention in the
present business scenario due to the value attached to human aspects for providing
sustainable competitive advantage. Human resources are rare, valuable and cannot
be copied or substituted (Barney 1991). These have immense creative capabilities to
upgrade the innovative domain of an organization. Though cultural diversity results
in knowledge sharing at various platforms in the organization, it also has adjust-
ment issues. In this context, Kour, Jyoti and Pereira (Chap. 9) have evaluated the
role of cultural adjustment (CCA) and work experience between cultural intelli-
gence (CQ) and knowledge sharing relationship in the banking sector. Structural
model explains the indirect effect of CQ on knowledge sharing with cross-cultural
adjustment as mediator. Further, the role played by language proficiency and work
experience has also been evaluated. The result revealed that CCA mediates the
combined effect of CQ and work experience on knowledge sharing. The study
contributes towards cultural intelligence theory. It helps in understanding the
complex relationships in organizational setup, which can be of immense use for the
practitioners at the workplace. The last chapter by Kumar, Singh and Rana analyses
the impact of employer branding on organizational attractiveness in Indian orga-
nizations using factor analysis, Pearson‘s r and step-wise multiple regression
analysis techniques. The results indicate that employer branding has a positive and
significant relationship with organizational attractiveness. Since economic value,
application value, social value and development value emerged as strong predictors
of attracting and retaining employees, employers can provide employees with
marketable skills through training and development in return for effort and flexi-
bility. The authors believed that the study findings can help in identifying varied
EBs aspects that are effective in extracting organizational attractiveness and
incorporating them into the organizational culture.
There is significant evidence that the ability to make better decisions improves
with the usage of quantitative-, qualitative- and financial-based techniques. Hence,
this book offers a relevant resource that can help the audience (research scholars,
practitioners, market researchers, etc.) in the application and interpretation of sta-
tistical practices, using real-world applications from the fields of marketing, human
resources, finance, operations research and information technology relating to
issues like preferences of a customer base, quality of manufactured products, high-
performance human resource policy, employee resilience, availability of financial
resources, operational flexibility, etc.
8 H. Chahal et al.

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Chapter 2
Big Data Analytics: The Underlying
Technologies Used by Organizations
for Value Generation

Bhavna Arora

Abstract The expansion of Internet and its applications globally has witnessed
generation of high volume of data resulting in high volume of information. In the
contemporary era of digital world, data is seen as the driving force behind the
progression of business enterprises. Today, the data that is generated worldwide has
grown ranging from terabytes to exabytes and petabytes, and the compounded rate
of data further growing is much fast. The data generated widely has many forms
and structures. The deluge of data generated, which is both valuable and chal-
lenging, along with emerging technologies and techniques that are used to handle it
is referred to as the evolution and era of “Big Data”. As the big data is generated
from multitudinous sources, majority of this data exists in unstructured form that
demands specialized processing and storage capabilities, unlike the structured data
that uses storage and processing of traditional relational structures. This results in
high complexity and uncertainty in data. The usage of statistical analysis,
computer-based models and quantitative methods that can help the business orga-
nizations to improve insights for better operations and decision-making is referred
as business analytics. To work intelligently and focus on value generation, orga-
nizations need to focus on business analytics. The analytics are a critical component
of big data computing. As defined in the literature, an intelligent enterprise has the
characteristics similar to human nervous system and is responsive to external
stimuli. To leverage the large volume of data for driving the business enterprises,
timely and accurate insights derived out of the big data are a big challenge. The
technologies like Hadoop and Apache Spark assist in handling big data on both
fronts. However, handling and analysis of big data are a challenge for any orga-
nization with respect to its storage and technical expertise. Business analytics is
used in business organizations for value generation by data manipulation along with
business intelligence and report generation. Advanced analytics are also used by
business enterprises that use techniques of data mining, data optimization and
predictive forecasting.

B. Arora (&)
Department of Computer Science & IT, Central University of Jammu, Jammu, J&K, India
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 9

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_2
10 B. Arora

Keywords Big Data
Data Analytics
Hadoop
V’s of Big Data

Apache Spark

2.1 Introduction to Big Data

The contemporary era has witnessed very large volumes of data and the termi-
nology and trends that have been accepted globally with these are “Big Data”. The
author in paper (“What Is Big Data?—Gartner IT Glossary—Big Data”, n.d.) has
defined big data as “Big data is high-volume, high-velocity and high-variety
information assets that demand cost-effective, innovative forms of information
processing for enhanced insight and decision-making”.
In Manyika et al. (2011), the author refers “Big Data” to “data set whose size is
beyond the ability of typical database software tools to capture, store, manage and
analyse”.
The volume of data that is being stored today around the world is exploding. In
the year 2000, the world witnessed storage of 8 lac petabytes of data. With the
expansion of Web and its applications, the data that is being stored is growing
exponentially. The data is likely to rise to 35 zettabytes by the year 2020. The data
that is created is not analysed efficiently, and the insights of the data is not revealed.
The data contains hidden insights that the companies can use to enhance their
business perspectives. How the volume of big data impacts the human mind is very
challenging. Considering the data volume that consists of multiples of terabytes
may be considered as big data, but actually when it can be managed in network
attached storages (NAS) or storage area network (SAN) using additional disc
arrays, then it might not be considered as really Big Data. When the data exceeds
this limit, i.e. about petabytes in size and can only be managed with sophisticated
applications and tools, the data can be referred as “Big Data”. This would require a
complex distributed computing and storage grids extensively, so that this data could
be managed.
However, companies used various tools and technologies to collect and store
different types of big data. The analysis of these diversities of big data is chal-
lenging as the tools that are required for big data analysis are extremely complex to
design and implement. The management of this data is another big challenge as the
companies should have the clarity on big data adoptions. It is paramount in agreeing
that such information in big data which is huge and complex has created various
challenges for organizations that did not exist earlier. The large volumes of data
available pose several problems for researchers, analysts and decision-makers in the
industry. At times, the decision-makers in the organization tend to make their
decisions without having complete facts, and others find the business intelligence
along with the data analytics to be part of their visionary plans so as to enhance
business competitiveness.
The evolution of big data has witnessed the explosive growth in the entire
world’s data that can be used to make decisions, but this can only be useful if this
2 Big Data Analytics … 11

can be made in timely manner. For this, powerful tools are needed that can assist in
storage, extraction and analysing the data from the big data sets. The big data can
also be defined as that data that cannot be processed through conventional methods
of processing. To mention few varieties and sources of data that come under the big
data realm are as follows (Jain 2015):
1. Black box data captures the voice and recordings of flight crew members of
helicopter and other aircraft along with the information pertaining to the per-
formance of the aircraft.
2. Data of stock holdings where the decisions made by a customer on a share or
equity of different companies.
3. Data from social media websites such as Facebook and Twitter that holds views
and other information posted by millions of users across the globe.
4. Transport and meteorological data sources.
5. Data retrieved by search engines from different databases.
6. Metamorphic and Census data.
7. Connection-oriented data that includes sensory data.
8. Data from cloud storages that provides computing and data on demand.
Big data is more than just more information; it represents the beginning of the
end of the industry experience as a core competitive advantage (Stubbs 2014). Big
data is not a philosophical fancy anymore. It is already in place in industry. Big data
cannot be argued as just the latest version of “data”. Today, the users are generating
much more data and more types of data than before. In their work, Manyika et al.
(2011) have proposed five major contributions that big data contributes to business
organizations:
• transparency creation by making big data more accessible and ready to use in
timely manner for value generation
• performance improvement by enabling experimentation
• population segmentation by tailoring products and services that meet specific
needs
• decision-making support
• innovative business models, products and services
Big data and business analytics work hand in glove. Without data, analysis
cannot be done. Without business analytics, big data is just noise. Big data bears the
potential of making things efficient and is capable of generating returns. These
returns include benefits to internal value such as productivity or external value like
revenue generation. It offers exceptional insights along with predictive capabilities
for those who are able to leverage it.
12 B. Arora

2.2 The V’s of the Big Data

The contemporaneous era is witnessing production of data at astronomical rates. To

analyse this data that is constantly varying, new tools and technologies are con-
tinuously being developed by experts that will be able to handle the complexities of
large volumes of data. The future trend is that the big data is going to grow more
rather than decrease, as more and more data generating applications are growing.
Big data can be characterized by volume, value, variety, velocity (Philip Chen and
Zhang 2014), veracity and variability, and each of these parameters can be defined
as under:

2.2.1 Volume

Today, the large volume of data is generated because nowadays organizations

collect and process data from a diverse range of sources such as application gen-
erated logs, machine-generated data, email data, weather and geographic informa-
tion systems (GIS) data, survey data, reports, social media data. Big data analytics
have the capability to compute gigantic volume of information. Data volumes have
reached levels to terabytes (TB) or petabytes (PB). As an example, the financial
industry produces voluminous data in terms of market data, quotes and financial
trading. The New York Stock Exchange creates about more than one terabyte of
data per day (“Want to make big bucks in stock market? Use Big Data Analytics”,
n.d.) and if this volume is calculated over the month, year and so on, the volume of
data is immense. About 10 billion photographs (Beaver 2008) were hosted by
Facebook creating about one petabyte of data storage in the year 2008. Another site
Ancestry.com, stores around four petabytes of data (Bertolucci 2013). Even the
Internet archive stores about two petabytes of data, and it is accelerated at a rate of
about twenty terabytes per month (“1. Meet Hadoop—Hadoop: The Definitive
Guide, 3rd Edition [Book]”, n.d.). These big data structures comprising of high
volumes of data tends to impose limitation on the storage and processing capa-
bilities. It also imposes limitations to the database structures, and hence, the data-
base modelling gets complicated as the data grows. In his work (Brock and Khan
2017), the author analyses that the huge amount of data poses challenges to
underlying storage infrastructure which in turns calls for systems with scalability
and capability for distributed querying. High computational power and parallel
processing are required for analysing big data as the traditional database techniques
are not able to cope with big data, as the size of data sets has surpassed the
capabilities of computation and storage.
2 Big Data Analytics … 13

2.2.2 Variety

The traditional systems heavily rely on underlying structured data whose dimensions are
considered as accuracy, completeness, relevance and timeliness. The inputs to such
systems need to be entered judiciously and meticulously so that the output that is
produced in the form of reports is meaningful and useful. The big data is heterogeneous.
In such environments, the system needs to use techniques for data cleaning so as to
eliminate the garbage data in source. Data collected from various sources like applica-
tions, stock data, emails, geographical data, weather data, social media application data is
difficult to handle as it comes from a variety of sources, and it is virtually impossible to
convert this heterogeneous data to a conventional structured form for processing. In
order to process such data, special techniques and technologies are used that can
understand and go beyond the traditional processing of the relational structured data. Big
data solutions need different types of processing tools to process heterogeneous data.

2.2.3 Velocity

The rate at which the data flows in the system and its environment is termed as
velocity. With the Internet and mobile data coming in the lives of the consumer, the
era witnesses high rate of data flow as the consumers carry with their devices, a huge
volume of streaming source of data that consist of geo-located images and audios.
Studies reveal that in the year 2013, about five exabyte data were generated in the
world every 10 min. Today, this figure has risen exponentially risen, and the data is
being generated every minute. However, the importance of velocity of big data
follows the similar rate of increase as in the case of volume of the data. For example,
the business Walmart creates about 2.5 petabytes per hour (Brock and Khan 2017).
One of the main challenges to the velocity is the communication networks. Since the
big data processing demands real-time processing, the processing capabilities for
inflow of the data streams in the networks are also a big challenge.

2.2.4 Veracity

The reliability and trustworthiness of data are termed as veracity of data. It also
refers to the quality of the data. The point to focus on is “how accurate is all this
data?” As an example, consider the tweets in Twitter posts. These posts contain
hashtags, typos, abbreviations, etc. The data that is to be considered should be
reliable, accurate and trustworthy. Manipulation and analysis of such data need to
be qualitative and trustworthy to get correct insights from it. For real-time appli-
cations, to provide correct and reliable data at times the applications may produce
nearest best results in the cases where the data that is being analysed in real-time
applications fails to deliver in a particular moment.
14 B. Arora

2.2.5 Value

Value refers to the worthiness of the data being extracted. On one hand, if the
organization has voluminous amount of data but unless it can be made useful for the
organization, it is worthless. Even though there is an explicit association between
data and insights, it does not definitely mean that there is value in big data. The
original data received might have low value as compared to its volume. By ana-
lysing a large volume of data appropriately, high value and pronounced insights
from the data can be obtained. The significance of embarking on initiatives of big
data is to understand the costs of analysing and reaping the benefits during the
process of collecting and analysing data. Thus, it ensures that the data that is reaped
is monetized and the organization is benefitted to the maximum.

2.2.6 Variability

The variation in the flow rates of data is referred to as variability of data. The
velocity of big data is inconsistent and has periodic troughs and peaks. As the big
data is generated from myriad resources, complexity also has to be analysed.
Complexity arises after collecting data from different sources as it has to connect,
clean, match and transform the data (Fig. 2.1).

2.3 Big Data Classification

As the data sources of big data are numerous, based on the types of data, big data
can be classified broadly into three categories—unstructured, semi-structured and
structured.

2.3.1 Structured Data

The data that is stored in the databases in an orderly manner is referred to as the
structured data. Statistics reveal that structured data only constitutes about

Fig. 2.1 6V’s of Big Data Velocity

V's of Big data

Value
Volume
Veracity
Variability
Variety
2 Big Data Analytics … 15

Sales

Inventory
Metadata
Summary
data

Raw Data

Marketing

Data sources Data Warehouse

Data Marts

Fig. 2.2 Overview of data warehouse and data marts

one-fourth of the data that the organizations use. This data can be used in pro-
gramming and querying structures from databases. The sources of such data can be
from machine input or humans. Data that is generated by machines includes data
from GPS-like devices or sensory devices like the medical equipment, Web
interfaces and logs. Data that is included by human systems includes database
records which involve human intervention in generating data. The two most popular
approaches that can be used to manage large data sets in a structured way are data
warehouses and its subsets, i.e. data marts. A data warehouse can be seen as an
assemblage of data which is isolated from the operational systems and the
decision-making process in any organization. It is a huge repository of historic data.
The data is compiled and assembled from various resources so as to provide timely
and accurate information. The data in a data warehouse is the extracted information
from various functional units of an organization. Before the data is integrated into
the warehouse, it undergoes a series of processes. These preprocesses are data
cleaning, data transformation and data cataloguing. After the preprocessing, the
data is available for higher-level online data mining functions. These warehouses
are controlled by a centralized unit. The subset of data warehouse is a data mart.
The data marts focus on specific functional area only. The warehouse and data mart
both primarily vary in their scope and usage area. The structured data forms only a
small subset of the Big data that is ready for analysis (Fig. 2.2).

2.3.2 Unstructured Data

Unlike the traditional row–column database structure, the unstructured data has no
clear formats in storage. Such data constitutes about 80% of the total data that is
included in big data. Till few years back, such data has been stored and analysed
manually as it was quite difficult to analyse this data. The unstructured data can
16 B. Arora

comprise the machine-generated or the human-generated data. Typical examples of

unstructured machine-generated data include satellite images, data captured from
radars, whereas the unstructured human-generated data is spread across the entire
globe which includes data from the Web content, social media and mobile data.
Users tend to upload data on Facebook, Instagram, audios and videos, etc.; they all
are a part of the massive unstructured data contributed by the user. The largest
unstructured data component is the video data that constitutes big data.

2.3.3 Semi-structured Data

A very thin line exists between the unstructured and semi-structured data. Unless
clearly defined, the semi-structured data can appear as unstructured. Even though
that the information is not typically arranged in traditional database structured
formats, but in order to process this data, some properties that make the data
processing easier and convenient to process are contained in it.

2.4 Data at Rest and Data in Motion

Technically speaking, in order to gain insights from big data, right technology for
various processes like collecting, managing and analysing is required. The pre-
dictive purpose for the same is quite critical. Since the data is from a variety of
sources and is of different types, there is a requirement of different computing
platforms that support in providing meaningful insights. In order to determine the
technology and processes that are required to glean the insights from the big data, it
is imperative to understand the difference between data at rest and data in motion.

2.4.1 Data at Rest

In data handling systems, data at rest refers to data that is stored in stable systems.
The data at rest comprises data compiled and stored in structures like spreadsheets,
databases, warehouses, archives and backups, mobile data. There can be different
points where data is analysed and where its action is taken. This can occur at two
separate times. For example, present month’s business activities can be predicted
based on last month’s sales data by a retailer. The action is making strategic
decisions, and the activity is the sales of the previous month. Market campaigns and
strategies can be planned accordingly based on the variables like customer beha-
viour, sale schemes. Looking at this data analysis, the business can take advantage
and such decisions can impact the sales in the stores, while the customer would be
benefitted with the sale schemes the store offers.
2 Big Data Analytics … 17

2.4.2 Data in Motion

There is a difference in the analytics for data in motion, even though the process of
data collection is similar to that of data at rest. Unlike data at rest, analytics can
occur at the same time when the event occurs, i.e. in real time. The data in motion
refers to data that is moving from one place to another. In such cases, many
different networks can be used, e.g. sending email on Internet. Many nodes are
connected to same network, and the transfer of the email has to go through multiple
nodes in a network. Security issues arise for data in motion, and the data needs to be
protected. Another example would be locating clients and their choices at various
outlets of a water park. Latency also becomes a key concern as the lag in processing
may affect the business results by missing an opportunity. This type of data is also
referred to as data in transit or data in flight. Data at rest and data in motion can
provide quiet meaningful insights for business analysis. It is important that
appropriate processing methods and infrastructure may be used and deployed in
order to obtain the perfect analysis of data.

2.5 Data Analytics

The process and techniques used for examining the data with the aim and purpose
for inferring and to draw conclusions about that information are data analytics. It
finds its usage in business organizations to help them make better decisions. Data
analytics can be distinguished from data mining with respect to the purpose, scope
and focus of the analysis. In order to mine data from the huge set of data that is in
question, sophisticated software is used that rely on algorithms and are capable of
working on large data sets. They can uncover undiscovered patterns and hence are
capable of establishing the hidden relationships. This process is referred to as data
mining. Appropriate analysis of big data can help a company to achieve cost
reductions and dramatic growth. So the business houses should not wait too long to
exploit the potential of analytics. Big data analytics focus on inferences, i.e. the
deriving to conclusion based on known facts. The analysis can be categorized as
under (“Data mining versus data analysis and analytics—Fraud and fraud detection
—Academic library—free online college e textbooks”, n.d.):
• Exploratory data analysis (EDA)—It is the preliminary stage where the data is
explored and new features are discovered.
• Confirmatory data analysis (CDA)—Existing hypotheses are proven true or
false.
• Qualitative data analysis (QDA)—It is analysis of the quality parameters of data
to draw conclusions from non-quantitative and non-numerical data like pictures,
audios, words or text, videos.
18 B. Arora

Big data analytics finds its significance in the cases of audits when the infor-
mation systems of business organizations’ along with other operations, procedures
and processes are under reference. Data analysis also helps to determine if the
systems under reference can effectively protect data while operating efficiently and
also helps the organization accomplish overall goals. Business intelligence defines
analytics from various perspectives. In call centre applications, it can be defined
from online analytical processing (OLAP) to customer relationship management
analytics (CRM). CRM analytics includes all process that analyses data about
customers and presents it to facilitate and streamline for better business decisions of
the organization.

2.5.1 Types of Business Analytics

The key sub-processes defined in big data are data management and data analytics.
The process of data management looks after the acquiring, storing, retrieval and
preparation for data analytics. The underlying technologies for data analytics are
acquisition, annotation, aggregation, etc. (Saravanakumar and Nandini 2017). For
analysing various types of structured, unstructured and semi-structured data, the
following analytics are used (Saravanakumar and Nandini 2017):
• Text Analytics: It is also known as text mining from the textual data. It refers to
the extraction of high-quality information from textual data by using statistical
patterns. It includes machine learning and statistical analysis of text data using
techniques such as information extraction (IE), summarization text, question
answering and sentiment analysis. Tools for text analytics are SAS text ana-
lytics, IBM text analytics, SAP text analytics, etc.
• Audio Analytics: To analyse the unstructured audio data, speech or audio
analytics is used. In audio analytics, information is extracted from natural lan-
guage, i.e. languages spoken by humans. The most popular application for audio
analytics is the call centres which have data for million hours and can be used to
improve the customer experience and to enhance the business turnover. For
audio analytics, two approaches are used—transcript-based approach and
phonetic-based approach. The tools that are used for audio analytics are
Marsyas, Vamp, SoundRuler and WaveSurfer, etc.
• Video Analytics: To monitor, detect and analyse data from video streams is
referred to video analytics. This includes determining meaningful data from
temporal and spatial events. The key applications where video analytics help are
retail stores, health centres, transportation, securities, etc. Video analytics is also
called video content analysis. This technology uses CCTV and surveillance
cameras for detecting breaches, recognizing suspicious activities, etc. The tools
used are Ooyala, Vidyard, Vimeo Analytics, etc.
• Social Media Analytics: The social media data consists of information that is
gathered from websites such as Facebook, Twitter and blogs. The data needs to
2 Big Data Analytics … 19

be analysed by business houses for decision-making by studying behaviours and

pattern of the user. The user opinions are extracted and analysed. The analytics
can be content based and structured based for social media analytics. Tools used
are ViralWoot, Collecto, SumAll, Tailwind, Beevolve, etc.
• Predictive Analytics: Historical and present data is analysed, and based on this,
data prediction is made. It expresses reliability that what might happen in the
future. This method is based on statistical methods. The various tools to perform
predictive analytics are splunk, medalogux, etc.

2.6 Big Data Paradigm in Business Organizations

Since past few years, various business enterprises and other organizations are
storing a large amount of data in large databases in data warehouses and data marts.
However, data was analysed with data-mining algorithms to extract insights.
Nowadays, the data stored is no longer homogenous in nature, but on contrary, it is
a compilation from a variety of sources. The data in the traditional systems was
organized and structured in rows and columns as it was largely generated from
transactions. On the contrary, nowadays, the stored data is unstructured and gen-
erated from a variety of sources like audio–videos, photographs, text messages,
maps generated from GPS devices, data from emails, social media sites, etc. All
these data when stored in digital media is unstructured as there cannot be a common
structure that can be defined for such data. Another key characteristic of such data is
its real-time accessibility. Data can be retrieved about activities and events in real
time and will also influence its outcomes. It is only possible if we have an orga-
nization that is designed to operate in real time. The process design should able to
analyse and use real-time data. It should be able to produce instant insights and
process those insights to support real-time decisions. The “real-time” factor affects
the organizations to take timely and appropriate action. Summarizing, in order to
gain maximum benefit out of big data, the organizations must work in real time.

2.6.1 Business Analytics: The Organizational

Transformation

Business analytics can be defined as the use of the data-driven insights to generate
value in real time. It is done by understanding the business relevancy, organiza-
tional insights, performance and value measurements (Stubbs 2014). The
data-driven insights include data manipulation, reporting and business intelligence
and advanced analytics. The advance analytics is that form of analytics that help
provide answers to questions like what happened, what will happen, why it hap-
pened and what best possible one could do (Stubbs 2014). The advanced analytics
include data-driven insights that include data mining, optimization and forecasting.
20 B. Arora

It can also be defined as the deep analysis of data or content by using appropriate
technologies, tools and different techniques that are typically beyond those that are
used with the traditional systems. The business intelligence (BI) may be used to
uncover patterns that assist in discovering deeper insights, along with generating
recommendations and making predictions. The techniques of advanced analytic
may include text and data mining, machine learning and pattern matching, visu-
alization, semantic and sentiment analysis, forecasting, network and cluster anal-
ysis, multivariate statistics, graph analysis, simulation, complex event processing,
neural networks (“Business Intelligence—BI—Gartner IT Glossary”, n.d.).
The output of business analytics is seen as value generation in an organization.
This could be internal or external (Stubbs 2014). Internal value is from the per-
spective of teams that are within an organization. The outside or external value is
seen from outside the organization. The organization needs to create these values
through its key resources, i.e. people, processes, data and the technologies. A series
of activities that can be linked to achieve an outcome is defined as a process. The
processes can be strongly or weakly defined. A series of specific steps that is
repeatable and may be automated is strongly defined process. On the contrary, an
undefined process that relies on the capability of the personnel for execution of the
process to complete it successfully is a weakly defined process. To generate new
assets, various tools and technologies are applied and are consolidated to a common
analytical platform. The key to business analytics is facilitating change, not driving
towards better outcomes. There is a major paradigm shift in the way organizations
execute their operational, tactical and strategic objectives as an outcome of business
analytics.

2.6.2 The Intelligent Enterprise

Irrespective of how the people act and react to situations in the organizations, most
of the organizations can be seen united under a common objective. A truly intel-
ligent enterprise operates like our nervous system (Stubbs 2014) and possesses
properties of agility, adaptability, flexibility and is appropriately responsive to
external stimuli. There are different levels that are described as progressive for any
organization. These are the approaches usually opted by organizations for building
capability. The first level is the unstructured mode; the second level is the structured
mode. The real process and mode start at level three, and from here, the system
starts its “best practices” from the theory of “things working”. When the gap
between these two is closed or reduced, the business system becomes an intelli-
gence enterprise.
Level 1: The Unstructured Mode In this system, everyone is working hard
without a plan or clarity of work. Quality is hard to measure at this level as
whatever is archived is not because of design and planning but just because of the
efforts of motivated individuals. Technologically, the analysts use tools that are
2 Big Data Analytics … 21

basic desktop-centric and devote considerable amount of time to try to manage,

source and exchange data within the tools that are semi-compatible. The data
fragmentation is done at this level, and each of the team that works in this envi-
ronment creates their own data repository. They tend to restart from beginning
every time they work on a new project. However, difficulty may arise as the
processes are manual, undefined, and may require substantial efforts to execute.
Level 2: Structured System Structured systems are the next level of the
unstructured system. It is when the system follows higher-order patterns, but the
system behaves randomly around a broader pattern. The organizations at this state
try to balance local choice while considering global requirements. Constraints are
set, functional and divisional strategies are established, and the entire organization
tries to comply with them. Unconscious ignorance is one of the key barriers to
success at this level. Data at this level exists in tabular format on networks that
allow sharing of the data as well. Simple and common tools for desktop processing
are used. Processes are weakly defined, and the skills are used of the employees
across various processes.
Level 3–5: Towards an Intelligence Enterprise The level next to the structured
system is the intelligent enterprise. This is the time when the organizations rec-
ognize the business analytics as integrated soul of the organization. The level at
which the intelligent enterprises reach this point is totally process-centric. The three
levels at which the intelligent enterprises work are at the team, department and
enterprise levels. Understanding that business analytics is a journey and must be
incorporated in all its functions and processes which is the key to success for the
organization.

2.6.3 Intelligent Analysis

The pyramid hierarchy that exists in organizations suffers a number of challenges.

The top management, i.e. where the strategic decisions are to be made, is far off
than the actual scene where the actions are done. This time lag leads to delay in the
decisions. The strategic decisions have a significant impact on various other levels
of organizations. The decisions range from resource allocation to affecting the
impact of the organization’s competitiveness in the marketplace. Then is the level
of tactical management, where the mid-level managers operate and affect the key
operations like marketing, accounting, production. The focus is not on the entire
organization and has lower resource implications as compared to the level above.
The transaction processing system that is used by the operational management
handles the structured data. It provides operational-level support. Figure 2.3 shows
different levels of management and their data usage in business organizations.
22 B. Arora

Unstructured
Strategic
Management (DSS)

Tactical Management Semi-structured

(Information System)

Operational Management Structured

(Transaction Processing system)

Fig. 2.3 Management system pyramid (Management systems with type of data handled)

2.7 Technologies for Data Analytics

Analytics refer to the discovery of meaningful patterns of data, e.g. data related to
sales, transaction, revenue. Most information system deploy traditional database
tools for relational databases such as structured query language (SQL). Business
houses need data experts that have broader and deeper analytical skills that can
provide support to challenges like data management, real-time analysis, real-time
predictive analysis, data management issues including security and privacy (Miller
2014). The data engineer responsible for the data extraction and analysis has
thorough and clear understanding of traditional relational databases along with
non-traditional and NoSQL databases like Hadoop. These engineers are capable of
integrating data from variety of data sources and are able to design data-driven
services. They work in coordination with the scientist that works on handling of
data.
In order to cope with the trends of big data, a variety of tools, techniques,
methods, and technologies have been developed in recent years. When data derives
in huge magnitudes, then the companies cannot rely on the in-house storage and
processing anymore, as the “traditional” technology that focuses only around the
central databases is no longer appropriate to handle it.
To determine what is needed and what fits in well, the requirements for big data
processing need to be reviewed (Vossen 2014). These requirements can be char-
acterized as follows:
• High processing capabilities
• High storage capabilities
• Scalability and support for distributed processing
• Fault-tolerant processing capabilities
• Support for parallel programming and processing paradigms
• Appropriate platform and execution environments.
2 Big Data Analytics … 23

2.7.1 Hadoop—The Underlying Technology for Big Data

Analytics

The Apache Hadoop is Java-based software platform that supports data-intensive

distributed applications (Philip Chen and Zhang 2014). It has been designed to
avoid the low performance and the complexity encountered when processing and
analysing Big data using traditional technologies (Oussous et al. 2017). The
Hadoop platform is used for distributing computing and spreads the data and its
processing across a number of servers. The paradigm that is used by Hadoop is the
MapReduce (Fig. 2.4).
The kernel, Hadoop distributed file system (HDFS) MapReduce along with
add-on projects that include Apache Hive and Apache HBase constitute the Apache
Hadoop. The model of the MapReduce is used for programming and execution. It is
also capable of processing and generating large volume of data sets. The underlying
algorithm that is used by MapReduce is divide and conquer. The divide and con-
quer algorithm works by breaking a complex high-level problem into several
sub-problems recursively. The sub-problems are then allocated to a cluster of
working notes which solve these problems separately and in parallel. Later, the
solutions are merged to give a solution to the problem in question. The Map step
and the Reduce step are the two steps that are used to implement this algorithm. The
two nodes that the Hadoop works on are master nodes and worker nodes. The role
of the master nodes is to take the input and divide it into smaller sub-problems
which are further distributed to worker nodes. Finally, the master node collects the
solutions to all of the allocated sub-problems and aggregates them to produce
output in Reduce step.
By default, Hadoop uses Hadoop distributed file system (HDFS). Hadoop also
has the capability of working on other file systems as well. The HDFS uses the
storage cluster arrays to hold the actual data. The data is dumped in HDFS, and it
can be analysed within Hadoop, or it can export the data to other tools for per-
forming analysis. The patterns used by Hadoop have three stages:
• LOAD—data into HDFS
• OPERATE—Map and Reduce sub-operations
• RETRIEVE—retrieve results from HDFS
The entire process is a batch operation. This is most suitable for analytical or
non-interactive tasks. Hadoop cannot be termed as a data warehouse solution,
neither it is a database, but it can support the analytical processes of the data. As an
example, Facebook is the most popular application that follows the patterns of
Hadoop. A database like MySQL stores the data, and this data is then replicated in
Hadoop for computations and analysis (Fig. 2.5).

Fig. 2.4 Hadoop system HDFS (Hadoop Hadoop

Distributed File HBase
System) MapReduce
24 B. Arora

Fig. 2.5 Hadoop Ecosystem (Al-Barznji and Atanassov 2017)

ROW

KEY(ROW) COLUMN FAMILIES

COLUMN COLUMN COLUMN

BYTE ARRAY
VER-1 DATA QUALIFIERS

VER-2 DATA

VER-2 DATA

Fig. 2.6 Structure of HBase (Haines 2014)

HBase It is the Hadoop database, a NoSQL database that runs on Hadoop. It runs on
the HD file system (HDFS) and provides scalability and real-time data access. This is
provided as a key-value store along with the analytic capabilities of MapReduce.
As the HBase is not a traditional relational database structure, it uses different
methodology to model data. A four-dimensional data model is proposed for HBase.
Each dimension is defined as under (Haines 2014), and the following four coordi-
nates define each cell (Fig. 2.6):
• Row Key: Each of the rows in HBase has a unique key termed as row key. It is a
byte array without a data type.
2 Big Data Analytics … 25

• Column Family: Data in the rows are structured into column families with
every row having the same set of column families. HBase stores column fam-
ilies in its own data files. Any changes to be made to column families are
difficult to incorporate; therefore, they need to be cautiously defined.
• Column Qualifier: The actual columns are referred as column qualifiers. Spread
across different rows, the same column families do not require the same column
qualifiers.
• Version: A configurable number of versions can be associated with each col-
umn. Data can be accessed for a specific version for a qualifier.

2.7.2 Hadoop in Business Organizations

The usage of Hadoop in business organizations can be understood in this example.

The production server of a company stores a data set that deals with the structure
and the business dealings of the company. This server facilitates the copying of the
data set to an analytics engine. This can be a Hadoop cluster and can assist in the
analytics of the data set. In order to prepare data and to copy it to be ready for
analytics, three major processes are used. These are extract, transform and load
(ETL) processes. The traditional ETL process consumes a lot of network resources
along with the processing power and the bandwidth. It is noted that about 80% of
the time is consumed by ETL process from each of the analytical job. Accordingly,
traditional ETL may lead to excessive resource consumption and/or prolonged
processing times in connection with analytics jobs.
Many organizations expand the data generated by the internal sources such as
sales and services with the external demographics and social media, using the
Hadoop-based analytics (Hortonworks 2013). These focus on the following key
issues:
• How to identify new customer segments
• How to personalize offers
• How to reduce the customer roil
The Hadoop-based analytics can also help in businesses by reducing mainte-
nance costs and improve asset utilization in asset-intensive industries, such as
utilities, oil and gas, and industrial manufacturing. The machine-generated data
along with the internally generated service data and external data can be integrated
and used for predictive analytics. These businesses can manage the maintenance
intervals as desired by the companies.
The Hadoop-based analytics find its application across broad spectrum of
industries today. Applications like retail management use these for site selection,
brand analysis, loyalty programs, market-based analysis along with sentiment
analysis of the products. The financial service-providing organizations leverage
Hadoop for fraud detection and risk assessment. Hadoop-based analytics are used
26 B. Arora

by government agencies for applications that relate to law enforcement, public

transportation, national security, health and public safety (Hortonworks 2013).

2.7.3 Apache SPARK

It is an open-source framework that is available for processing of big data. It was

inititally developed in the AMP Lab at U.C. Berkeley in 2009 and later was
later open sourced in 2010 as an Apache project. The concept behind Spark is to
provide a memory abstraction which allows efficient sharing of data. The data is
shared across different stages of a map-reduce job. It also provides in-memory data
sharing. It provides a comprehensive, unified framework which can manage big
data processing requirements for data sets that are from myriad sources. These
sources could be real-time data streaming or batch processing, online Web-sourced
data, etc. Hadoop cluster application is very fast and can execute up to a hundred
times faster in memory and ten times faster when running on disc (Shanahan and
Dai 2015). Deployment of Spark can be done in different ways. It can provide
native bindings for Java, Python, Scala and R programming languages. It also
supports streaming data, SQL, machine learning along with graph processing.
Apache Spark provides the potential and power of big data along with support for
real-time analytics to the business organizations.
Spark Ecosystem Apache Spark is an open source cluster computing system. It
consists of libraries and framework ecosystems for advanced data analytics. Apache
Spark is a powerful and easy to use tool and is more productive as compared to the
MapReduce. It also provides in-memory, faster runtimes and support for distributed
computing. Some other libraries in addition to the Spark Core API library are also
part of the Spark Ecosystem. These are capable of providing advanced capabilities
for big data analysis as shown in Fig. 2.7 (Hightower and Maalouli 2015;
Penchikala 2015).

Blink DB Spark R
IntegraƟon

Spark SQL Spark Streaming Machine Graph AnalyƟcs Spark Cassandrs

Learning (MLib) (GraphX) Connector

Spark‘s Core API

JAVA SCALA R PYTHON

Fig. 2.7 Apache Spark Ecosystem (Hightower and Maalouli 2015; Penchikala 2015)
2 Big Data Analytics … 27

The base is the core engine on which the entire ecosystem is built. The API has
support for Scala, Java, Python and R programming languages. Various libraries
which provide additional computational power to spark are as follows:
• Spark Streaming can be used to process real-time streaming data which is based
on the micro-batch style (i.e. splitting the input data into small batches) of
computing and processing. To process the real-time data stream, DStream is
used, which is a series of resilient distributed data sets (RDDs) (Zaharia et al.
2016).
• Spark data sets can be uncovered by Spark SQL which runs over the JDBC API.
With the help of the traditional business intelligence along with the help of the
visualization tools, Spark SQL allows running of SQL-like queries on big data.
It also helps the users in data extraction from different formats (like Parquet,
JSON or a database), transforming it and then finally exposing using to handle
ad hoc queries.
• The machine learning library of Spark is the MLlib. It consists of both super-
vised and unsupervised machine learning algorithms, which include data clas-
sification, data clustering, linear and logistics regression, collaborative filtering,
dimensionality reduction of data and optimization primitives(“Big Data
Processing with Apache Spark—Part 1: Introduction”, n.d.).
• To compute graphs, the Spark GraphX component of Spark API is used.
GraphX extends the Spark resilient distributed data set (RDD). It introduces the
resilient distributed property graph which is a directed multigraph along with the
properties that are associated with every edge and every vertex. GraphX also
includes a collection of graph algorithms for simplifying graph analysis.
There are also adapters for integration with other products like Cassandra (Spark
Cassandra Connector) and R (SparkR). The Cassandra connector allows Apache
Spark to access data that is stored in a Cassandra database for data analysis.

2.8 Challenges of Big Data

With the growing size of Big data and the use of analytics, many challenges are
uncovered. They are presented as under (Saravanakumar and Nandini 2017):
• Size–Volume
New technologies have been proposed to facilitate the user and allow to store
and query large data sets. However, the volume of data that is generated today is
enormous; hence, new techniques with new algorithm along with new tech-
nology platform and ability to understand the data structure and business values
is essential. To handle such challenges, “Data Scientists” with multidisciplinary
expertise are required.
28 B. Arora

• Acceptance of Big Data

It involves client motivation so as to acknowledge big data as a medium or
channel for accepting and adopting new procedures and system. The acceptance
of the same is time-consuming because to understand the big data and analytics
is a tough task.
• Understanding Analytics
Understanding the analytics to reduce the size and improve the business value is
a major challenge. This happens as the objects that have to be modelled are of
different nature than the contemporary. They are huge, complex and distributed.
To handle this challenge, modelling and simulation techniques are needed which
should be simple, robust, distributed and parallel computing.
• Capturing Data
The data that constitutes the big data is of different types. They can be
unstructured, semi-structured or unstructured. To capture such data for analysis
is also quite challenging for the business organization.
• Data Curation
In the big data era, data curation indicates processes and activities that are
related to the organization along with the integration of data that is collected
from a variety of sources. The data curation has become important as the
software processes very high volume of complex data. It also includes data
annotation, publication and presentation. Technically, data curation indicates the
process of extracting of relevant information from large data set of interest.
• Data Visualization
There is a vibrant problem of data visualization. As the big data is enormous, the
users when access complex information and handle associated tasks, there is a
vibrant difficulty faced by the users. In order to face these challenges, system
software need to be used judiciously.
• Performance and Scalability
The two main concerns and challenges of storage and processing enormous
volume of big data systems are performance and scalability. To accomplish this,
process analysis can be used so as to improve the performance and scalability.
• Distributed Storage
Big data storage depends on distributed storages as the huge volume of data can
only be stored and accessed in distributed platforms. These storages have to be
handled technically and intelligently so that the data is available on the go.
Handling the high volume and high velocity of big data is also a big challenge.
Security of the data in motion also poses a great amount of trial.
• Content Validation
Another major challenge that the data of the Internet face is the content vali-
dation. A large number of data sources like blogs, social networking sites,
tweets, comments have information that is difficult to validate. Automated
validation may be performed by using the machine learning algorithms to
extract and validate the Web content.
2 Big Data Analytics … 29

2.9 Conclusion and Future Trends

In the past decade, the data exploded and became bigger and bigger ranging from
terabytes to petabytes to exabytes. The business intelligence has revolutionized in
past few years. Cloud technology has gained the maximum acceptance. Business
houses rely on this structure for their data storage. However, the data can be stored
in big reservoirs termed as data lakes. Unlike the data that the traditional databases
use, the big data comprises unstructured, semi-structured and structured data that is
generated from a large number and a variety of data sources. The big data is said to
be at rest when it is stored in a stable structure, whereas the data in motion is when
the data is in transit and has not reached the repository. The missionary data
structure storages took a backseat and big data provided an actionable and insightful
data presented with visualizations and interactive business dashboards.
Business intelligence was in full boom in year 2017. Trends that are present in
the year 2017 will continue in 2018, but additional trends in analytics will be seen.
The adopted strategies for analytics will be increasingly customizable. The question
for business organizations would be somewhat like “What is the best solution that is
available?” for business and what opportunities can be explored. The expected
analytics and business intelligence trends for 2018 include (Lebied 2017) use of
artificial intelligence for business intelligence; use of analytics tools—predictive
and prescriptive; data quality management; the multicloud strategy deployment;
data governance; natural language processing; security concerns; chief data officer
—roles and responsibility embedded and collaborative business intelligence.

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Chapter 3
Application of Panel Quantile
Regression and Gravity Models
in Exploring the Determinants
of Turkish Automotive Export Industry

Ibrahim Huseyni, Ali Kemal Çelik and Miraç Eren

Abstract This paper purposes to determine potential factors influencing the

amount of Turkish automotive industry exports. For this purpose, the available data
of 68 major trading partners of Turkey in terms of automotive industry exports
were utilized for the sample period 2007–2015. Both panel quantile regression and
the gravity model of trade approaches were considered to analyze the relevant data.
The empirical findings of this paper revealed that the population and the distance
variables were found as statistically significant for all quantiles, while the former
has positive and the latter has negative signs as expected. Results also indicated that
there was a statistically significant positive correlation between GDP per capita and
the amount of Turkish automotive industry exports at 10 and 50% quantiles;
however, it was not statistically significant at 90% quantile despite its positive sign.
Among Turkey’s exporter countries, being a EU member country dummy variable
was found to have a statistically significant positive impact on the amount of
automotive industry exports. Real exchange rate was not found as a significant
determinant of the amount of automotive industry exports. In the lights of empirical
evidence obtained from this study, several recommendations were made for
Turkey’s future international trade policies.

Keywords Automotive industry
Export
Quantile regression

Gravity model Panel data

I. Huseyni
Şırnak University, Şırnak, Turkey
e-mail: [email protected]
A. K. Çelik (&)
Ardahan University, Ardahan, Turkey
e-mail: [email protected]
M. Eren
Ondokuz Mayıs University, Samsun, Turkey
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 31

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_3
32 I. Huseyni et al.

3.1 Introduction

Economic growth is widely regarded as one of the most important macroeconomic

goals of every country to boost employment and general welfare. In that context,
there exists a strong empirical evidence in the existing literature that export-led
expanding markets have positively contributed to economic growth by providing
more efficient use of convenient resources since the late of 1800s (Emery 1967;
Syron and Walsh 1968; Michaely 1977; Balassa 1978; Tyler 1981). As well as
expanding markets, total exports also provide an indirect impact on economic
development by increasing foreign exchange entry significantly. Developing
countries require to increase fixed capital formation in numbers to increase their
levels of revenues and to converge to developed countries. However, developing
countries necessitate to import several commodities as their levels of technology
lack to produce fixed capital formation. Nevertheless, their current foreign
exchange reserves numerically are one of the most significant obstacles to their total
imports. At that point, the total exports of a country play a key role to overcome the
corresponding import restriction. Recent research (Yapraklı 2007; Altıntaş and
Çetintaş 2010; Doru and Ersungur 2014; Kaya and Hüseyni 2015; Hüseyni and
Çakmak 2016) that concerns on the impact of exports on economic growth confirms
that exports positively contribute to economic growth of a country.
Recent rapid developments particularly on transportation and communication
industries have led many automotive companies to transfer some of their production
into developing countries due to keep closeness to relevant market, to utilize from
inexpensive labor force and to avoid relatively high environment taxes. The current
policies of automotive companies have been appeared as an alternative foreign
exchange source for developing countries and the magnitude of automotive pro-
duction and exports in developing countries have significantly increased. Moreover,
the transfer of operations in the automotive industry into developing countries
stands for expanding total exports, accordingly an increase in the supply of foreign
exchange and more efficient finance of the imports of investment goods. As a
developing country, Turkey also takes advantage of the present policies of multi-
national automotive companies while Turkish automotive exports have experienced
a significant growth trend particularly after post-1996 period when Customs Union
Agreement has come into force. The corresponding trend has led the total exports of
the Turkish automotive industry to become one of the leading industries in Turkish
economy, and numerically, the Turkish automotive industry has been an indis-
pensable industry for total Turkish production and exports after post-2000 period.
Before the period of 2000s, labor-intensive textile industry has provided the
most crucial contribution to Turkish exports in numbers, whereas automotive
industry comes into prominence at the present time. Figure 3.1 illustrates the total
exports of automotive industry in Turkey since 1989. As seen in Fig. 3.1, there is
an enormous increase of the Turkish automotive exports after the year 2000 and the
total automotive exports have overwhelmingly reached to $18 billion in 2008
compared to $800 million in 1998. As mentioned above, Customs Union
3 Application of Panel Quantile Regression and Gravity Models … 33

25000

20000

15000

10000

5000

0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Fig. 3.1 Total automotive industry exports in Turkey between 1989 and 2016 (in $ million)

Agreement between Turkey and the European Union (EU) have significantly
motivated the corresponding increase since the Agreement wholly eliminates cer-
tain tariffs on industrial goods. Not surprisingly, many multinational companies
have carried out a remarkable amount of their automotive investments to the
Turkish market and they have imported their products with inexpensive labor costs
and environmental standards to specific regions including Europe, Middle and Near
East. Thus, this circumstance stimulated the Turkish automotive exports to grow
dramatically after post-2000 period. On the other hand, the negative impact of the
2008 Global Economic Crisis led the Turkish automotive industry exports to a
remarkable decrease while the Turkish automotive industry exports have not been
able to reach the previous favorable status before the crisis until 2015.
Figure 3.2 depicts a comparison between total exports and automotive industry
exports of Turkey between 1989 and 2016 to better examine substantial changes
relatively during the sample period. The blue line in Fig. 3.2 represents an index of
the total amount of automotive industry exports while the claret red line represents
an index of the total amount of exports for Turkey. In Fig. 3.2, an index was
introduced by taking the numbers of 1989 year as the base and representing them as
100. As shown in Fig. 3.2, a more significant change trend has been experienced on
the Turkish automotive industry exports than total exports in Turkey. Specifically,
along with increases after 2000, the Turkish automotive industry exports have
displayed a 140-time increase with respect to only a ten-time increase on total
exports. In this sense, the impact of the 2008 Global Economic Crisis revisits, when
both the Turkish automotive industry and total exports have significantly decreased
in numbers in 2009. While the total exports have exhibited a strong and rapid
recovery behavior after 2009, the Turkish automotive industry exports were not
able to achieve such a short-term improvement numerically. One of the main
reasons behind this situation may be explained as prolonged period under the
negative influence of the 2008 Global Economic Crisis in the EU compared to rest
of the world that led to the decline of supply. As the exports of the EU states
34 I. Huseyni et al.

16000
14,614
13,642
14000 13,221

12000

10000

8000

6000

4000
1,135 1,161
2000

0
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Fig. 3.2 Comparison between automotive industry and total exports of Turkey between 1989 and
2016

90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
-
2007 2008 2009 2010 2011 2012 2013 2014 2015

Fig. 3.3 Total exports of Turkey to the EU (in $ billion)

generate a majority of total exports of Turkey, the amount of Turkish automotive

industry exports has been negatively affected.
Particularly, Fig. 3.3 illustrates exports of automotive products to the EU and the
share of exports of automotive products to the EU on total exports of Turkey
between 2007 and 2015. In Fig. 3.3, blue bars represent the total amount of exports
to the EU member countries, while orange bars represent the share of the amount of
automotive industry exports on the total amount of automotive industry exports. As
seen in Fig. 3.3, the share of exports of automotive products to the EU on total
exports varies between 70 and 80% during the sample period. This circumstance
implies that Turkish automotive industry exports to the EU are highly dependent on
the potential changes of automotive industry products supply in the EU.
3 Application of Panel Quantile Regression and Gravity Models … 35

3.2 Methodology

Quantile regression analysis provides a practical framework to examine how

covariates make an impact on location, scale, and shape of the whole response
distribution with an emphasis of classical least squares regression on the conditional
mean (Koenker 2005). The generalization of conditional mean models is widely
regarded as essential tools for the field of social sciences. Conditional mean models
are able to explain a complete and parsimonious description of the association
between the response distribution and the covariates and they provide
maximum-likelihood and least-square estimators more useful in terms of calculation
and interpretation (Hao and Naiman 2007).
Quantiles and quantile functions present a valuable information of summary
measures when the distributions increasingly become less symmetrical and the
quantile regression model specifies the condition quantile function. Theoretically,
the pth quantile Q(p) of a cumulative distribution function F is accepted as the
minimum set of values y that satisfies F(y)  p. In this context, as a function of p,
the function Q(p) is defined as the quantile function of cumulative distribution
function F (Hao and Naiman 2007).
The quantile regression model estimates the possible differential impact of a
covariate on a variety of quantiles in the conditional distribution. A quantile
regression model can be briefly defined in regard to the linear regression model as
the following:
ðpÞ ðpÞ ðpÞ
yi ¼ b0 þ b1 xi þ ei ð1Þ

where 0 < p < 1 denotes the proportion of the population having scores less than
the quantile at p. Further, the pth condition quantile given xi can be specified as

ðpÞ ðpÞ
QðpÞ ðyi jxi Þ ¼ b0 þ b1 xi þ QðpÞ ðei Þ ð2Þ

that can also be considered as the determination of the conditional pth quantile by
0 + b1 ) and a specific value of covariate xi.
quantile-specific parameters (i.e., b(p) (p)

When the error terms ɛi are introduced, the equation

ðpÞ ðpÞ
QðpÞ ðyi jxi Þ ¼ b0 þ b1 xi þ QðpÞ ðei Þ ð3Þ

can be obtained (Hao and Naiman 2007).

Gravity models of international trade were introduced by Tinbergen (1962) and
Pöyhönen (1963; Oguledo and Macphee 1994; Cheng and Wall 1999) and gravity
model studies have been commonly utilized in explaining a wide variety of inter-
national and interregional association such as commuting, international trade, and
labor migration (Cheng and Wall 1999). The gravity model is usually applied to
international trade flows to state the size or the magnitude of trade flows between
two countries (Oguledo and Macphee 1994). The traditional concept of the gravity
36 I. Huseyni et al.

equation suggests that GDP and GDP per capita in numbers and both preference
factors such as common border and language and trade impediment such as distance
are main explanatory variables of bilateral trade (Egger 2002). In other words, the
distance is described as a function of several variables that can be considered as
trade resistance factors (Metulini et al. 2018) The gravity equation that facilitate to
explain bilateral trade flows across pairs of countries is defined as the following:

PXij ¼ w0 ðYi Þw1 ðYi =Li Þw2 ðYj Þw3 ðYj =Lj Þw4 ðDij Þw5 ðAij Þw6 eij ð4Þ

In Eq. (1), PXij denotes the value of the flow from country i to country j in US
dollars; Yi(Yj) denotes the value of nominal GDP in i(j) in US dollars; Li(Lj) denotes
the total population in i(j); Dij denotes the distance from the economic center of i to
the economic center of j; Aij denotes any other factor(s) that has an impact on trade
between i and j, and finally, eij denotes the error term with a log-normal distribution.
The estimates of w1, w2, w3, w4 are representatively expected to be positive,
whereas the estimates of w5 are expected to have a negative sign (Bergstrand 1989).
Quantile regression analysis and the gravity models of trade applications take
their respectable place in the existing literature. Dufrenet et al. (2010) explore the
variation of the impact of trade openness on the growth rate of per capita income
with the conditional distribution of growth using a quantile regression approach and
they suggest a heterogeneous trade versus growth association for both short and the
long run. Using the data on aggregate bilateral sales in 2008 for 93 economies,
Baltagi and Egger (2016) find that trade costs show a differentiation across the
quantiles of the conditional distribution of bilateral exports. Using a quantile
regression approach, Trinh and Doan (2018) found that internationalization was
positively correlated with several variables including the growth of employment,
output, and labor productivity for Vietnamese enterprises. Özer (2014) investigates
the determinants of the textile production exports of Turkey for the sample period
2007–2012 using a gravity of trade and quantile approaches and finds that there
exists a statistically significant association between the total population and a
demand increase. On the contrary, Tatlıcı and Kızıltan (2011) find that the popu-
lation and the amount of Turkish exports, while the distance was negatively cor-
related. Martínez-San Román et al. (2016) find evidence on the positive association
between trade integration and foreign direct investment activity for their selected
countries. Very recently, Metulini et al. (2018) perform a spatial-filtering
zero-inflated approach to estimate the gravity model of trade which they argue to
be considered when the level of trade between countries is zero. (See Egger and
Pfaffermayer 2016; Egger and Staub 2016; Spring and Grossmann 2016 for further
successful applications of gravity models of trade).
The dependent variable of this study was selected as the total amount of auto-
motive industry exports of Turkey to country i in year t. The data of the dependent
variable were drawn from the United Nations’ Comtrade database (United Nations
2018). The independent variables that may possibly influence Turkish automotive
industry of Turkey to country i in year t were explained in detail as the following.
3 Application of Panel Quantile Regression and Gravity Models … 37

3.2.1 GDP Per Capita

GDP per capita was included as an independent variable in the estimated model. As
automotive industry products are not inferior goods, an increase on the GDP per
capita for country i, namely an increase of revenues for the corresponding country,
will increase the export capacity that also leads to increase automotive demand. An
increasing automotive demand will inherently increase the amount of automotive
imports for country i. The sign of the GDP per capita is expected to be positive.
The GDP per capita data of selected countries was drawn from the World Bank
database (The World Bank 2018).

3.2.2 Population

The total population of exporter country i to Turkey is the second independent

variable that was included in the estimated model. An increase on the population of
a country will encourage to an increase on the amount of total demand by providing
a potential increase on the amount of consumption. The increasing total demand
will have a positive impact on automotive industry exports by influencing the
amount of total imports in proportion as the ratio of import tendency. The popu-
lations of exporter countries were also drawn from the World Bank database (The
World Bank 2018) and the population variable is expected to have a positive sign.

3.2.3 The Distance Between Exporter Country

to the Capital of Turkey

The total distance among countries will boost transportation costs, while the foreign
trade capacity will tend to decrease numerically. In fact, recent foreign trade data
put forward that relatively higher amount of foreign trade among neighbor coun-
tries. As high volume goods will also lead to increase transportation costs, the
distance and foreign trade are widely regarded as negatively correlated. Since many
goods of automotive industry have relatively higher volume, the distance between
capital cities of exporter countries to the capital city of Turkey (i.e., Ankara) was
included in the estimated model as an independent variable.

3.2.4 The Real Exchange Rate

The real exchange rate is available for both countries; therefore, it should be
carefully used in the estimated model. An increase on real exchange rate for any
38 I. Huseyni et al.

country i (i.e., appreciation of the currency) will encourage to increase the amount
of automotive demand to Turkey. Nevertheless, if the real exchange rate has
declined (i.e., depreciation of the currency) in the same period, the Turkish
exporters will tend to sell their automotive industry products with higher prices. In
that case, a consumer in country i will no longer use the increase on purchasing
power by courtesy of the appreciation of the currency for imported automotive
industry products from Turkey. This situation appears to avoid the increasing
purchasing power by an increase on real exchange rate of country i to have a
potentially positive impact on the amount of imports from Turkey. Moreover, if the
decline on the real exchange rate is numerically less than an increase on the real
exchange rate of country i, then the amount of imports of country i from Turkey
may even decrease. In order to reflect the impact of actual changes of the real
exchange rates for both countries, the real exchange rate of Turkey was divided into
the foreign exchange rate of country i and the corresponding ratio was included in
the final model being estimated. The data of the real exchange rates were drawn
from multiple databases including the World Bank and Federal Reserve Economic
Data (The World Bank 2018; Federal Reserve Bank of St. Louis 2018). The real
exchange rate is expected to have a negative sign in the estimated model.

3.2.5 The Dummy Variable

As previously stated, the EU member countries were among the most important
exporter countries of Turkey, especially after the Customs Union Agreement has
come into force in 1996. When the prominent potential of the EU member countries
were considered, being a EU member country is expected to be a relatively
important determinant of the estimated model since Turkey will more likely to
export to a EU member country than any other country in the rest of the world with
respect to the recent total export statistics of Turkey. Therefore, a dummy variable
was generated where 1 stands for being a EU member country and 0 stands for not
being a EU member and was included in the estimated model. Hence, the marginal
effect of being a EU member country on the demand of automotive industry
products to Turkey would be examined. The dummy variable introduced to the
model was expected to have a positive sign.

3.3 Empirical Evidence

The main objective of the present study is to examine the main determinants that
may influence Turkey’s vehicle (car, minibus, bus, van, and truck) exports to its
major 68 trading partners over the period of 2007–2015. For this purpose, a gravity
model and a panel data quantile regression approaches were performed calculated
by the Bootstrap Method to obtain more consistent empirical results. The gravity
3 Application of Panel Quantile Regression and Gravity Models … 39

Table 3.1 Descriptive statistics of variables

Variables Min. 1st Qu. 2nd Qu. 3rd Qu. Max. Mean Skewness Kurtosis
25% 50% 75%
quantile quantile quantile
ln Eit 5.704 14.731 17.532 18.869 21.736 16.772 −0.560 −0.260
ln Yit 6.016 8.611 9.624 10.639 11.674 9.499 −0.470 −0.660
ln Pit 12.650 15.470 16.220 17.630 21.040 16.460 −0.010 0.040
ln DISi 6.659 7.612 8.164 8.997 9.717 8.258 0.020 −0.950
RERTit 0.600 0.870 0.920 0.990 1.240 0.923 0.160 1.310

models take an increasingly attention to explain exports and trade for panel data
analyses in the existing literature. An econometric model was introduced to
determine factors that may possibly have an impact on the automotive industry
product exports of Turkey as the following:

ln Eit ¼ b0 þ b1 ln Yit þ b2 ln Pit þ b3 ln DISi þ b4 RERTit þ b5 DEU þ uit ð5Þ

where Eit denotes the total automotive industry exports (in US dollars) from Turkey
to the i country in year t; Yit denotes the GDP per capita of importer country i in
year t; Pit denotes the total population of the importer country i in year t; DISi
denotes the geographical distance from Turkey to country i; RERTit denotes the
ratio of Turkey’s real exchange rate to real exchange rates of country i in year t; and
finally, DEU denotes the dummy variable of automotive industry exports to a
country where stands for 1 if it is a member of the EU and 0 where it is not a
member of the EU As seen in Eq. (1), some of the variables were measured in
logarithmic terms. Table 3.1 presents the descriptive statistics of the variables used
in the estimated model.
Table 3.1 indicates that different quantiles will describe different distribution
tendency. For instance, when both mean and second quantile (i.e., median) values
of selected variables are compared, and one can notice that the distribution of
variables will substantially differ. Therefore, an ordinary least squares
(OLS) regression approach may generate biased results (Santos Silva and Tenreyro
2006). As seen in Table 3.1, all variables are appeared to be skewed that confirms
the use of quantile regression approach for the estimated model to determine
potential factors that may have an impact on the automotive industry exports of
Turkey. A set of data was collected from some databases related to the explanatory
variables.
Table 3.2 summarizes the panel quantile regression analysis results to determine
potential factors that may influence automotive industry exports of Turkey for the
sample period 2007–2015. Due to the different levels of the GDP per capita vari-
able, the impact of other independent variables on Turkey’s automotive industry
exports may also regard as different. Thus, this study adopts three different levels of
the GDP per capita as three different levels of income and measures the direct
40 I. Huseyni et al.

Table 3.2 Quantile regression results for the amount of Turkish automotive industry exports
Quantiles
Variables 10th quantile 50th quantile 90th quantile
ln Yit 2.354 (0.022)* 2.545 (0.000)** 0.619 (0.287)
ln Pit 1.222 (0.000)** 1.144 (0.000)** 1.139 (0.000)**
ln DISi −1.714 (0.008)** −1.408 (0.000)** −1.050 (0.000)**
RERTit 0.375 (0.676) 0.820 (0.175) −0.502 (0.298)
DEU 1.170 (0.022)* 0.439 (0.004)** 0.206 (0.295)
Notes Values in parentheses are significancy probabilities
*Statistical significance at 5%
**Statistical significance at 1%

effects of selected independent variables on the automotive industry exports of

Turkey to its major trading partners between 2007 and 2015.
Quantile regression analysis results in Table 3.2 present valuable information
about the determinants of automotive industry exports of Turkey. In regard to high
and low quantiles, the empirical evidence highlights that there exist significant
differences for the impact of GDP per capita for selected countries on the condi-
tional distribution of the amount of automotive industry exports to major trading
partners. Particularly, the impact of GDP per capita on automotive industry exports
was statistically significant and remarkable in the 10th quantile. For instance,
several countries including Equatorial Guinea, Trinidad and Tobago, Dominican
Republic, Paraguay, Costa Rica, Zambia, the Philippines, Iceland, Uganda, and
Uruguay purchase automotive products with relatively low commercial values. On
the other hand, the impact of GDP per capita on the automotive industry exports
was not statistically significant for higher quantiles. In lower levels of quantiles, one
of the most important barriers on car ownership can be principally considered as
comparatively low income. Certainly, when individuals’ income increases, their
automotive demand also increases which will make a positive impact on Turkish
automotive industry exports.
In higher quantiles, where some high-income countries including France, the
UK, Germany, Italy, Russian Federation, Spain, Belgium, and the USA are
appeared, tastes and preferences take the place of income level to be an important
determinants of automotive industry demand. Specifically, the automotive industry
demand cannot be simultaneously increased with a potential increase on the amount
of income since the income level that will increase automotive demand is elimi-
nated in a sense. Moreover, a potential increase on the amount of income in the
relevant quantile with high-income cases may reversely lead an increase on the
consumption of luxury automotive products which are not exported, in Turkey. In
this circumstance, an exclusion of middle-segment products may even expected for
Turkey’s further exports. However, the amount of GDP per capita of countries in
high quantiles shows a decreasing tendency in the long run during the selected
3 Application of Panel Quantile Regression and Gravity Models … 41

sample period. For that reason, the positive correlation between the amount of GDP
per capita and Turkish automotive industry exports was not associated for all
quantiles being observed. In this sense, one can argue that there exists an exact
heterogeneity for the impact of different values of GDP per capita on the amount of
automotive industry exports.
The population variable used in the model was found to have a statistically sig-
nificant positive impact on the amount of Turkish automotive industry exports. In
other words, a respectable increase on total population numerically leads to an increase
on total consumption, and thus, exporter countries tend to increase their imports from
Turkey including automotive industry products. Results revealed that there was a
statistically significant correlation between the distance variable and the amount of
automotive industry exports for all quantiles as well. As expected, the distance vari-
able was found to have a negative sign that implies the amount of Turkish automotive
industry exports decreases relatively when the distance from the capital of Turkey to
the exporter country increases. The dummy variable, namely, being a EU member
country was found as a statistically significant variable with a positive impact on the
amount of Turkish automotive exports in the first two quantiles. This evidence was
actually expected; however, being a EU member country was unexpectedly not found
to have a statistically significant impact on the amount of Turkish automotive exports
in higher quantiles despite its expected positive sign.
The real exchange rate was expected to have a negative sign before fitting the
panel quantile regression model; however, it was not found as statistically signif-
icant. Accordingly, one can suggest that the real exchange rate may not essentially
be an important determinant of Turkish automotive exports during the sample
period. One explanation for this outcome may be comparatively high amounts of
imported output numerically in the automotive industry. Though a real exchange
rate appraisal contributes to competition power of exporter enterprises in the
automotive industry, its actual impact on the amount of Turkish automotive exports
is somehow deteriorated due to higher numbers of Turkish imports comparatively.

3.4 Main Conclusions and Policy Implications

Economic growth is an essential goal of every country to be accomplished because

a sustainable economic growth has a crucial role on improving employment and
welfare indicators. Recent debates since the late of eighteenth century suggest that
the amount of exports is one of the most important determinants of economic
growth when its impact on expanding markets and enabling the efficient use of
resources. The amount of exports can especially provide developing countries an
opportunity to converge to developed countries through increasing fixed capital
investments numerically with foreign exchange entry.
Recent rapid developments on communication and transportation industries and
simultaneous remarkable influence of globalization have led multinational com-
panies to carry their production operations to developing countries. Particularly,
42 I. Huseyni et al.

multinational companies take advantage of cheaper labor force and avoid strict
environmental standards in developing country markets. Thus, developing countries
are able to have increasing production and exporting opportunities. In that sense,
automotive industry can be considered as the leading industry in terms of its high
potential of exporting and the production operations in the automotive industry
have been significantly increased. After the 1996 Custom Unions Agreement with
the EU, many multinational automotive companies have shifted a respectable
number of productions to the Turkish market by courtesy of eliminating customs
tariffs. Thus, the amount of Turkish automotive industry exports has significantly
improved since 2000s.
When the importance of automotive industry exports for the Turkish economy is
considered, the determination of factors influencing the amount of Turkish auto-
motive industry exports gives valuable information for future foreign trade policies.
This study aimed at determining factors affecting the amount of Turkish exports to
68 major trading partners using panel quantile regression and gravity approaches
instead of OLS estimators frequently performed in the existing literature. The
empirical evidence obtained from the estimation results revealed that the population
of importer country and the amount of per capita income were found as positively
correlated with the amount of Turkish automotive exports. Additionally, when the
distance between importer country and the capital of Turkey increases, the amount
of Turkish automotive industry exports was more likely to have a decreasing
behavior. As expected, exporting a EU member country was found to have a
statistically significant increasing impact on the amount of automotive industry
exports. The estimation results also indicated that the real exchange rate was not a
statistically significant determinant of the amount of automotive industry exports
during the sample period. Turkey cannot exactly succeed to use the competitive
advantage of the possible declines on real exchange rates due to higher costs of
imports in the automotive industry. Consequently, potential increases on the pop-
ulation and revenues of importer countries of Turkey were found to be significantly
effective on Turkish automotive industry exports. The amount of automotive
industry exports may be increased in the coming years, after the devastating impacts
of the 2008 Global Economic Crisis in the EU completely disappear. Further,
foreign trade policies in Turkey may also concentrate on decreasing the importing
costs of the automotive industry to take the advantage of a decrease on real
exchange rates.

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Chapter 4
Impact of Macroeconomic
and Bank-Specific Indicators on Net
Interest Margin: An Empirical Analysis

Arif Ahmad Wani, S. M. Imamul Haque and Shahid Hamid Raina

Abstract The purpose of this paper is to identify the indicators from macroeco-
nomic and bank environment, which tend to affect earning capacity (quantified by
net interest margin) of public sector banks (PSBs) of India. The paper also quests to
explore the possible linkages between the indicators under the purview of this
paper. The financial statements, financial notes, and annual reports of the sample
banks, publications from Government of India, Reserve Bank of India, and World
Bank have been accessed to get the data regarding the variables under the study.
The classical multiple regression analysis has been employed with diagnostic tests
to derive concrete inferences from the data. The empirical evidences illuminated the
positive correlation of gross domestic product (GDP), inflation, lending interest rate
(LIR), and capital to risk-weighted assets ratio (CRAR) with the net interest margin
(NIM) of sample banks, while as non-performing loans (NPLS) established an
indirect relationship. The study established that favorable macroeconomic envi-
ronment proves to be a main driver for encouraging net interest margin (NIM) with
a prudent control over CRAR along with NPLs on the part of sample banks. The
study suggested installing latest advances and practices of risk management espe-
cially on the credit front, which will also help the banks to utilize excessive capital
rather than accumulating it unnecessarily. It is also suggested for the PSBs to merge
for better consolidation, allocation of funds, and better investment prospects.

Keywords Net interest margin (NIM) Indian Public sector banks (PSBs)



Economic growth Inflation Non-performing loans (NPLs)

A. A. Wani
S. M.I. Haque

Department of Commerce, Aligarh Muslim University, Aligarh 202002, UP, India
e-mail: aarifi[email protected]
S. M.I. Haque
e-mail: [email protected]
S. H. Raina (&)
Department of Economics, Central University of Jammu, Jammu 181143, India
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 45

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_4
46 A. A. Wani et al.

4.1 Introduction

Banking sector is considered to be the backbone for the growth of any economy.
The economic development of a nation depends on the financial system it has
instituted (King and Levine 1993; Rousseau and Wachtel 1998). Therefore, it is
imperative to appraise the different components of financial system in order to
invigorate the economy. Banking sector as one of the constituents of financial
system needs greater alertness for it acts as a precursor to financial stability (Mishra
et al. 2013). Moreover, more vibrant and stronger the banking sector, stronger and
less fragile is its financial stability. In India, banking sector has witnessed major
transitions and survived successfully since its inception from traditional banking
practices, nationalization at different points of time to privatization with a number
of private players both from within and outside the country, offering a diverse set of
competitive services (Goyal and Joshi 2012; Haque and Wani 2015). Inter alia
major transitions, economic reforms in 1991 unlocked new pinnacles of develop-
ment but parallel to this posed new challenges and strains before the Indian banking
sector. The major changes are spread across a spectrum of activities ranging from
credit expansion, enhanced profitability and productivity almost at par with
developed economies, lower incidence of non-performing loans (NPLs), financial
inclusion, development in supervisory and regulatory insight to prudential and
instrumental ways of advancing in terms of size, assets, profitability, and therefore,
efficiency. Despite this progression, Indian banking industry is vulnerable to eco-
nomic shocks and financial risks. The most prominent financial shocks across the
globe like subprime of 2008 in USA, debt crisis in different economies including
India, and euro zone crisis have exploded the confidence of financially vibrant
economies and created an uncertain environment for the world economy. These
economic downturns have raised different question marks about the survival and
growth of economies throughout the globe. After these crises, the financial insti-
tutions are being subjected to stronger regulatory framework consistent with the
international standards. Thus, to ensure financial stability of an economy, the les-
sons taught by these dynamite events were translated into regulatory policies, which
were later strongly recommended to be instituted for prudence and conservatism.
However, amidst all this pandemonium and turmoil, Indian banking sector has been
among the few to recoup resilience. Notably, the momentum of development for the
Indian banking industry has been gilt-edged over the past decade. It is evident from
the higher pace of credit expansion with a slight control over NPLs, expanding
profitability with minimum costs and focus on increasing the banking ambit
through the schemes like financial inclusion. Such competencies have contributed
to making Indian banking more vibrant and stronger. Indian banks like the
developed economies have learnt to revamp their growth approach and re-evaluate
the prospects to keep the economy rolling without interruptions. This is evident
from the fact that Indian banks are striving to withstand against the competition
from global banks as technological innovation has compelled the banks to rethink
and revisit their policies and strategies (Goyal and Joshi 2012).
4 Impact of Macroeconomic and Bank-Specific … 47

Financial intermediation offered by the banking sector supports economic

growth by converting deposits into productive investments. There exists a strong
connection between financial intermediation and economic growth as the funding
costs have a significant impact on the investment level, capital allocation, and thus
on growth potential and the direction of an economic activity (Claeys and Vander
2008; Kasman et al. 2010; Maudos and De Guevarra 2004). Financial intermedi-
ation also affects the profitability of the banking sector and therefore its stability and
ability to support the real economy (García-Herrero et al. 2009). Indian banking
sector is one of the cornerstones for financial stability and economic development
of the country.
Therefore, it is quite imperative to examine the viability and sustenance of
Indian banks and contribute to the literature by identifying and empirically inves-
tigating the impact of different indicators on the net interest margin of banks. This
paper seeks to investigate the determinants, their linkages and impact on net interest
margin of banks. To pursue the objectives, the study takes into account the public
sector banks of Indian industry in order to turn up with potential explanations and
policy implications which will help in obviating the undesirable practices.

4.2 Conceptual Framework

4.2.1 Net Interest Margin (NIM)

Commercial banks run business with a public role which includes money supply,
payments system, insured deposits, and more (Gup and Kolari 2006). Banks play an
indispensable role in modern economies by transferring the funds from savers to
borrowers by incurring the costs of financial intermediation. The cost of financial
intermediation is a prominent indicator of total financing costs. The primary source
of income for commercial banks is the interest income. Banks maintain assets and
liabilities of different magnitude and maturities and subsequently charge different
types of interest rates for each category. Therefore, there is no fixed way of
determining what they charge and pay. One of the best and widely used indicators
to measure the difference is net interest margin (NIM), which is arrived at by
dividing net interest income (NII) by the total earning assets of the bank. NIM is
seen as an efficiency ratio as it best explains the employment of earning assets.
Research witnesses that the cost of financial intermediation has important con-
sequences for the economy and banks. Thus, NIM has different repercussions for
economies and banks. For the economy, consistently high NIMs might be con-
sidered as symptomatic for a spectrum of systemic problems like lack of compe-
tition, unsoundness of banks, higher operating costs due to low operating efficiency,
perceived financial risks, scale of diseconomies, unfavorable environment, and
presence of various regulatory obstructions, which in a synergetic manner distort
the financial market activities. Such distortions due to higher NIMs further signal
48 A. A. Wani et al.

low efficiency of banks; higher costs and inefficient control of operating expenses,
which together negatively affect the financial market development and get reflected
in the sluggish movement in the economic growth. On the contrary, lower NIMs are
treated as good indicators of financial market development, increased investments,
and thus, higher economic growth. In juxtaposition to these influences, higher NIM
has positive repercussions for the profitability and capital of banks and vice versa.
At the same time, possible reason for lower NIMs may be thought that banks may
be deliberately foregoing their NIM by availing more income through the delivery
of non-interest bearing services like fees, commissions (Kasman et al. 2010).
Therefore, NIM as a measure of income is seen differently through economic and
banking perspectives.

4.2.2 Economic Growth

Indian economy has weathered many challenges successfully in recent times and is
currently placed on the back of strong policies and a whiff of new optimism. With
the dawn of reforms, the economy faced testing times with issues like lower eco-
nomic growth, escalated levels of inflation, widening current account deficit, and
interest rate volatility. Despite the moderate progression in gross domestic product
(GDP) growth rate from 4.5% in FY13 to 4.7% in FY14, Indian macroeconomic
ambience has proved to be moving less vigorously. At the macrolevel, this lack-
luster behavior can be attributed to a gamut of reasons like sluggish industrial
growth, supply-side constraints, restrained demand conditions, inflation, and
decelerated growth in services sector. All these factors synergistically leave a
profound impact and pose greater challenges to the banks operating in India. At the
bank level, rising NPAs, obsolete quality of assets, risk aversion behavior of banks,
regulatory obstructions followed by reduced credit, and deposit base led to
declining interest margins and profitability. This series of events eventually con-
tributed to the lagging of economic growth. Among all the issues, the two main
challenges having relevance and showing the relationship between earning potential
of PSBs and economic growth are financing challenge and the banking challenge
(Economic Survey of India 2014–2015).
PSBs were identified as one of the main reasons behind the sluggish perfor-
mance of Indian economy. PSBs financed a significant portion of infrastructure in
the country, but the deterioration of their balance sheets holds back such private
investment. Such a situation can be observed from their stressed financial state-
ments, which clearly indicate that PSBs alone account for over 12% NPAs.
Therefore, this balance sheet syndrome decreases their ability of lending and credit
extending potential to the private sector, which eventually gets reflected in the
slowdown of the economy.
Indian banking is also presumed to be crippled by regulatory policies reflecting
double financial repression which impedes competition in the sector. The double
financial repression reduces the earnings of both savers and banks by misallocating
4 Impact of Macroeconomic and Bank-Specific … 49

capital to investors. It is evident from the Statutory Liquidity Ratio (SLR) (holding
Govt. securities requirements) and priority sector lending (deployment of funds in
less efficient ways). Further, there appears a significant variation among PSBs in
terms of performance measured by prudence and profitability. It is also quite fla-
grant to notice that the best PSB records its performance well below the level of an
average private sector bank. For this performance, it is believed that indulging in
social obligations placed PSBs at a competitive disadvantage. Financial repression
has also risen since 2007, when escalated inflation has resulted in negative real
interest rates and reduction in household savings. Therefore, to deal with such
problems, a policy of 4Ds has been recommended which comprise of deregulation,
differentiate, diversify, and disinter. The policy is pragmatic in the sense if financial
repression on the liability side of the balance sheet is overcome, there will be fall in
inflation, thus relaxing the asset-side financial repression. Eventually, SLR
requirements will be eased and priority sector lending norms will be revisited to
bring the liquidity back to the banks for further credit creation and delivery of other
services. This will help them to gear up both NII and non-interest income and thus,
contribute to economic growth and strengthen the economic development.

4.2.3 Inflation

Economic growth and inflation are often used to demonstrate economic stability
and monetary or price stability. Inflation as a concomitant element along with other
indicators decides the direction of economic growth, its linkage with other macro-
and microlevel indicators spell out different implications. Research witnesses its
medium- to long-term association with the financial stability and economic growth.
On the contrary, escalated inflation or in other words price instability adversely
affects financial stability (Dhal et al. 2011). In the common parlance, persistent
inflation seems to entrench uncertainty over prices, which in turn negatively affects
investment and consumption patterns in an economy. In the Indian context, infla-
tion has marked a remarkable improvement which is evident by the Consumer Price
Index (CPI) inflation of 4.4% in November 2014 against 11.2% in the yesteryear
(Financial Stability Report 2014–2015). As a result, Reserve Bank of India
(RBI) reduced the repo rate by 25 basis points (to 7.75%) and SLR by 50 basis
points (to 21.5%) in the past year. Along with other measures to tackle the
inflationary pressure in an economy, the central bank tightens the monetary policy.
As a result, banks increase the lending rates to improve their interest margins.

4.2.4 Lending Interest Rates (LIR)

Lending interest rate is the bank rate that usually meets the short- and medium-term
financing needs of the private sector. This rate is normally differentiated according
50 A. A. Wani et al.

to creditworthiness of borrowers and objectives of financing. As a general rule,

higher the lending rate, higher will be the margins. But the literature has witnessed
that interest rates adopt dynamic behaviors in the short, medium, and long terms. In
the short run, higher interest rates contribute to the declining interest margins; while
as in medium to long term, they propel the interest margins high and higher (Busch
and Memmel 2017). Laconically, such an uncertain and unpredictable movement in
the interest rates exerts pressure on the earnings of banking sector and thus, infuses
interest rate risk. During the inflationary pressures, banks hike their interest rate to
make the economy withstand against inflation as well as to boost their interest
earnings (Poghosyan 2013).
Moreover, the financial system of a country is one of the most important sources
of financing economic decisions related to consumption and investment, capital
accumulation and technological innovations, aimed at medium-term productivity
growth to more dynamic and sustainable rates of economic growth. Accordingly,
the price of financing through bank loans (i.e., lending rates) and the efficiency of
the banking system (as measured by interest rate spreads) are essential for the
allocation of additional financial potential in the economy, and thus for the accel-
eration or sustainability of economic growth (Georgievska et al. 2011).
Interest rate risk in a banking sector is important for a variety of reasons. Firstly,
fluctuations in interest rates tend to manifest undeterminable jumps rather than
gradual jumps especially when interest rates are used to wipe the excess liquidity
from the economy as well as to meet the monetary objectives of the government.
Secondly, complying with the international standards of risk-adjusted capital does
not encompass interest rate risk, which therefore requires continuous quantification,
control, and thus greater alertness.

4.2.5 Capital to Risk-Weighted Assets Ratio (CRAR)

Capital is the blood of banking whose purpose is to ensure that banks can sustain
unexpected losses of the assets they hold while still honoring withdrawals and other
essential obligations. Capital adequacy is a measure of creditworthiness of the
banks, which is a result of combination of factors like regulation, market pressures,
and business strategy of the bank. Such a measure prevents banks from accepting
risks more than their appetite and ensuring stability in the banking sector (Claeys
and Vander 2008). Thus, lower ratio of capital adequacy signals a relatively risky
position which may result in a negative coefficient (Berger 1995). On the other
hand, higher ratio of capital represents prudent lending by banks, infers ability to
cut down funding costs (Altunbarş et al. 1997), helps in borrowing less, serves as a
cushion against non-performing loans, and finally increases the expected earnings
by lowering the costs of financial distress including bankruptcy (Berger 1995). In
the Indian context, capital adequacy will start becoming a big issue for the com-
mercial banks in India, as they start gearing for growth and becoming compliant to
4 Impact of Macroeconomic and Bank-Specific … 51

Basel III guidelines, implemented in India effective from April 01, 2013, which will
be fully implemented in a phased manner by March 31, 2019.
The CRAR as per Basel II at the end of March, 2014 was recorded at a com-
fortable level of 13.02%, which declined to 12.75% in September 2014. Though
satisfying the regulatory requirement for CRAR of 9%, capital positions suffered a
decline due to capital deterioration by PSBs which need to be infused with more
capital to make their operations productive (Financial Stability Report 2014–2015).

4.2.6 Non-Performing Loans (NPL)

Asset quality is an important indicator to assess health of the banks. With regard to
PSBs, they have suffered significant deterioration which is verified by the statistics
of gross NPAs of 4.5% in September 2014 against 4.1% in March 2014. The sectors
which solely held 54% of total stressed advances of PSBs as on June 2014 included
infrastructure, iron and steel, textiles, mining, and aviation with 17.5% alone with
the infrastructure (Economic Survey 2014–2015).
In pursuance of problem loans, RBI has taken a number of measures to with-
stand against this problem. In the month of June, 2014, it introduced guidelines on
‘Early Recognition of Financial Distress,’ ‘Prompt Steps for Resolution & Fair
Recovery for Lenders,’ and ‘Framework for Revitalizing Distressed Assets in the
Economy.’ Subject to the implementation of these measures, asset quality of PSBs
is expected to improve in the near future. In the event of failure of these guidelines,
banks could resort to the ‘Debt Recovery Tribunals’ or seek legal assistance by way
of ‘SARFAESI Act, 2002’ or may sell their NPAs to Asset Reconstruction
Companies (ARCs), other banks, or non-banking financial companies (NBFCs)
having requisite skills of resolving non-performing assets (NPAs) smoothly and
efficiently (RBI Bulletin, March 2015). Thus, NPAs are problematic for all com-
mercial banks including PSBs as they primarily depend on interest payments for
income.

4.3 Review of Literature

This section not only surveys what past studies have revealed but also appraises,
encapsulates, and compares various scholarly works. There is ample of literature
which verifies and empirically investigates the linkage between the variables under
study.
With regard to relationship between capital adequacy and bank profitability, a
positive relation was verified by Bourke (1989). The underlying hypotheses for this
relationship put forth were bankruptcy and signaling hypothesis, where the former
believes offsetting of such costs with the capital at disposal and latter conveys the
conservative approach of banks by ignoring the potential investment opportunities.
52 A. A. Wani et al.

The hypothesis of bankruptcy costs was further supported by Berger (1995) with a
potential explanation that higher the expected chances of insolvency, capital ade-
quacy ratio also increases to lower the bankruptcy costs and thus, combat the
chances of failure. These evidences are also supported by Angbazo (1997), Haslem
(1969), and Olalekan and Adeyinka (2013).
With respect to GDP and inflation, they are expected to affect profitability
according to the economic conditions, viz. they bring about positive changes in an
economy where financial markets are finely developed and influence an economy
negatively with developing financial markets (Alexiou and Sofoklis 2009).
A negative correlation between inflation and profitability of banks were observed
by Guru et al. (2002), whereas positive association between the two was reported
by Tan and Floros (2012). Banks earn higher margins through increased lending
rates enforced as a result of anticipated high inflation, while as banks profitability
suffers when inflation is unanticipated (Perry 1992). The same results were revealed
by Demirgüç-Kunt and Huizinga (1999) for developing countries, and also they
stated positive association between GDP and profitability of banks. In another study
by Hoggarth et al. (2001), inflationary pressures were found to infuse complexities
in the contemplation of loan processing. The association between inflation and
profitability was reported subjectively like Jiang et al. (2003) for Hong Kong and
Guru et al. (2002) for Malaysia observed positive relationship while as Demirgüç-
Kunt and Huizinga (1999) for developing countries and Abreu and Mendes (2001)
concluded with a negative relation between inflation and profitability. Positive
correlation of GDP and inflation with the financial performance of banks was
observed by Fadzlan and Kahazanah (2009). Moreover, impact of different
macroeconomic variables like inflation and GDP on NIM was reported subjectively
by Kasman et al. (2010), Beck and Hesse (2009), Horváth (2009), Claeys and
Vander (2008), and Brock and Suarez (2000) in their studies. In another study
conducted by Kanwal and Nadeem (2013), any noticeable contribution by
macroeconomic variables like inflation, GDP, and real interest rate toward earnings
of the banks were not observed. Instead, they recommended concentrating on other
variables with prime focus on internal factors of banks.
Similarly, studies like Maudos and De Guevara (2004) and Angbazo (1997)
have verified a significant positive effect of credit risk on net interest margin.
Maudos and De Guevara (2004), Brock and Suarez (2000), and Saunders and
Schumacher (2000) concluded that interest volatility has been found to bear a
significant and positive effect on interest margin in different countries. Monetary
policy also affects the profitability of banks indirectly through the revision of
interest rates under different circumstances (Khan and Sattar 2014).
Undoubtedly, researchers have extensively enquired into the relationship
between profitability and macro- as well as microlevel indicators. The almost vis-
ibly common effort can be traced from their studies is that profitability has been
quantified by measures other than NIM. Consequently, there appeared paucity of
literature which strikes a relationship taking NIM as a profitability measure and
examining its relevance with macro- and microlevel indicators in terms of both
direction and magnitude. To fill the gap, the researchers believe this study to be on
4 Impact of Macroeconomic and Bank-Specific … 53

the cusp of a new literature that explores the phenomena and attempts to demon-
strate the linkage between indicators and illustrate their impact with possible
potential explanations.

4.4 Objectives of the Study

1. To study the conceptual framework of net interest margin (NIM) and its rele-
vance with the economic growth.
2. To examine the linkages and impact of different macro- and bank-specific
indicators on the earning capacity of public sector banks (PSBs) of Indian
banking industry.

4.5 Research Methodology

4.5.1 Data Sources

The study is analytical and empirical in nature, which intends to demonstrate the
linkages and impact of different macro- and bank-specific indicators on the earning
capacity of PSBs of Indian banking industry. The present work is committed to
improve the insight of regulators, supervisors, and investors and conclude with
potential explanations. The econometric model developed for the study incorporates
net interest margin (NIM) as a regress, and the predictors include lending interest
rate (LIR), gross domestic product (GDP), inflation (INF), capital adequacy ratio
(CAR), and non-performing loans (NPLs).
The data for lending interest rate, GDP, and inflation has been collected from the
World Bank database, where as balance sheets, income statements, and their notes
have been studied to get the data regarding CAR and NPL. The financial data has
also been collected from the annual reports of the selected PSBs and publications of
Reserve Bank of India (RBI) like Annual Report on Currency and Finance, RBI
Bulletin, Financial Stability Report, and some information has also been brought
from the relevant Web sites. The Government of India publications like Economic
Survey 2014–15 and Union Budget 2014–15 have also been referred to gain better
insight of economic indicators used in the study.

4.5.2 Nature of Data

In order to meet the research objectives, the study makes use of balanced panel data
as it fits better than the single time series or cross sectional alone as advocated by
54 A. A. Wani et al.

Brooks (2014). Further, the use of panel data tackles more complex problems than
would be possible with pure time series or cross-sectional data. Brooks (2014)
revealed that the combination of time series with cross sections can enhance the
quality and quantity of data in ways that would be impossible using only one of
these two dimensions.

4.5.3 Sample and Period of the Study

The data collected is a balanced pool of fifteen public sector banks in India, selected
on the basis of market capitalization (National Stock Exchange). The study period is
taken as fifteen financial years starting from April 01, 2001 to March 31, 2015. The
scope of the study is limited only to the selected public sector banks excluding
private sector banks and foreign banks operating in India.

4.5.4 Analytical Model

Keeping the cognizance of different perspectives of the study and past empirical
literature, the study proposes the following classical multiple regression model:

nimit ¼ b0 þ b1 lirit þ b2 gdpit þ b3 inf it þ b4 crarit þ b5 nplit þ eit

where
b0 The intercept of equation,
b1, b2, b3, b4, and b5 Coefficients for independent variables,
it i represents the bank and t represents the year,
nim Net interest margin,
lir Lending interest rate,
gdp Gross domestic product growth rate,
inf Inflation,
crar Capital adequacy ratio,
npl Non-performing loans, and
eit Error or stochastic term.
For computation of variables, see Table 4.1.

4.5.5 Data Analyses Techniques

For the purpose of carrying out empirical analyses, this study utilizes econometric
techniques, i.e., Pooled OLS, Fixed Effects and Random Effects estimation models
4 Impact of Macroeconomic and Bank-Specific … 55

Table 4.1 Computation of variables

Variable Measurement Literature
Net interest (Interest earned minus interest Ho and Saunders (1981), Saunders
margin (nim) extended) divided by (total earning and Schumacher (2000), Claeys and
assets) Vander (2008), Horváth (2009),
Schwaiger and Liebeg (2008)
Lending interest Imported from World Bank Maudos and De Guevara (2004),
rate (lir) Brock and Suarez (2000), Saunders
and Schumacher (2000)
Gross Domestic Annual percentage growth rate of Alexiou and Sofoklis (2009),
Product (gdp) GDP at market prices based on Demirgüç-Kunt and Huizinga
constant local currency (1999, Fadzlan and Kahazanah
(2009), Claeys and Vander (2008),
Horváth (2009)
Inflation (inf) Inflation as measured by the annual Guru et al. (2002), Jiang et al.
growth rate of the GDP implicit (2003), Perry (1992), Hoggarth et al.
deflator shows the rate of price (2001), Tan and Floros (2012)
change in the economy as a whole.
The GDP deflator is the ratio of
GDP in current local currency to
GDP in constant local currency
Capital (Tier I capital plus Tier II capital) Bourke (1989), Berger (1995),
adequacy ratio divided by risk-weighted assets Angbazo (1997), Olaleken and
(crar) Adeyinka (2013), Haslem (1969)
Non-performing Ratio of the problem loans to total Maudos and De Guevara (2004),
loans (npl) loans Angbazo (1997)
Source Compiled by authors from different sources

related to balanced panel data. Balanced panel data is preferred over unbalanced
panels, because it allows an observation of the same unit in every time period and
reduces the noise introduced by unit heterogeneity (Brooks 2014). The classical
linear multiple regression model establishes the relationship between the variables
under study. For the effective analysis of the data, MS Excel and econometric
package STATA 13 have been used.
Before carrying out the analysis, linear multiple regression model was carried
out under the Pooled OLS, Fixed Effects and Random Effects Estimation Models.
To check as to which model is fit and appropriate between fixed and random effects
model, Hausman Test identified random effects model as an appropriate model. To
differentiate between Pooled OLS and the random effects model, Breusch–Pagan
Lagrange Multiplier Test was applied which declared random effects model to be
the appropriate model. Further, it is mandatory to fulfill the assumptions of the
model, viz. multicollinearity, heteroscedasticity, and autocorrelation in particular.
The model calculates variance inflation factors and tolerance values and also plots
the correlation matrix to detect the chances of multicollinearity. Secondly, the
model is tested for heteroscedasticity by Breusch–Pagan or Cook–Weisberg Test
56 A. A. Wani et al.

for Heteroscedasticity. Thirdly, autocorrelation in panel data was checked through

Wooldridge Test of Autocorrelation.

4.6 Analysis

The model summary of the data is highlighted in Table 4.2. From Table 4.2, the
NIM of the sample banks has ranged from 0.94 to 8.92% with a standard deviation
and average of 1.03 and 3.47%, respectively. From the macroeconomic environ-
ment, lending interest rates have varied from 8.3 to 14% with a standard deviation
and average of 1.45 and 11.44%, respectively, whereas Indian economic growth has
ranged from 3.8 to 10.3% with a standard deviation and average of 2.20 and 7.02%,
respectively. Similarly, from the bank-level indicators, CRAR was recorded min-
imum at 1% in the year 2001 to maximum of 20.11% in the year 2004 with a
standard deviation and average of 1.96 and 12.28%, respectively. With regard to
non-performing loans, minimum value of 2.2% and maximum value of 12.8% were
registered along with a standard deviation and mean value of 3.51 and 5.56%,
respectively.
Table 4.3 highlights the correlation between the variables used in the study. As
is evident from Table 4.3, pair-wise correlation coefficients indicate statistically
significant positive correlation of net interest margin with lending interest rates and
capital to risk-weighted assets ratio, whereas a negative correlation of NIM with
GDP, INF, and NPL is observed at 5% level of significance. The correlation matrix

Table 4.2 Descriptive Variable Obs. Mean Standard Min Max

statistics Deviation
Nim 225 3.47 1.03 0.94 8.92
Lir 225 11.44 1.45 8.3 14
Gdp 225 7.02 2.20 3.8 10.3
Inf 225 5.626667 1.805671 3.2 9
Crar 225 12.28 1.96 1 20.11
Npl 225 5.56 3.51 2.2 12.8
Source Results Obtained from using STATA Software

Table 4.3 Correlation matrix Variables Nim Lir Gdp Inf Crar Npl
Nim 1.00
Lir 0.22 1.00
Gdp −0.05 −0.52 1.0
Inf −0.31 −0.38 0.22 1.00
Crar 0.06 −0.31 0.30 0.32 1.00
Npl −0.46 0.47 −0.53 −0.76 −0.38 1.00
Source Results Obtained from using STATA Software
4 Impact of Macroeconomic and Bank-Specific … 57

Table 4.4 Collinearity Variable VIFb Tolerancea (1/VIF)

statistics
Lir 1.55 0.64
Gdp 1.92 0.52
Inf 2.87 0.35
Crar 1.21 0.83
Npl 3.70 0.27
Mean VIF 2.25
a
Most commonly tolerance values of 0.10 or less are cited as
problematic
b
VIF Variance inflation factor (VIF, stands for variance inflation
factor, is the reciprocal of tolerance. It indicates the degree to
which the standard errors are inflated due the level of collinearity.
Most commonly VIF values more than 5 are cited as
problematic.)
Source Results obtained using STATA software

also reveals correlation between independent variables, where NPL is negatively

associated with GDP, INF, and CRAR which are positively associated with LIR. In
the same way, CRAR is positively correlated with GDP and INF, while it is
negatively associated with LIR. Similarly, INF is found to be negatively associated
with LIR and positively correlated with GDP. As far as GDP is concerned, it is
negatively associated with LIR. From Table 4.3, high correlation of 76% between
INF and NPL signals the chances of multicollinearity. Therefore, to detect the
chances of multicollinearity in order to avoid biased regression coefficients, due
care has been taken in the regression analysis by evaluating the tolerance levels and
variance inflation factor (VIF) values of the independent variables used in this
study.
Table 4.4 presents the calculated VIF and tolerance values to detect any chances
of multicollinearity among the independent variables. The VIF values, as is elicit
from the observations, range from 1.21 to 3.70, which clearly verifies that none of
the observation surpasses the threshold limit of 5 whether individually or collec-
tively (Mean VIF = 2.25). This conclusion is also supported by the values of
tolerance, as none of the observation is nearing zero. Consequently, it is concluded
that there is no problem of multicollinearity between the independent variables
considered under the study (Gujarati and Porter 2009; Marquardt 1970).
Another problem commonly encountered in the cross-sectional data is
heteroscedasticity, i.e., unequal variance in the error term. The problem is diag-
nosed by using Breusch–Pagan or Cook–Weisberg Test for Heteroscedasticity1
which verified the absence of homoscedasticity (equal variance) as the p-value

1
Breusch–Pagan/Cook–Weisberg test for heteroscedasticity (STATA output):
H0: Constant Variance; Variables: fitted values of NIM
chi2(1) = 189.64
Prob > chi2 = 0.000.
58 A. A. Wani et al.

(0.000) for the test was found significant, thus rejecting the null hypothesis of
constant variance. To overcome this problem, Robust Standard Errors have been
used for the reason; OLS assumes that errors are both independent and identically
distributed. Therefore, robust standard errors relax either or both of those
assumptions. Hence, when a symptom of heteroscedasticity is diagnosed, robust
standard errors tend to be the best treatment and therefore, more trustworthy
(Williams 2015).
After the assumptions of multicollinearity and heteroscedasticity, serial correla-
tion was also examined for the model, which is a common problem found in time
series data. For the panel data, serial correlation also called as autocorrelation was
diagnosed by applying Wooldridge Test of Autocorrelation.2 The results plotted by
the test verified the presence of autocorrelation as the significant p-value (0.004) for
the test rejected the null hypothesis of no serial correlation. First difference operator
has been used, which helped in overcoming the problem. But the result obtained
after first differencing the variables is assumed to produce less reliable results as the
procedure ignores the first observation, which may not matter for large samples but
may prove detrimental in case of small samples. In order to cure this problem,
another procedure called as Prais–Winsten Transformation (Gujarati 2014) has been
used to take into account the first observation as well. Therefore, the results por-
trayed by the Prais–Winsten estimation indicated a transformed d-statistic3 of 1.76,
which lies between the upper bound (dU) of 1.82 and lower bound (dL) of 1.70, thus
signaling absence of serial correlation in the model (Table 4.5).

4.6.1 Interpretation and Findings

Table 4.6 shows the result of multiple regression analysis carried on a sample of 15
PSBs for a period from April 2001 to March 2015 comprising of five predictors
regressed against NIM (dependent variable). The value of R2 in the model is
estimated at 0.36 which reveals that predictors collectively are responsible for
bringing a change of 36% in NIM. The value of 0.000 for prob > chi2 indicates that
the model is nicely fitted as none of the regression coefficients for explanatory
variables equals zero. The regression coefficients for each regressor along with their
p-values and standard errors are also highlighted in Table 4.6.
It can be estimated that there exists a positive and significant correlation between
NIM and LIR as the values of regression coefficient and p-value are 0.1347 and
0.001, respectively. It means that there will be positive change of 13.47% in NIM of

2
Wooldridge test for autocorrelation in panel data (STATA output):
H0: no first-order autocorrelation
F (1, 14) = 1.448
Prob > F = 0.004.
3
The values of dL and dU are taken from Durbin–Watson table for 225 observations with 5
regressors at 5% level of significance (where d-statistic stands for Durbin–Watson Statistic).
4 Impact of Macroeconomic and Bank-Specific … 59

Table 4.5 Prais–Winsten transformation

Source: Results obtained using STATA Software

Table 4.6 Regression analysis

Predictors: lir - Lending Interest Rate, gdp – Gross Domestic Product Growth Rate, inf - Inflation,
crar - Capital to Risk Weighted Assets Ratio and npl – Non Performing Loans.
Dependent Variable: nim - Net Interest Margin.
Source: Results obtained using STATA Software.
60 A. A. Wani et al.

PSBs as a result of a unit change in LIR. In other words, bank’s policy of increasing
the lending interest rates will prove improving the NIM. Among the macroeco-
nomic indicators, there exists a positive and statistically direct relationship between
NIM and GDP as the values for regression coefficient and p-value are 0.1807 and
0.000, respectively. Similarly, direct and significant relationship between INF and
NIM can be estimated from the regression coefficient and p-value, which stand at
0.1713 and 0.000%, respectively. These values confirm that a unit change in
inflation can bring a positive variation of 17.13% in NIM. From the bank-level
indicators, a positive correlation of CRAR and NIM can be estimated as the
regression coefficient stands at 0.1436% (approx.). Further, this relationship is
statistically significant as the p-value stands at 0.000. All the PSBs have maintained
CRAR on an average well above the threshold value of 9% as laid down by
Basel II. Moreover, a negative and statistically significant association between NPL
and NIM can be estimated as is elicit from the regression coefficient of −0.2690%
and p-value of 0.000. This negative correlation signals that 26.90% downside
change in NIM can be experienced, if a unit change in NPL is observed.
Though all the relationships are economically significant, it can also be observed
from Table 4.6 that except NPL, all other predictors bear a positive and significant
relationship with NIM. For brevity of exposition, these statistically and economi-
cally significant correlations are consistent with the theoretical literature and vari-
ably related to the empirical evidences.
All macroeconomic indicators included in the study proved to be statistically and
directly linked to NIM, meaning that macroeconomic environment in which PSBs
operate, significantly influences their performance. The positive connection between
NIM and GDP implies that in the periods of higher growth, NIM can increase due to
proliferation in the credit activity and better loan quality. The PSBs can improve
their efficiency by augmenting their NIM, when they operate in the favorable
macroeconomic ambience as verified by the empirical findings related to INF and
GDP. There are various empirical studies like Tan and Floros (2012), Fadzlan and
Kahazanah (2009), Jiang et al. (2003), Guru et al. (2002), and Demirgüç-Kunt and
Huizinga (1999) which support this inference. Further, the positive economic growth
can be understood as the productive functioning of all the sectors in an economy,
where banking is not an exception. With respect to inflation, PSBs are seen bene-
fitting from the increase in inflation in terms of NIM. The possible reason for the
relationship can be conceived from the impact of inflationary pressures on the
economy. To grapple such pressures, banks normally employ the policy of
increasing lending rates in order to limit the circulation of money into the economy
and bring down the inflation to the normal level. The RBI executes the strategy of
contractionary monetary policy by either allowing banks to expand the money
supply more slowly than usual or strictly directing them to shrink the supply of
money for the sake of price stability and thus financial stability. During such periods,
any advances made by the PSBs can boost their efficiency by experiencing higher
NIM through increased lending rates. Laconically, it can be thought of that increased
lending rates especially during the periods of higher inflation can prove beneficial for
the PSBs. Thus, the results are in line with Perry (1992).
4 Impact of Macroeconomic and Bank-Specific … 61

Within the banking environment, a significant negative correlation observed

between NPL and NIM signals about stressed financial statements of PSBs. The
underlying possible explanation can be attributed to lending and credit extension by
the PSBs to the private sector, which resulted in the deteriorated picture of their
balance sheet and erosion of their capital. The problem of NPL has become a
stumbling block in the path of income generation and in beautifying the capital base
of PSBs. The languished picture of financial statements or balance sheet syndrome
has further led to inadequate loss provisions resulting into the adverse impact on
depositor’s and investor’s confidence. This way PSBs are apprehended to be prone
to the financial risks, stagger and direct themselves to get hobbled by the reputa-
tional risk. This catchall of circumstances in the PSBs emphasizes to institute better
policies of lending and credit to rejuvenate their actual potential and thus invigorate
the economy. Therefore, PSBs can combat the problem of NPL by earmarking
reserves of reasonable magnitude and periodically keep monitoring their long-term
debtors for income smoothing. The adverse consequences of rising NPLs may
otherwise infuse credit risk, inviting liquidity crisis and thus, eroding the capital
buffers as well.
With regard to CRAR, it has proved to be a cushion for the survival of PSBs as
usual, as the PSBs are very prudent in maintaining capital ratio more than profit
making. This risk aversion mechanism in terms of CRAR may signal the conser-
vative behavior adopted by PSBs. This may also be estimated that due to the rising
toll of NPAs, regulators start weaving safety nets through increased buffers of
capital with the opportunity cost of missing the investment avenues to elevate their
efficiency through financial intermediation. These inferences are also supported by
empirical evidences like Bourke (1989), Berger (1995), Angbazo (1997), Haslem
(1969), and Olalekan and Adeyinka (2013).

4.7 Limitations of the Study

The study is confined to a time period of fifteen years from 2000–01 to 2014–15
and includes only public sector banks, comprising of fifteen representative banks on
the basis of market capitalization (NSE), which as a whole constitutes 56% of
Indian public sector banks. Furthermore, only a few indicators from macro- and
bank environment have been studied on the grounds of their criticality, relevance,
and understandability.

4.8 Conclusion

In this study, we analyzed the determinants of NIM from both macroeconomic and
bank environments for a sample of 15 PSBs during the period starting from April
2001 to March 2015. The study used classical multiple linear regression with fixed
62 A. A. Wani et al.

effects and random effects model. The regression analysis educed with a host of
conclusive remarks and policy implications.
As far as macroeconomic performance is taken into account, it significantly
influences the financial intermediation of PSBs. The favorable economic ambience
can prove as a main driver for encouraging net interest margin of PSBs, which can
be traced from the empirical relevance of inflation and GDP with the NIM. The
growing economy implies smooth functioning of private sector, which can be seen
as an indication of the recovery of bad debts pertaining to the PSBS. Inflation as a
concomitant element of the economic growth can be put under the thumb by the
timely ensured monetary policies. In light of favorable macroeconomic circum-
stances, PSBs can efficiently intermediate but as the inflation paces up, contrac-
tionary monetary policy can prove benign for the PSBs. As the policy increases, the
short-term lending rates, the borrowing capacity and attractiveness of loans
diminish. During the time, any advances made by the PSBs give impetus to their net
interest margins. High capital to risk-weighted assets ratio (CRAR) has implied the
prudence, risk aversion behavior, and also foregoing of profitable investment
opportunities on the part of PSBs. The PSBs need to revamp their policy with
respect to CRAR as unreasonable or excessive quantum of capital buffers will only
make them incur opportunity cost of relinquishing the lucrative investment avenues.
As far as NPLs are concerned, it has proved to be a chronic problem especially
with PSBs in India. The policy implications like cutting the loan loss provisions to
the level of reasonability, timely and consistent implementation of guidelines from
the central bank, cautious credit extension, persistent monitoring of long-term
debts, and accessing Reserve Bank Of India’s database on non-performing loans
(CRILC—Credit Repository Information On Large Credits) will be instrumental in
bringing the NPLs down to a large possible extent.
It is suggested for the public sector banks to merge for better consolidation,
allocation of funds, and investment prospects. It is also suggested to install better
risk management practices and let them trickle down to the branch level for better
monitoring of interest rate structure, capital adequacy norms, and NPL management
along with other operations.

4.9 Directions for Future Research

As the current study is limited to a few PSBs, researchers may enquire into the same
phenomena for all public sector banks for substantial results. Further areas for
research may also include impact of interest rate risk and credit risk on NIM of
banks; studying the behavior of NIM during recessionary and booming periods in
an economy alongside inflationary pressures on the earnings of banks can also be
the debatable topics for future research. Researchers may also deliberate on issues
like non-performing loans and liquidity crisis particularly in public sector banks of
India.
4 Impact of Macroeconomic and Bank-Specific … 63

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Chapter 5
A Trend Analysis of Reforms
in the Indian Bond Market

Rahul Rangotra

Abstract The paper analyses the impact of various reforms undertaken by the
government of india to improve liquidity, transparency, and security in the Indian
bond market. It considers reforms initiated by government of india since 1992 that
include introduction of system of primary dealers, establishment of Clearing
Corporation of India Limited as a clearinghouse, introduction of screen-based
trading in government securities through negotiated dealing system-order matching
(NDS-OM), trading of bonds through stock exchanges, introduction of delivery
versus payment system, etc. Time series graphs are used for analysis by collecting
secondary data from Reserve Bank of India, Securities and Exchange Board of
India, Clearing Corporation of India Limited, and National Stock Exchange. Indian
government securities market has changed significantly in the last two decades.
The impact of reforms on the Indian bond market is examined by analyzing the
combined gross borrowing of center and state government through government
securities (increased by around 8900% from 1991–92 to 2016–17), secondary
market transactions in government securities (increased by around 430,000% from
September 1994 to September 2017), net corporate debt outstanding (increased by
around 225% from June 2010 to September 2017), total trade in corporate bond
market (increased by around 1450% from 2007–08 to 2016–17), and other vari-
ables related to the liquidity and size of Indian bond market. The impact of reforms
is found to be positive for all the dimensions but have significant impact only on the
size and liquidity of the Indian bond market. The study concludes with strategic
implications.

Keywords Corporate bond market
Government securities market

India

R. Rangotra (&)
Department of Management Studies, Central University of Kashmir,
Srinagar, Jammu and Kashmir, India
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 65

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_5
66 R. Rangotra

5.1 Introduction

Before eighteen century, the Indian princely states used to meet the borrowing
requirements from indigenous bankers. Raising debt from the public was first
introduced by the East India Company to finance Anglo-French wars (RBI, n.da).
Raising the public debt was also one of the main reasons for setting central bank in
India. In 1867, first time the public debt was raised to finance railways construction
and public works like irrigation canals in India. British government also raised
public debt to finance the cost of war. In India, public debt was managed by
Comptroller and Auditor General of India till 1913 and by controller of currency till
1935. After the Reserve Bank of India commenced its operations, the public debt is
managed by the public debt office of RBI. After independence of India the public
debt was used to finance the five years plans. Between 1985 and 1991 with the
recommendation of the Chakravarty Committee Report, the attempt was made to
align the interest rate on government securities with market interest rates.
Indian bond market is an emerging bond market. However, it is comparatively
small and less liquid than developed bond markets and is ranked fourth in Asia with
70% share of government bonds, (Sabnavis and Mehta 2014). Relative to its Asian
peers, a wide range of issuers, such as government, public sector undertakings,
banks and corporates and investors participate in Indian bond market and due to
underdeveloped corporate bond market in emerging markets, corporations generally
depend on the banks to raise capital. This consequently results in more credit risk to
be borne by the banks. To overcome the problems in the Indian bond market, the
government of india has introduced various reforms since 1992. Before 1992, the
market of government securities was dominated by the banks due to high statutory
liquid ratio (SLR) and cash reserve ratio (CRR). The interest rates were kept very
low to provide low-cost finance to the government. Liquidity was lacking, sec-
ondary market was not transparent, and there was lack of smooth yield curve which
can be used as a benchmark for corporate bond market.

5.2 Review of Literature

The corporate debt market is important for economy and its stakeholders like
government, corporate, investors, and financial institutions (The International
Capital Markets Association 2013). As revealed by many studies that relationship
between the size of corporate bond market, equity market, bank loan, and gov-
ernment bond market is vital for the development of the corporate bond market and
act as benchmark for the corporate bond market. Endo (2000) argued that corporate
bond market can substitute the long-term bank loans and reduces the risk in the
banking system. Goodfriend (2005) argued that the interest cost is less for the firms
which raise funds from the corporate bond market. Endo (2000) observed that in
5 A Trend Analysis of Reforms in the Indian Bond Market 67

developing countries the corporate bond market can reduce the risk of banking
system and regulatory, and institutional support is required for corporate bond
market. Rakshit (2000), Herring et al. (2000), Corsetti et al. (1998) argued that had
there been bond market particularly corporate bond market the Asian financial crisis
of 1997 would have been avoided. Wells and Schou-Zibell (2008) argued that for
the development of corporate bond market regulatory framework is important and
disorganized and inconsistent regulatory framework hinders the development of the
corporate bond market. Endo (2000) argued that the reforms in the corporate bond
market were started in the developed bond markets like USA, Germany, Japan after
the reforms in the equity and the government bond market (Endo 2000). Wells and
Schou-Zibell (2008) stated that the securitization in India is yet to be taken off.
Luengnaruemitchai and Ong (2005) argue that the crowding out increases the cost
of borrowing for the corporate. But in India it is otherwise, i.e., government bond
market helped in the development of the corporate bond market (Raghavan and
Sarwano 2012). The banking system is large in the economy where the corporate
bond market is absent (Harkansson 1999). So, analyzing the impact of reforms in
the Indian government securities and corporate bond market is important for at least
five reasons. First, government securities markets help to fund the budget deficit of
the government in a non-inflationary way. Second, it improves the effectiveness of
monetary policy of the central bank. Third, sovereign yield provides the benchmark
for valuation of other securities. Fabella and Madhur (2003) suggested that active
sovereign bond market need to be established which serves as a base for the
development of corporate bond market. Particularly, sovereign debt market of a
country should be efficient, liquid, transparent, and risk-free to act as benchmark in
valuation of other securities in the country. Fourth, research on the factors affecting
bond market is important to help the policymakers to improve the stability and
efficiency of the financial system. Fifth, domestic bond market needs to be devel-
oped as it helps in less dependency on foreign currency debt which causes problems
during fluctuations in exchange rate. It also helps in efficient operations of monetary
policy. Also, development of corporate bond market is necessary to reduce the
dependence on the banking system and diversify the credit risk in the economy.
Taking into consideration the significance of the bond markets the present study is
conducted to analyze the impact of reforms undertaken by the government of india
since 1992 on the Indian bond market.
The paper is divided into sections. The second following section of the paper
discusses the reforms in the Indian government securities market since 1992, third
section highlights the research methodology used, fourth section shows the impact
of reforms in Indian government securities and corporate bond market with the help
of graphs, and the last section gives the concluding remarks.
68 R. Rangotra

5.3 Reforms in the Indian Bond Market

The Indian debt market can be divided into three main segments: government
securities market, public sector undertaking bonds, and corporate debt market. In
secondary market, the government securities can be traded through negotiated
dealing system-order matching (NDS-OM) and through telephone/over the counter.
Clearing Corporation of India Limited operates NDS-OM. Stock exchanges like
National Stock Exchange, Bombay Stock Exchange are allowed to facilitate trading
in government securities, public sector undertaking bonds and corporate bonds.
These exchanges have separate debt market segments called as wholesale debt
market and corporate bond market. National Securities Depository Limited (NSDL)
and Central Depository Services Limited (CDSL) act as depositaries in case of
government securities traded through stock exchanges. In stock exchanges, these
securities are regulated by Securities and Exchange Board of India (SEBI). There is
long list of reforms in the Indian bond market since 1992 (RBI 2007).
Reforms in the government securities and corporate bond market in India were
started in 1992. Before 1992, government securities market was dominated by the
banks due to various factors such as high statutory liquid ratio (SLR), low-interest
rates, low liquidity, and transparency in the secondary bond market, and due to all
these, there is lack of smooth yield curve which can be used as a benchmark.
Mohan (2004a, b) in his paper remarked even after reforms that due to high cash
reserve ratio (CRR) and SLR. RBI has very little room for monetary maneuvering.
The government securities market has undergone the reforms such as adoption of
screen-based trading, holding of government securities in dematerialized form,
incorporation of Clearing Corporation of India Limited, issuing of new types of
government securities like inflation-indexed bonds, securities with embedded
options, floating rate government securities, deregulation of interest rates,
improvement in transparency and liquidity, better legal environment. Further, the
network of primary dealers was introduced and wholesale debt market segment was
introduced in National Stock Exchange and Bombay Stock Exchange. Also, retail
and foreign investors are entering into the market beside the Indian institutional
investors. (Sabnavis and Mehta 2014) remarked that in India among the different
institutional investors, banks are the major investors of government bonds in India.
Domestic financing is dominated by the bank credit, and the share of corporate
bonds is only 18.4% while foreign holding in local government bonds is only 1.4%.
Reforms in the bond market were essential due to many reasons, some of the
reasons were (a) to finance the increasing budget deficit of the government at
reasonable cost, (b) to increase the investor base, (c) to increase the overall effi-
ciency of the Indian capital market, (d) to improve the liquidity and transparency in
the secondary market of the government securities, (e) to help in funding the
infrastructure projects, (f) to better implementation of monetary policy, (g) to
reduce the burden of lending and share the credit risk with the banks, (h) to help the
5 A Trend Analysis of Reforms in the Indian Bond Market 69

development of corporate bond market, as government securities’ market act as a

benchmark for corporate bond market, (i) to help the corporates to raise debt from
the market efficiently.

5.4 Methodology

The objective of the paper is to analyze the impact of reforms undertaken by the
government of india since 1992 in the Indian bond market. The secondary data was
collected from Reserve Bank of India (RBI, n.db), Securities and Exchange Board
of India, Clearing Corporation of India Limited, and National Stock Exchange. All
the data was analyzed under seven heads, namely expansion of the government
securities market (from 1980 to 2017), expansion of Indian corporate bond market
(from 2009 to 2017), turnover of government securities market (from 1998 to
2017), treasury bills outstanding (from 2006 to 2017), ownership pattern of the
government of india dated securities (from 2007 to 2017), maturity pattern of
government securities (from 1976 to 2017), and Indian 10-year government bond
yield (from 1994 to 2017). Period of the analyzing depends upon the availability of
the data. Time series graphs and descriptive statistics are used for data analysis.

5.5 Impact of Reforms on Bond Market

5.5.1 Expansion of Governments Securities Market

Indian government finances its fiscal deficit through debt financing by issuing
short-term, medium-term, and long-term securities. Table 5.1 shows the gross fiscal
deficit (GFD) of central government and its financing through market borrowings.
The gross fiscal deficit has increased from Rs. 82.99 billion in 1980–81 to Rs.
5465.32 billion in 2017–18, and the major portion of this fiscal deficit was financed
by the market borrowing, i.e., by issuing of government securities. As it is clear
from Table 5.1 and Fig. 5.1 that major portion of the GFD of the government of
india is financed by issuing the government securities. The percentage of GFD
financed from market borrowings has increased from 32% in the year 1980–81 to
63% in the year 2017–18. This is a significant change.
State governments also raise funds by issuing government bonds, called as state
development loans (SDL), with the help RBI to finance their budget deficit. SDL
add to the supply of government securities in the market, these securities also
eligible for investment under statutory liquid ratio (SLR). Table 5.2 shows the
states’ gross fiscal deficit and its financing, and it is clear from Table 5.2 and
Fig. 5.2 that the major portion of the state gross fiscal deficit is also financed by
issuing government securities, i.e., market borrowings. The percentage of GFD
 70

Table 5.1 Centre’s gross fiscal deficit of central government and its financing (Rupees billion)
Year 1980–81 1985–86 1990–91 1995–96 2000–01 2005–06 2010–11 2015–16 2017–18
Gross fiscal deficit 82.99 218.58 446.32 602.43 1188.16 1464.35 3735.91 5327.91 5465.32
Financing of GFD—market borrowings 26.79 48.84 80.01 340.01 734.31 1062.41 3263.99 4149.31 3482.26
% of GFD financed from market borrowings 32.281 22.34,422 17.9266 56.43975 61.80228 72.55164 87.368 77.87876 63.71557
Source of data RBI’s Database on Indian Economy
R. Rangotra
5 A Trend Analysis of Reforms in the Indian Bond Market 71

6000.00

5000.00 Gross fiscal deficit

4000.00

3000.00 Financing of GFD - Market

borrowings
2000.00

1000.00

0.00

Source of Data: RBI’s Database on Indian Economy

Fig. 5.1 Centre’s gross fiscal deficit of central government and its financing

financed from market borrowings has increased from 5% in the year 1980–81 to
75% in the year 2017–18, beside this total financing of GFD through market
borrowing has increased from 1.98 billion rupees to 3387.42 billion rupees,
respectively (Fig. 5.3).
Gross fiscal deficit as percentage of GDP has decreased but the quantum of
deficit has increased as the Indian economy is expanding. Since 1970, gross fiscal
deficit of central government is fluctuating between 2.5 and 8% of GDP. In the
current fiscal year, gross fiscal deficit is estimated as 3.24% of GDP. Table 5.3 and
Fig. 5.4 show the combined fiscal deficit of state and central government. The
combined fiscal deficit is very high even if the gross fiscal deficit of the central
government is decreasing. The combined gross fiscal deficit in the current fiscal is
6.5% of GDP. All this show that both state and central government have to depend
on the market borrowing for financing the fiscal deficit which increases the supply
of the government securities in the Indian government securities market.
Table 5.3 and Fig. 5.5 show the combined market borrowings of central and
state governments since 1980. The combined market borrowings of central and
state governments are increasing and in the year 2016–2017 reached to
11,065.05 billion rupees gross and 7393.41 billion rupees net.
This shows that the supply of the Indian government securities is increasing very
fast. As India is a developing country, deficit budget is the requirement for
development of the economy and to finance the fiscal deficit government has to
depend on the market borrowing. Because of this the supply of government
securities has increased significantly.

5.5.2 Expansion of Indian Corporate Bond Market

Indian corporate bond market is small as compared to the government securities

market. Corporate bond market has expanded many times after the reforms.
 72

Table 5.2 States’ gross fiscal deficit and its financing (Rupees billion)
Year 1980–81 1985–86 1990–91 1995–96 2000–01 2005–06 2010–11 2015–16 2016–17
Gross fiscal deficit 37.13 75.21 187.87 308.7 879.22 900.84 1614.61 4933.61 4495.24
Financing of GFD—market borrowings 1.98 10.1 25.56 58.88 125.19 153.05 887.76 2840.5 3387.42
% of GFD financed from market borrowings 5.332615 13.42907 13.60515 19.07353 14.23876 16.9897 54.98294 57.57447 75.35571
Source of data RBI’s Database on Indian Economy
R. Rangotra
5 A Trend Analysis of Reforms in the Indian Bond Market 73

6000.00
Gross Fiscal Deficit
5000.00
Financing of GFD - Market
4000.00 Borrowings

3000.00

2000.00

1000.00

0.00

Source of Data: RBI’s Database on Indian Economy

Fig. 5.2 States’ gross fiscal deficit and its financing

9.00
Gross Fiscal Deficit
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00

Source of Data: RBI’s Database on Indian Economy

Fig. 5.3 Gross fiscal deficit of central government as percentage of GDP

Table 5.3 Market borrowings of central and state governments (combined) (Rupees billion)
Year 1980–81 1985–86 1990–91 1995–96 2000–01 2005–06 2010–11 2015–16 2016–17
Gross 32.04 71.78 115.58 467.83 1284.83 1817.47 5835.21 10335.93 11065.05
Net 28.11 60.74 105.7 327.21 866.67 1136.92 4147.97 7048.35 7393.41
Source of data RBI’s Database on Indian Economy

The data on public issue of corporate debt shows that only one company
issued public corporate debt in 2009 with issue size of Rs. 1500 crores, but in 2016
sixteen companies issued public corporate debt with the total issue size of
74 R. Rangotra

12.0
Gross fiscal deficit
10.0

8.0

6.0

4.0

2.0

0.0

Source of Data: RBI’s Database on Indian Economy

Fig. 5.4 Combined deficits of the central and state governments (as percentage to GDP)

12000
Gross
10000
Net
8000

6000

4000

2000

Source of Data: RBI’s Database on Indian Economy

Fig. 5.5 Market borrowings of central and state governments (combined)

Rs. 29547.15 crores. Outstanding corporate debt in June 2010 was Rs. 735433.10
crores which has increased to Rs. 2586857.33 crores in September 2017. Total
trading in corporate bonds in 2007–08 was Rs. 95889.706 crores which has
increased to Rs. 1470662.51 in 2016–17. Source of data is Securities and Exchange
Board of India (SEBI, n.d.). This data shows that the corporate bond market is
expanding and moving toward a developed bond market.
Charts 5.1 and 5.2 (Khan 2016) show that the liquidity in both primary and
secondary markets of Indian bond market is improving and bid–ask spread is
decreasing.
5 A Trend Analysis of Reforms in the Indian Bond Market 75

Chart 5.1 Liquidity in the primary and secondary markets

Chart 5.2 Bid–ask spread

5.5.3 Turnover of Government Securities Market

(Face Value)

Turnover is one of the most important indicator of liquidity in the capital market.
Due to improvement in the technology, screen-based trading, and other develop-
ments, there is significant increase in turnover in the government securities market
in the last two decades. The turnover in the state government securities was very
low as compared to central government securities. Share of central government
securities has increased to more than 90% at the end of 2017. Table 5.4 shows that
the turnover is also low in T-Bills. Total turnover has increased from 58 billion
rupees in 1998 to 3858 billion rupees at the end of the year 2017. Figure 5.6 shows
the increase in the turnover in the last few decades.
 76

Table 5.4 Turnover in government securities market (face value)

Week ended Outright transactions (Rs. Billion) Total Percentage of total
Central government State government T-Bills Central government State government T-Bills
dated securities dated securities dated securities dated securities
03-Apr-1998 37.42 0.41 20.57 58.40 64.08 0.70 35.22
25-Dec-1998 28.23 0.27 12.20 40.70 69.36 0.66 29.98
31-Dec-1999 98.45 2.17 17.66 118.28 83.23 1.83 14.93
29-Dec-2000 113.31 0.44 14.01 127.76 88.69 0.34 10.97
28-Dec-2001 150.11 2.58 26.32 179.01 83.86 1.44 14.70
27-Dec-2002 686.04 7.35 38.99 732.38 93.67 1.00 5.32
26-Dec-2003 420.13 3.74 33.52 457.39 91.85 0.82 7.33
31-Dec-2004 250.56 9.45 124.47 384.48 65.17 2.46 32.37
30-Dec-2005 107.77 3.55 28.04 139.36 77.33 2.55 20.12
29-Dec-2006 63.51 2.89 18.50 84.90 74.81 3.40 21.79
28-Dec-2007 368.31 6.13 61.47 435.91 84.49 1.41 14.10
26-Dec-2008 1115.41 24.34 60.39 1200.14 92.94 2.03 5.03
25-Dec-2009 863.71 29.35 111.13 1004.19 86.01 2.92 11.07
31-Dec-2010 660.64 12.78 57.12 730.54 90.43 1.75 7.82
30-Dec-2011 1494.45 12.16 129.65 1636.26 91.33 0.74 7.92
28-Dec-2012 1908.99 29.27 168.80 2107.05 90.60 1.39 8.01
27-Dec-2013 1256.70 25.53 279.46 1561.70 80.47 1.63 17.89
25-Dec-2015 2224.62 134.85 222.44 2581.91 86.16 5.22 8.62
30-Dec-2016 3446.51 245.72 692.78 4385.02 78.60 5.60 15.80
10-Nov-2017 3603.70 110.91 143.71 3858.32 93.40 2.87 3.72
Source of data RBI’s Database on Indian Economy
R. Rangotra
5 A Trend Analysis of Reforms in the Indian Bond Market 77

Turnover In Government SecuriƟes Market

18000.00
(Face Value)
16000.00
14000.00
(Rupees Billion)

12000.00
10000.00
8000.00
6000.00
4000.00
2000.00
0.00

Year
Central Government Dated SecuriƟes State Government Dated SecuriƟes Treasury Bills Total

Source of Data: RBI’s Database on Indian Economy

Fig. 5.6 Turnover in government securities market (face value)

5.5.4 Treasury Bills Outstanding

Treasury bills are the short-term source of finance for government of india.
Government of india issues 14 days, 91 days, 182 days, 364 days, and cash
management bills to raise short-term funds from the market. The bills outstanding
are increased significantly over the years. 14 days, 91 days, 182 days, and
364 days T-Bills increased from 357.21, 231.43, 73.74, and 402.38, respectively, to
1127.99, 2045.75, 859.65, and 1403.91 billion rupees, respectively, from 2006 to
2017 and in percentage they have increased to 215.7778, 783.9606, 1065.785, and
248.9015%, respectively.
As it is clear from Table 5.5 that the total outstanding treasury in the year 2017
is more than Rs. 6000 billion. So the increase in T-Bills outstanding is very sig-
nificant in the last one decade (Figs. 5.7 and 5.8).

5.5.5 Ownership Pattern of Government

of India Dated Securities

One aspect of the Indian government securities market has not much changed in the
last decade or so is the ownership pattern. Ownership in the Indian government
securities market is dominated by the commercial banks, insurance companies, and
RBI. Various participants in the Indian debt market are central government, state
government, commercial banks, primary dealers, PSUs, corporates, and financial
 78

Table 5.5 Government of india: treasury bills outstanding

Weed 14 day total 14 day total 91 day total 91 day total 182 day total 182 day total 364 day total 364 day total
ended (Rs. Billion) (% increase (Rs. Billion) (% increase (Rs. Billion) (% increase (Rs. Billion) (% increase
from 2006) from 2006) from 2006) from 2006)
12-May-06 357.21 231.43 73.74 402.38
18-May-07 290.62 −18.6417 493.9 113.4123 192.49 161.0388 569.42 41.513
16-May-08 442.95 24.00269 470.48 103.2926 170.88 131.7331 589.25 46.44118
15-May-09 641.59 79.61143 800.03 245.6898 203.75 176.3087 494 22.76952
14-May-10 782.9 119.1708 735 217.5906 215 191.565 445.23 10.64914
13-May-11 727.08 103.5441 810.17 250.0713 272.51 269.5552 444.57 10.48511
18-May-12 735.6 105.9293 1473.10 536.5208 550.1 645.9995 993.8 146.9805
17-May-13 817.5 128.857 1164.15 403.0247 641.99 770.613 1304.89 224.293
16-May-14 675.59 89.12964 1588.28 586.2896 763.97 936.032 1408.15 249.9553
15-May-15 746.79 109.0619 1553.99 571.473 769.73 943.8432 1431.73 255.8154
13-May-16 1027.54 187.6571 1542.93 566.694 774.95 950.9222 1539.67 282.6408
12-May-17 1326.60 271.3782 1623.60 601.5512 872.24 1082.859 1412.50 251.0363
04-Nov-17 1127.99 215.7778 2045.75 783.9606 859.65 1065.785 1403.91 248.9015
Source of data RBI’s Database on Indian Economy
R. Rangotra
5 A Trend Analysis of Reforms in the Indian Bond Market 79

Treasury Bills Outstanding

2,500.00

2,000.00
RUPEES BILLION

1,500.00

1,000.00

500.00

0.00

Time
14 Day (Intermediate) 91 Day Total 182 Day Total 364 Day Total

Source of Data: RBI’s Database on Indian Economy

Fig. 5.7 Government of india: treasury bills outstanding

Total % Increase in T- Bill Outstanding

1200

1000

800
Percent

600

400

200

0
01-Nov-08

01-Nov-13

01-Oct-16
01-Apr-09

01-Oct-11

01-Apr-14

01-Jul-15
01-May-06
01-Oct-06

01-Jul-10

01-Dec-15
01-May-16

01-Mar-17
01-Aug-17
01-Mar-07
01-Aug-07

01-Dec-10
01-May-11

01-Mar-12
01-Aug-12
01-Jan-08

01-Feb-15
01-Jun-08

01-Sep-09
01-Feb-10

01-Jan-13
01-Jun-13

01-Sep-14

-200

Axis Title
14 Day Total (% Increase from 2006) 91 Day Total (% Increase from 2006)
182 Day Total (% Increase from 2006) 364 Day Total (% Increase from 2006)

Source of Data: RBI’s Database on Indian Economy

Fig. 5.8 Total percentage increase in T-Bill outstanding

institutions. Primary dealers are the market makers in the government securities
market, underwrite the government securities, and help in the primary and sec-
ondary market operations. As it is clear from Fig. 5.9 that in March 2007
80 R. Rangotra

Ownership Pattern of Government of India Dated Securities

60.00

50.00

40.00
Percentage

30.00

20.00

10.00

0.00
Nov 2007

Nov 2008

Nov 2009

Nov 2010

Nov 2011

Nov 2012

Nov 2013

Nov 2014

Nov 2015

Nov 2016
Mar 2007
Jul 2007

Mar 2008
Jul 2008

Mar 2009
Jul 2009

Mar 2010
Jul 2010

Mar 2011
Jul 2011

Mar 2012
Jul 2012

Mar 2013
Jul 2013

Mar 2014
Jul 2014

Mar 2015
Jul 2015

Mar 2016
Jul 2016

Mar 2017
year
Commercial Banks Non-Bank PDs
Insurance Companies Mutual Funds
Co-operative Banks Financial Institutions
Corporates Foreign Portfolio Investors
Provident Funds RBI
Others (Inclu. State Governments) State Governments

Source of Data: RBI’s Database on Indian Economy

Fig. 5.9 Ownership pattern of government of india dated securities

commercial banks, insurance companies, and RBI owned 49.68, 26.19, and 6.51%
of the government securities, respectively, which is changed in March 2017 to
40.46, 22.9, and 14.65%, respectively. So the domestic institutional investors are
dominant players in Indian government securities market (Fig. 5.10).
Figure 5.8 shows the percentage ownership of foreign portfolio investors in
government securities in India. As it is clear from Fig. 5.8 that the ownership has
increased from 0.18% in March 2007 to 3.53 in March 2017. So the role of foreign
portfolio investors is increasing in the Indian government securities market.

5.5.6 Maturity Pattern of Government of India Rupee Loans

Maturity pattern of government securities is also changing, and earlier the market
was dominated by the securities with maturities more than 10 years. Table 5.6
shows how the maturity pattern has changed in the last four decades. The per-
centage of over 10-year bonds is decreasing and under 5-year bonds and between 5-
and 10-years bonds are increasing. As it is clear from Fig. 5.11 that the over
10-year maturities still dominate but the bonds with maturities under 5-years and
between 5 and 10 years are also increasing (Fig. 5.12).
5 A Trend Analysis of Reforms in the Indian Bond Market 81

Ownership Pattern of Government of India Dated Securities March 2007

1.86 0
6.68 6.51

4.79 0.18

0.70
2.97
49.68
0.44

26.19

0.41

Commercial Banks Non-Bank PDs Insurance Companies

Mutual Funds Co-operative Banks Financial Institutions
Corporates Foreign Portfolio Investors Provident Funds
RBI Others (Inclu. State Governments) State Governments

Ownership Pattern of Government of India Dated Securities March 2017

5.98 1.92

40.46

3.53
1.05
0.81
2.70 22.90
0.16
1.49

Commercial Banks Non-Bank PDs

Insurance Companies Mutual Funds
Co-operative Banks Financial Institutions
Corporates Foreign Portfolio Investors
Provident Funds RBI
Others (Inclu. State Governments) State Governments

Source of Data: RBI’s Database on Indian Economy

Fig. 5.10 Ownership pattern of government of india dated securities

82 R. Rangotra

Table 5.6 Maturity pattern of government of india rupee loans

Year Percent
Under 5 years Between 5 and 10 years Over 10 years
1977 15.1285 17.0343 65.0749
1987 9.79511 9.80765 80.3972
1997 40.9764 40.8326 18.191
2007 30.1336 29.8805 39.9859
2017 25.0397 33.2895 41.6694
Source of data RBI’s database on Indian Economy rest

Change in Percentage Share of Foreign Portfolio Investors in Indian Government Securities

Market.
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Nov 2007

Nov 2008

Nov 2009

Nov 2010

Nov 2011

Nov 2012

Nov 2013

Nov 2014

Nov 2015

Nov 2016
Mar 2007
Jul 2007

Mar 2008

Jul 2010

Mar 2011
Jul 2011
Jul 2008

Mar 2009
Jul 2009

Mar 2010

Mar 2012
Jul 2012

Mar 2013
Jul 2013

Mar 2014

Mar 2015
Jul 2015

Mar 2016
Jul 2016

Mar 2017
Jul 2014

Year
Source of Data: RBI’s Database on Indian Economy

Fig. 5.11 Change in percentage share of foreign portfolio investors in Indian government
securities market

Maturity Pattern of Government of India Rupee Loans

100

80
PERCENTAGE

60

40

20

0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Axis Title
Under 5 Years Between 5 and 10 Years Over 10 Years

Source of Data: RBI’s Database on Indian Economy

Fig. 5.12 Maturity pattern of government of india rupee loans

5 A Trend Analysis of Reforms in the Indian Bond Market 83

5.5.7 Indian 10-Year Government Bonds Yield

The benchmark yield of Indian 10-year government bonds is decreasing over the
years. The 10-year government bond yield was 12.8% in the year 1994 and
decreased to the lowest to 5.285 in the year 2004 but the standard deviation of the
yield had been increased during the period. In the year 2009 and 2014, the yield
increased to 6.681 and 8.662, respectively, but the standard deviation has
decreased. Recently at the end of the year 2017, the yield was 7.34 and standard
deviation was 0.6562. Standard deviation is a measure of risk. So it can be con-
cluded that both risk and yield on the 10-year yield on government bonds have
decrease in the last two decades. It is good sign for the Indian economy as gov-
ernment is paying less for borrowing from the market and risk in the Indian market
has decreased. As it is also clear from Fig. 5.13 the 10-year government bond yield
is fluctuating from 5 to 12% points. The source of Fig. 5.13 is tradingeco-
nomics.com (Fig. 5.13; Table 5.7).

Fig. 5.13 Indian 10-year government bonds yield

Table 5.7 Indian 10-year government bonds yield

Year 01-05-1994 01-06-1999 01-06-2004 01-06-2009 01-06-2014 01-01-2018
10-year bond yield 12.8 12.22 5.285 6.681 8.662 7.34
St. Dev. 1.156724 2.409271 0.766376 0.499593 0.656205
84 R. Rangotra

5.6 Conclusion

Before 1990s, the Indian bond market was underdeveloped. In the last two decades,
the Indian bond market has changed significantly. The market has become more
liquid, transparent, and secure. Investor base is widening. With the innovation in the
market infrastructure such as introduction of NDS-OM, CCIL, screen-based trad-
ing, network of primary dealers, allowing the government securities to be traded
through stock exchanges, the volume in the secondary market has increased. With
the growth of market borrowings by central and state government, the supply of the
government securities has grown significantly in the last two decades. Beside the
plain vanilla bonds the innovative bonds like zero-coupon bonds, inflation-indexed
bonds, bonds with call and put options are also introduced in the Indian government
securities market. RBI is no longer taking part in the primary market of government
securities in India. Primary dealers act as underwriters in the market. RBI issues
securities with a wide range of maturities. Market is still dominated by the Indian
institutional investors but the role of foreign institutional investors is also
increasing. With the improvement in liquidity, transparency, and security of
investment in the government securities market, investors’ base is widening. Retail
investors are still reluctant to invest in the Indian government securities market.
Ownership of these securities is still dominated by the commercial banks, insurance
companies, and other institutional investors. The ownership of foreign portfolio
investors has increased from 0.18% in March 2007 to 3.53 in March 2017. The
maturity pattern is also changing. Over 10-year maturities still dominate but the
bonds with maturities under 5 years and between 5- and 10-years are also
increasing. There is significant increase in turnover in the government securities
market in the last decade due to improvement in the technology, screen-based
trading, and other developments. Benchmark 10-year government bond yield has
decreased in the last decade. Amount of outstanding treasury bills has increased
significantly over the years. In July 2017, outstanding treasury was more than
Rs. 6000 billion. The Indian government securities market is moving from
underdeveloped to the mature and developed debt market but the liquidity and
depth in the market are still low as compare to the developed debt markets. Central
government has issued securities worth of Rs. 15,000 crores every week in the
2017. The turnover in the market has also increased significantly. The impact of
reforms found to be positive for all the dimensions, and these reforms have sig-
nificant impact on the size and liquidity of the Indian bond market. The government
securities market is more liquid than the corporate bond market and liquidity is still
low as compared to the developed bond markets. Although liquidity is improving,
in order to reduce the dependency on the banking sector, India needs further
reforms, particularly in the corporate bond market. Even after the reforms the Indian
government securities market cannot compete with the developed debt markets in
other parts of the world. Challenges the Indian debt market still facing are low
participation of the retail investors, low liquidity of some of the securities like
securities issued by the state governments, which increases the cost of borrowings
5 A Trend Analysis of Reforms in the Indian Bond Market 85

of the state governments, domination of the large institutional investors. To com-

pete with the developed debt markets in the world, the liquidity, transparency, and
depth of Indian government securities market required to be improved further. The
study suggests that to improve liquidity in the Indian bond market the participation
of retail investors need to be increased, access to the trading platform of govern-
ment securities should be given to the small investors, government securities should
be allowed to trade through the Demat account and tax benefits should be given to
investors for investing in the government securities and corporate bonds.

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road ahead. RBI Bulletin, May 2004
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html
Chapter 6
Demand Forecasting
of the Short-Lifecycle Dairy Products

Rahul S. Mor, Swatantra Kumar Jaiswal, Sarbjit Singh

and Arvind Bhardwaj

Abstract Predictions of future market demands for dairy products are important
determinants in developing marketing strategies and farm-production planning
decisions. For business operations in dairy industry, the accuracy of the forecast is of
crucial importance because of the volatile demand pattern, influenced by an envi-
ronment of rapid and dynamic response. The current study aims to compare the
forecasting models like moving average, regression, multiple regression, and the
Holt–Winters model based on accuracy measures, applied to demand forecasting of
a time series formed by a group of perishable dairy products in milk processing
industry. Further, the metric analysis of various error-measuring techniques is also
applied to select the least error-producing model for such products as a performance
measure. Findings of the study will help dairy industry to achieve high order fill rate,
good inventory control as well as high profits. However, the selection of these
models depends upon the knowledge, availability of data, and context of forecasting.

Keywords Demand forecasting Error measures Dairy industry




Short-lifecycle products Seasonality Food processing

Nomenclature
Ft Forecasted demand for the period ‘t’
Yt Actual demand for the period ‘t’
ui Level factor for the period ‘t’
vi Trend factor for the period ‘t’
Si Seasonal factor for the period ‘t’
a Smoothing constant for demand or level

Electronic supplementary material The online version of this chapter (https://doi.org/10.1007/

978-981-13-1334-9_6) contains supplementary material, which is available to authorized users.

R. S. Mor (&)
S. K. Jaiswal
S. Singh
A. Bhardwaj

Department of Industrial & Production Engineering, National Institute of Technology,
Jalandhar, Punjab, India
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 87

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_6
88 R. S. Mor et al.

b Smoothing constant for trend

c Smoothing constant for seasonality
MAD Mean absolute deviation
MSE Mean square error
RMSE Root-mean-square error
MAPE Mean absolute percentage error
M.A. Moving average
H-W Holt and Winters

6.1 Introduction

India is the largest producer of milk in the world, and it is also the largest consumer
of milk, consuming almost its whole milk production. The dairy industry has been a
significant contributor to the gross domestic product in India, and its value of output
has grown significantly where the milk is processed and marketed by 170 milk
producers’ cooperative unions, which federate into 22 state cooperative milk mar-
keting federations. The organized sector still remains a minor stakeholder and
handles about 20% of the milk, whereas the unorganized sector of dudhiyas and
mithaiwallas still controls about 80% of the industry. There is a wide range of dairy
products in India such as milk (full cream, toned, double-toned, cow milk, standard
milk), curd, lassi (plain lassi, sweet lassi, spicy lassi), paneer, ghee, kheer (simple
kheer, kesar kheer), ice cream, butter, Pio milk 200-ml bottle, panjiri, khoya, pro-
cessed cheese, kaju pinni, jal jeera. The dairy industry needs key development in the
effectiveness of supply chain so as to meet the high-quality, reliability, and safety
standards of the export markets (Bhardwaj et al. 2016; Mor et al. 2018a, b, c, d).
Forecasting means estimating future event by casting the forward past data where
past data is systematically combined in a predetermined way to get the future esti-
mate. In other words, forecasting is the process of making predictions of the future
based on the past and present data and most commonly by analysis of trends or by
analysis of seasonality. Forecasting may be used for long-range planning,
intermediate-range planning, and short-term control (Kaloxylos et al. 2013).
Analysis of data requires the analyst to identify the underlying behavior of the series.
This can often be accomplished by merely plotting the data and visually examining
the plot at a specified interval of time. One or more patterns might appear like trends,
seasonal variations, cycles, and variations around an average (Yuan and Cai 2008).
In addition, there can be various terms such as trend, seasonality, cyclic variation,
random or irregular variations. Both qualitative and quantitative methods are used
for forecasting (Mor et al. 2018e). The quantitative methods of forecasting are based
on opinions, intuition, or personal experiences and are subjective in nature. They do
not rely on rigorous mathematical computations and permit inclusion of human
factor and are used for long- or intermediate-range decision of the new product (Leat
and Giha 2008). Whereas quantitative methods use the past data to forecast through
6 Demand Forecasting of the Short-Lifecycle Dairy Products 89

some statistical tools and are usually applied to short or intermediate range decisions.
These use time-series and casual methods for forecasting.

6.2 Literature Review

Mishra et al. (2016) observed the increase in expected number of items requested
by customers due to that with the sales forecasting, and it also affects the production
in order to produce goods. Ping (2016) aimed to predict their future handling
capacity based on the regression analysis model of the upper Yangtze River port
through forecasting. Sugiarto et al. (2016) used the sales and distribution module to
simplify the process of selling to customers in accordance with the interests of
customers for goods and services, make it easy to check the sale of goods and
delivery of goods, and facilitate the collection of customers. Tratar and Strmčnik
(2016) said that if an error occurs caused by the production of demand forecasting,
it will affect the process of the sale of goods to customers, and demand forecasting
can also be used for the avoidance of excess or shortage of supply of goods in the
warehouse. Gupta (2015) and Sarno and Herdiyanti (2010) worked on forecasting
the packaged food product demand using mathematical programming and found
demand forecasting as most common phenomenon observed in the industry.
Harsoor and Patil (2015) made an attempt by understanding the retail store busi-
ness’s driving factors by analyzing the sales data of Walmart store that is geo-
graphically located at various locations and the forecast of sales. Hassan et al.
(2015) proposed the procedure for new product sales forecasting which guides the
calculation of new product sales forecasts based on accusation, evaluation, and
choice of subjective forecasts provided by executives and sales team for new
products which do not have any historical data. Mor et al. (2015, 2017) concluded
that the sustainable agri-food supply chains can be achieved through innovation,
supply chain collaboration, elimination of uncertainties. Zhou et al. (2015) found
that a reliable inventory prediction can avoid product overstock and reduces the
maintenance cost, and proposed two-step dynamic forecasting model which is
capable to capture the characteristics of stock out time series. García et al. (2014)
emphasized on the strategic connotations to do with packaging design being one of
the supports of competitive advantages in the supply chain management.
Patushi and Kume (2014) suggested the cluster development as a way to increase
competitiveness in business and a way for the effective use of the potential of the
dairy processing industry through policy guidance and their management to meet the
challenges, focusing primarily the region of Tirana. Veiga et al. (2014) aimed to
compare the performances between ARIMA and Holt–Winters (H-W) models for
the prediction of a time series formed by a group of perishable dairy products. Weber
et al. (2014) dealt with the interactions of prices concerning different marketing
levels in the German dairy sector focusing on whole milk powder. Assis et al. (2013)
proposed a traffic characterization using two-dimensional flow analysis for modeling
the behavior traffic pattern, here called digital signature of network segment using
90 R. S. Mor et al.

flow analysis. Spicka (2013) presented an in-depth view on the competitive envi-
ronment of the Czech dairy industry through Porter’s five forces analysis and con-
cluded that the vertical business relationships within dairy supply chain can be
considered as the weakness of the Czech dairy industry. Amorim et al. (2013)
presented the trade-off by developing risk-averse production planning models and
suggested that it is possible to reduce the percentage of expired products that reach
the end of their shelf lives by using the risk-averse models. Taylor (2011) found that
efficient supply chain management relies on accurate demand forecasting. Jraisat
et al. (2013) stated that a company can sustain in business with the sale, but it must
have a strong sales function and also be able to distribute goods to customers quickly
and efficiently. Ghosh (2008) used the univariate time-series methods like multi-
plicative, seasonal, autoregressive, integrated, moving average, and Holt–Winters
multiplicative exponential smoothing to forecast the monthly peak demand of
electricity in India. Dhahri and Chabchoub (2007) applied the ARIMA model for
forecasting the sugarcane productions in India with annual data. Vaida (2008) dealt
with the theoretical aspects of the market demand method selection criteria and their
application in developing the Lithuanian furniture demand forecast.

6.2.1 Research Gaps

Forecasting is pretty basic practice in short-lifecycle products, and many of the

dairy industries have not adopted any advanced forecasting techniques. The
day-to-day demand in these industries is recorded on the basis of the information
given by the customers or retailers through telephonic conversation or other
informal methods. This method is simple yet sometimes proves efficient. But due to
the highly perishable nature of dairy items, a perfect forecasting technique is must
which leads to efficient production as well as the inventory management. This leads
to low order fill rate and wastages due to which overburden on the milk processing
plant is caused to meet the uncertain demand. All these reasons motivated authors
to design a research problem in the current study.

6.3 Methodology

This study started with an aim to identify various forecasting methods. The second
aim of the study is to propose a forecasting framework for short-lifecycle dairy
products. After the comprehensive literature review, pilot study, and discussion
with top-level managers of case industry, the problem is identified. Data is collected
from milk processing units located at northern India. The demand pattern analysis is
carried out based on collected data, and suitable forecasting models have been
nominated. Seasonality factor is also considered while estimating the demand, and
the hypothesis is framed. Findings of the study have been carried out while con-
sidering the accuracy measures also as follows.
6 Demand Forecasting of the Short-Lifecycle Dairy Products 91

6.3.1 Data Collection

A milk processing unit located in northern India was selected to execute the demand
forecasting of its perishable products in the current study. In order to forecast the
demand of the case industry, four-year data (from April 2013 to March 2017) was
collected through personal visits to various departments such as marketing, sales,
and procurement. The collected data was then converted into an excel spreadsheet.

6.3.2 Demand Pattern Analysis

The analysis of data requires the analyst to identify the underlying behavior of the
series. This can often be accomplished by merely plotting the data in MS Excel and
visually examining the plot at a specified interval of time. One or more patterns
might appear such as trends, seasonal variations, cycles, and variations around an
average. Seasonality may refer to regular annual variations where the variations in
time-series data repeat upward or downward movements. The term seasonal vari-
ation is also applied to daily, weekly, monthly, and other regularly recurring pat-
terns in data. Seasonality in a time series is expressed in terms of the amount that
actual values deviate from the average value of a series. If the series tends to vary
around an average value, then seasonality is expressed in terms of that average (or a
moving average), but if the trend is present, seasonality is expressed in terms of the
trend value. There are two different models of seasonality as additive and multi-
plicative. In the additive model, seasonality is expressed as a quantity (e.g., 20
units), which is added or subtracted from the series average in order to incorporate
seasonality. In the multiplicative model, seasonality is expressed as a percentage of
the average (or trend) amount (e.g., 1.10), which is then used to multiply the value
of a series to incorporate seasonality. Demand pattern found in various dairy
products of case milk processing industry is mentioned below:
i. Milk: During forecasting analysis, it was found that the milk demand follow
seasonal pattern and no trend was observed. So, it has to be taken into analysis
as it can help in minimizing the error. Milk demand pattern is shown in Fig. 6.1.
ii. Curd: As shown in Fig. 6.2, curd is also following monthly seasonal
demand pattern.
iii. Paneer: The demand pattern of paneer is shown in Fig. 6.3.
iv. Plain Lassi: The demand pattern of plain lassi is shown in Fig. 6.4.
v. Kheer: The demand pattern of kheer is shown in Fig. 6.5.
vi. Ice Cream: The demand pattern of ice cream is shown in Fig. 6.6.
vii. Table Butter: The demand pattern of table butter is shown in Fig. 6.7.
viii. Pio 200-ml Bottle: The demand pattern of Pio 200-ml bottle is shown in
Fig. 6.8.
ix. Ghee: The demand pattern of ghee is shown in Fig. 6.9.
92 R. S. Mor et al.

Milk Demand Pattern (2013-17)

4000000

3500000

3000000
0 10 20 30 40 50 60

Fig. 6.1 Demand pattern for milk

Curd Demand Pattern (2013-17)

200000
150000
100000
50000
0
0 10 20 30 40 50 60

Fig. 6.2 Demand pattern for curd

Paneer Demand Pattern (2013-17)

40000
30000
20000
10000
0
0 10 20 30 40 50 60

Fig. 6.3 Demand pattern for paneer

Plain Lassi Demand Pattern (2013-17)

1000000

500000

0
0 10 20 30 40 50 60

Fig. 6.4 Demand pattern for plain lassi

Kheer Demand Pattern (2013-17)

20000
15000
10000
5000
0
0 10 20 30 40 50 60

Fig. 6.5 Demand pattern for kheer

6 Demand Forecasting of the Short-Lifecycle Dairy Products 93

Ice Cream Demand Pattern (2013-17)

6000
4000
2000
0
0 10 20 30 40 50 60

Fig. 6.6 Demand pattern for ice cream

Table Butter Demand Pattern (2013-17)

10000

5000

0
0 10 20 30 40 50 60

Fig. 6.7 Demand pattern for table butter

Pio Bottle Demand Pattern (2013-17)

80000

60000

40000

20000

0
0 10 20 30 40 50 60

Fig. 6.8 Demand pattern for Pio bottle

Ghee Demand Pattern (2013-17)

60000

40000

20000

0
0 10 20 30 40 50 60

Fig. 6.9 Demand pattern for ghee

94 R. S. Mor et al.

6.4 Analysis, Result, and Discussions

The data collected from the select dairy industry has been analyzed by using MS
Excel, and the results obtained from the forecasting methods’ analysis are men-
tioned below.

6.4.1 Forecasting Results

6.4.1.1 Forecasting Results for Milk

For demand analysis of milk, different forecasting techniques were used and four
different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.1).
From Table 6.1, the method with minimum error will be chosen for the fore-
casting of milk and demand analysis (Fig. 6.10).
The errors calculated for multiple regression technique are minimum. Thus,
multiple regression technique is best for the forecasting of milk.

Table 6.1 Milk demand analysis

S. Forecasting MAPE MAD MSE RMSE
No. methods
1 MA5 3.820019 136844.9 26,637,481,767 163,209.9
2 MA6 4.012007 143,867.3 30,353,610,176 174,222.9
3 MA7 3.87788 139,026.7 28,730,615,087 169,501.1
4 MA8 3.839402 138,103.3 28,628,503,966 169,199.6
5 MA9 3.648302 131,416.6 27,807,111,090 166,754.6
6 H-W 1.552632 55,706.5 5,411,244,645 73,561.16 Optimum value
a b c
0.04 0.95 0.2
7 Linear 3.2835 117,644.3 21,625,623,286 147,056.5
regression
8 Multiple 1.30297 46,632.8 2,928,077,122 54,111.71
regression
9 Multiple 3.5531 125,871.5 18,889,692,267 137,439.8
regression 2
6 Demand Forecasting of the Short-Lifecycle Dairy Products 95

Milk
4000000
3800000
3600000 Actual
3400000 Forecast
3200000
0 10 20 30 40 50 60

Fig. 6.10 Comparison of actual demand versus forecast of milk

6.4.1.2 Forecasting Results for Curd

For demand analysis of curd, different forecasting techniques were used and four
different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.2).
From Table 6.2, the method with minimum error will be chosen for the fore-
casting of curd and demand analysis (Fig. 6.11).
The errors calculated for Holt–Winters technique are minimum. Thus, Holt–
Winters technique is best for the forecasting of curd.

Table 6.2 Curd demand analysis

S. Forecasting MAPE MAD MSE RMSE
No. methods
1 MA5 24.91038 28,190.63 1,165,788,899 34,143.65
2 MA6 26.85498 30,236.56 1,265,533,987 35,574.34
3 MA7 27.81183 31,207.15 1,303,164,214 36,099.37
4 MA8 26.9243 31,021.88 1,229,869,877 35,069.5
5 MA9 25.41938 30,251.85 1,113,538,210 33,369.72
6 H-W 5.8111 7331.148 96,106,553.08 9803.395 Optimum value
a b c
0.1 0.95 0.95
7 Linear 21.7303 24,109.44 834,042,945.9 28,879.8
regression
8 Multiple 7.212 9278.54 134,994,511.6 11,618.71
regression
9 Multiple 18.157 28,624.71 918,927,754.6 30,313.82
regression 2
96 R. S. Mor et al.

Curd
300000

200000
Actual
100000 Forecast
0
0 10 20 30 40 50 60

Fig. 6.11 Comparison of actual demand versus forecast of curd

6.4.1.3 Forecasting Results for Paneer

For demand analysis of paneer, different forecasting techniques were used and four
different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.3).
From Table 6.3, the method with minimum error will be chosen for the fore-
casting of paneer and demand analysis (Fig. 6.12).

Table 6.3 Paneer demand analysis

S. Forecasting MAPE MAD MSE RMSE
No. methods
1 MA5 14.17066 2574.06 10,537,647.14 3246.174
2 MA6 13.54214 2462.133 10,238,182.52 3199.716
3 MA7 11.65128 2195.213 8,952,866.56 2992.134
4 MA8 11.42924 2210.491 8,956,561.717 2992.752
5 MA9 11.29246 2241.011 9,256,606.814 3042.467
6 H-W 10.645 2049.809 63,332,577 2516.461 Optimum
value
a b c
0.2 0 0.95
7 Linear regression 12.354 2206.103 8,248,411 2872
8 Multiple 9.52 1727.61 4,677,638 2162.79
regression
9 Multiple 10.12 2310.25 9,525,315 3086.31
regression 2

Paneer
30000
25000
20000 Actual

15000 Forecast
10000
0 10 20 30 40 50

Fig. 6.12 Comparison of actual demand versus forecast of paneer

6 Demand Forecasting of the Short-Lifecycle Dairy Products 97

The errors calculated for multiple regression technique are minimum. Thus,
multiple regression technique is best for the forecasting of paneer.

6.4.1.4 Forecasting Results for Plain Lassi

For demand analysis of plain lassi, different forecasting techniques were used and
four different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.4).
From Table 6.4, the method with minimum error will be chosen for the fore-
casting of plain lassi and demand analysis (Fig. 6.13).
The errors calculated for multiple regression technique are minimum. Thus,
multiple regression technique is best for the forecasting of plain lassi.

Table 6.4 Plain lassi demand analysis

S. No. Forecasting methods MAPE MAD MSE RMSE
1 MA5 116.3831 146,794.3 31,755,752,075 178201.4
2 MA6 133.8051 153,265.9 35,339,066,828 187,986.9
3 MA7 147.8859 156,355.3 36,523,227,245 191,110.5
4 MA8 150.9534 156,293.5 35,149,012,148 187,480.7
5 MA9 142.1247 152,584.6 32,271,211,772 179,641.9
6 H-W 12.56711 29,733.87 2,872,405,609 53,594.83 Optimum value
a b c
0.9 0 0.05
7 Linear regression 103.36 124,624.5 22,558,506,710 150,194.9
8 Multiple regression 15.78 26,173.17 996,408,394.4 31,565.94
9 Multiple regression 2 25.97 39,065.02 2,033,333,297 45,092.5

Plain Lassi
800000
600000
400000 Actual

200000 Forecast
0
0 10 20 30 40 50 60

Fig. 6.13 Comparison of actual demand versus forecast of plain lassi

98 R. S. Mor et al.

6.4.1.5 Forecasting Results for Kheer

For demand analysis of Kheer, different forecasting techniques were used and four
different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.5).
From Table 6.5, the method with minimum error will be chosen for the fore-
casting of kheer and demand analysis (Fig. 6.14).
The errors calculated for multiple regression technique are minimum. Thus,
multiple regression technique is best for the forecasting of kheer.

Table 6.5 Kheer demand analysis

S. No. Forecasting MAPE MAD MSE RMSE
methods
1 MA5 34.58572 2925.877 12,087,493.94 3476.707
2 MA6 36.91362 3129.921 12,860,550.39 3586.161
3 MA7 38.4764 3268.201 13,429,585.37 3664.64
4 MA8 38.49255 3293.778 13,618,657.23 3690.346
5 MA9 36.64657 3234.154 13,109,667.8 3620.728
6 H-W 9.628 1069.402 1,950,975 1396.773 Optimum
value
a b c
0.7 0 0.8
7 Linear regression 30.119 2401.91 8,206,995 2864.78
8 Multiple 8.87 817.31 1,081,155 1039.786
regression
9 Multiple 22.14 2159.16 5,727,059 2393.12
regression 2

Kheer
20000
15000
10000 Actual

5000 Forecast

0
0 10 20 30 40 50 60

Fig. 6.14 Comparison of actual demand versus forecast of kheer

6 Demand Forecasting of the Short-Lifecycle Dairy Products 99

6.4.1.6 Forecasting Results for Ice Cream

For demand analysis of ice cream, different forecasting techniques were used and
four different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.6).
From Table 6.6, the method with minimum error will be chosen for the fore-
casting of ice cream and demand analysis (Fig. 6.15).
The errors calculated for multiple regression technique are minimum. Thus,
multiple regression technique is best for the forecasting of ice cream.

Table 6.6 Ice cream demand analysis

S. No. Forecasting MAPE MAD MSE RMSE
methods
1 MA5 114.0027 1295.813 2,249,901.515 1499.967
2 MA6 126.2364 1353.883 2,479,202.677 1574.548
3 MA7 135.0631 1365.076 2,578,585.739 1605.798
4 MA8 135.5148 1362.211 2,525,711.811 1589.249
5 MA9 124.5884 1317.24 2,338,875.246 1529.338
6 H-W 18.81674 412.5208 303,085.3 550.5318 Optimum value
a b c
0.05 0.2 0.5
7 Linear 105.76 1043.95 1,501,256 1225.25
regression
8 Multiple 14.92 240.95 103,270.5 321.35
regression
9 Multiple 22.2 307.54 140,380.8 374.67
regression 2

Ice Cream
6000

4000
Actual
2000 Forecast
0
0 10 20 30 40 50 60

Fig. 6.15 Comparison of actual demand versus forecast of ice cream

100 R. S. Mor et al.

6.4.1.7 Forecasting Results for Table Butter

For demand analysis of table butter, different forecasting techniques were used and
four different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.7).
From Table 6.7, the method with minimum error will be chosen for the fore-
casting of table butter and demand analysis (Fig. 6.16).
The errors calculated for the multiple regression technique are minimum. Thus,
multiple regression technique is best for the forecasting of table butter.

Table 6.7 Table butter demand analysis

S. Forecasting MAPE MAD MSE RMSE
No. methods
1 MA5 36.81538 1521.722 3,699,990.651 1923.536
2 MA6 39.07002 1591.702 4,012,062.866 2003.013
3 MA7 41.28587 1670.318 4,200,824.363 2049.591
4 MA8 40.25224 1640.179 4,139,873.408 2034.668
5 MA9 39.44391 1560.724 3,897,315.163 1974.162
6 H-W 32.16 1367.779 2,762,688 1662.123 Optimum value
a b c
0.01 0.95 0.95
7 Linear 30.636 1267.076 2,533,924 1591.83
regression
8 Multiple 20.457 850.833 1,143,088 1069.15
regression
9 Multiple 70.05 2099.039 5,365,511 2316.35
regression 2

Table Buer
10000
8000
6000
Actual
4000
2000 Forecast

0
0 10 20 30 40 50 60

Fig. 6.16 Comparison of actual demand versus forecast of table butter

6 Demand Forecasting of the Short-Lifecycle Dairy Products 101

6.4.1.8 Forecasting Results for Pio bottle

For demand analysis of Pio bottle, different forecasting techniques were used and
four different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.8).
From Table 6.8, the method with minimum error will be chosen for the fore-
casting of Pio bottle and demand analysis (Fig. 6.17).
The errors calculated for the multiple regression 2 technique are minimum.
Thus, multiple regression 2 technique is best for the forecasting of Pio bottle.

Table 6.8 Pio bottle demand analysis

S. No. Forecasting methods MAPE MAD MSE RMSE
1 MA5 63.70856 15,403.67 324,812,176.7 18,022.55
2 MA6 68.46004 15,852.38 356,790,213.5 18,888.89
3 MA7 72.72545 16,225.98 372,384,886.5 19,297.28
4 MA8 74.81113 16,404.69 371,399,301.6 19,271.72
5 MA9 71.97338 16,101.73 349,555,832.6 18,696.41
6 H-W 13.34916 3963.806 28,279,949 5317.889 Optimum value
a b c
0.1 0.05 0.5
7 Linear Regression 58.06 12,567.84 285,775,316.3 16,904.89
8 Multiple Regression 11.96 2893.32 13,251,240 3640.225
9 Multiple Regression 2 10.675 3312.667 19,186,587 4380.25

Pio Bottle
80000
60000
40000 Actual

20000 Forecast

0
0 10 20 30 40 50 60

Fig. 6.17 Comparison of actual demand versus forecast of Pio bottle

102 R. S. Mor et al.

6.4.1.9 Forecasting Results for Ghee

For demand analysis of ghee, different forecasting techniques were used and four
different types of errors were calculated, i.e., MAPE, MAD, MSE, and RMSE
(Table 6.9).
From Table 6.9, the method with minimum error will be chosen for the fore-
casting of ghee and demand analysis (Fig. 6.18).
The errors calculated for the multiple regression technique are minimum. Thus,
multiple regression technique is best for the forecasting of ghee.

Table 6.9 Ghee demand analysis

S. No. Forecasting methods MAPE MAD MSE RMSE
1 MA5 53.35496 9831.307 133,235,331 11,542.76
2 MA6 52.25332 10,050.51 140,643,879.7 11,859.34
3 MA7 53.21595 10,251.76 144,702,910.2 12,029.25
4 MA8 43.84376 9669.556 134,086,428.8 11,579.57
5 MA9 41.48676 9048.746 124,128,291.7 11,141.29
6 H-W 33.12453 6828.214 83,040,822.35 9112.674 Optimum value
a b c
0.1 0 0.95
7 Linear regression 45.44 7713.63 91,728,710 9577.512
8 Multiple regression 32.202 5177.805 41,942,027.5 6476.266
9 Multiple regression 2 37.559 6879.486 64,677,426 8042.228

Ghee
60000

40000
Actual
20000 Forecast

0
0 10 20 30 40 50 60

Fig. 6.18 Comparison of actual demand versus forecast of ghee

6 Demand Forecasting of the Short-Lifecycle Dairy Products 103

6.4.1.10 Forecasting Results for Milk: Daily Demand

For demand analysis of milk (daily demand basis), different forecasting techniques
were used and four different types of errors were calculated, i.e., MAPE, MAD,
MSE, and RMSE (Table 6.10).
From Table 6.10, the method with minimum error will be chosen for the fore-
casting of milk and demand analysis (Fig. 6.19).
The errors calculated for the Holt–Winters technique are minimum. Thus, H-W
technique is best for the forecasting of milk (daily demand).

Table 6.10 Milk (based on daily demand) demand analysis

S. No. Forecasting MAPE MAD MSE RMSE
methods
1 H-W 2.994861 3134.495 52,411,611.35 7239.586 Optimum
value
a b c
0.2 0 0.01
2 Linear 4.178335 4608.72 60,900,472.83 7803.876
regression
3 Multiple 4.070971 4484.643 59,452,294.76 7710.531
regression
4 Multiple 5.675612 6319.01 86,816,156.89 9317.519
regression 2

Milk Daily Demand

170000

120000 Actual

70000 Forecast

20000
0 200 400 600 800 1000 1200 1400 1600

Fig. 6.19 Comparison of actual demand versus forecast of milk (based on daily demand)
104 R. S. Mor et al.

6.4.2 Hypothesis

Following hypothesis is framed for linear regression case:

H0: Whether the coefficients values are zero or not.
1. After analyzing the regression result, we can conclude that R-squared value
(coefficient of determination) is low. It is not near to 1.
2. As adjusted R-squared value is less than R-squared value, which shows that our
model run is good and is in favor of results obtained, as shown below:
Residuals
Min 1Q Median 3Q Max
−26.172 −8.157 2.163 8.346 22.197
Coefficients
Estimate Std. error t value Pr(>|t|)
(Intercept) 7.428e−01 7.742e+00 0.096 0.92398
Actual 1.836e−04 5.811e−05 3.160 0.00279
Signif. codes: 0 Ô***Õ 0.001 Ô**Õ 0.01 Ô*Õ 0.05 Ô.Õ 0.1 ÔÕ1
Residual standard error: 12.83 on 46 degrees of freedom
Multiple R-squared: 0.1784, adjusted R-squared: 0.1605
F-statistic: 9.987 on 1 and 46 DF, p value: 0.002788

P value is less than 0.05, and hence, null hypothesis is accepted.

Thus, demand forecasting assists other subsidiary departments of the industry
such as finance, human resources, marketing. Food products show frequent changes
in demand for different seasons, and thus, it is very necessary to forecast the
demand of these products precisely. The present study analyzes the results obtained
from the above-mentioned methods of forecasting for a dairy industry, thereby
selecting an effective forecasting method for better results. However, the selection
of these models depends upon the knowledge, availability of data, and context of
forecasting.

6.5 Conclusions

Seasonal products are such a short-life span type of products in which the tolerance
of excess stocks is lesser than for non-perishables. Demand forecasting is essential
for perishable products like dairy industry to work efficiently. The study compared
the performances between different forecasting models for the prediction of a time
series formed by a group of dairy products. As performance measures, metric
analysis of the various error-measuring techniques is done to select the least
error-producing model for such products and hence to meet market demand.
Authors compared the MA, regression, multiple regression, and Holt–Winters
models based on MAPE, MAD, MSE, and RMSE applied for the demand
6 Demand Forecasting of the Short-Lifecycle Dairy Products 105

forecasting of a time series formed by a group of dairy products at a milk processing

unit located at northern India. The following conclusions have been drawn based on
the outcomes of this study:
1. Multiple regression is being used globally for forecasting purpose, and the
current study concludes that this method is suitable for the forecasting of dairy
products such as milk, paneer, kheer, ice cream, table butter, and ghee because it
produces least error; i.e., MAPE value was seen least while using this method.
2. Holt–Winters is also a suitable technique for the forecasting of dairy products.
Based on the results obtained in the current study, we conclude that this method
is useful for the forecasting of curd, plain lassi, and milk on the basis of daily
demand since it also produces the least value of MAPE when compared with all
other methods.
3. Multiple regression 2 is used in the current study for the data of the last three
years to find out intercepts. This method may be useful for the forecasting of Pio
bottle on the basis of error measures obtained.
4. Moving average is also a forecasting technique being used in various areas, but
this technique is not suitable for the forecasting of dairy products because of
high percentage error obtained.
Thus, it can be recommended that these methods of forecasting are very useful
for milk processing industry and other short-lifecycle products. Further, this
methodology may be applied to multiple case studies of food processing industry,
though some other techniques like linear programming can also be attempted for the
forecasting of such products.

6.5.1 Managerial/Research Implications

This is a unique study in itself which attempts to capture the dynamics of milk
processing sector and to incorporate all relevant constraints that would significantly
affect the demand and supply system. The study gives more visibility to forecasting
theory by addressing the problem of dairy industry. Demand forecasting aided for
attaining the high order fill rate, controlled inventory, and more process flexibility
in the case industry. The forecasting model developed in this study has been dis-
cussed with the dairy industry managers and experts from academics. This study
will help practitioners, regulators, and dairy industry professionals to focus their
efforts in handling the demand fluctuations effectively, distribution channel man-
agement, and supply chain coordination by means of eradicating the uncertainties
through demand forecasting. Further, this study should be of interest to researchers
working in the area of operations management, marketing management, production
planning and control, food supply chain management, etc.
106 R. S. Mor et al.

Acknowledgements The authors would like to thank all the key resource persons from dairy
industry. Further, the authors would like to express their sincere gratitude for the remarks and
recommendations made by anonymous reviewers and editor which radically improved the quality
of this work.

Appendix

Forecasting Models and the Calculations for MAD, MSE, MAPE, and RMSE
1. Moving Average (MA)
A. MA5: Moving average of 5 months (MA5) has been considered here, as
derived below:
The values in Table 6.11 have been calculated for ‘One period,’ and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, i.e., C11 = AVERAGE(B6:B10)
(b) Error = B11 − C11
(c) abs error = ABS(D11)
(d) Square Error = E11 * E11
(e) % Error = E11/B11 * 100

Table 6.11 MA5

6 Demand Forecasting of the Short-Lifecycle Dairy Products 107

(f) MAPE = AVERAGE(G11:G53)

(g) MAD = AVERAGE(E11:E53)
(h) MSE = AVERAGE(F11:F53)
(i) RMSE = SQRT(J11)
B. MA6: Here, the moving average of 6 months has been derived, as explained
below:
The values in Table 6.12 have been calculated for ‘One period,’ and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, i.e., C66 = AVERAGE(B60:B65)
(b) Error = B66 − C66
(c) abs error = ABS(D66)
(d) Square Error = E66 * E66
(e) % Error = E66/B66 * 100
(f) MAPE = AVERAGE(G66:G107)
(g) MAD = AVERAGE(E66:E107)
(h) MSE = AVERAGE(F66:F107)
(i) RMSE = SQRT(J66)

Table 6.12 MA6

108 R. S. Mor et al.

C. MA7: Here, the moving average of 7 months has been derived, as explained
below:
The values in Table 6.13 have been calculated for ‘One period,’ and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, i.e., C121 = AVERAGE(B114:B120)
(b) Error = B121 − C121
(c) abs error = ABS(D121)
(d) Square Error = E121 * E121
(e) % Error = E121/B121 * 100
(f) MAPE = AVERAGE(G121:G161)
(g) MAD = AVERAGE(E121:E161)
(h) MSE = AVERAGE(F121:F161)
(i) RMSE = SQRT(J121)

Table 6.13 MA7

6 Demand Forecasting of the Short-Lifecycle Dairy Products 109

D. MA8: Here, the moving average of 8 months has been derived, as explained
below:
The values in Table 6.14 have been calculated for ‘One period,’ and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, i.e., C176 = AVERAGE(B168:B175)
(b) Error = B176 − C176
(c) abs error = ABS(D176)
(d) Square Error = E176 * E176
(e) % Error = E176/B176 * 100
(f) MAPE = AVERAGE(G176:G215)
(g) MAD = AVERAGE(E176:E215)
(h) MSE = AVERAGE(F176:F215)
(i) RMSE = SQRT(J176)

Table 6.14 MA8

110 R. S. Mor et al.

E. MA9: Here, the moving average of 9 months has been derived, as explained
below:
The values in Table 6.15 have been calculated for one period, and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, i.e., C230 = AVERAGE(B221:B229)
(b) Error = B230 − C230
(c) abs error = ABS(D230)
(d) Square Error = E230 * E230
(e) % Error = E230/B230 * 100
(f) MAPE = AVERAGE(G230:G268)
(g) MAD = AVERAGE(E230:E268)
(h) MSE = AVERAGE(F230:F268)
(i) RMSE = SQRT(J230)

Table 6.15 MA9

6 Demand Forecasting of the Short-Lifecycle Dairy Products 111

2. Holt and Winters

A. Monthly Demand
The values in Table 6.16 have been calculated for ‘One period,’ and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand
• For first period
Level Factor (u), D15 = C15/F15
Trend Factor (v), E15 = 0
Seasonal Factor (s), F4 = C4/AVERAGE(C$4:C$15)
• For the other periods using the following formula
(u), D16 = M$14 * C16/F4 + (1 − M$14) * (D15 + E15)
(v), E16 = O$14 * (D16 − D15) + (1 − O$14) * E15
(s), F16 = Q$14*C16/D16 + (1 − Q$14) * F4
So, the Forecast, G16 = (D15 + E15) * F4
(b) Error = C16 − G16
(c) abs error = ABS(H16)
(d) Square Error = I16 * I16
(e) % Error = I16/C16 * 100
(f) MAPE = AVERAGE(K16:K51)

Table 6.16 Monthly demand

112 R. S. Mor et al.

(g) MAD = AVERAGE(I16:I51)

(h) MSE = AVERAGE(J16:J51)
(i) RMSE = SQRT(M4)
B. Daily Demand
The values in Table 6.17 have been calculated for ‘One period,’ and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand
• For first period
Level Factor (u), D9 = C9/F9
Trend Factor (v), E9 = 0
Seasonal Factor (s), F3 = C3/AVERAGE(C$3:C$9)
• For the other periods using the following formula
(u), D10 = M$16 * C10/F3 + (1 − M$16) * (D9 + E9)
(v), E10 = O$16 * (D10 − D9) + (1 − O$16) * E9
(s), F10 = Q$16*C10/D10 + (1 − Q$16) * F3
So, the Forecast, G10 = (D9 + E9) * F3
(b) Error = C10 − G10
(c) abs error = ABS(H10)
(d) Square Error = I10 * I10
(e) % Error = I10/C10 * 100
(f) MAPE = AVERAGE(K10:K1463)
(g) MAD = AVERAGE(I10:I1463)

Table 6.17 Daily demand

6 Demand Forecasting of the Short-Lifecycle Dairy Products 113

Table 6.18 Regression analysis

(h) MSE = AVERAGE(J10:J1463)

(i) RMSE = SQRT(M3)
3. Regression Analysis
The values in Table 6.18 have been calculated for ‘One period,’ and rest can be
calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, F3 = M$20 + D3 * M$21
(b) Error = C3 − F3
(c) abs error = ABS(G3)
(d) Square Error = H3 * H3
(e) % Error = H3/C3 * 100
(f) MAPE = AVERAGE(J3:J50)
(g) MAD = AVERAGE(H3:H50)
(h) MSE = AVERAGE(I3:I50)
(i) RMSE = SQRT(S4)
4. Multiple Regression
A. Monthly Demand
The values in Tables 6.19 and 6.20 have been calculated for ‘One period,’ and
rest can be calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, P57
114 R. S. Mor et al.

Table 6.19 Monthly demand

Table 6.20 ANOVA

P57 = C$126 + C$127 * D57 + C$128 * E57 + C$129*F57 + C

$130 * G57 + C$131 * H57 + C$132 * I57 + C$133 * J57 + C$134 * K57 + C
$135 * L57 + C$136 * M57 + C$137 * N57 + C$138 * O57
(b) Error = C57 − P57
(c) abs error = ABS(Q57)
(d) Square Error = R57 * R57
(e) % Error = R57/C57 * 100
6 Demand Forecasting of the Short-Lifecycle Dairy Products 115

(f) MAPE = AVERAGE(S57:S104)

(g) MAD = AVERAGE(R57:R104)
(h) MSE = AVERAGE(T57:T104)
(i) RMSE = SQRT(W57)
B. Daily Demand
The values in Tables 6.21 and 6.22 have been calculated for ‘One period,’ and
rest can be calculated by using formula for MAPE, MAD, MSE, and RMSE.
(a) Forecast Demand, J4
J4 = Q$22 + C4 * Q$23 + D4 * Q$24 + E4 * Q$25 + F4 * Q$26 + G4 * Q
$27 + H4 * Q$28 + I4 * Q$29
(b) Error = B4 − J4
(c) abs error = ABS(K4)
(d) Square Error = L4 * L4
(e) % Error = L4/B4 * 100
(f) MAPE = AVERAGE(N4:N1464)

Table 6.21 Daily demand

Table 6.22 ANOVA

116 R. S. Mor et al.

(g) MAD = AVERAGE(L4:L1464)

(h) MSE = AVERAGE(M4:M1464)
(i) RMSE = SQRT(R4)

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Chapter 7
Customer Experience and Its Marketing
Outcomes in Financial Services:
A Multivariate Approach

Swati Raina, Hardeep Chahal and Kamani Dutta

Abstract The purpose of this paper is twofold: first, to validate the customer
experience quality (EXQ) scale in Indian sector, across financial products in Indian
settings. And second, to assess EXQ impact on the marketing outcomes, that is
customer satisfaction, word-of-mouth, loyalty intentions and service value. The
respondents comprised of customers of Jammu City, India, who have experienced
one of the three services, that is Banking or Insurance or Investment from the public
and private sectors. The customer experience quality scale is assessed through
validity and reliability analysis assuring the validation of EXQ scale in Indian
settings. It is validated as four-dimensional scale, that is peace of mind, moment of
truth, outcome focus and product experience. Also, the findings suggest that all the
four individual dimensions have positive and significant impact on the marketing
outcomes. First, the study is based on three financial services such as banking,
investment and insurance only, and for further research, it is suggested to adopt
other services comprehensively to understand customer experience from their
perspective. Secondly, the major limitation of the research is related to the presence
of subjective responses of the customers with respect to customer experience
constructs in the study. This study contributes to the extant marketing literature by

The original version of this chapter was revised: The author Phillip Klaus’ name has been removed.
The correction to this chapter is available at https://doi.org/10.1007/978-981-13-1334-9_11

S. Raina
Lovely Professional University, Jalandhar - Delhi G.T. Road, Phagwara, Punjab, India
e-mail: [email protected]
H. Chahal (&)
University of Jammu, Jammu, India
e-mail: [email protected]
K. Dutta
University of Jammu, Udhampur Campus, Jammu, India
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 119

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_7
120 S. Raina et al.

validating the domain of consumer experience quality in financial service sector

operating in emerging economies, that is India, and its impact on marketing
outcomes.

Keywords Customer experience
Customer satisfaction
Moment of truth

Peace of mind

7.1 Introduction

The term customer experience was first addressed in the literature by Pine and
Gilmore (1999) and Carbone and Haeckel (1994). Since then, it has started
receiving paramount attention from practitioners, academicians and consultants.
And this is primarily because favourable experiences are considered as a base for
companies to attract customers, differentiate themselves from competitors, achieve
competitive advantage and make profit (Pareigis et al. 2011). Remarked that vast
numbers of organizations are applying customer experience-based strategies to
compete successfully in the market vis-a-vis to generate, strengthen and sustain
customer loyalty. The significant attention on customer experience has resulted
from two reasons. First, the distinction between experience and commodities has
primarily shifted the focus of companies from service-based economy to an
experience-based economy which has led to increasing interest among both aca-
demicians and practitioners on customer experience (Verhoef et al. 2009). This shift
enhances the need of companies to deliver high levels of service quality to achieve
outcomes—customer satisfaction, loyalty and positive word-of-mouth. Second,
according to Knutson et al. (2006), though from different perspective, factors such
as state-of-the-art technology, more sophisticated and demanding consumers,
increasingly competitive business environment have made commodities to be
similar to services. Even the recent contemporary school on service-dominant logic
also established the dominance of services even among the products. Carbone and
Haeckel (1994) suggested that whenever a customer purchases a service, he will
have an experience that means every experience comes with the purchase of ser-
vice. Further, in their paper on conceptualizing and measuring customer experience
quality (EXQ) categorically remarked that “products and services might not be the
most important offerings anymore; experience, which represents customers’ per-
sonal sensations and fulfils customers’ inner needs, is becoming a key element of a
new economic stage”.
Since each customer’s experience is unique and individualized, the businesses
must go beyond goods and services and start creating memorable experiences for
each customer (Gilmore and Pine 2002). Thus, it is important for companies to
make memories and create the stage for greater economic value rather than simply
making goods and delivering services (Kim et al. 2011). However, observed that
7 Customer Experience and Its Marketing Outcomes … 121

existing literature on the impact of customer experience on consumer behaviour is

largely descriptive and generally explores the “what” rather than the “why”. Also,
firms are still typically measuring CE against service quality criteria, which has
proved to be an insufficient approach (Klaus and Maklan 2011). Recently, Klaus
and Maklan (2012) developed a measure of customer experience quality (EXQ),
which needs to be validated across different service products. Hence, the purpose of
this paper is twofold: first, to validate the customer experience quality (EXQ) scale
of Klaus and Maklan (2012) developed and tested in UK settings, across financial
products in Indian settings. And second, to assess EXQ impact on the marketing
outcomes, that is customer satisfaction, word-of-mouth, loyalty intentions and
service value. Adhikari and Bhattacharya (2015) give insight and direction into an
understanding of customer experience from consumption of an experience product
as well as interaction with sensory memorabilia. This remarked that this would help
the marketer to categorize customer experience in a more meaningful way than
considering it as overall marketing phenomena. Very recently, Rias et al. (2016)
remarked that it is important for the marketer to learn and understand how to
evaluate customer experience quality in determining the client future behaviour.
The study is a contribution to the extant literature on customer experience
quality. It validates consumer experience quality in financial sector (i.e. banking,
insurance and investment) in an emerging context, that is India. Further, it also
compares the results of finance-based service experiences in Indian and UK
contexts.
The paper is based on following structure. At the outset, the review of the
literature on customer/service experience is discussed. In the next following section,
a framework is presented for investigating key dimensions for creating favourable
service or customer experiences. The next section discusses the methodology
adopted for data collection, which is followed by data analysis. The final section
summarizes the major findings, discusses the managerial and theoretical implica-
tions and concludes with suggestions for future research.

7.2 Review of Literature and Hypotheses Development

Customer experience in the literature is discussed in terms of impressions, feelings

and intangible assets which results from the interaction between customer and
service provider. It is defined as the user’s interpretation of his total interactions
with the brand, perceived value of the encounter/encounters between a customer
and a product or a company or part of its organization which provokes his reaction
(Biedenbach and Marell 2009; Verhoef et al. 2009; Frow and Payne 2007).
Most of the researchers consider customer experience from comprehensive per-
spective. According to customer experience focuses on direct experience of different
individuals with varied frontline employees. In other words, it is a total experience
including search, purchase, consumption and after-sale phases of experience. The
122 S. Raina et al.

scholars further remarked that effective personal interaction between a customer and
an organization results in positive and stronger experience-based beliefs, which have
positive impact on overall brand awareness. Similarly, Carbone and Haeckel (1994)
defined “experience as a take away impression formed by people’s encounters with
products, services, and businesses—perception produced when humans consolidate
sensory information” (p. 9). Haeckel et al. (2003) explained experience as the feelings
that a customer gets after using the particular product, service, etc. They also men-
tioned various stages of delivery process which ultimately results in an experience.
Researchers namely Ding et al. (2011) and Nagasawa (2008) shared similar
viewpoint on customer experience. They conceptualized customer experience as an
important intangible asset which captures customer interaction within certain ser-
vice systems, that occurs in response to some stimulation. On the flip side, Meyer
and Schwager (2007) expressed customer experience in terms of internal and
subjective responses, that results when a customer establishes direct and indirect
contacts with a company. Direct contact is initiated by a customer and leads to
experience during the course of purchase, use and service, whereas indirect contact
involves unplanned encounters with a representative of a company’s product, ser-
vices or brands and takes the form of word-of-mouth or criticism. Customer
experience is holistic in nature. The authors further expressed that customer
experience involves responses namely cognitive, affective, emotional, social and
physical. From significance perspective, Chung and Kwon (2009) stated that cus-
tomer experience is important in understanding customer perceptions, attitudes and
behaviour. According to customer experience comes from the interaction of cus-
tomer with the firm, its staff, self-service technologies, service environment and
service companies. For instance, Gilmore and Pine 2002 argued that it is important
to realize that actual experiences are distinct from services. They stated that “when a
person buys a service, he purchases a set of intangible activities carried out on his
behalf. But when he buys an experience, he pays to spend time enjoying a series of
memorable events that a company stages—as a theatrical play to engage him in a
personal way” (p. 2). Similarly, Terblanche and Boshoff (2004) stated that “In-store
shopping experiences include to all interactions and experiences that a customer
goes through from entering to leaving the shop door” (p. 3). Helkkula (2011)
expressed service experience to be a three-component framework based on phe-
nomenological, process-based and outcome-based characteristics. He related ser-
vice experience with hedonic expression. Similarly, Grace and Cass (2004)
described service experience in terms of core service, employee service and ser-
vicescape. However, researchers like Frow and Payne (2007) considered customer
experience as an outcome of co-creation process which is linked with a brand. They
remarked that when a co-creation approach is adopted, customer engages himself in
a dialogue and interaction with suppliers during product design, production,
delivery and subsequent consumption. Rias et al. (2016), defined customer expe-
rience from emotional perspective. Suggest that emotions define the importance of
an experience. Similarly, Rias et al. (2016) conceptualized customer experience
quality as an overall customer journey through emotion towards product, services
or even brand, which is at affective level.
7 Customer Experience and Its Marketing Outcomes … 123

Klaus and Maklan defined customer experience as the direct and indirect
interactions (cognitive and emotional) of customer with the firm. This definition is
highly consistent with conceptualizations offered by other researchers (e.g. Verhoef
et al. 2009). Identified and evaluated critical success factors like servicescape,
online functional elements, convenience and customer interaction for measuring
customer experience in a service organization more effectively.

7.2.1 Customer Experience Dimensions

The customer experience is considered as a multidimensional construct in the lit-

erature by marketing researchers. However, the conceptualization has been con-
sidered from different perspectives. Its dimensionality was explained initially by
Schmitt (2000, 1999) who discussed five types of experiences, which include
sensory (sense), affective (feel), cognitive (think), physical experience (act) and
social identity experience (relate). He expressed that sense marketing appeals to the
senses with the objective of creating sensory experiences through sight, sound,
touch, taste and smell. From functionality perspective, three clues namely func-
tional, humanics and mechanics are considered by Haeckel et al. (2003) that lead to
customer experience. These clues can be considered as three dimensions of cus-
tomer experience. Functional clues are linked to the reliability of services. Berry
et al. (2006) link functional clues with technical quality. They address that it is
important for the service providers to manage functional clues to meet their
expectations. The mechanics is referred to service encounters, service environment,
servicescape, atmospherics, physical environment and mechanic clues. It involves
place where service is assembled, service provider–customer interactions, com-
bined with tangibles that facilitate performance or communication of the service.
Mechanic clues are physical representation of services and include building, design,
equipment, sound, smell or any other stimuli that communicate about the service
without any word and action. Berry and Seltman (2007) mention that mechanic
clues in certain situations have the ability to influence customers before humanics
and functional clues and hence contribute to creating first-hand expression.
Employee’s behaviour and performance represent the third category of clues that is
humanics. The humanic clues are concerned with action and appearance of
employees and service providers such as tone of voice, body language, appearance,
level of enthusiasm, etc. The customer–provider interactions are very significant
and may contribute in high performance than their expectations and create an
emotional involvement add service experience. Humanic clue behaviours include
behaviour and performance of employee, perceived efforts of employee, credibility,
competence. All the three clues play synergistic role in creating customer experi-
ence. Later, Payne et al. (2008) suggested that customer experience consists of three
components: cognition, emotions and behaviour. These components are essential
inputs to customer learning. They expressed that supplier can enhance the customer
experience by supporting customer learning and developing processes that
124 S. Raina et al.

acknowledge cognitions, emotions and behaviour. However, the framework inad-

equately explains the impact of the social context of the customer experience.
Klaus and Maklan (2011) established five dimensions of customer experience in
context the of sports tourism industry. These include hedonic enjoyment which is felt,
perceived and experienced by participants at any time in the camp; social interaction
refers to a sense of belonging to a community where members share common ground;
efficiency enables the core experience for the customers, organizations and service
providers; surreal feelings are described as recollection of a dream-like state, an almost
altered stage of reality based on a certain activity and lastly, personal progression refers
to making “progress” improving their free ride skills and techniques like goal, chal-
lenge, coaching, peer influence and self motivation. They remarked that improving
customer experience is a growing priority for market research because experience is
replacing quality as the competitive battleground for marketing (p. 2). Customer
experience quality’s core tenants as given by Klaus and Maklan (2011) include
1. It is assessed as an overall perception by customers and not as a gap to
expectations.
2. Customers’ assessment is based on overall value in use and not just a summation
of performance during individual service episodes.
3. The measure of experience has a broader scope than that proposed by
SERVQUAL. It includes emotions and peer influences.
4. Experience begins before service encounters and continues after the encounters.
5. Experience is assessed against service encounters across all channels.
6. An ideal measure should link more directly to customer behaviour and business
performance than do either SERVQUAL or customer satisfaction.
Research with practitioners indicates that most firms use customer satisfaction,
or its derivative Net Promoter Score, to assess their customers’ experiences. Klaus
and Maklan (2013) questioned this practice and proposed the principles of a new
measure appropriate for the modern conceptualization of customer experience: the
customer experience quality (EXQ) scale. In this chapter, we extend that work to
financial service contexts to support a claim of generalizability better and compare
its predictive power with that of customer satisfaction. We propose that EXQ better
explains behavioural intention and recommendation than customer satisfaction.
Klaus and Maklan (2012, 2013) identified product experience, outcome focus,
moment of truth and peace of mind as significant components of customer expe-
rience quality.
Product experience refers to the importance of customers’ perception of having
choices and the ability to compare offerings. (1) Outcome focus. It is associated
with reducing customers’ transaction cost, such as seeking out and qualifying new
providers. (2) Moments of truth. It emphasizes the importance of service recovery
and flexibility, dealing with customers once complications arise in the process of
acquiring a service.
(3) Peace of mind. This dimension describes the customers assessment of all the
interactions with the service providers before, during and after securing a
7 Customer Experience and Its Marketing Outcomes … 125

mortagage. This dimension includes statements strongly associated with the emo-
tional aspects of service (Liljander and Strandvik 1997; Edvardsson 2005) and takes
many items from the qualitatively generated dimension of provider experience. The
dimension is reflecting the emotional benefits customers experience based on the
perceieved expertise of the service provider and guidance throughout the process,
which appeared to the customers not only as easy (Dabholkar et al. 1996), but also
seemed to be “putting them at ease and subsequently, “increasing their confidence
in the provider”. Customers react to the peace of mind often with a notion of
looking a building “a relationship” with a service provider rather than looking at the
mortgage in a “purely transactional way” (Geyskens et al. 1996). Thus, it is
important for companies to optimize the experience to ensure the continuity of
customer relationship. However, to create an ultimate experience for the consumer,
a company needs to understand factors influencing his or her decision-making and
especially the motivation for initiating an act.
Although all customer experience conceptualizations are relevant, the present
study is primarily conducted to validate the customer experience quality scale.
Based on Klaus and Maklan (2013) we hypothesized that all four dimensions—
peace of mind, moment of truth, outcome focus and moment of truth—contribute
significantly to customer experience quality.
Hypothesis 1: Peace of mind, moment of truth, outcome focus and moment of truth
contribute significantly to customer experience quality.

7.2.2 Customer Experience Outcomes

The service marketing literature on performance outcome measures such as con-

sumer satisfaction, loyalty and brand equity is well established. Although extant
literature indicates a strong connection between customer experience and customer
satisfaction, empirical linkages between experience and performance measures are
yet to be established. Kumar et al. (2007) discussed customer experience and
remarked that customer expectations along with customer experience can create
high satisfaction scores, whereas negative expectation and a positive experience
towards the service create highest satisfaction scores as well. Kim et al. (2008) and
Shankar et al. (2003) illustrated that overall, the more favourable the prior expe-
rience is, the higher is the satisfaction. To add, the relationship between service
satisfaction and loyalty is nonlinear; that is, when satisfaction increases above a
certain level, customer loyalty will increase rapidly (Oliva et al. 1992). Arnold et al.
(2005) have also discussed outcomes of terrible experience. They remarked that
customers who endured terrible experiences would either tell others about their bad
experience, i.e. negative word-of-mouth, or voiced their complaints as a result of
the terrible occurrences in the form of sending emails, writing letters, etc. or would
stop visiting the provider again, i.e. discontinue patronage and switch to other.
126 S. Raina et al.

So, customer experience not only drives customer satisfaction and loyalty intentions
but also word-of-mouth (Keiningham et al. 2007). Subsequently, the relationship
between customer experience and word-of-mouth is also being validated.
Furthermore, the study proposed the stronger relationship between customer
experience and service value which needs to be tested in the literature.
Klaus and Maklan (2013) remarked that to ensure satisfaction, positive
word-of-mouth and loyalty, the whole experience should be well designed from the
very first touch point that prospective customer may have with the company. The
authors have established nomological validity of customer experience quality
(CEX) with respect to customer satisfaction, word-of-mouth and loyalty intentions.
Customer experience quality has significant impact on customer satisfaction, loy-
alty intentions, word-of-mouth and service value. Hence, we also hypothesized the
following:
Hypothesis 2: Customer experience has a significant positive impact on customer
satisfaction.
Hypothesis 3: Customer experience has a significant positive impact on loyalty
intentions.
Hypothesis 4: Customer experience has a significant positive impact on
word-of-mouth behaviour.
Hypothesis 5: Customer experience has a significant positive impact on service
value.
Hypothesis 5: Customer experience has a stronger positive impact on loyalty
intentions than customer satisfaction.
Hypothesis 6: Customer experience has a stronger positive impact on
word-of-mouth behaviour than customer satisfaction.
Hypothesis 7: Customer experience has a stronger positive impact on service value
than customer satisfaction.

7.3 Research Methodology

The Klaus and Maklan (2013) EXQ items are as such used to examine the reliability
and validity of the EXQ scale in financial sector of emerging economies—India.
The respondents comprised of customers of Jammu City, India, who have
experienced one of the three services, that is Banking or Insurance or Investment
from the public and private sectors. The area sampling is used for the selection of
customers from selected household. The Jammu City at the outset was divided into
four geographically divided regions, that is north, south, east and west. One ward
from each region was selected in the next stage, and later one locality from each
ward from four regions (Gandhi Nagar, Trikuta Nagar, Krishna Nagar and Shastri
Nagar) was selected. One customer availing services from last at least three years
from each household for one of the three services was selected for the collection of
data. The items generated for customer experience instrument are based on
7 Customer Experience and Its Marketing Outcomes … 127

seven-point scale (1 = strongly disagree, 7 = strongly agree) or as Do not know/

Not applicable. The finalized customer experience scale comprised of 7 brand
experience items change after, please, 11 of service experience, 05 belongs to
post-purchase experience, 05 of customer satisfaction, 05 belongs to behavioural
loyalty intentions, 07 of word-of-mouth and 07 of service value.

7.3.1 Descriptive Statistics

Before initiating data analysis, the descriptive analysis was undertaken to identify and
delete non-normal items and outliers for proceeding for exploratory factor analysis.
The items with skewness and kurtosis values greater than <0.5 were considered for
deletion. A total of 21 items were deleted; that is, 03 items belonged to brand
experience, 01 item was from service experience, 04 items belonged to post-purchase
experience, 02 items were from behavioural loyalty intentions and customer satis-
faction, 05 items belonged to word-of-mouth, and 04 from service value.

Constructs Mean Standard Skewness Kurtosis

deviation
Min Max Min Max Min Max Min Max
Peace of mind 3.07 3.18 1.31 1.38 0.04 0.07 0.8 1.2
Moment of truth 2.82 3.17 1.32 1.41 0.02 0.05 0.7 1.1
Outcome focus Experience 2.73 3.20 1.31 1.48 0.03 0.05 0.5 1.04
Product experience 2.74 3.11 1.29 1.33 0.01 0.03 0.6 1.2
Customer satisfaction 2.60 2.78 1.36 1.54 0.03 0.06 0.03 0.05
Behavioural loyalty Intentions 2.28 2.87 1.36 1.50 0.03 0.06 0.04 0.07
Word-of-mouth 2.58 2.84 1.11 1.30 0.01 0.03 0.03 0.08
Service value 2.58 2.72 1.09 1.39 0.01 0.03 0.04 0.07

7.3.2 Scale Development

The study validates the customer experience quality scale through confirmatory
factor analysis (CFA).

7.3.3 Confirmatory Factor Analysis

The customer experience scale is tested individually using CFA initially, and its
nomological validity is tested using SEM using marketing outcomes, that is cus-
tomer satisfaction, behavioural loyalty intentions, word-of-mouth and service value.
The results are discussed as under:
128 S. Raina et al.

7.3.3.1 Customer Experience Quality

The validity of the customer experience quality (EXQ) scale as second-order scale is
examined using SFA. The EXQ as a four-dimensional scale is confirmed; however,
the model is found to be marginally fit. The chi-square, CMIN/df, CFI, RMSEA and
NFI came to be 518.514, 3.457, 0.777, 0.081 and 0.719. All the four factors are found
to be significant predictors of EXQ. All the items under these factors significantly
contribute to their respective factors. The CR values were above the threshold criteria
(greater than 1.96) and the SRW ranged between 0.55 and 0.98 (Table 7.1).

Table 7.1 Confirmatory factor analysis

Factor Items CR SRW
Peace of Confidence in the service provider expertise. 6.316 0.641
mind Feeling with the service provider is easy 5.647 0.545
Looking after the customer for a long time. 6.332 0.644
The service provider gives independent advice on 8.016 0.986
which product or service will best suit my needs
I have built a personal relationship with the people at – 0.553
the service provider
The service provider advises me throughout the 6.567 0.681
service delivery process
Moment of The service provider demonstrate flexibility in dealing 9.134 0.743
truth with me
The service provider will keep me up to date 9.852 0.797
The service provider has a good reputation 9.588 0.777
Service provider has good people skills. 9.011 0.734
The service provider deal(t) well with me when things – 0.742
go wrong
Outcome The service provider delivers a good customer service 6.672 0.662
focus The service provider knows exactly what I want 8.064 0.886
The service providers’ facilities are better design to 7.320- 0.755
fulfil my needs than their competitors
The service providers’ facilities are designed to be as 0.601
efficient as possible for me
Product The service provider offerings are superior to their 4.828 0.629
experience competitors
The service provider offerings have the best quality 2.919 0.624
I do not choose the service provider by the price of his 8.050 0.824
offerings alone
At the service provider, I always deal with same 0.558
forms and same people
Model fit chi-square = 518.514
indices CMIN/df = 3.457
NFI = 0.719
CFI = 0.777
RMSEA = 0.081
7 Customer Experience and Its Marketing Outcomes … 129

7.3.3.2 Customer Experience with Marketing Outcomes

To validate the results of EXQ, SEM is applied between EXQ and the four mar-
keting outcomes—customer satisfaction, behavioural loyalty intentions,
word-of-mouth and service value.

Customer Experience—Customer Satisfaction (Table 7.2)

The chi-square, CMIN/df, CFI, RMSEA and NFI values for the customer experi-
ence—customer satisfaction model came to be 728.199, 2.924, 0.812, 0.082 and
0.742 showing marginal model fitness. The SRW of the items lie between 0.55 and
0.91 with all critical ratio values above 1.96, indicating that all the items have
significant impact.

Table 7.2 Confirmatory factor analysis—customer satisfaction

Factor Items CR SRW
Peace of mind I am confident in the service provider expertise 6.302 0.642
Feeling with the service provider is easy 5.365 0.546
The service provider will look after me for a 6.315 0.644
long time
The service provider gives independent advice 7.992 0.986
on which product or service will best suit my
needs
I have built a personal relationship with the 0.552
people at the service provider
The service provider advises me throughout the 6.548 0.681
service delivery process
The service provider demonstrates flexibility in 9.080 0.742
dealing with me
Moment of The service provider will keep me up to date 9.805 0.796
truth The service provider has a good reputation 9.541 0.776
The people I am dealing with have good people 9.041 0.739
skills
The service provider deal(t) well with me when 0.741
things go wrong
The service provider delivers a good customer 6.652 0.658
service
Outcome focus The service provider knows exactly what I want 8.095 0.888
The service providers’ facilities are better 7.341 0.756
design to fulfil my needs than their competitors
The service providers’ facilities are designed to 0.603
be as efficient as possible for me
The service provider offerings are superior to 0.637
their competitors
(continued)
130 S. Raina et al.

Table 7.2 (continued)

Factor Items CR SRW
Product The service provider offerings have the best 3.960 0.622
experience quality
I do not choose the service provider by the price 3.900 0.818
of his offerings alone
At the service provider, I always deal with same 8.161 0.560
forms and same people
Customer My feelings towards the service provider are 0.902
satisfaction very positive
I feel good about coming to the service provider 16.683 0.887
for the offerings I am looking for
Overall I am satisfied with the service provider 15.622 0.862
and the service they provide
I feel satisfied that the service provider produces 18.140 0.917
the best results that can be achieved for me
The extent to which the service provider has 16.331 0.879
produced the best possible outcome for me is
satisfying
Model fit chi-square = 728.1999
indices CMIN/df = 2.924
NFI = 0.742
CFI = 0.812
RMSEA = 0.082

Customer Experience—Behavioural Loyalty Intentions (Fig. 7.1)

The customer experience—behavioural loyalty intentions model indicate that the

items were significantly and positively contributing and the SRW ranged between
0.50 and 0.98. All the critical ratio values showed significant results (Table 7.3).

Peace of Mind Customer Satisfaction

H2
H1 H5

Moment of Truth H1
Customer Experience Marketing H3
Behavioual Loyalty
Quality (EXQ) Outcomes
Intentions
H1

H4
H6
Outcome Focus H1 H5
H7

Word of Mouth

Product Experience Service Value

Fig. 7.1 Conceptual model of customer experience quality (EXQ)

7 Customer Experience and Its Marketing Outcomes … 131

Table 7.3 Confirmatory factor analysis—behavioural loyalty intentions

Factor Items CR SRW
Peace of I am confident in the service provider expertise 6.345 0.641
mind Feeling with the service provider is easy 5.637 0.545
The service provider will look after me for a long 6.319 0.649
time
The service provider gives independent advice on 7.998 0.553
which product or service will best suit my needs
I have built a personal relationship with the people 0.681
at the service provider
The service provider advises me throughout the 6.553 0.742
service delivery process
The service provider demonstrates flexibility in 9.102 0.742
dealing with me
Moment of The service provider will keep me up to date 9.835 0.797
truth The service provider has a good reputation 9.575 0.777
The people I am dealing with have good people 9.010 0.735
skills
The service provider deal(t) well with me when 0.742
things go wrong
The service provider delivers a good customer 6.655 0.662
service
Outcome The service provider knows exactly what I want 8.050 0.887
focus The service providers’ facilities are better design to 7.301 0.755
fulfil my needs than their competitors
The service providers’ facilities are designed to be 0.600
as efficient as possible for me
The service provider offerings are superior to their 3.462 0.632
competitors
Product The service provider offerings have the best quality 2.914 0.642
experience I do not choose the service provider by the price of 8.068 0.822
his offerings alone
At the service provider, I always deal with same 0.558
forms and same people
Customer My feelings towards the service provider are very 0.500
satisfaction positive
I feel good about coming to the service provider 4.856 0.522
for the offerings I am looking for
Overall I am satisfied with the service provider and 6.273 0.863
the service they provide
I feel satisfied that the service provider produces 6.179 0.826
the best results that can be achieved for me
The extent to which the service provider has 6.237 0.848
produced the best possible outcome for me is
satisfying
Model fit chi-square = 799.984
indices CMIN/df = 3.213
NFI = 0.774
CFI = 0.747
RMSEA = 0.072
132 S. Raina et al.

Customer Experience—Word-of-Mouth

The model showed chi-square, CMIN/df, CFI, RMSEA and NFI values as 810.941,
2.981, 0.799, 0.775 and 0.075, respectively. All critical ratio values were greater
than 1.96, and SRW was between 0.54 and 0.98 (Table 7.4).

Table 7.4 Confirmatory factor analysis— word-of-mouth behaviour

Factor Items CR SRW
Peace of I am confident in the service provider 6.305 0.641
mind expertise
Feeling with the service provider is easy 5.638 0.545
The service provider will look after me for a 6.321 0.644
long time
The service provider gives independent 8.002 0.986
advice on which product or service will best
suit my needs
I have built a personal relationship with the 0.553
people at the service provider
The service provider advises me throughout 6.556 0.681
the service delivery process
The service provider demonstrates flexibility 9.125 0.742
in dealing with me
Moment of The service provider will keep me up to date 9.850 0.797
truth The service provider has a good reputation 9.591 0.777
The people I am dealing with have good 9.014 0.734
people skills
The service provider deal(t) well with me 0.743
when things go wrong
The service provider delivers a good 6.657 0.662
customer service
Outcome The service provider knows exactly what I 8.042 0.887
focus want
The service providers’ facilities are better 7.300 0.755
design to fulfil my needs than their
competitors
The service providers’ facilities are designed 0.600
to be as efficient as possible for me
The service provider offerings are superior to 6.294 0.630
their competitors
Product The service provider offerings have the best 6.912 0.642
experience quality
I do not choose the service provider by the 8.054 0.824
price of his offerings alone
At the service provider, I always deal with 0.558
same forms and same people
(continued)
7 Customer Experience and Its Marketing Outcomes … 133

Table 7.4 (continued)

Factor Items CR SRW
Customer My feelings towards the service provider are 0.835
satisfaction very positive
I feel good about coming to the service 9.468 0.693
provider for the offerings I am looking for
Overall I am satisfied with the service 11.503 0.796
provider and the service they provide
I feel satisfied that the service provider 13.637 0.891
produces the best results that can be achieved
for me
The extent to which the service provider has 10.401 0.742
produced the best possible outcome for me is
satisfying
Model fit chi-square = 810.941
indices CMIN/df = 2.981
NFI = 0.799
CFI = 0.775
RMSEA = 0.075

Customer Experience—Service Value (Table 7.5)

The customer experience—service value model indicated that the items were
positively contributing as the SRW and SMC were quite acceptable as per the
threshold criteria. All the critical ratio values showed significant results.

Table 7.5 Confirmatory factor analysis—service value

Factor Items CR SRW
Peace of I am confident in the service provider 6.305 0.641
mind expertise
Feeling with the service provider is easy 5.638 0.545
The service provider will look after me for a 6.321 0.644
long time
The service provider gives independent 8.001 0.986
advice on which product or service will best
suit my needs
I have built a personal relationship with the 0.553
people at the service provider
The service provider advises me throughout 6.556 0.681
the service delivery process
The service provider demonstrates flexibility 9.126 0.743
in dealing with me
(continued)
134 S. Raina et al.

Table 7.5 (continued)

Factor Items CR SRW
Moment of The service provider will keep me up to date 9.843 0.796
truth The service provider has a good reputation 9.959 0.778
The people I am dealing with have good 9.014 0.734
people skills
The service provider deal(t) well with me 0.743
when things go wrong
The service provider delivers a good 6.660 0.633
customer service
Outcome The service provider knows exactly what I 8.043 0.886
focus want
The service providers’ facilities are better 7.302 0.755
design to fulfil my needs than their
competitors
The service providers’ facilities are designed 0.600
to be as efficient as possible for me
The service provider offerings are superior to 6.163 0.630
their competitors
Product The service provider offerings have the best 2.916 0.624
experience quality
I do not choose the service provider by the 8.059 0.823
price of his offerings alone
At the service provider, I always deal with 0.558
same forms and same people
Customer My feelings towards the service provider are 0.789
satisfaction very positive
I feel good about coming to the service 10.772 0.824
provider for the offerings I am looking for
Overall I am satisfied with the service 9.994 0.774
provider and the service they provide
I feel satisfied that the service provider 8.022 0.642
produces the best results that can be achieved
for me
The extent to which the service provider has 9.568 0.746
produced the best possible outcome for me is
satisfying
Model fit chi-square = 796.368
indices CMIN/df = 2.690
NFI = 0.793
CFI = 0.779
RMSEA = 0.081
7 Customer Experience and Its Marketing Outcomes … 135

7.3.3.3 Overall Confirmatory Factor Analysis

The overall model that is customer experience with its four marketing outcomes
namely customer satisfaction, behavioural loyalty intentions, word-of-mouth and
service value showed chi-square (2190.927), CMIN/df (2.698), CFI (0.724),
RMSEA (0.072) and NFI (0.789). All the customer experience values were sig-
nificantly and positively contributing to the marketing outcomes (Table 7.6).

Table 7.6 Overall confirmatory factor analysis

Factor Items CR SRW
Peace of I am confident in the service provider 6.304 0.641
mind expertise
Feeling with the service provider is easy 5.637 0.545
The service provider will look after me for a 6.320 0.644
long time
The service provider gives independent 8.000 0.986
advice on which product or service will best
suit my needs
I have built a personal relationship with the 0.553
people at the service provider
The service provider advises me throughout 6.555 0.681
the service delivery process
The service provider demonstrates flexibility 9.126 0.742
in dealing with me
Moment of The service provider will keep me up to date 9.849 0.796
truth The service provider has a good reputation 9.598 0.778
The people I am dealing with have good 9.020 0.734
people skills
The service provider deal(t) well with me 0.743
when things go wrong
The service provider delivers a good 6.657 0.633
customer service
Outcome The service provider knows exactly what I 8.039 0.886
focus want
The service providers’ facilities are better 7.298 0.755
design to fulfil my needs than their
competitors
The service providers’ facilities are designed 0.600
to be as efficient as possible for me
The service provider offerings are superior to 2.052 0.630
their competitors
(continued)
136 S. Raina et al.

Table 7.6 (continued)

Factor Items CR SRW
Product The service provider offerings have the best 2.916 0.624
experience quality
I do not choose the service provider by the 8.062 0.823
price of his offerings alone
At the service provider, I always deal with 0.558
same forms and same people
Customer My feelings towards the service provider are 0.569
satisfaction very positive
I feel good about coming to the service 4.481 0.590
provider for the offerings I am looking for
Overall I am satisfied with the service 5.879 0.878
provider and the service they provide
I feel satisfied that the service provider 5.783 0.830
produces the best results that can be achieved
for me
The extent to which the service provider has 5.822 0.848
produced the best possible outcome for me is
satisfying
Model fit chi-square = 2190.927
indices CMIN/df = 2.698
NFI = 0.789
CFI = 0.724
RMSEA = 0.072

7.3.4 Reliability and Validity

The study assessed reliability and validity of the customer experience and its
marketing outcomes by computing composite reliability and average variance
extracted. The composite reliability of individual customer experience construct
with the marketing outcomes came to be customer satisfaction (0.97), loyalty
intentions (0.97), word-of-mouth (0.97) and service value (0.97). Further, conver-
gent validity assumes that measures of construct should be theoretically related to
each other and in practice as well. As the dimensions of customer experience have
shown critical ratio values (more than 1.96) and standardized regression weight
(more than 0.50) in CFA which established the convergent validity of the scale. In
addition, convergent validity was also established by examining the average vari-
ance extracted (AVE) of each customer experience construct with the marketing
7 Customer Experience and Its Marketing Outcomes … 137

outcomes. The AVE of the following constructs namely customer namely customer
experience with customer satisfaction (0.60), loyalty intentions (0.60),
word-of-mouth (0.62) and service value (0.61) are above the threshold criteria of
0.50 hence indicating convergent validity.

Dimensions CR AVE Value

Peace of mind (POM) 0.91 0.66 0.88
Moment of truth (MOT) 0.90 0.78 0.87
Outcome focus (OF) 0.92 0.71 0.81
Product experience (PE) 0.91 0.62 0.80
Customer satisfaction (CS) 0.97 0.60 0.95
Word of mouth (WM) 0.97 0.62 0.91
Behavioural loyalty intentions (BL) 0.97 0.60 0.84
Service value (SV) 0.97 0.61 0.87
Goodness of fit indices
CMIN df CFI IFI RMSEA
2196 812 0.721 0.726 0.08

7.3.5 Results of Hypothesis Testing

The results for the customer experience quality, customer satisfaction, behavioural
loyalty intentions, word-of-mouth and service value are illustrated in Table 7.3. The
study shows that customer experience has a significant and positive impact on the
customer satisfaction (0.52), behavioural loyalty intentions (0.79), word-of-mouth
(0.57) and service value (0.50). Hence, in both the settings (UK and India), four
hypotheses which relate to CE–CS (H1), CE–LI (H2), CE–WOM (H3) and CE–SV
(H4) are accepted. Further, hypothesis (H5) that is related a stronger positive impact
on loyalty intentions (0.765) than customer satisfaction (0.462) is accepted. While
(H6 and H7) stronger impact on customer satisfaction in regard to word-of-mouth
behaviour (0.449) and service value (0.699) are respectively, rejected.
138 S. Raina et al.

Hypothesis 1 EXQ—Customer satisfaction 0.524

PEA–EXQ 0.315
MOM–EXQ 0.448
OUT–EXQ 0.784
PRO–EXQ 0.286
Hypothesis 2 EXQ—Behavioural loyalty intentions 0.788
PEA–EXQ 0.297
MOM–EXQ 0.597
OUT–EXQ 0.558
PRO–EXQ 0.267
Hypothesis 3 EXQ—Word-of-mouth 0.575
PEA–EXQ 0.359
MOM–EXQ 0.476
OUT–EXQ 0.703
PRO–EXQ 0.265
Hypothesis 4 EXQ—Service value 0.50
PEA–EXQ 0.268
MOM–EXQ 0.582
OUT–EXQ 0.574
PRO–EXQ 0.240
Hypothesis 5 EXQ—Customer satisfaction—Loyalty intentions 0.462–0.765
Hypothesis 6 EXQ—Customer satisfaction—Word-of-mouth 0.535–0.449
Hypothesis 7 EXQ—Customer satisfaction—Service value 0.769–0.699

Therefore, all results of the hypotheses are shown in Table 7.7.

Table 7.7 Hypotheses confirmation

Hypothesis Customer experience has a significant Confirmation Evidence (Path
positive impact upon… estimate
scores)
1 Customer satisfaction Yes Path estimate of
0.524
2 Behavioural loyalty intentions Yes Path estimate of
0.788
3 Word-of-mouth Yes Path estimate of
0.575
4 Service value Yes Path estimate of
0.50
Customer experience has a higher positive impact than customer satisfaction upon …
5 Behavioural loyalty intentions Yes 0.462–0.765
6 Word-of-mouth No 0.535–0.449
7 Service value No 0.769–0.699
7 Customer Experience and Its Marketing Outcomes … 139

7.3.6 Discussion

The present study is an extended work on customer experience quality (EXQ)

undertaken by Maklan and Klaus (Forthcoming) in service sector of UK setting.
This study contributes to the extant marketing literature by validating the domain of
consumer experience quality in financial service sector (banking, insurance and
investment) operating in emerging economies, that is India, and its impact on
marketing outcomes (customer satisfaction, behavioural loyalty intentions,
word-of-mouth and service value).
The customer experience quality scale is assessed through validity and reliability
analysis assuring the validation of EXQ scale in Indian settings. It is validated as
four-dimensional scale, that is peace of mind, moment of truth, outcome focus and
product experience. Also, the findings suggest that all the four individual dimen-
sions (peace of mind, moment of truth, outcome focus and product experience) have
positive and significant impact on the marketing outcomes, that is customer satis-
faction, behavioural loyalty intentions, word-of-mouth and service value. Further,
there is significant influence of each individual factor of customer experience
quality on the marketing outcomes (Table 7.8). Moreover, there exist stronger and
positive relationship between customer experience and behavioural loyalty inten-
tions than customer satisfaction. The results put forth that a loyal customer is more
likely to find the service encounter and the overall experience (with the service
provider) more satisfying in comparison with non-loyal customer. Yi and Gong
(2009) put forth that to improve customer satisfaction and loyalty, it is important to
pay attention towards customer experience. In the context of UK services, the
customer experience quality scale works well. Perhaps, the opinions of Indian
customers in regard to EXQ were somewhat different. According to the Indian
context, moment of truth (0.97) seems to be the most important factor that has to be
considered by financial services for creating favourable customer experience quality
followed by outcome focus (0.94), peace of mind (0.82) and product experience
(0.74). The dimension product experience displays weakest association among all
dimensions (outcome focus, peace of mind and moment of truth) with customer
satisfaction (0.28), behavioural loyalty intentions (0.26), word-of-mouth (0.26) and
service value (0.24). The relatively weak association with all marketing outcomes
suggests that customer awareness about competitive services has increased and they
no more accept every type of services from the same service provider because of
varied customers’ choices and their ability to compare offerings with different
service providers. This gives customers the feeling of having a choice, and without
a choice, they will unlikely to accept the offer no matter how good the offer was. So,
it is important that all service providers should adopt appropriate strategy that can
improve their services and increase customers’ optimal experience which will
subsequently enhance customer satisfaction, word-of-mouth, behavioural loyalty
intentions and service value.
Moreover, the dimension moments of truth has strongest association with
behavioural loyalty intentions and service value as it emphasizes on the importance
140 S. Raina et al.

Table 7.8 Confirmatory Factor 1 = Customized services CE–BL 0.674

factor analysis with individual
CE–CS 0.643
marketing outcomes
CE–WM 0.604
CE–SV 0.781
Factor 2 = Informative services CE–BL 0.742
CE–CS 0.647
CE–WM 0.576
CE–SV 0.716
Factor 3 = Reputation CE–BL 0.678
CE–CS 0.657
CE–WM 0.596
CE–SV 0.773
Factor 4 = Relationship commitment CE–BL 0.641
CE–CS 0.672
CE–WM 0.574
CE–SV 0.815
Factor 5 = Responsiveness CE–BL 0.674
CE–CS 0.677
CE–WM 0.558
CE–SV 0.788
Note CE customer experience, BL behavioural loyalty intentions,
CS customer satisfaction, WM word-of-mouth and SV service
value

of service recovery and flexibility in dealing with the customers wherein compli-
cations arise in the process of acquiring the services. Further, it is assumed that
there is an importance of experiences related to the service company (“service
provider deal well with me when things go wrong” and “service provider has good
people skills”) to form the positive behavioural intentions and influence the loyalty
of the customers (Buttle and Burton 2002).
Lastly, the findings demonstrate greater influence of outcome focus on customer
satisfaction and word-of-mouth. This strong association illustrates that in the Indian
context, the customers are more satisfied with the service provider that gives
accurate information of the services to the customers and also delivers good cus-
tomer service. For instance, it reflects the importance of goal-oriented experiences
such as providing a good match of service products to the customers. These
goal-oriented experiences would endure customers to tell others about their expe-
riences or may recommend the service provider to friends and family or would visit
the service provider again.
From overall perspective, there exists stronger relationship between customer
satisfaction (CE–CS) and customer experience quality than word-of-mouth
(CE–WM) and service value (CE–SV). This indicates that even though cus-
tomers are satisfied with the services but they do not prefer to tell to others about the
services offered by the service providers to maintain their and the service providers
7 Customer Experience and Its Marketing Outcomes … 141

confidentiality. In this context, Shankar et al. (2003) opined that overall the more
favourable the experience is, the higher is the satisfaction. Similarly, Chen et al.
(2008) considered actual experience and expectation as significant predictors of
satisfaction. They remarked that the gap between expectation and actual experience
leads to satisfaction/dissatisfaction. Further, customer experience not only drives
customer satisfaction and loyalty intentions but also word-of-mouth (Keiningham
et al. 2007) which may be positive or negative. The positive word-of-mouth
endorses positive experience, satisfaction and loyalty, while negative
word-of-mouth enhances switching intentions.

7.3.7 Implications, Limitations and Future Research

The present study of customer experience is validated by the findings which

showed that there exists significant impact of customer experience on important
marketing outcomes. The study illustrated a detailed structure whereby organiza-
tions can determine which dimensions of the customer experience are most strongly
associated with the marketing outcomes. This allows the organizations to improve
their customer experience management.
The research work to validate customer experience scale was conducted along
the presence of certain unavoidable limitations. First, the study is based on three
financial services such as banking, investment and insurance only, and for further
research, it is suggested to adopt other services comprehensively to understand
customer experience from their perspective. Secondly, the major limitation of the
research is related to the presence of subjective responses of the customers with
respect to customer experience constructs in the study. Nevertheless, appropriate
efforts were taken to check the subjectiveness of the responses using various
validity and reliability methods. Lastly, the scale needs to be tested across various
states to generalize the results.

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Chapter 8
Re-investigating Market Orientation
and Environmental Turbulence
in Marketing Capability and Business
Performance Linkage: A Structural
Approach

Jagmeet Kaur, Hardeep Chahal and Mahesh Gupta

Abstract This study aims to re-investigate the role of market orientation as an

antecedent to marketing capability and effect of environmental turbulence as
moderating variable in marketing capability—competitive advantage—business
performance relationship. Data are collected from multiple respondents, that is, a
branch manager and three senior managers of 144 branches of public and private
banks operating in Jammu city, North India. The study establishes marketing
capability as a three-dimensional construct, comprising outside-in, inside-out and
spanning, unlike majority of previous studies on marketing capability. The study
also supports the school of thought which believes that market orientation acts as an
antecedent to marketing capability rather than its dimension. Further, the findings
reveal partial mediating role of marketing capability on market orientation and
competitive advantage linkage. However, environmental turbulence does not
moderate in marketing capability-competitive advantage relationship in the
tech-savvy banking sector.

Keywords Business performance Competitive advantage
Environmental


turbulence Market orientation and marketing capability

J. Kaur
Government General Zorawar Singh Memorial Degree College, Reasi, India
e-mail: [email protected]
H. Chahal (&)
Department of Commerce, University of Jammu, Jammu, India
e-mail: [email protected]
M. Gupta
University of Louisville, Louisville, USA
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 145

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_8
146 J. Kaur et al.

8.1 Introduction

Marketing scholars such as Day (1994), Vorhies and Morgan (2005) underscore
that an organisation needs to build resources that are valuable, non-substitutable and
inimitable to sustain competitive advantage (CA). They further remark that mar-
keting capability (MC) is one of the market-based resources which facilitates the
organisation to better understand market needs and develops long-term relationship
with different stakeholders. Day (1994) also puts forth that an organisation with
marketing capability is able to perform varied marketing activities such as market
information generation market positioning, segmentation, market planning activi-
ties, product development activities and promotion efficiently. In 2011, Day
explicates that marketing capability, by minimising the gap between market com-
plexities and organisational ability, enables a firm to cope up with market changes.
Evidence within marketing literature suggests that marketing capability leads to
achieve superior business performance, and hence, the concept requires more
extensive attention (Day 1994, 2011; Hooley et al. 1999; Vorhies and Morgan
2005; Pham et al. 2017). Further, the researchers recommended that there is a need
to explore the impact of antecedents, such as market orientation, differentiation
strategies, organisational culture, niche versus broad market selection, industry
context, learning, on marketing capability (Vorhies 1998; Vorhies and Yarbrough
1998). Vorhies (1998), Vorhies and Yarbrough (1998) and Ros et al. (2010) also
underline that the studies on marketing capability, competitive advantage and
business performance relationship are scarce. For instance, Vorhies (1998) quotes
that “research is needed that investigates how various marketing capability mar-
keting capability contribute individually to organisational success” (p. 18). In line
with this, Krasnikov and Jayachandran (2008) also pointed out that empirical
research that examines the impact of marketing capability on business performance
is scarce as compared to the impact of general capabilities such as R&D, operations
in other functional areas. Recently, Pham et al. (2017) put forth that there is a need
of examining and validating the role of marketing capability such as product
development, pricing, marketing communication, distribution, in enhancing busi-
ness performance in emerging economies. The study observed mixed relationships
between marketing capability and business performance in Vietnam export sector.
Marketing capability such as product development, pricing, marketing communi-
cation showed direct and positive relationship with business performance, whereas
the relation of distribution and after-sale service was found to be insignificant.
Lindblom et al. (2008) conducted study in retail sector and identified weak linkage
of marketing capability and business performance. The scholars advocated that if
variables such as competitive intensity, store location are considered in the mar-
keting capability and business performance relationship, then such weak linkage
can be controlled and strengthened as well. Hence, they suggested that the effects of
the moderating factors on marketing capability–business performance relationship
are required to be undertaken in the future. In this context, Najafi Tavani et al. (2016)
8 Re-investigating Market Orientation and Environmental … 147

also highlighted the need of measuring role of environmental turbulence as a

moderator in marketing capability–business performance relationship.
This study is conducted to identify the influence of market orientation (an-
tecedent) on marketing capability and its subsequent impact on competitive
advantage and business performance in service sector. Besides, the study also aims
to re-investigate the role of market orientation as an antecedent to marketing
capability, environment turbulence as a moderator in marketing capability, com-
petitive advantage and business performance relationship. In addition, the role of
competitive advantage as a mediator on marketing capability and business perfor-
mance relationship would also be identified.
The structure of the paper is as follows: firstly, literature review and hypotheses
development are presented. After that, discussion on hypotheses development and
research methods used to test these hypotheses along with the results of hypotheses
testing are addressed. The study ends with discussions, limitations and directions
for future research.

8.2 Literature Review and Hypotheses Development

8.2.1 Marketing Capability

The marketing literature offers four different perspectives of marketing capability

which include operational (Day 1994, 2011; Cadogan et al. 2002; Greenley et al.
2005), marketing mix (Vorhies and Yarbrough 1998; Vorhies and Harker 2000;
Weerawardena 2003; Vorhies and Morgan 2005), intellectual capital (Moller and
Antilla 1987) and competition (Fahy et al. 2000).
The operational perspective conceptualises marketing capability as the combi-
nation of outside-in, inside-out and spanning capability (Day 1994). This concept
has been considered in the present paper. Researchers such as Vorhies (1998),
Vorhies and Morgan (2005) focus on marketing mix elements such as 4Ps, mar-
keting planning and implementation, market research to comprehend marketing
capability. According to Moller and Antilla (1987), intellectual capital, which is the
third perspective, considers marketing capability as the composition of human,
market and organisational assets. Lastly, competition-based perspective of mar-
keting capability puts emphasis on (Fahy et al. 2000) market orientation, time
horizon of strategic decisions and positioning skills.
Regarding different conceptualisations of marketing capability, Guenzi and
Troilo (2007) suggested that all these conceptualisations of marketing capability
primarily focus on developing business capabilities to identify, anticipate and
understand market requirements. While conceptualising marketing capability, Day
(1994) remarks that though it is not possible to list all organisational capabilities but
capabilities that correspond to core processes for creating business value can be
identified.
148 J. Kaur et al.

This study focuses on operational perspective of marketing capability. From

operational perspective, marketing capability can be conceptualised as an integra-
tion of firm’s resources and employees’ knowledge and skills to create superior
customer value. Day (1994) and Tsai and Shih (2004) consider marketing capability
as valuable, rare and inimitable which is difficult for the organisation to replace with
any other resources. Day (1994) categorised marketing capability into outside-in,
inside-out and spanning capabilities. Outside-in capability (such as market sensing,
customer linking) helps an organisation in identifying and understanding the market
needs (Day 1994; Greenley et al. 2005). Inside-out capability is internally focused
marketing capability which is created to enhance firm’s operational performance
(Vijande et al. 2012). Lastly, spanning capability is the integration of outside-in and
inside-out capabilities.

8.2.2 Market Orientation

Body of researchers such as Vorhies et al. (1999), Vorhies and Harker (2000),
Hooley et al. (2005), Murray et al. (2011), Merrilees et al. (2011) and Ngo and
O’Cass (2012) underlined market orientation as a significant antecedent of mar-
keting capability. Morgan et al. (2009) put forth that market orientation, being
market-based knowledge asset, can enhance marketing capability of an organisation
by considering customers’ needs, competitive strategy, channel requirement, etc.,
important for sustaining competitive advantage. However, Hooley et al. (1999) and
Fahy et al. (2000) considered market orientation as one of the components of
marketing capability. They remarked that market orientation as the dimension of
marketing capability is the main strategy which facilitates an organisation in
achieving superior performance. In this study, like other school of thought we argue
that as an antecedent, market orientation provides a knowledge base that aid in the
creation of valuable and inimitable marketing capability. Besides market orienta-
tion, there are other antecedents such as marketing knowledge management, market
information processing capabilities, task routinisation, entrepreneurial intensity,
management capabilities, organisational culture and structure considered in the
literature that affects marketing capability. These antecedents, however, are asso-
ciated either directly or indirectly with market orientation. For instance, marketing
knowledge management (Tsai and Shih 2004) and market information processing
(Vorhies 1998) are related with generation, dissemination and communication of
information within and between departments and can be judged through market
orientation. Further, entrepreneurial intensity (comprising innovative, proactive and
risk-taking abilities of top management) and management capabilities (market
support capabilities) are also indirectly linked with market orientation, since the
availability of such skills in an organisation will enhance market orientation and its
marketing capability.
However, Lafferty and Hult (2001) categorised the concept of market orientation
into five perspectives. These perspectives include decision-making, strategic,
8 Re-investigating Market Orientation and Environmental … 149

customer orientation, market intelligence and culturally based behavioural per-

spectives. The first perspective, that is, decision-making, revolves around the
commitment of top management in pursuing decision-making practices as well as
sharing of information among the employees. The strategic, second perspective, of
market orientation concentrates on strategy development and execution, while the
third perspective customer orientation focuses on developing a culture based on
customer orientation. The fourth perspective, market intelligence or behavioural
perspective, considers market orientation as the composite of market intelligence
generation, dissemination and responsiveness (Jaworski and Kohli 1993). Finally,
culturally based behavioural, the fifth perspective conceptualises market orientation
as an organisational culture which consists of three behaviour components which
include customer orientation, competitor orientation and inter-functional coordi-
nation (Narver and Slater 1990).
Lafferty and Hult further suggested although the characteristics of varied con-
ceptualisations of market orientation available in the literature are different, all of
them agree that market orientation focuses on customers and gives importance to
sharing of information, inter-functional coordination of and responding to mar-
keting activities by taking the appropriate action. Even though five different per-
spectives of market orientation exist in the literature, the study considers
behavioural perspective of market orientation (Fig. 8.1). Number of marketing
scholars such as Vorhies et al. (1999), Vorhies and Harker (2000), Morgan et al.
(2009), Murray et al. (2011) used behavioural perspective of market orientation to
determine its relationship with marketing capability as this perspective specifically
emphasises on organisation-wide usage of market information. Market-oriented
organisation constantly gathers information about current and future customers,

Market Orientation Marketing Competitive

capability Advantage
• Intelligence • Outside-in
Generation • Inside-out • Service
• Intelligence • Spanning differentiation
Dissemination
• Responsiveness

Environmental
Turbulence

Business Performance

• Profitability
• Return on
asset
• Return on

Fig. 8.1 Relationships of market orientation, marketing capability, competitive advantage,

environmental turbulence and business performance
150 J. Kaur et al.

competitor’s capabilities and other market pressures such as technological changes,

government policies (Murray et al. 2011). All these information are consequently
shared among the employees of an organisation who quickly respond to these
market changes. Thus, market orientation provides unique know-what knowledge
base for the development of marketing capability which, in turn, helps the organ-
isation in better serving target market (Morgan et al. 2009; Ngo and O’Cass 2012).
Market orientation refers to the organisation-wide generation of market intelli-
gence about current and future customer needs, dissemination of its intelligence
across departments and organisation-wide responsiveness to the disseminated
intelligence (Jaworski and Kohli 1993). This perspective of market orientation is
well accepted in the marketing capability literature, as it is considered as
market-based knowledge asset which focuses on organisational and human activ-
ities pertaining to the creation, dissemination and reaction to market intelligence
that may be difficult for managers to directly observe in their competitors.
Researchers observed that market orientation have positive and significant
influence on marketing capability (Murray et al. 2011; Merrilees et al. 2011; Ngo
and O’Cass 2012). They further remarked that since market-oriented organisation
emphasises on meeting customers’ needs as well as on building relationship with
them, such organisation possesses better marketing capability in comparison to
non-market-oriented organisation. Further, Qureshi and Mian (2010) contended that
a market-oriented organisation is actively engaged in acquiring information to
enhance its ability to predict prevailing market trends and also to unveil latent needs
of the customers. Organisation which is first to uncover such latent needs is in a
better position to develop the marketing capability. Hence, the study hypothesises
that:
H1: Market orientation is a strong and positive predictor of marketing capability.
Morgan et al. (2009) express that market orientation-based marketing capability
helps an organisation in resource adaptation better than the competitors. Murray
et al. (2011) also observed that market orientation improves business performance
through marketing capability. Therefore, while analysing market orientation–busi-
ness performance linkage, the mediating impact of marketing capability is signif-
icant. Hence, we hypothesise that:
H2: Market orientation has significant and positive impact on (a) competitive
advantage and (b) business performance through marketing capability.
The marketing literature confirms that marketing capability paves ways for
achieving competitive advantage (Day 1994; Weerawardena 2003; Kaleka and
Morgan 2017). Weerawardena (2003) puts forth that an organisation should keep
on developing and nurturing marketing capability up to that point until they lead to
achieve competitive advantage. Recently, Kaleka and Morgan (2017) observed that
an organisation with marketing capability (i.e. informational, customer relationship
and product development) is more competitive in attaining marketing differentia-
tion. They also put forth that customer relationship capabilities create superior
8 Re-investigating Market Orientation and Environmental … 151

customer value which acts as a tool for gaining significant market information. Such
information ultimately enhances the organisational ability to differentiate its
product/service. Thus, it is hypothesised that:
H3: Marketing capability is positively and significantly related to competitive
advantage.
Najafi Tavani et al. (2016) underlined that an organisation with marketing
capability is able to build effective strategies and policies and hence enjoys superior
business performance. Researchers such as Nath et al. (2010) and Krasniko
demonstrated that organisation’s financial performance is more significantly influ-
enced by marketing capability than other functional capabilities such as operations
capabilities, R&D. Krasniko and Jayachandran (2008) also remarked that marketing
capability is in fact “success-producing capabilities” that keep an organisation
ahead of its competitors, whereas R&D and operations capabilities can be seen as
“failure prevention capabilities” which are essential for its survival. Azizi et al.
(2009) also observed positive relationships of marketing capability with financial
performances. They remark that marketing capability leads to develop effective
marketing techniques in an organisation, and hence, this results in better perfor-
mance. Thus, we hypothesise that:
H4: There is a strong relationship between marketing capability and business
performance.
Vorhies and Yarbrough (1998), Murray et al. (2011) also observed indirect role
of competitive advantage in marketing capability–business performance linkage.
The study results of Vorhies and Yarbrough (1998) found that an organisation with
marketing capability is comparatively better in attaining market growth, position
and ROA. Further literature also discusses that strong relationship between mar-
keting capability and business performance through competitive advantage. Murray
et al. (2011) established the role of cost and differentiation strategies in improving
marketing capability–business performance relationship. Specifically, the authors
remarked that marketing capability such as pricing capability, marketing commu-
nication capability consequently creates differentiated image and leads to compet-
itive advantage and business performance. Thus, it is hypothesised that:
H5: Marketing capability has positive and significant impact on business perfor-
mance through competitive advantage.
The literature highlights that an organisation which develops marketing capa-
bility is able to respond to the environment that possesses competitive intensity,
market and technological turbulences and hence, is effective in reducing uncertainty
levels regarding environmental impacts better than the competitors (Vorhies and
Yarbrough 1998). The researchers further assert that marketing capability facilitates
an organisation to collect, process, distribute and react to environmental informa-
tion better than the competitors which, in turn, paves way for achieving superior
business performance. Hence, we hypothesise that:
152 J. Kaur et al.

H6: Environmental turbulence moderates the relationship between marketing

capability and (a) competitive advantage and (b) business performance.

8.3 Research Methodology

8.3.1 Generation of Scale Items

Marketing capability is measured by using MARKCAPB scale developed by

Chahal and Kaur (2014). Further, competitive advantage is assessed using
self-developed items of service differentiation as the items for measuring the same
in banking sector are not available in the literature. Jaworski and Kohli (1993) scale
is used to measure market orientation and environmental turbulence. Lastly, busi-
ness performance is assessed through financial indicators, namely market share
growth, ROI, ROA and profitability (Vorhies and Harker 2000; Morgan et al.
2009).

8.3.2 Data Collection

The study is conducted in urban Indian banking sector operating in Jammu (i.e.
144 branches of twenty-one public and seven private banks). The data are collected
from multiple respondents, that is, four (one branch manager and three senior
managers/officers) from each bank’s branch to minimise common method biasness.
The response rate of the study was 52.60% which includes 303 fully filled ques-
tionnaires out of 576.

8.3.3 Exploratory Factor Analysis (EFA)

Before performing EFA, data were made normal by deleting sixteen outliers. The
descriptive statistics of retained items is given in Table 8.1. Further, alpha values of
the selected constructs were found to be above threshold value of 0.70.
EFA based on principal component analysis with a varimax rotation was con-
ducted on 287 observations. All the items were examined for retention based on
criteria such as eigenvalues (  1) Kaiser–Meyer–Olkin (KMO) value (  0.50),
measure of sampling adequacy (MSA) (  0.70), communality (  0.50) and min-
imum factor loading (  0.40) (Hair et al. 2009).
The study considers marketing capability as a three-dimensional construct. EFA
was performed separately on all three dimensions of marketing capability, namely
outside-in, inside-out and spanning. The EFA results are shown in Table 8.2.
8 Re-investigating Market Orientation and Environmental … 153

Table 8.1 Descriptive statistics

Constructs Mean Standard Skewness Kurtosis
deviation
Min Max Min Max Min Max Min Max
MC 2.29 4.37 0.63 1.19 −0.02 −1.70 0.10 5.74
MO 3.26 4.28 0.60 1.14 −0.38 −1.44 −0.03 2.94
ET 3.62 4.15 0.55 0.88 −0.01 −1.11 0.18 0.83
CA 3.34 4.26 0.69 1.12 −0.42 −0.42 −0.02 2.47

Table 8.2 EFA results of marketing capability

Dimensions Factor KMO Variance Communality
loading (%)
Outside-in 0.76 67.72
F1: Relationship Relationship with channel 0.86 38.25 0.77
member
Relationship with channel 0.86 0.76
member w.r.t cash transfer
Relationship with channel 0.73 0.62
member w.r.t cheque
processing
F2: Regularity Regular customer contact 0.84 16.92 0.72
Periodic market research 0.75 0.62
Regular interdepartmental 0.68 0.52
meetings
F3: Communicating service 0.84 12.55 0.74
Communication changes
Effective solutions to 0.78 0.67
customer problems
Inside-out 0.79 62.20
F1: Web Product/service information 0.79 33.54 0.65
technology on website
Online relationship building 0.80 0.67
User-friendly website 0.79 0.63
Investment to upgrade 0.60 0.47
technology
F2: Employee Encouraging employees 0.72 28.64 0.56
bonding Fair appraisal system 0.82 0.67
Providing constant guidance 0.81 0.71
to employees
(continued)
154 J. Kaur et al.

Table 8.2 (continued)

Dimensions Factor KMO Variance Communality
loading (%)
Spanning 0.71 74.67
F1: Effective Developing and executing 0.87 26.52 0.77
brand and advertising programmes
advertising Managing advertising 0.890 0.81
programmes
Effective use of brand 0.71 0.57
management
F2: Pricing skill Using pricing skills 0.85 26.40 0.75
Information about 0.85 0.75
competitors pricing tactics
Responding to competitors 0.73 0.66
pricing tactics
F3: Product/ Developing new product/ 0.89 21.75 0.84
service skill service
Launching new product/ 0.86 0.84
service

The study identified three dimensions of outside-in (i.e. relationship, regularity and
communication), two dimensions of inside-out (i.e. Web technology and employee
bonding) and three of spanning, that is, effective brand and advertising; pricing and
product/service skills were related to effective brand and advertising; pricing and
product/service skills.
Similarly, EFA results identified four dimensions each of market orientation
(intelligence generation-I, intelligence generation-II, intelligence dissemination and
responsiveness) and competitive advantage (online bank services, cash/fund pro-
cessing time, ATMs’ service quality and draft/cheque processing) (Table 8.3).
While five factors are revealed for environmental turbulence which include market
turbulence-I (Marketing practices), market turbulence-II (Product/Service prefer-
ence), competitive intensity, technological turbulence-I (Change in technology) and
technological turbulence-II (Technological competitiveness) in the study.

8.3.4 Confirmatory Factor Analysis (CFA)

CFA was employed on selected study constructs—market orientation, marketing

capability, environmental turbulence and competitive advantage—o assess and
validate the measurement of factors included in the respective models. The CFA
models were evaluated on the basis of fitness given in Table 8.4. Moreover, path
value criteria, that is, critical ratio (CR) and standardised regression weight (SRW),
are used to ensure that the observed variables load as predicted on the expected
8 Re-investigating Market Orientation and Environmental … 155

Table 8.3 EFA results of MO, ET and CA

Dimensions Factor KMO Variance Communality
loading (%)
Market orientation 0.82 64.08
F1: Intelligence Customer’s 0.54 17.26 0.59
generation-I requirements are
(Customer identified regularly
need-focused) Customer preferences 0.79 0.64
change a lot over a short
period of time
Assessing impact of 0.70 0.64
product prices on
customers’ expectation
Assessing customer’s 0.53 0.51
opinion regarding
product/services
F2: Intelligence Generating information 0.58 16.33 0.52
generation-II about forces influencing
(Customer customers’ preferences
satisfaction-focused) Regular measures of 0.87 0.78
improving customer
service
Measuring customer 0.83 0.77
satisfaction on regular
basis
F3: Intelligence Interdepartmental 0.66 16.02 0.53
dissemination meetings for discussing
customer needs
Periodic circulation of 0.78 0.67
documents
Frequent circulation of 0.85 0.76
customer information
F4: Responsiveness Business plans are 0.56 14.46 0.49
driven more by market
advances
Taking corrective 0.750 0.73
actions when customers
are dissatisfied
Modifying products/ 0.76 0.68
services as per
customer’s desire
(continued)
156 J. Kaur et al.

Table 8.3 (continued)

Dimensions Factor KMO Variance Communality
loading (%)
Environmental 0.69 68.64
turbulence
F1: Competitive Cutthroat competition 0.80 15.84 0.69
intensity Many promotion wars 0.79 0.69
Anything that a 0.67 0.56
competitor can offer
other can match readily
F2: Market Changes in marketing 0.88 14.09 0.85
turbulence-I practices to keep up
(Marketing with competitors
practices) Changes in marketing 0.87 0.81
practices to keep up
with customers
F3: Technological Technological 0.69 13.05 0.55
turbulence-I development is
(Change in relatively minor
technology) Technology is not 0.74 0.58
subject to very much
change
Difficult to forecast the 0.66 0.58
technology
F4: Technological New ideas are made 0.83 12.91 0.75
turbulence-II through technological
(Competitiveness) breakthrough
Technological changes 0.79 0.67
provide big
opportunities
F5: Market Frequent changes in 0.82 12.75 0.73
turbulence-II customers product/
(Product preference) service preferences
Customers tend to look 0.83 0.77
new product all the time
Competitive advantage 0.82 75.42
F1: Online bank Instant access to account 0.79 20.89 0.72
services information on the
Internet
Instant access to loan 0.85 0.76
statement on the Internet
Quick downloading of 0.82 0.77
pages from the Internet
Secured online bill 0.68 0.53
payment services
(continued)
8 Re-investigating Market Orientation and Environmental … 157

Table 8.3 (continued)

Dimensions Factor KMO Variance Communality
loading (%)
F2: Cash/fund Processing time for 0.89 20.22 0.87
processing time depositing cash
Processing time for cash 0.90 0.88
withdrawal
Quick fund transfer 0.83 0.77
services
F3: ATMs service ATMs are always 0.78 18.25 0.69
quality operational
Neat and clean 0.88 0.85
surrounding around
ATMs
Secured ATMs services 0.87 0.83
F4: Draft/cheque Draft delivery 0.87 16.07 0.81
processing Clearance of cheque of 0.85 0.81
bank’s branch
Clearance of cheque of 0.59 0.52
other bank

number of factors. The critical ratio is the value of a test statistic which indicates a
specified significance level. Values greater than 1.96 which denotes an estimate that
is statistically significantly different from zero at the 0.05 level are used to retain the
items. Similarly, standardised regression weight reflects the change in the depen-
dent variable for each unit change in the independent variable (Hair et al. 2009).
The SRW value less than 0.50 is considered to delete the items. However, utmost
care is taken not to remove those items which are significant for the study.
Following EFA, CFA was run on identified factors of all the four constructs,
namely marketing capabilities, market orientation, environmental turbulence and
competitive advantage. The CFA results established marketing capability as
multi-dimensional construct consisting of outside-in, inside-out and spanning
capabilities. One item of spanning capabilities was deleted as the omission of the
item resulted into better fit of the model.
Market orientation, environmental turbulence and competitive advantage were
observed as multi-dimensional second-order constructs. In this stage, two items of
market orientation and three of environmental turbulence are deleted due to low
standardised regression weights. The standardised regression weights of all the
items of the four constructs were greater than threshold criterion 0.50.

8.3.5 Common Method Bias

Common method variance is a form of systematic error variance which can cause
observed correlations among variables to differ from their population values
 158

Table 8.4 Measurement model

Constructs v2/ Normed fit Relative fit Incremental fit Tucker–Lewis Comparative fit Root mean square of error
df index index index index index approximation
Fit indices
˂5  0.9  0.9  0.9  0.9  0.9 ˂0.08
Outside-in 2.10 0.94 0.89 0.97 0.95 0.97 0.06
Inside-out 2.13 0.95 0.93 0.98 0.96 0.98 0.06
Spanning 2.09 0.96 0.94 0.98 0.97 0.98 0.06
Marketing 2.61 0.79 0.76 0.86 0.84 0.86 0.07
capability
Market orientation 2.71 0.88 0.84 0.92 0.88 0.92 0.07
Competitive 2.51 0.93 0.91 0.96 0.94 0.96 0.07
advantage
Environmental 2.62 0.91 0.85 0.94 0.90 0.94 0.07
turbulence
J. Kaur et al.
8 Re-investigating Market Orientation and Environmental … 159

(Meade et al. 2007). It is a potential source of measurement error that can create a
serious threat for the validity of conclusions about the associations among variables
(Podsakoff et al. 2003). Hence, in order to avoid this problem, the study assesses the
common method variance for all the constructs. First, we conducted Harman single
factor test in which all variables of the constructs in the study are loaded into an
exploratory factor analysis to determine the number of factors that are necessary to
account for the variance. Podsakoff et al. (2003, p. 889) quote that “the basic
assumption of this technique is that if a substantial amount of common method
variance is present, either (a) a single factor will emerge from the factor analysis or
(b) one general factor will account for the majority of the covariance among the
variables.” Hence, to examine common method bias using this method, all vari-
ables of the marketing capability, market orientation, environmental turbulence and
competitive advantage were entered into an exploratory factor analysis, using
unrotated principal component factor analysis and principal component analysis
with varimax rotation. The factor analysis revealed the presence of 16 distinct
factors rather than a single factor. The 16 factors accounted for 69.61% of variance
in which first largest factor accounted for 5.94% variance. The result indicates that
no single factor emerged from this analysis which accounted for the majority of
variance. Further, to cross-validate the results obtained from the above method,
common latent factor was also performed. In this method, relationships between
latent factor (created) and variables were developed in CFA to assess the variance
explained by different relationships. The variance values obtained were less than
25% for marketing capability (10.89%), market orientation (6.25%), competitive
advantage (20.25%) and environmental turbulence (6.25%). Thus, the results from
both the methods denote that common method bias is not the subject of any concern
in the study.

8.3.6 Reliability and Validity

The study performed psychometric analyses to provide evidence of the reliability

and validity of the constructs used in the study which is discussed below.

8.3.6.1 Reliability

The reliability is the extent to which a variable or a set of variables is consistent in

what it intends (Hair et al. 2009). We first computed the Cronbach alpha (a) value
for all the constructs which range from 0.74 to 0.88, thus exceeding the recom-
mended value, that is, 0.70 (Hair et al. 2009). The study also identified that the
values of composite reliability are within acceptable range, that is, between 0.95
and 0.98, greater than 0.70 benchmark (Malhotra and Dash 2010). All scales are
found to be reliable.
160 J. Kaur et al.

8.3.6.2 Validity

The study assessed the convergent and discriminant validity of the measurement
scales. Convergent validity is determined using average variance extracted
(Malhotra and Dash 2010). As shown in Table 8.5, the average variance extracted
values for all constructs is found to be above the threshold criterion of 0.50 (i.e.
between 0.62 and 0.75), indicating convergent validity of the constructs. The study
further assessed the discriminant validity (i.e. degree to which the construct is
distinct from other constructs) of all the measurement scales. Further discriminant
validity is also established as the correlation estimates are less than square root of
AVE.

8.4 Results of Hypotheses Testing

The study hypotheses, that is, H1, H3 and H4, are tested using structural equation
modelling (SEM) (Fig. 8.2). Based on SEM result, the hypothesis H1, indicating
significant and positive impact of market orientation on marketing capability, is
accepted (CR = 8.6 and SRW = 0.93). The results also confirmed positive rela-
tionship of marketing capability with competitive advantage (CR = 3.69 and
SRW = 0.32) and business performance (CR = 3.62 and SRW = 0.25). Hence,
hypotheses H2 and H4 stand accepted.

8.4.1 Mediation Results

To assess the indirect role of mediating variable, the study framed three contrasting
models—fully (i.e. the model with indirect relationship between independent and
outcome variables, with paths from independent and mediating variables as well as
from mediating to outcome variables), partially mediated model (i.e. the model with
the addition of a direct path from independent variable to outcome variable) and
non-mediating model (a direct relationship between independent variable to out-
come variable, with no path from mediating variable to outcome variable) (Arnold
et al. 2007). The chi-square difference test was used for selection among the
models. The mediating relationships results are given in Table 8.6.
While estimating the effects of marketing capability on market orientation and
competitive advantage linkage, the study identifies significant difference among the
three models implying that model with better fitness indices is to be selected. The
partially mediating model offered better-fit indices than fully mediating model.
However, since SRW for two relationships, that is, market orientation–competitive
advantage and marketing capability–competitive advantage, were above one,
multi-collinearity issue is present, which could be verified further in future analysis.
The result confirms marketing capability as a partial mediator in market orientation
Table 8.5 Composite reliability, average variance extracted, correlation matrix and Cronbach’s alpha
Constructs Composite Average variance Correlation Cronbach’s
reliability extracted Marketing Market Environmental Competitive alpha
capability orientation turbulence advantage
Marketing 0.98 0.72 0.85a – – – 0.88
capability
Market 0.95 0.62 0.73 0.83a – – 0.83
orientation
Environmental 0.96 0.73 0.53 0.57 0.85a – 0.74
turbulence
Competitive 0.98 0.75 0.29 0.15 0.06 0.87a 0.88
8 Re-investigating Market Orientation and Environmental …

advantage
a
Values in the diagonal of correlation matrix are the square root of AVE
161
162 J. Kaur et al.

e1 e2 e3 e4 e5 e6 e7 e9
SD1 e11
.66

.55
MO1 MO2 MO3 MO4 OI IO SP SD2 e12
CA .64
.70 .67 .57 .71 .73 .76
.74
.32 SD3 e13
. .60

.93 SD4 e14

MO MC
e10
BP4 e15
.25 .80

.86
BP3 e16
e8 BP .75
χ2/df= 2.141, NFI= .895, RFI= .872, IFI=
.941, TLI= .927, CFI= .941, RMSEA= .063
BP2 e17
.83

BP1 e18

Fig. 8.2 Market orientation, marketing capability, competitive advantage and business perfor-
mance relationship (Note MO = Market orientation, MC = Marketing capability,
CA = Competitive advantage, BP = Business performance, MO1 = Customer need-focused
intelligence generation, MO2 = Customer satisfaction-focused intelligence, MO3 = Intelligence
dissemination, M4 = Responsiveness, OI = Outside-in, IO = Inside-out, SP = Spanning,
SD1 = Online bank services, SD2 = Cash/fund processing time, SD3 = ATMs’ service quality,
SD4 = Draft/cheque processing, BP1 = ROA, BP2 = ROI, BP3 = Market share growth,
BP4 = Profitability, e1–e18 = errors variances for model items)

and CA relationship. Hence, H2a is partially accepted. Further, mediating role of

marketing capability in market orientation and business performance is also
accepted. Among the three models, non-mediating model fails to be accepted as its
RMSEA has come out to be above 0.08. Since the study found insignificant dif-
ference between fully and partially mediating models, both the models are accepted.
The use of Sobel test for fully mediating model suggested indirect and significant
(critical ratio = 2.14 and p = 0.01) impact of marketing capability on market ori-
entation and business performance. On the other hand, partial mediation effect is
examined through SEM and Sobel test. The SEM result indicated insignificant
relationship (critical ratio = −0.62 and p = 0.54) between market orientation and
business performance. Similarly, Sobel test also revealed insignificant relationship
between market orientation, marketing capability and business performance (i.e.
Sobel t = 0.82 and p = 0.42). Hence, H2b is accepted. The study finds significant
difference among full, partial and non-mediating models while testing the influence
of competitive advantage on marketing capability and business performance
relationship. Among the above three models, partially mediating model was
accepted. The value of critical ratio (i.e. 2.48) advocated direct and significant
relationship between marketing capability and business performance relationship.
On the other hand, the use of Sobel test recommended insignificant relationship
between marketing capability, competitive advantage and business performance.
Thus, the hypothesis H5 is partially accepted.
Table 8.6 Mediation models
Models v2/df Normed fit Relative fit Incremental fit Tucker–Lewis Comparative fit Root mean square of error
index index index index index approximation
MO–MC–CA
Fully 2.74 0.89 0.86 0.93 0.90 0.93 0.0 8
mediating
Partially 2.58 0.89 0.86 0.94 0.91 0.93 0.07
mediating
Non-mediating 3.22 0.88 0.83 0.92 0.88 0.92 0.09
MO–MC–BP
Fully 2.07 0.94 0.92 0.97 0.96 0.97 0.06
mediating
Partially 2.11 0.94 0.92 0.97 0.96 0.97 0.06
mediating
Non-mediating 3.09 0.94 0.91 0.96 0.94 0.96 0.08
8 Re-investigating Market Orientation and Environmental …

MC–CA–BP
Fully 2.49 0.91 0.88 0.94 0.93 0.94 0.07
mediating
Partially 2.36 0.92 0.89 0.95 0.93 0.95 0.07
mediating
Non-mediating 2.80 0.96 0.93 0.97 0.96 0.97 0.079
163
164 J. Kaur et al.

8.4.2 Moderation Results

The study used the procedure given by Zhao and Cavusgil (2006) for examining the
moderation effect of environmental turbulence using SPSS 17 and AMOS 20. Two
models—unconstrained (where all paths are allowed to move freely) and con-
strained (where paths are constrained fixed to be equal) models—are developed.
Based on moderate and high environmental turbulence groups, unconstrained
model was developed to identify the presence of insignificant paths for deletion in
the two groups. One insignificant path, that is, between competitive advantage and
business performance, was identified and deleted. The chi-square value and degree
of freedom of both models were compared using Excel. Since, there does not exist
any difference in the models, H6a and H6b are not accepted.

8.5 Discussions

The primary aim of the study is to analyse the impact of market orientation as an
antecedent to marketing capability vis-à-vis competitive advantage and business
performance in the banking sector. In this context, the study found significant and
positive linkage of market orientation and marketing capability. These results
support the findings of other studies such as Vorhies and Harker (2000), Hooley
et al. (2005), and Ngo and O’Cass (2012) which remarked that market-oriented
organisation is more capable in building marketing capability. Further, marketing
capability developed through such activities enhances an organisation’s ability to
understand what customers’ expect from marketplace offerings and what is to be
delivered to them in the market (Ngo and O’Cass 2012). Moreover, the result
established that marketing capability is a mediating factor in market orientation and
competitive advantage vis-à-vis market orientation and business performance
linkages. In line with these findings, scholars, namely Murray et al. (2011) and Ngo
and O’Cass (2012), remarked that market orientation activities aid an organisation
in building marketing capability by using market-based knowledge and informa-
tion. Further, the results also reveal partial mediating role of competitive advantage
in marketing capability and business performance relationship. Further, the study
does not find any moderating role of environmental turbulence in marketing
capability, competitive advantage and business performance. This might be because
of the fact that commercial Indian banks equipped with marketing capability are
proactive in predicting market changes. For instance, with the help of outside-in
capabilities, commercial banks are able to predict changes in the customers’ needs
and requirements, in advance, as banks have maintained long-term and strong
relationship with their customers. Further, through spanning capabilities, the banks
are capable of changing the marketing practices accordingly. Similarly, Web
technology capabilities (inside-out capabilities) aid retail banks in identifying tur-
bulence in technological environment.
8 Re-investigating Market Orientation and Environmental … 165

8.6 Managerial Implications

The study makes number of academic and managerial contributions. The study
advances an in-depth understanding of the significance of marketing capability in
attaining business performance in the following manner. First, it offers new insight
into marketing theory by identifying four perspectives of marketing capability, from
the literature, which included operational, marketing mix, intellectual capital and
competition. This study discussed marketing capability from a broader aspect that is
operational, which classified marketing capability as outside-in, inside-out and
spanning. These capabilities empower managers with competitive skills and
knowledge to capture information about the customers’ requirements (both internal
and external) and the competitors. Second, the study contributes to marketing
management literature by highlighting on major dimensions of market orientation
(i.e. customer need-focused intelligence generation, customer satisfaction-focused
intelligence generation, intelligence dissemination and responsiveness) that is
required to develop marketing capability in an organisation to achieve competitive
advantage and business performance. Hence, market orientation functions as the
marketing support capability that expedites the development of marketing capa-
bility. For instance, market orientation activities (such as customer need-focused
intelligence generation and customer satisfaction-focused intelligence generation)
undertaken by bank help it in providing more accurate and relevant information
about customers’ unfulfilled needs and their post-purchase satisfaction level. This
information facilitates the bank’s manager in understanding customers’ problems
more precisely and guides him/her in taking necessary steps to overcome these
problems. Hence, all information generation activities can pave ways for compre-
hending customers and their needs which represents outside-in capabilities of an
organisation. Further, dissemination of such intelligence among the concerned
employees leads to the development of inside-out capabilities of an organisation.
For example, if the customers express unhappiness regarding the behaviour of the
employees, then the bank either through constant guidance or training programmes
can motivate its employees to improve their skills and abilities. Furthermore,
responsiveness to the intelligence generated allows an organisation to build span-
ning capabilities such as new product development, pricing capabilities. Further,
marketing capability developed and nurtured through learning (market knowledge
about customer needs) and experimentation (past experience in forecasting and
responding to customer needs) can enable an organisation to generate several
benefits over its competitors such as increased customer base and enhanced per-
formance in terms of net growth, profitability, ROI, ROA, etc.
166 J. Kaur et al.

8.7 Limitations and Directions for Future Research

The researchers come across with certain unavoidable limitations while conducting
the study. The study was conducted from operational based perspective—
outside-in, inside-out and spanning. Thus, comprehending marketing capability
based on other perspectives, that is, intellectual capital, marketing mix, and com-
petition and identifying which perspective is more comprehensive in grasping the
concept of marketing capability and attaining business performance could be an
important basis for research. Further, since the study has focused only on marketing
capability, the other organisational capabilities such as technology, R&D, opera-
tions, financial may have a stronger impact on business performance. Thus, which
capabilities that is, either marketing or other organisational, contribute more
towards achieving business performance could also prove to be an interesting line
for future research. As the study is cross-sectional in nature, a longitudinal study is
suggested for understanding and validating the various relationships identified by
the study. The study stresses on the significant role of market orientation in the
development of marketing capability, and other variables such as culture, innova-
tion, marketing employee development capabilities and organisation’s efficiency on
marketing capability–business performance relationship were excluded which could
be examined for further development of marketing capability concept.

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Chapter 9
Examining the Impact of Cultural
Intelligence on Knowledge Sharing: Role
of Moderating and Mediating Variables

Jeevan Jyoti, Vijay Pereira and Sumeet Kour

Abstract Globalisation of world has brought lot of challenges for individuals and
organisations in the form of cultural diversity management. In this perspective,
cultural intelligence is an ability, which can enhance an employee’s skill to com-
municate with individuals belonging to his/her culture as well as host region
nationals. The study aims at analysing the moderating role played by work expe-
rience between cultural intelligence (CQ) and cross-cultural adjustment
(CCA) relationship. Further, the mediating role is played by cross-cultural adjust-
ment between cultural intelligence and knowledge sharing relationship. 530 bank
managers working in nationalised banks operating in Delhi (North India) have been
contacted for the study. In order to establish normality of the data, 18 respondents
have been deleted by inspecting boxplots. Therefore, the effective sample came to
512. Confirmatory factor analysis (CFA) has been used to validate the scale, and to
check the hypotheses, structural equation modelling (SEM) has been used. The
result reveals that work experience moderates between CQ and CCA. The findings
further reveal that CCA mediate between CQ and knowledge sharing
relationship. The study is cross-sectional in nature. Further, the role of only one
moderating variable, i.e. work experience, has been explored between CQ and CCA
relationship. The study contributes towards cultural intelligence theory. Cultural
intelligence acts as an essential tool in selection of managers who can work
effectively in cross-cultural context. Culturally intelligent managers are talented and
interactive which helps them to give their best performance. These managers can be
sent for overseas assignments as they are able to communicate successfully with
individuals belonging to dissimilar cultural backgrounds.

J. Jyoti
S. Kour (&)

Department of Commerce, University of Jammu, Jammu, Jammu and Kashmir, India
e-mail: [email protected]
J. Jyoti
e-mail: [email protected]
V. Pereira
University of Wollongong, Dubai Campus, Dubai, United Arab Emirates
e-mail: [email protected]

© Springer Nature Singapore Pte Ltd. 2019 169

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_9
170 J. Jyoti et al.

Keywords Cross-cultural adjustment Cultural intelligence
Knowledge sharing


and previous work experience India

9.1 Introduction

With the rising globalisation, there is an increasing need to know how to suc-
cessfully communicate with individuals belonging to diverse culture. The organi-
sations today require managers, who are aware and have knowledge of diverse
cultures as they have to interconnect with individuals from various cultures.
Therefore, managers need to have global expertise to become an effective leader. In
this perspective, cultural intelligence (CQ) is the capability, which enhances per-
son’s skill to communicate with individuals outside their culture and nation. It is the
skill and trait that let one to successfully network with new cultural settings
(MacNab et al. 2012). Culturally intelligent managers can sense, adjust, reason and
act on cultural signals promptly in conditions distinguished by cultural diversity.
Lower level of CQ gives rise to cultural encounter and unhealthy associations.
More and more organisations are stating the necessity for managers who rapidly
adapt to several cultures and work in international teams (Earley and Peterson 2004,
p. 100). CQ is emerging notion with narrow investigation on this. Hence, the study
generalises the concept of CQ in Indian context (Tsang and Kwan 1999) due to its
varied cultures. Further, the present study also assess its effect on knowledge
sharing via CCA and the role played by work experience in between CQ and
knowledge sharing relationship.
India is a culturally diverse country, which needs managers, who can efficiently
manage the diverse workforce. Most of the studies conducted on CQ have focused
on the concept (Earley and Peterson 2004; Ng and Earley 2006; Triandis 2006;
Turner and Trompenaars 2006; Kumar et al. 2008; Thomas et al. 2008; Crowne
2009; Van Dyne et al. 2010; Blasco et al. 2012). Review of literature indicated that
CQ significantly affects CCA (Ang et al. 2007; Kumar et al. 2008; Lee 2010; Lee
and Sukoco 2010; Ramalu et al. 2010, 2011; Huff 2013; Malek and Budhwar 2013;
Huff et al. 2014; Lee and Kartika 2014), and most of them are done in MNCs and
focused mainly on expatriates’ CQ. There are few studies about CQ of Indian
managers (Jyoti and Kour 2015; Jyoti et al. 2015), who have to work with various
cultural workforce, and few studies have been conducted on the relationship
between CCA on knowledge sharing (Lee and Kartika 2014), which demands
research in this area in India. Lee and Kartika (2014) founded that CCA signifi-
cantly predicts knowledge sharing. They concluded that expatriates who adapt well
to the host region become a vital part of knowledge transfer from parent company to
subsidiary company and enhance the organisational performance. Therefore, the
study will inspect the effect of CQ on cross-cultural adjustment and further the
impact of cross-cultural adjustment on knowledge sharing. Further, various
empirical researches have shown the positive affect of work experience on cultural
intelligence (Crowne 2008; Moon 2010; Moon et al. 2012; Lee and Kartika 2014)
9 Examining the Impact of Cultural Intelligence … 171

and cross-cultural adjustment (Lee and Kartika 2014; Peltokorpi and Froese 2012;
Huff et al. 2014). In contrast, researchers have also found that experience has an
insignificant influence on cultural intelligence (MacNab and Worthley 2012; Lee
2010; Gupta et al. 2013). Lee and Sukoco (2010) have revealed the moderating role
of experience in between CQ and CCA relationship. Hence, there is dearth of
consent concerning this relationship. So, to evidently understand the relationship of
work experience with CQ and CCA, the present study will examine the role played
by work experience between cultural intelligence and CCA.
Therefore, this study will try to cover all the possible gaps. So, the objective of
the study is to analyse the mediating role played by cross-cultural adjustment
between cultural intelligence and knowledge sharing relationship. Further, the role
of work experience between CQ and CCA shall also be explored.

9.2 Objectives of the Study

1. To examine the impact of cultural intelligence on cross-cultural adjustment.

2. To study the effect of CCA on knowledge sharing.
3. To analyse the mediating role played by cross-cultural adjustment between CQ
and knowledge sharing.
4. To study the moderating role played by work experience between CQ and CCA.

9.3 Review of Literature and Hypotheses Development

9.3.1 Cultural Intelligence, Experience and Cross-Cultural

Adjustment

Experience is a time element (Jyoti and Kour 2017b; Goodman et al. 2001). In the
present study, experience denotes the direct observation in culturally connected
actions or the state of being affected by such observation (Takeuchi and Chen
2013). The experience is the events that have occurred in the past and is presently
occurring (Goodman et al. 2001). Earlier studies have indicated that cultural
intelligence positively affects CCA (Jyoti and Kour 2015, 2017a, b; Wang 2016).
Further, researchers found that the effect of cultural intelligence on cross-cultural
adjustment is magnified if the previous cross-cultural work experience is positive
(Takeuchi et al. 2005; Lee and Sukoco 2010). In this perceptive, managers, having
more cross-cultural experience, are more likely to develop comprehensive cognitive
schemata (Lee and Sukoco 2010). So, managers with more CQ level as well as
higher international work experience adjust and accomplish more successfully in
the host region (Lee and Sukoco 2010). Cross-cultural work experience enhances
the confidence and exposure to effectively communicate with individuals outside
172 J. Jyoti et al.

their culture, which aids them to adjust to their host region (Bhaskar-Shrinivas et al.
2005 cited in Moon et al. 2012). Previous international work experience offers an
individual with the means of foreseeing what an overseas assignment contains, rises
the probability of realistic expectations, decreases uncertainty and thereby simpli-
fying the adjustment (Black et al. 1992). Out of home state, work experience helps
culturally intelligent individuals/managers to learn suitable work behaviours and to
learn how to communicate with locals of host region (Lee 2010), which aid them to
adjust to host region. When the culturally intelligent managers have more experi-
ence of working in host region, they have a tendency to adjust more effortlessly
during their overseas assignments. Whereas there are some studies, which have
revealed an insignificant influence of cross-cultural work experience on
cross-cultural adjustment (Hechanova et al. 2003; Puck et al. 2008; Shaffer et al.
1999 cited in Moon et al. 2012). Therefore, there is lack of agreement regarding this
relationship. Thus, to clearly understand the role of previous work experience in the
relationship between cultural intelligence and cross-cultural adjustment, the present
study will analyse the integrative model, wherein positive work experience mod-
erates the impact of cultural intelligence on cross-cultural adjustment. Therefore,
previous work experience magnifies/strengthens the CQ and CCA relationship.
Hypothesis 1 Work experience moderates the relationship between cultural intel-
ligence and cross-cultural adjustment.

9.3.2 Cultural Intelligence, Cross-Cultural Adjustment

and Knowledge Sharing

The concept of cultural intelligence (CQ) has been developed by Earley and Ang
(2003). CQ is the capability of the individuals to function successfully in
multi-cultural settings (Ang and Van Dyne 2008). Individuals with CQ level have
the capability to handle unclear and confusing circumstances. They think deeply
about the situation or conditions and make suitable adjustments to how they
understand, relate and lead in the context of these various cultures. It is adjustable
state that can be developed over a period of time. Cultural intelligence is a
multi-dimensional concept containing cognitive, meta-cognitive, behavioural and
motivational dimensions (Ang et al. 2007). This phenomenon positively affects
CCA (Jyoti and Kour 2015, 2017a, b; Wang 2016; Mehra and Tung 2017).
Cross-cultural adjustment is the psychological ease an individual has in the host
region (Black and Stephens 1989; Gregersen and Black 1990). Researchers in the
cross-cultural studies have revealed the positive impact of CQ on CCA (Ramalu
et al. 2010, 2011; Lee and Sukoco 2010). CQ has a direct impact on the CCA as it
aids the individuals to adapt more effortlessly to the host region environment
(Earley and Ang 2003). The two dimensions of CQ, i.e. meta-cognitive and
motivational dimension, are positively associated with all the three dimensions of
9 Examining the Impact of Cultural Intelligence … 173

cross-cultural adjustment, i.e. general, work and interaction adjustment (Ramalu

et al. 2010) as it accelerates the cultural learning process and develops essential
interest in various other cultures. Further, behavioural cultural intelligence is pos-
itively associated with CCA as it has the ability to differ behaviours, which help to
adapt in an unaware and unfamiliar environment (Ramalu et al. 2011; Kumar et al.
2008). Culturally intelligent managers have flexible behaviour, which aids them to
adapt in multi-cultural setting. Cognitive cultural intelligence is the knowledge
element of cultural intelligence, which positively correlates to all the dimensions of
cross-cultural adjustment (Ramalu et al. 2011; Kumar et al. 2008). Individuals who
have higher level of CQ are more able to adapt in the host region environment.
Cross-cultural adjustment is the process by which an expatriate feel psycho-
logically comfortable in the new cultural environment and harmonises with it
(Huang et al. 2005). CCA is multi-dimensional concept comprising general
adjustment, work adjustment and interaction adjustment. It is one of the primary
outcomes in an expatriate assignment that affect the development of secondary or
more distal expatriate adjustment such as stress (Hechanova et al. 2003), organi-
sational commitment (Naumann 1993; Shaffer and Harrison 1998), job satisfaction
(Takeuchi et al. 2002), performance (Kim and Slocum 2008; Shay and Baack 2006)
and turnover intentions (Hechanova et al. 2003). This phenomenon positively
affects knowledge sharing (Lee and Kartika 2014). Knowledge is a critical asset for
organisations (Nonaka 1994). Knowledge sharing relates to exchanging events,
experience, thought or understanding of anything with a hope to increase more
understanding and insight understanding about something for temporary curiosity
(Sohail and Daud 2009). Cultural diversity within the workplace could impact
knowledge sharing processes. Studies have revealed that culture plays a vital role in
KS processes (De Long 1997; Gold et al. 2001; Kayworth and Leidner 2003).
Culture has been seen as a barrier in knowledge sharing process (De Long and
Fahey 2000; McDermott and O’Dell 2001). Culture is the set of characteristics a
particular set of people have with respect to language, social habits, religion, habits,
cuisine, art and music (Jyoti and Kour 2015). Knowledge sharing is influenced by
the prevailing culture (Peng et al. 2008). Therefore, when the expatriate adjust
themselves to the cultural difference, they are able to share their knowledge to the
host nationals in a better manner. Lee and Kartika (2014) revealed that adjustment
of the expatriate has a positive impact on expatriate’s knowledge transfer.
Expatriates are the source of knowledge transfers from parent company to the
foreign subsidiary or from the host county knowledge to back to the parent com-
pany (Lee and Kartika 2014, p. 5486). Expatriate who adapt successfully in the new
and unfamiliar environment are more able to complete their assignment and create
an understanding about corporate challenges, and it became a significant part of the
knowledge transfer from parent company to the subsidiary or from the host country
back to the parent company (Lee and Kartika 2014, p. 5490). Expatriate who adjust
themselves in the host region have high knowledge, greater ability to communicate
and share knowledge with colleagues (Paik and Shon 2004). Expatriates are the
home region assignee that holds key positions in host regions and transfers or share
their knowledge with colleagues at workplace (Harzing 2001). Well-adjusted
174 J. Jyoti et al.

expatriates do not have difficulty in creating and sharing knowledge as they interact
effectively with host nationals and interaction is core in contributing and developing
new knowledge (Nonaka 1994). Managers who adjust themselves in host region are
able to share new and innovative ideas, which in turn helps organisation to increase
its performance. Well-adjusted managers act as source of knowledge transfer from
home region to host region (Lee and Kartika 2014). The manager who is well
adjusted and is prepared to face the challenge of new culture and unfamiliar con-
cepts will not hesitate to share and implement new idea at the workplace. Therefore,
it can be concluded from above discussion that cross-cultural adjustment signifi-
cantly affects knowledge sharing.
CQ significantly affects CCA as it comforts the individuals to adjust more
effortlessly to the host region (Earley and Ang 2003). Indian managers have to
communicate with people belonging to diverse cultural background and make
several adjustments as each region (western, eastern, northern and southern) of
India have diverse values, languages and belief system (Banerjee 2013). Further,
expatriate is vital part of the knowledge transfer from parent company’s knowledge
to the foreign subsidiary or from host country knowledge to be transferred back to
the parent company (Gong 2003). When culturally intelligent managers adjust
themselves in host region environment, he/she can easily share their knowledge at
the host region and can systematically introduce the new ideas. Culturally intelli-
gent managers who adjust themselves with the general, interaction and work
environment of the host region can easily share their knowledge with others as they
can effectively communicate with locals and colleagues. When expatriate adopt out
of home state assignment, he/she have to make various kinds of adjustment related
to general environment (food, clothing, housing facilities, cost of living, etc.),
working environment (responsibilities, supervision, working norms, etc.) and have
to make interactions with the local nationals and colleagues, and when expatriate
adjust themselves in host region environment, he/she is in a better position to share
their ideas, views and knowledge. Therefore, to conclude, managers who are cul-
turally intelligent adapt themselves in multi-cultural settings are in the better
position to share their knowledge.
Hypothesis 2 Cross-cultural adjustment mediates between cultural intelligence and
knowledge sharing relationship (Fig. 9.1).

Work Experience Control Variables

Gender
Age

Cultural Intelligence Cross-cultural Adjustment Knowledge Sharing

Fig. 9.1 Conceptual framework

9 Examining the Impact of Cultural Intelligence … 175

9.4 Research Methodology

To make the study objective, the following steps have been taken:

9.4.1 Data Collection

The study population consisted of 530 bank managers working in nationalised

banks operating in Delhi (North India). They have been contacted on the basis of
random sampling (chit method). There are 2539 nationalised banks operating in
Delhi, out of which 10% have been selected with the help of random number table.
From each selected bank, two managers (on the basis of hierarchy) have been
contacted personally for data generation. All branch managers and immediate junior
managers have been contacted for data collection, but in some banks, there were
only one manager, in that case, one extra branch has been contacted. Therefore,
total 265 banks have been contacted. Structured questionnaire has been used to
gather the data. In order to establish normality of the data, 18 respondents have
been deleted by inspecting boxplots (Hair et al. 2010). The retained data exhibited
normal distributed (skewness = 0.066; Kurtosis = −0.101) which are within the
range. Therefore, the effective sample came to 512.
The sample included 286 (56%) male, and majority of the managers (88%) are
married. About 29% managers are in the age group 35–40 years followed by 31–
34 years (17%). Majority of managers (43%) have 6–10 years of experience of
working outside their home state. About 55% of managers can speak 4–5 lan-
guages. Majority of managers have 6–10 years of total work experience (24%).

9.4.2 Measures

For the sake of consistency, five-point Likert scale was used for measuring the
variables ranging from strongly disagree (1) to strongly agree (5).
Cultural Intelligence 20-items CQ scale developed and validated by Ang et al.
(2007), having four factors, have been used. The inventory comprises four items for
meta-cognitive CQ, five for motivational CQ, six for cognitive CQ and five for
behavioural CQ. Sample items include “Know the legal and economic systems of
other cultures”, and “Enjoy interacting with people from different cultures”.
Cross-Cultural Adjustment Black and Porter (1991) 14-items scale has been used
to measure CCA. The scale comprises seven items of general adjustment, three
items of work adjustment and four items of interaction items. Sample items include
“Adjust myself to interact with host people on day to day basis in state I am posted
176 J. Jyoti et al.

other than home” and “Adjust myself to the performance standards and expecta-
tions at work in state I am posted other than home”.
Knowledge Sharing Ten items have been used to measure KS (Ramayah et al.
2014). Sample items contain “I express ideas and thoughts in meetings” and “I
propose problem-solving suggestions in team meetings”.

9.5 Results

9.5.1 Exploratory Factor Analysis (EFA)

EFA has been conducted to recognise the dimensions of various scales used in the
study. Varimax rotation of principle component analysis has been used. To test the
appropriateness of a factor analysis KMO measure of sampling adequacy has used,
wherein values greater than 0.50 are acceptable (Hair et al. 2010), indicating its
significance for further analysis. The statement with factor loading less than 0.50
has been removed (Hair et al. 2010). The KS scale contains ten items that got
reduced to five items and joined under one factor. Likewise, cultural intelligence
scale originally contains 20 items that got reduced to 14 items and converged under
four factors (viz. meta-cognitive, cognitive and motivational). Lastly, the CCA
scale contains 14 items, which has been reduced to ten items and joined under the
three factors (viz. general adjustment, work adjustment and interaction adjustment).
For all the constructs, KMO value is greater than 0.78 and total variance explained
for all the constructs is above eighty per cent (Hair et al. 2010). Detailed results are
presented in Table 9.1.

Table 9.1 Results of exploratory factor analysis

Factor M SD FL C E.V. V.E. (%) KMO Cronbach alpha
Cultural intelligence 4.11 0.71 85.483 0.887 0.934
Meta-cognitive 4.18 0.89 3.547 25.337 0.871
MOG1 4.09 0.87 0.774 0.812
MOG2 4.19 0.90 0.807 0.806
MOG3 4.27 0.91 0.764 0.781
Cognitive 4.01 1.00 3.515 25.107 0.894
COG3 4.05 1.11 0.870 0.887
COG4 3.97 1.15 0.867 0.864
COG5 3.91 1.17 0.805 0.737
Motivation 4.11 0.93 2.573 18.380 0.955
MOT1 4.14 1.00 0.930 0.956
MOT2 4.07 1.00 0.928 0.953
MOT3 4.14 0.90 0.914 0.911
MOT5 4.11 0.93 0.745 0.730
(continued)
9 Examining the Impact of Cultural Intelligence … 177

Table 9.1 (continued)

Factor M SD FL C E.V. V.E. (%) KMO Cronbach alpha
Behavioural 4.17 0.82 2.332 16.660 0.954
BEH1 4.19 0.85 0.890 0.947
BEH2 4.18 0.88 0.829 0.838
BEH3 4.19 0.85 0.889 0.947
BEH4 4.10 0.92 0.824 0.797
Cross-cultural adjustment 4.14 0.69 75.033 0.923 0.919
General adjustment 4.15 0.72 3.586 35.858 0.786
GA1 4.24 0.82 0.843 0.772
GA2 4.33 0.78 0.829 0.754
GA5 3.93 1.10 0.844 0.790
GA6 4.10 0.94 0.695 0.659
Interaction adjustment 4.07 0.85 2.144 21.441 0.759
IA1 4.04 1.12 0.891 0.889
IA2 4.18 0.83 0.651 0.752
IA4 4.21 0.82 0.694 0.664
Work adjustment 4.21 0.70 1.773 17.733 0.879
WA1 4.26 0.80 0.688 0.679
WA2 4.17 0.81 0.566 0.726
WA3 4.21 0.75 0.677 0.809
Knowledge sharing 4.24 0.65 3.175 63.491 0.780 0.850
KS1 4.26 0.70 0.855 0.730
KS2 4.35 0.77 0.778 0.606
KS5 4.11 0.98 0.780 0.609
KS6 4.20 0.88 0.800 0.640
KS9 4.30 0.75 0.768 0.590
Key M = mean, SD = standard deviation, FL = factor loading, C = communality, E.V. = eigen value, V.
E. = variance explained and KMO = Kaiser-Meyer-Olkin measure of sampling adequacy

9.5.2 Confirmatory Factor Analysis (CFA)

To test the validity and reliability of the constructs, CFA has been used. As multiple
factors have been emerged after exploratory factor analysis, therefore, second-order
factor models have been designed for all the scales. Fit indices of all the models are
within the recommended limit as all the values of the absolute goodness of fit (GFI
and AGFI), incremental fit (NFI and CFI) and badness of fit (RMSEA and RMR)
were within the threshold limit (Table 9.2). Further, convergent validity has been
established as all the standardised estimates are above 0.50 and the variance
explained by each construct is also above 0.50 (Hair et al. 2010, Table 9.2). In
order to test the internal consistency, composite reliability and Cronbach’s alpha
have been calculated as it is the display the reliability of the construct (Hair et al.
2010). The results demonstrated that alpha values for all constructs are above 0.70
(Table 9.2) and composite reliability for all constructs is also greater than 0.80
178 J. Jyoti et al.

Table 9.2 Reliability and validity analysis and fit indices

Scales Standardised Average Composite Cronbach’s Fit indices
regression variance reliability alpha
weight extracted
Cultural 0.93 0.98 0.93 v2/df = 3.387
intelligence RMR = 0.052
Meta-cognitive 0.87 0.96 0.98 0.87 GFI = 0.937
CQ NFI = 0.976
AGFI = 0.910
Cognitive CQ 0.67 0.96 0.98 0.89
CFI = 0.983
Motivational 0.60 0.98 0.99 0.95 RMSEA = 0.068
CQ
Behavioural 0.77 0.98 0.99 0.95
CQ
Cross-cultural 0.97 0.99 0.91 v2/df = 4.950
adjustment RMR = 0.030
General 0.98 0.93 0.98 0.78 GFI = 0.948
adjustment NFI = 0.952
AGFI = 0.907
Interaction 0.91 0.93 0.97 0.76
CFI = 0.962
adjustment
RMSEA = 0.088
Work 0.98 0.98 0.99 0.88
adjustment
Knowledge 0.94 0.98 0.85 v2/df = 2.202
Sharing RMR = 0.023
KS1 0.94 GFI = 0.948
NFI = 0.994
KS2 0.80
AGFI = 0.903
KS5 0.53 CFI = 0.928
KS6 0.58 RMSEA = 0.073
KS9 0.61

(Table 9.2). Therefore, the composite reliability and Cronbach’s alpha values show
that the scales are reliable. Furthermore, discriminant validity has also been proved
as average variance extracted (AVE) for all the scales is greater than the squared
correlation (Fornell and Larcker 1981, Table 9.3).

Table 9.3 Discriminant validity and correlation analysis

Constructs Cross-cultural adjustment Knowledge sharing Cultural intelligence
Cross-cultural 0.97
adjustment
Knowledge (0.11) 0.94
sharing 0.34**
Cultural (0.73) (0.10) 0.93
intelligence 0.86** 0.32**
Note Values on the diagonal axis represents the average variance extracted. Values below the
diagonal axis are correlation and values in the parentheses represent the squared correlation.
**p < 0.01
9 Examining the Impact of Cultural Intelligence … 179

9.5.3 Common Method Bias

Single source data have been gathered for the present study, which may inflate the
relationship. Therefore, common method bias has been checked through common
latent factor method (Podsakoff et al. 2003). The results indicated that there is no
item, whose difference is greater than 0.20 (Gaskin 2012). The chi-square difference
test further confirmed that the two models that are with common latent factor and
without common latent factor model are different (Dv2 > 270.336, p < 0.001).
Thus, in the present study, common method bias is not the problem.

9.5.4 Examining the Impact of Cultural Intelligence

on Knowledge Sharing: Role of Moderating
and Mediating Variables

9.5.4.1 Moderation

To check the various hypotheses, structural equation modelling has been used
(Byrne 2010). In this study, we have work experience (metric) as moderating
variables. To test the moderation of work experience, interaction effect has been
used (Little et al. 2007, p. 223).
Product indicator approach has been applied to model the moderating effect of
previous work experience (metric) (Chin et al. 1996, 2003). For cultural intelli-
gence, we have four manifest variables (meta-cognitive, cognitive, motivational and
behavioural) and previous work experience is metric and observed in nature, which
lead to four latent interaction variables (Mog*Exp, Cog*Exp, Mot*Exp and
Beh*Exp). Further, to check the moderating effect of previous work experience,
conditions described by Baron and Kenny (1986) have been satisfied first. The
results demonstrated that previous work experience has insignificant effect on
cross-cultural adjustment (SRW = 0.02, p > 0.05) and the interaction of CQ and
work experience is significantly predicting cross-cultural adjustment (SRW = 0. 21,
p < 0.01, Table 9.4). Thus, it can be concluded that previous work experience
moderates between cultural intelligence and cross-cultural adjustment
relationship. Hence, hypothesis 9.1 stands accepted.

9.5.4.2 Mediation

To check the various mediations in the study Preacher and Hayes (2004),
methodology has been followed. They suggested that to check the mediation effect,
significance of indirect effect should be analysed. Thus, the estimation of the
indirect effect, with the Sobel test as well as with a bootstrap approach, to obtain
confidence intervals (CIs) has been used in the study.
180 J. Jyoti et al.

Table 9.4 Structural equation modeling results for moderation

Model I Model II Model III
CQ ! CCA 0.88*** 0.88*** 0.85***
Work experience ! CCA 0.02 (ns) 0.19***
Work experience * CQ ! CCA 0.21***
R2 0.77 0.77 0.80
Covariance . .
CQ and work experience 0.11* 0.12*
Work experience and CQ * work experience 0.56***
Work experience * CQ and CQ 0.11*
*p < 0.05; ***p < 0.001

Table 9.5 Bootstrapping results for mediation analysis

Hypothesis Independent ! Mediator ! Indirect LL 95%/UL
mediator dependent effect 95%
CQ ! CCA ! KS 0.88*** 0.20*** 0.18** 0.053/0.464
Note **p < 0.01, ***p < 0.001; N = 1000 bootstrapping resamples; LL BCA and UL
BCA = lower level and upper level of the bias corrected and accelerated confidence interval
Key CQ = cultural intelligence, CCA = cross-cultural adjustment, KS = knowledge sharing

The results founded significant effect of CQ on cross-cultural adjustment

(SRWa = 0.88, p < 0.001, Table 9.5) and CCA on knowledge sharing
(KS) relationship (SRWb = 0.20, p < 0.001, Table 9.5). Further, the Sobel statistic
is also found to be significant for the indirect effect of cultural intelligence on
knowledge sharing through cross-cultural adjustment (Sobel statistic = 2.851,
p < 0.01). In addition, bootstrapping results also yielded significant indirect effect
of cultural intelligence on knowledge sharing through CCA (0.18, p < 0.01,
Table 9.5). The upper and lower bound values did not contain zero at 95% con-
fidence interval (Table 9.5). Further, the model yielded moderate fit (v2/df = 6.527,
RMR = 0.030, GFI = 0.924, AGFI = 0.856, NFI = 0.941, CFI = 0.950,
RMSEA = 0.104). Moreover, the absence or presence of control variables did not
bring any variation in the hypothesised relationships, so these have not been con-
sidered during evaluation (Arnold et al. 2007). Hence, hypothesis 9.2 got accepted.

9.5.4.3 Moderated-Mediation Test

Further, integrated model has been tested wherein the strength of the relationship
between cultural intelligence on knowledge sharing through cross-cultural adjust-
ment is conditional on the moderator’s value, i.e. previous work experience. The
moderated mediation is confirmed when the indirect effect of cultural intelligence
on knowledge sharing in the presence of moderating variable is significant. The
moderated-mediation effect of the interaction of CQ and previous work experience
9 Examining the Impact of Cultural Intelligence … 181

Table 9.6 Bootstrapped conditional indirect effect of CQ on knowledge sharing through CCA at
value of work experience (moderator)
Moderator Level Conditional indirect effect Boot SE Boot Boot
LL 95% UL 95%
Experience High 0.510*** 0.070 0.388 0.651
Low 0.200* 0.394 0.050 0.350
Note *p < 0.05; ***p < 0.001; N = 5000 bootstrapping resamples; LL BCA and UL
BCA = lower level and upper level of the bias corrected and accelerated confidence interval

through cross-cultural adjustment on knowledge sharing is significant for both the

groups as the indirect relations are significant (Table 9.6).

9.6 Discussion

The present study depicts the significance of cultural intelligence (CQ) in increasing
knowledge sharing. The study has undertaken three issues: (i) the moderating role
of previous work experience in between CQ and cross-cultural adjustment rela-
tionship, (ii) mediating role of cross-cultural adjustment (CCA) in between CQ and
knowledge sharing and (iii) moderated mediation of previous work experience and
cross-cultural adjustment between cultural intelligence and knowledge sharing.
The study found that cultural intelligence positively affects cross-cultural
adjustment; i.e., culturally intelligent managers are more adjustable. The findings
are consistent with the earlier research (Ramalu et al. 2010, 2011; Jyoti and Kour
2015; Jyoti et al. 2015). Culturally intelligent managers are more adjustable with
people of host region. They can effectively handle stresses and cultural shocks.
Managers make different types of adjustments concerning to various languages, as
India being multi-lingual and multi-ethnic country, and they also have to make
different adaptations relating to clothing, food, shopping conditions, etc. (Jyoti and
Kour 2015). CQ aids managers to adjust with culturally dissimilar situations.
Managers, who have the capability to manage with several types of stress connected
with cross-cultural communications, are more able to adapt in a new cultural
settings/environment.
The study further revealed that cultural intelligence and cross-cultural adjust-
ment relationship gets strengthened when managers have experience of working in
host region. The relationship between cultural intelligence and cross-cultural
adjustment gets boosted when the managers’ have the experience of working
outside their home state. Culturally intelligent managers who possess experience of
working in host region are more adapt in cross-cultural settings. These managers
have the awareness as well as the knowledge from previous experience about the
culture spread in host region. This experience increases the confidence level of
managers to communicate in culturally diverse situations. Experienced managers
have the skill, understanding as well as knowledge of the host region setting
182 J. Jyoti et al.

(language, culture, religion, beliefs, values, etc.), which boost the impact of cultural
intelligence on CCA. They recall and recollect their earlier cross-cultural meets
with host region nationals, which aids them in accomplishing understanding about
host region and adjust themselves in that atmosphere. Experienced managers have
more prospects and opportunities to communicate with host region nationals and
have necessary knowledge and skills that aid them to adjust in culturally dissimilar
region (Moon et al. 2012). Having more experience of working in host region does
not mean that managers/expatriates are more culturally adjustable, unless they also
have greater cultural intelligence (Lee and Sukoco 2010). Hence, work experience
acts as a catalyst or moderator between cultural intelligence and CCA. The result is
in line with the earlier studies (Takeuchi et al. 2005; Lee and Sukoco 2010; Lee
2010). Managers who are culturally intelligent and also have the experience of
working in outside their home regions are more adaptable or adjustable in culturally
diverse settings. Therefore, higher the work experience, stronger is the relationship
between cultural intelligence and cross-cultural adjustment.
The study revealed that CCA mediates between cultural intelligence and
knowledge sharing relationship. The results indicated that CQ significantly influ-
ences cross-cultural adjustment (Ramalu et al. 2010, 2011; Lee and Sukoco 2010;
Jyoti and Kour 2015; Jyoti et al. 2015), which in turn affects knowledge sharing
(Lee and Kartika 2014). High level of CQ increases CCA, which in turn leads to
knowledge sharing among the managers. The results revealed that culturally
intelligent managers have enhanced level of cross-cultural adjustment. Managers
with higher cultural intelligence are more able to adjust with individuals that belong
to diverse culture as they are flexible and can handle successfully the cultural
shocks and stresses (Jyoti and Kour 2015). Culturally intelligent managers adapt
successfully in cross-cultural environment, which in turn helps to express and share
their ideas and thoughts with employees working in the organisation. Culturally
intelligent managers spend more time in personal interactions (discussion over
lunch, through telephone, etc.) and professional conversation with others managers
and employees working with them as they can adjust to speak with local people and
colleagues. They become an important source of knowledge sharing from home
region to host region. Well-adjusted managers complete their out of home state
assignments successfully as they have an understanding of the host region situation,
which helps them to easily share the knowledge with employees working in host
region. Well-adjusted managers regularly update themselves with banking rules and
regulations and exchange the same with the employees working with them in host
region. Culturally intelligent managers are motivated and confident to communicate
in unfamiliar environment, which helps them to adjust themselves in culturally
diverse settings. It results in sharing of more knowledge among employees working
in the bank. Managers, who adjust themselves in diverse culture, have better
understanding of host region, which helps them to easily disseminate their
knowledge. Further, results revealed that all the dimensions of CCA, i.e., interac-
tion adjustment, general adjustment and work adjustment, mediate between cultural
intelligence and knowledge sharing relationship. Culturally intelligent managers are
more able to adapt with the general conditions (food, living conditions, housing
9 Examining the Impact of Cultural Intelligence … 183

conditions, entertainment facilities, health facilities, cost of living, etc.), working

conditions (job responsibilities, performance standards, supervisory responsibilities,
etc.) and can adjust themselves to socialise with host region nationals, which
comforts them to share their ideas and experiences in foreign assignments. Hence, it
can be concluded that cross-cultural adjustment mediates in CQ and knowledge
sharing relationship.
Further, it has been revealed that cross-cultural adjustment mediates the rela-
tionship between the interaction of cultural intelligence and work experience on
knowledge sharing. Culturally intelligent managers with experience are more
effortlessly adapt themselves in culturally diverse settings/situations, which boost
their knowledge sharing capability in the host region. The study revealed that
managers, who are culturally intelligent, can effortlessly adapt themselves in diverse
cultural situations if they have worked previously under the similar settings to that
in which they are transferred with their co-workers or local nationals, which helps
them to share knowledge in host region.
To conclude, the study explains the impact of CQ on knowledge sharing through
cross-cultural adjustment and the moderating role of language proficiency and work
experience. The study shows that cross-cultural adjustment mediates the combined
effect of cultural intelligence and work experience on knowledge sharing.

9.7 Implications

9.7.1 Theoretical Implications

The study contributes to theoretical development of CQ concept by Earley and Ang

(2003). The present study enriches the knowledge about CQ as an effective
cross-cultural skill construct by proving a relationship between CQ and knowledge
sharing. It enhances to CQ–CCA literature by assessing the role of work experience
in between this relationship. Further, it proved the construct validity and reliability
of CQ, CCA and knowledge sharing within culturally different countries like India,
which enlarged the generalisability of the scales. The present study has also
assessed the moderated mediation of variables (previous work experience and
CCA) in CQ and knowledge sharing relationship, which enhances to the CQ
literature.

9.7.2 Practical Implications

The study has certain practical implications which are helpful to organisations. CQ
can be used as key selection tool. Cultural intelligence scale will help to identify
people who can give their best performance in foreign/overseas assignments as they
184 J. Jyoti et al.

can successfully communicate in host region. By this, those managers who achieve
well in national contexts but probably be unproductive in cross-cultural commu-
nications could be screened out, which will lessen unnecessary expenses arising
from failure of international/out of state assignments. Developing culturally intel-
ligent employees will aid organisations to sustainable competitive advantage.
Hence, CQ can be used by organisation as criteria for evaluation and service
compensation. Organisations can improve organisational commitment by encour-
aging teamwork and by providing job security to the managers, who are posted
outside home state.
Organisations should motivate their managers to share the knowledge at
workplace, as if things are properly shared, managers become aware about what is
expected out of them and they can thus create a road map keeping in mind the
accessibility of resources, its pros and cons and try to achieve better results for the
organisation as well as clients and themselves. Organisations should formulate
teams, and work should be assigned to them as it promotes culture of sharing and
improves response time towards the clients making the delivery of the services on
time without any delays. The absence of such a sharing culture results into lack of
employees taking interest in management’s objective, and they feel isolated,
thinking themselves to be an unimportant part, which results into resistance to new
ideas. Organisation should adopt a variety of mechanisms like knowledge man-
agement and preserve the knowledge which can be later used by other employees
even when one moves out, and this practice would develop a legacy for the
organisation. Further, organisation can reward employees to encourage knowledge
sharing. It is suggested that to encourage knowledge sharing, an ideas database
should be created and that employees should be paid for their contributions.
Rewards should be announced for outstanding sharing employee and department.
Organisation can use intranet service that acts as a social/public platform, infor-
mation centre and employee communication gateway. This helps employees to
pursue and share information about problems which are common, minimising the
need for managers to step in.

9.8 Limitations and Future Research

The paper has several limitations, which can be taken care of in the future. Firstly,
the present study is cross-sectional in nature; it is suggested that in future, longi-
tudinal study can be done. Secondly, additional consequences of CQ can be taken
into account in the future study for clearly understanding the concept. Lastly, other
variables like language proficiency, compensation, type of expatriation, etc., can
also be explored between CQ and CCA.
9 Examining the Impact of Cultural Intelligence … 185

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Chapter 10
Employer Branding Analytics
and Retention Strategies for
Sustainable Growth of Organizations

Ravindra Sharma, S. P. Singh and Geeta Rana

Abstract Disruptive trends continue to create opportunities for organizations to

quickly develop new capabilities and gain a competitive advantage. Employer
branding and organizational attractiveness have garnered considerable research
attention over the years owing to their significance in disruptive economy.
Digitalization, global development, technological advancements, and greater
dependence on data analytics have significantly accelerated market disruption,
causing difficulties for employers in attracting employees in competitive advan-
tages. For organizations, it is necessary to remain competitive; to this end,
employers do a number of exercises to retain and attract employees. The aim of the
research paper empirically explores the impact of organization’s branding on
employer attractiveness in Indian companies. Thus, 300 employees employed in
various companies in India were surveyed. This paper uses correlation technique,
factor analysis, and stepwise regression techniques to establish the impact of
employer branding analytics on organizational attractiveness. Results suggest that
branding analytics positively and significantly relates to companies’ attractiveness.
This paper offers deeper insights into the link between both of the variables, makes
association between aspects and dimensions of the aforementioned constructs, and
in doing so, provides significant implications for both researchers and practitioners.
Findings of the study could help practitioners identify employer branding dimen-
sions influencing organizational attractiveness the most. Practitioners could, with
such knowledge, incorporate the most influential dimensions of employer branding
in organizational culture.

Keywords Employer branding Organizational attractiveness
Talent retention


Disruptive decade Knowledge economy

R. Sharma (&)
Uttarakhand Technical University, Dehradun, India
e-mail: [email protected]
R. Sharma
G. Rana
Swami Rama Himalayan University, Dehradun, India
S. P. Singh
Gurukul Kangri Vishwavidyalaya, Haridwar, India

© Springer Nature Singapore Pte Ltd. 2019 189

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_10
190 R. Sharma et al.

10.1 Introduction

Disruption is the latest buzzword in the business; it is an “event that results in a

displacement or discontinuity.” “Disruption” generally refers to the introduction of
novel technologies’ blockchain, virtual reality, and innovative models of business.
In order to remain competitive when facing progressive acceleration in disruption,
several firms are forced to reconsider and redesign their operations and offerings.
The convergence of consumer expectations and novel technologies, in combination
with cost and performance pressures, only increases the degree of difficulty. This
makes present times both exciting and nervous for employers (Birkinshaw and
Markides 2017). Firms today face several ongoing and potential threats to growth.
Digitalization, global development, advances in technology, and higher dependence
on data analytics have significantly accelerated market disruption, causing difficulty
for employers in attracting employees in competitive advantages. For organizations,
it is necessary to remain competitive; to this end, employers do a number of
exercises to retain and attract employees (Figurska and Matuska 2013).
Disruption has become a growing concern among employers, not only in terms
of how it affects their business model, but also the way it impacts the workforce and
their skills. These evolving conditions are forcing employers to rethink their
approach toward retaining and attracting employees. Employer branding (EB) is
developing as a best practice to ensure that companies are prepared for an unpre-
dictable future (Jiang and Iles 2011). In these disruptive times, nobody can claim
complete control of their business and its readiness for what lies ahead. But one
thing that remains true is that people are a company’s most valuable asset. Any
employer that can develop, retain, and attract great people will have the intellectual
capital to compete far into the future, and this is the essence of contemporary
employer branding (Bakanauskienė et al. 2014).
According to Ambler and Barrow (1996) EB in terms of an organizational
culture (considering the organization as an employer) of communication and
development. It suggests psychological, functional, and economic benefits offered
by the employing firm, projecting it as a good workplace. Sullivan (2004) sees
employment branding as a long-term strategy aimed at managing perception and
awareness (of existing and potential employees and stakeholders) regarding a firm.
Chhrabra and Mishra (2008) describe EB as a firm’s identity creation and image
management process as an employer. EB has been employed to project a firm as a
superior employer, as well as incorporate techniques to engage and motivate
employees. Van Mossevelde (2014) highlighted that lack of skilled labor and
changed perceptions of the new generation were responsible for the emergence of
EB. CIPD (2009) states that employer branding comprises intangible qualities and
attributes that draw potential workers toward a firm. Backhaus and Tikoo (2004)
emphasized that EB is a distinctive facet of a firm’s employment offerings that
differentiates it from rival firms. King and Grace (2008) stated that EB was the
identity of an organization as an employer.
10 Employer Branding Analytics and Retention Strategies … 191

Another construct that has been taken up in the study is organizational attrac-
tiveness (OA); it is considered a competitive advantage for the employer and
enables employees to feel comfortable and remain in the organization (Cable and
Turban 2001). Robertson et al. (2005) observed that companies’ attractiveness
mediates between intention to agree to the job offer and recruitment message.
According to Albinger and Freeman (2000), increasing media influence caused job
seekers to become more cautious; any negative or positive information regarding a
firm impacted potential employees’ decision, influencing the recruitment process in
turn. Carless and Imber (2007) asserted that OA referred to particular policies that
attracted employees toward organizations. Bhatnagar and Srivastava (2008) opined
that organizations should guard their attractiveness as employers so as to be able to
attract talent amidst great competition in the business world. Ehrhart and Ziegert
(2005) emphasized that OA greatly influenced whether workers stayed with the
firm. Cable and Edwards (2004) said that OA increased by person-organization fit
and it also helps potential candidates to compare their organizational needs, values,
and personalities; the better the match more the probability of potential candidate to
join the organization. According to Fombrun and Shanley (1990), it is vital for
organizations to develop a positive corporate persona that appeals to potential
workers as it boosts OA perception. Collins and Stevens (2002) stated that OA
acted as important element in the job market which differentiates among potential
employees (Armstrong 2007).
Disruptive changes across a variety of sectors significantly affect OA among
employees. Unlike majority of previous studies that focus more on the link between
different dimensions of EB and OA, the present paper seeks to examine the two
constructs in such a way that EB’s impact (as a whole and the effect of each aspect
of EB) on each dimension of OA may be established. Such examination would offer
deeper insights into the link between the two constructs and help academics and
practitioners recognize specific aspects that affect particular dimensions more, and if
any particular aspects have a greater role in determining OA. Thus, this study
empirically analyzes the link between EB and OA using two approaches: (1) by
regarding the two constructs as whole and (2) examining the association between
OA constructs with different measurements of EB at different workplaces of India.
Such a twofold analysis has not been attempted before in regard to the study
variables and associations considered in this study, making the present piece of
work a unique one. The association between separate aspects of OA and EB has
been observed by previous studies; however, till date no study found the link
between both constructs (as whole) while also analyzing the relationships between
separate dimensions of OA and aspects of EB. Hence, this study carries immense
originality value and significantly contributes to the extant literature.
192 R. Sharma et al.

10.2 Literature Review

Branding analytics helps organization employee for their development and retention
policies while engaging employees in challenging task (Backhaus and Tikoo 2004).
Authors examined what role EB played in retaining and attracting workers.
Findings indicated that an organization established its own identity through its
culture, style of management, quality of existing employees and economic condi-
tions, social development, etc. Makwana and Dave (2014) examined EB practices
in an Indian IT company. They emphasized that EB comprised beliefs and ideas
that influenced how existing and potential workers perceived an organization, and
the employment experience offered by the firm. Dawn and Biswas (2010) stated
that quality and number of applicants could be increased by employing an effective
employer branding strategy. Effective employer brand image development is a
process that is gradual and warrants the creation of an organizational culture
begetting a quality work environment meeting the expectations of potential
workers. Hence, careful EB management is vital to its effectiveness. Lyons and
Marler (2011) emphasized that in slowdown economy, companies must attract and
provide opportunities in job market through the use of public network to attract
capable employees.
According to Rai (2012), social media rose to global prominence rapidly, and
technological characteristics influenced OA in a company. Ilesanmi (2014) exam-
ined the relevance and role of employer branding in retaining and attracting workers
in disrupting decade. Even amid fierce competition, successful companies maintain
their ability to draw and retain skilled workers by way of branding analytics which
possesses higher capability and competencies for existing and new entrant’s
employees. Wilden et al. (2010) suggested that EB influenced employee decision to
enter, leave, or remain with the organization. Shivaji (2013) opined that employer
brand comprised a firm’s “employment experience which includes factors like
salary, rewards and benefits, organizational culture, management style as well as
growth opportunities” and attracted employees toward the organization even in
disruptive economy. Mak and Sockel (2001) proposed enforcement of policies for
better career development, decreasing burnout and stress, fair remuneration, moti-
vating workers, and creating a better organizational culture to decrease turnover
tendency. According to CIPD (2014), robust EB associates HR policies, people
strategy, and firm values to firm brand. Perception toward a brand as employer
generates value that draws talent which, in turn, can be converted into profits
(Copenhagen Business School 2009). Armstrong (2007) observed that individuals
were drawn to firms that met their needs. According to Kapoor (2010), positive firm
image developed by way of employer branding steadily drew applicants to the firm
and conveyed that it was great to work in the firm.
Krishnan (2014) explained that employer value proposition referred to indirect
and direct advantages that employees sought such as respect, diverse growth
opportunities, empowering performance, and forward looking. Martin (2011)
10 Employer Branding Analytics and Retention Strategies … 193

emphasized that EB identified with its missions, strategies, and cultures which
attracted and retained talented employees in a competitive marketplace. Peyron
(2013) argued that the younger generation was affected by aspects different from
career growth and salary in a company. In a disruptive environment, jobs are
viewed not just as means to money or career, but they are seen as a part of life.
Thus, firms are expected to create an organizational environment, wherein workers
may discover life and career paths. Highhouse et al. (2003) examined organiza-
tional attraction as surrogate assessment of organizational pursuit.
This scarcity of the literature highlights the need for the present study. The
present study analyzes the relevance of branding analytics in companies’ attrac-
tiveness in Indian companies, especially in disrupting economy. Thus, this study
seeks to determine if a firm’s employer brand acts as a significant factor when
deciding to join or remain in the firm.
The discussion above suggests that EB affects OA. Branding values mentioned
above such as economic, interest, application, salary, security, development capa-
bility bear similarity to many EBs included in the present study. This paper aims to
determine the association between EBs and OA in the context of India and, in doing
so, fill the gap in the extant literature. To achieve this objective, links between
separate aspects of EB and dimensions of OA have been analyzed while observing
the overall affect of EB on overall OA. It is therefore proposed:
H1 Significant association exists between employer branding (“social value,
development value, application value, interest value, and economic value”) and
organizational attractiveness (“general attractiveness, intention to pursue, and
prestige”). Also, employer branding will significantly predict organizational
attractiveness (Fig. 10.1).

10.3 Methodology

10.3.1 Sample

Three hundred employees of different Indian companies were approached “for the
purpose of data collection using convenience sampling.” Questionnaires containing
questions on OA and EB were used to collect data. Recorded information about
individual such as name, gender, occupation, highest qualification, designation,
work experience, and family status was sought through questionnaires. Table 10.1
is used to describe and summarize the data.
194 R. Sharma et al.

SOCIAL VALUE
GENERAL
ATTRACTIVNESS

DEVELOPMEN EMPLOYER
T VALUE BRANDING

INTENTION TO
PERSUE
APPLICATION
VALUE
ORGRANIZATIONAL
ATTRACTIVENESS

INTEREST PRESTIGE
VALUE

ECONOMIC
VALUE

Fig. 10.1 Proposed model

10.3.2 Instruments

Data were collected with the help of two measuring instruments. A description of
each scale has been given below.
EB instrument carries 25 items generated by Berthon et al. (2005). The scale
identifies five dimensions. These are “social value, development value, interest
value, economic value, and application value.” The use of the instrument in various
nations and contexts, and across occupational levels establishes its validity. The
reliability coefficients for these dimensions are 0.91, 0.91, 0.89, 0.91, and 0.91,
respectively. Respondents were requested to reply on a seven-point Likert scale
(“anchored on ‘to a very little extent’ and ‘to a very great extent’”).
The dimensions of employer branding have been defined below:
1. Interest value assesses the degree of attraction of a person toward an employer
providing a work environment that is exciting, new work practices, and that uses
creativity of employees to manufacture innovative and high-quality services and
products.
2. Social value observes the degree of attraction of a person toward an employer
providing a happy and fun working environment that presents healthy collegial
associations and a team atmosphere.
10 Employer Branding Analytics and Retention Strategies … 195

Table 10.1 Distribution of Demographic variable Frequency Percent

frequency values in the
sample (n = 300) Gender
Male 274 91.3
Female 26 8.7
Total 300 100
Marital status
Married 268 89.3
Unmarried 32 10.7
Total 300 100
Educational qualification
Graduate 166 55.3
Postgraduate 134 44.7
Total 300 100
Age
25–40 114 38
41–56 144 48
57–72 42 14
Total 300 100
Work experience
1–15 146 48.7
16–30 131 43.7
31–45 23 7.6
Total 300 100

3. Economic value assesses how much a person is drawn toward organization

salary compensation package, promotional opportunities, and security.
4. Development value evaluates the degree of attraction of a person toward “an
employer that offers confidence, self-worth, and recognition along with
career-enhancing experience and a launch pad to employment in the future.”
5. Application value “assesses the degree to which a person is drawn toward an
employer” offering workers opportunities to apply their learning and educate
others in a humanitarian- and customer-oriented environment.

10.4 Organizational Attractiveness Scale (OAS)

OA was assessed on a 15-item scale given by Highhouse et al. (2003). The scale
identifies three dimensions. “These are general attractiveness, intentions to pursue,
and prestige.” The reliability coefficients for these dimensions are 0.77, 0.92, and
0.95, respectively. Respondents were requested to reply to a “five-point Likert scale
(1 = strongly disagree; 5 = strongly agree).”
196 R. Sharma et al.

Dimensions of employer branding have been defined below:

1. General attractiveness. Initial attitudes toward the firm as potential employer.
2. Intentions to pursue. Assessed intentions toward the company with a “modern
approach to transacting with the firm in the future.”
3. Prestige. Emphasis on facets of a firm exposed to “social influence such as
status, popularity, and reputation.”

10.5 Statistical Analysis

Various statistical analyses such as correlation and stepwise regression techniques

were carried out on collected data to assess the influence of employer branding on
organizational attractiveness. Along with these data analysis techniques, factor
analysis is used.

10.6 Total Variance Explained

Table 10.2 shows the factor matrix for both the study variables. Employer branding
scale was subjected to factor analysis on the basis of principal factor analysis; the
three factors were obtained up to eigenvalues over 1.00, and they explained 53.69%
of total variance. Factor analysis was carried out on employer branding scale; 23 of
25 items were kept for further analysis; items having more than 0.55 factor loadings
were chosen for the study. Communalities giving proportion of variance for each
original variable are put in the last factor matrix column. Table 10.2 shows rotated
factor solutions.

Table 10.2 Employer branding scale rotated component matrix

Variables/items Components h2
1 2 3
SV1 0.63 0.43
SV2 0.79 0.65
SV3 0.74 0.62
SV4 0.68 0.54
SV5 0.83 0.69
DV1 0.62 0.46
DV2 0.70 0.53
(continued)
10 Employer Branding Analytics and Retention Strategies … 197

Table 10.2 (continued)

Variables/items Components h2
1 2 3
DV3 0.78 0.62
DV4 0.66 0.58
DV5 0.74 0.59
AV1 0.66 0.55
AV2 0.49a 0.29
AV3 0.78 0.63
AV4 0.67 0.47
AV5 0.64 0.55
IV1 0.61 0.38
IV2 0.42a 0.46
IV3 0.69 0.51
IV4 0.63 0.42
IV5 0.59 0.38
EV1 0.65 0.45
EV2 0.72 0.35
EV3 0.63 0.45
EV4 0.62 0.47
EV5 0.58 0.27
Eigenvalues 6.76 4.78 4.10 12.34
Percentage of variance 25.882 17.249 10.238 53.369
Source Authors’ own
Notes Score less than 0.55 was deleted from the solution
a
SV, social value; DV, development value; AV, application value; IV, interest value; EV,
economic value

For organizational attractiveness, 12 items out of 15 were obtained and 2 items

were eliminated from the scale owing to factor loadings below 0.55. The scale
accounted for 65.41% of variance, and the communalities ranged from 0.48 to 0.98.
Table 10.3 presents rotated factor solutions.

Table 10.3 Organizational attractiveness scale rotated component matrix

Variables/items Components h2
1 2 3
GA1 0.80 0.67
GA2 0.98 0.98
GA3 0.74 0.68
GA4 0.83 0.70
(continued)
198 R. Sharma et al.

Table 10.3 (continued)

Variables/items Components h2
1 2 3
GA5 0.69 0.65
IP1 0.63 0.56
IP2 0.77 0.68
IP3 0.74 0.64
IP4 0.59 0.49
IP5 0.53a 0.48
P1 0.54a 0.55
P2 0.63 0.63
P3 0.74 0.71
P4 0.62 0.69
P5 0.65 0.45
Eigenvalues 7.14 1.05 1.63 9.56
Percentage of variance 51.05 7.54 6.81 65.41
Source Authors’ own
Notes Item scores less than 0.55 were deleted from the solution
a
GA, general attractiveness; IP, intentions to pursue; P, prestige

The criteria mentioned above permit the entry of five predictors—“development

value, social value, interest value, economic value, and application value.”
Collectively, these dimensions contribute to the judgment of dimensions of orga-
nizational attractiveness.

10.7 Analysis

Clearly, robust correlations between every independent and dependent variable

support our hypothesis. Table 10.4 shows correlation between both the variables
displayed through a significant link between the two with the value r = 0.78**
(p < 0.01 level). The association between EB and OA (on overall basis) is shown
with the help of a graph (see Fig. 10.2). Among all the dimensions of EB, that is
“social value, development value, application value, interest value, and economic
value were significant for the general attractiveness, intention to pursue, and
prestige” (Table 10.5).
Stepwise multiple regression (see Table 10.5) shows that of all employer branding
dimensions, economic value predicted general attractiveness with multiple R as 0.63
(F = 69.42**, p < 0.01, b = 0.63, R2 = 0.40), and social value with multiple R as
0.65 (F = 38.61**, p < 0.01, b = 0.21, R2 = 0.43), and jointly accounted for 40%
variance in the prediction of general attractiveness. All together, economic value
emerged as the most robust predictor of general attractiveness with estimated beta
value of 0.63.
 10

Table 10.4 Intercorrelation, mean, and standard deviation between constructs of EB and OA (N = 300)
S. No. Variables Mean S.D. 1 2 3 4 5 6 7 8
1. Social value 2.10 0.5712 1
2. Development value 2.27 0.5433 0.88** 1
3. Application value 2.17 0.5282 0.90** 0.86** 1
4. Interest value 2.13 0.5433 0.54** 0.51** 0.52** 1
5. Economic value 2.38 0.5832 0.42** 0.56** 0.43** 0.59** 1
6. General attractiveness 2.35 0.4692 0.50** 0.47** 0.45** 0.85** 0.62** 1
7. Intention to pursue 2.25 0.6058 0.56** 0.67** 0.51** 0.71** 0.61** 0.67** 1
8. Prestige 2.35 0.6107 0.52** 0.57** 0.71** 0.61** 0.66** 0.77** 0.69** 1
Employer Branding Analytics and Retention Strategies …

Source Authors’ own

** It dipicts values are singnificant at .05 level
199
200 R. Sharma et al.

Fig. 10.2 Relationship between EBT and OAT Source Authors’ own

Table 10.5 Stepwise regression analysis

Variables R R2 SEM F-value D.F. b-value
D.V.: general attractiveness
Economic value 0.63 0.40 0.3644 69.42 1298 0.63
Economic value, social value 0.65 0.43 0.3574 38.61 1297 0.49, 0.21
D.V.: intention to pursue
Application value 0.70 0.49. 0.4336 100.92 1298 0.70
Application value, development 0.75 0.56 0.4034 17.17 1297 0.41, 0.39
value
Application value, development 0.76 0.58 0.3973 4.19 1296 0.34, 0.31,
value, social value 0.19
D.V.: prestige
Economic value 0.64 0.41 0.4706 72.84 1298 0.64
Economic value, social value 0.69 0.48 0.4408 15.53 1297, 0.40, 0.36
Economic value, social value, 0.71 0.51 0.4336 4.43 1296 0.30, 0.27,
application value 0.22
Source Authors’ own

The organizational attractiveness dimension intention to pursue was predicted by

the dimension of employer branding application value R as 0.70 (F = 100.92**,
p < 0.01, b = 0.70, R2 = 0.49); development value with estimated R as 0.75
(F = 17.17**, p < 0.01, b = 0.39, R2 = 0.56) and social value with the calculated
10 Employer Branding Analytics and Retention Strategies … 201

R as 0.76 (F = 4.19**, p < 0.01, b = 0.19, R2 = 0.58), and jointly accounted for
58% variance in the prediction of intention to pursue. All together, application
value emerged as the most robust predictor of intention to pursue with estimated
beta value of 0.70.
Finally the organizational attractiveness dimension prestige was predicated on
the basis of employer branding dimensions and economic value predicted prestige
with multiple R as 0.64 (F = 72.84**, p < 0.01, b = 0.64, R2 = 0.41); social value
with multiple R as 0.69 (F = 15.53**, p < 0.01, b = 0.36, R2 = 0.48) and appli-
cation value with the multiple R as 0.71 (F = 4.43**, p < 0.01, b = 0.22,
R2 = 0.51), and jointly explained 51% variance in the prediction of prestige. All
together, economic value emerged as the most robust predictor of prestige with
estimated beta value of 0.41. Thus, based on results obtained, Hypothesis 1 is
retained at 0.01 level.

10.8 Discussion

10.8.1 Relationship Between EB and OA

Table 10.4 shows that EB leads to general attractiveness, intention to pursue, and
prestige. Findings indicate that employer branding provides a reputation to the firm
as the best place to work; employers have to offer economic, functional, psycho-
logical, and social benefits to “attract and retain the best talent,” and by doing so,
firms can enhance employee motivation (Dell et al. 2001; Copenhagen Business
School 2009). EB is the perfect package that provides salary, proper atmosphere,
and career development opportunities to their employee which attract them toward
organization. According to Verma and Verma (2014), employers are responsible to
provide workers the perfect workplace. Sullivan (2004) suggested that employer
branding was an approach for organizations during a slowdown in the economy; it
helped build an image in potential workers’ minds of “a grade place to work”
(Minchington 2010). Social value, development value, and economic value at the
workplace provide envisioned benefits to workers so that they attract toward
organizations. Development value and application value motivate employees to
effectually utilize their skills and abilities at work, and lead them to perceive the
workplace as enjoyable; this gives shape to their expectations with respect to their
employment (Lievens 2007).
Table 10.4 shows that EB dimensions positively correlate with general attrac-
tiveness, intention to pursue, and prestige. When employees perceive the workplace
as interesting, socially supportive, and filled with creative value, they undergo
growth and advancement which causes employee confidence and satisfaction;
further, they are simultaneously attracted toward the organization. Findings further
suggest that development, application, and economic values encourage employees’
satisfaction, high ROI on professional as well as personal levels (Dawn and Biswas
2010).
202 R. Sharma et al.

Results indicate that employer branding in disrupting economic time conveys a

firm to generate a choice of employer.

10.8.2 Prediction of OA with the EB Dimensions

Table 10.5 clearly indicates that economic value is the most robust predictor of all
three EB dimensions. General attractiveness was predicted by economic and social
values. Findings imply that economic value at place of work, such as above average
salary, job security, and career development opportunities, attracts employees in a
competitive market. In disruptive market, employees are generally less likely to
pursue alternative employment; they prefer companies offering secure jobs and
promotional opportunities for continuous learning (Wallace et al. 2014).
Social value attracts employees toward the employer and recognizes the people
in troubled economic times. In economic downturn, employers provide progressive,
friendly, and enjoyable environment to attract employees (Berthon et al. 2005;
Ambler and Barrow 1996). Application value, development value, and social value
also positively attract employees which delivers a stimulating innovative work
environment along with building a set of different competencies among employees
through training, coaching, and mentoring opportunities (Minton-Eversole 2009;
Cooper 2008). All these values collectively provide better career development and
greater challenges a modern approach to transacting with the firm in the future
(intention to pursue). Economic value, social value, and application value also
emerged as key predictors of prestige. It has been suggested that these dimensions
of employer branding change the way employees think by developing creative
programs and provide challenges, recognition, and empowerment to retain and
attract brightest employees in disruptive economy. Economic value, social value,
and application value also emerged as key predictor for prestige. It has been sug-
gested that these dimensions of employer branding change the way employees think
by developing creative programs and provide challenges, recognition, and
empowerment to retain and attract brightest employees in disruptive economy.
Findings indicate that economic value influences a company’s image in terms of
reputation, popularity, and status (prestige); therefore, employees attract toward
healthy climate of innovation which engages and retains employees.

10.9 Implications and Contribution

This study carries significant implications for practitioners and academics. Findings
reveal that EB influences OA; thus, managements could use our findings to rec-
ognize EB aspects that are particularly effectual in obtaining OA. It has been
observed that “economic value, application value, social value and development
value emerged as strong predictors of attracting and retaining employees in recent
10 Employer Branding Analytics and Retention Strategies … 203

trend such as downsizing, and outsourcing”, “employers provide employees with

marketable skills through training and development in return for effort and flexi-
bility (Baruch 2004)”. Practitioners, with some effort, would be able to recognize
the dimensions helpful in drawing workers to firms, thus leading to OA.

10.10 Limitations and Future Research Direction

In this research paper, limitation is as follows: First, the population could have been
better represented by a larger sample. Second, employees at only senior managerial
and managerial positions have been considered. Validating the findings of this
study with the help of larger samples could be an area of future research. Further,
similar studies could be conducted in multicultural organizational contexts and
environments.

10.11 Conclusion

This paper empirically analyzes the link shared by EB and OA. This is done by
considering both constructs as whole, as well as examining the association between
the different dimensions of EB and aspects of OA. Such twofold analysis makes the
present piece of work unique, contributing significantly to the extant literature.
Results indicate that OA (as a whole) is influenced by EB (as a whole). Further,
“social value, economic value, application value, and development value” are OA
dimensions commonly influencing three EB aspects, suggesting that these aspects
are vital to OA. Economic value appeared as the most robust predictor as it affected
all three OA aspects. Employers could create work environments encouraging and
enforcing job security with many other packages of benefits such those career
development branding values that provide culture and experiential benefits to the
employees.

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Correction to: Customer Experience
and Its Marketing Outcomes
in Financial Services: A Multivariate
Approach

Swati Raina, Hardeep Chahal and Kamani Dutta

Correction to:
Chapter 7 in: H. Chahal et al. (eds.),
Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_7

In the original version of this chapter, the author Phillip Klaus’ name was included
erroneously as a co-author. This has now been rectified and the author name has
been removed.

The updated version of this chapter can be found at

https://doi.org/10.1007/978-981-13-1334-9_7

© Springer Nature Singapore Pte Ltd. 2019 E1

H. Chahal et al. (eds.), Understanding the Role of Business Analytics,
https://doi.org/10.1007/978-981-13-1334-9_11