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

1. Relationships Among Levels of Government Support, Marketing Activities, and Financial Health Of Performing Arts Organizations (Publication forthcoming in the International Journal of Nonprofit and Voluntary Sector Marketing, 2006) Authors: Theresa A. Kirchner Edward P. Markowski John B. Ford Old Dominion University Norfolk, VA, USA February 17, 2006

2. Presentation Outline • Why is research on this topic relevant? • Why is this research relevant? • Review of literature on the topic • Premises developed from the literature • Model, conceptual arguments, and hypotheses • Variables and data • Methodology • Results of empirical analysis • Contributions of this analysis • Limitations of this analysis • Managerial / public policy implications • Opportunities for future research

3. Why is research on this topic relevant ? • Arts organizations often have difficulty surviving even in good economic conditions; significant numbers fail. (Kotler & Scheff 1997) • Non-profit performing arts organizations are unique from an economic / artistic standpoint. They are dependent on government support and traditionally have been less motivated than for-profit organizations to leverage marketing activities and achieve financial health. (Baumol & Bowen 1966, Baumol 1995, Stone 1995, Scheff & Kotler 1996) • Government support at all levels is declining from a recipient perspective.(Arnold & Tapp 2003) • There is increasing linkage of government support to recipient effectiveness and economic viability, including effective use of marketing strategies and plans.(McDonald & Harrison 2002)

4. Why is research on this topic relevant ? (cont.) • A focus on current marketing concepts and strategies is important for growth of both audiences and donations, and, in some cases, for survival.(Yavas 1996) • Little previous empirical research has been published in major academic journals on relationships between, and effects of: • the effects of financial levels of government support • the effects of that support on the types of marketing tools and techniques employed • the effects of both government support and marketing activities on financial health (Fillis 2002, Arnold & Tapp 2003) • Previous cultural research has generally concentrated on studies of single organizations or groups of organizations within a single geographic area. (Garcia et al. 2003)

5. Why is this research relevant? • This research provides a broad review of literature on non-profit performing arts organizations. • It examines relationships among levels of government support, marketing activities and financial health of these organizations from an empirical standpoint at a U.S. national level. • The research has practical implications and uses for: • government agencies • academic researchers • arts organization managers, boards of directors, and donors

6. Literature Review • Builds on 2 prior literature reviews: • Thomas and Cutler (1993), Journal of Professional Services Marketing Literature review of 31 articles on performing arts marketing in major marketing journals over the prior 20 years; showed low level of empirical research • Rentschler (2002, 1998), Journal of Arts Management, Law & Society 2 literature reviews of 171 marketing-related articles in 7 selected international journals over the prior 25 years; categorized into 3 chronological periods (Foundation, Professionalization, and Discovery) and 3 thematic classifications (Marketing as Culture, Strategy, and Tactics) • Linked to “Cultural Economics” – Seminal work (“Performing Arts – The Economic Dilemma,” Baumol & Bowen 1966) and recent literature • Outlines contributions in 3 areas: • The economic nature of the industry and the role of government support • Government support implications for marketing • The evolution of performing arts organization marketing strategies and tools

10. Premises Developed From The Literature • Performing arts organizations typically require and receive some level of government support. (Baumol 1995) • Marketing and donor development efforts of performing arts organizations contribute to the financial health of those organizations. • Marketing and donor development efforts of performing arts organizations have traditionally concentrated on advertising and public relations activities and neglected the wider range of marketing tools and activities. • The level of support from both public and private sources is increasingly dependent on the financial health of recipient performing arts organizations. (McDonald & Harrison 2002) • Public and private donors increasingly demand responsible financial government support as a criterion for support. (Stone 1995)

11. Hypothesized Correlations

12. Conceptual Argument / Hypotheses • Based on the literature, it is reasonable to assume that there is a significant relationship between government support and marketing activities, given increasing government requirements for marketing plans. (Rentschler et al. 2002, McDonald & Harrison 2002) H1a: There is a significant relationship between the level of marketing activities of performing arts organizations and the level of government support.

13. Conceptual Argument / Hypotheses (cont.) • Government support may leave a non-profit performing arts organization less motivated to develop and implement additional marketing activities. (Stone 1995) • In that case, a negative relationship would exist between level of government support and level of marketing activities. H1b: There is a significant negative relationship between the level of marketing activities of performing arts organizations and the level of government support.

14. Conceptual Argument / Hypotheses (cont.) • Based on the literature, it is reasonable to assume that government support, examined independently of the level of marketing activities, should have a significant relationship with the financial health of the performing arts organization. (Baumol 1995, Kotler & Scheff 1997) H2a: There is a significant relationship between the level of government support and the financial health of performing arts organizations.

15. Conceptual Argument / Hypotheses (cont.) • Government support, examined independently of level of marketing activities, should directly result in the increased financial health of a non-profit performing arts organization. (NEA 2000, Arts Council of England 1998) • Hence, a positive relationship should exist between government support and financial health. H2b: There is a significant positive relationship between the level of government support and the financial health of performing arts organizations.

16. Conceptual Argument / Hypotheses (cont.) • Based on the literature, it is reasonable to assume that the level of marketing activity, examined independently of the level of government support, should have a significant relationship with the financial health of the performing arts organization. (Gainer & Padanyi 2002, Kotler & Andreasen 1987) H3a: There is a significant relationship between the financial health of performing arts organizations and the level of marketing activity.

17. Conceptual Argument / Hypotheses (cont.) • A higher level of marketing activities, viewed independently of the influence of government support, should result in the increased financial health of a non-profit performing arts organization.(Arnold & Tapp 2003, Gainer & Padanyl 2002) • Hence, a positive relationship should exist between levels of marketing activities and financial health. H3b: There is a significant positive relationship between the financial health of performing arts organizations and the level of marketing activity.

18. Theoretical Path Flow Model (H4)

19. Conceptual Argument / Hypotheses (cont.) • Once the various relationships are established in hypotheses 1-3, the complete set of relationships can be tested using a more complex methodology. H4: The amount of government support will have a direct negative effect upon the level of marketing activities undertaken by a performing arts organization, which will, in turn, have a direct positive effect upon financial health of the organization, which, in turn, will have a positive direct effect upon the level of government support. It is also hypothesized that the level of government support will have a direct positive effect upon the level of financial health of the performing arts organization.

20. Empirically Suggested Path Flow Model

21. Variables

22. Data • Secondary data • American Symphony Orchestra League (ASOL) Annual Statistical Survey • 20 seasons (years) of data for 63 U.S. professional orchestras which responded to the annual ASOL survey for each of those time periods • Data set comprised of a panel of relevant variables for each orchestra, with each panel containing a 20-period time series

23. Methodology Approach (Adapted from Brooks 1999): • Analysis with longitudinal data over time to assess any time lag effects. (Dawes 2000) • Simple correlational analysis • Granger Causality test – regresses each variable on lagged values of other variables and itself, followed by restricted F tests (Granger 1969)

24. Correlation Results * p < .05. ** p < .01.

25. Granger Causality Test Results

26. Correlation Results, Large Orchestras * p < .05. ** p < .01.

27. Granger Causality Test Results, Large Orchestras

28. Results • The study was able to find significant correlations among the constructs in question: • The higher the level of marketing activities, the higher the level of government support. • The higher the level of government support, the poorer the financial performance of the performing arts organization. • Better financial health is associated with lower levels of marketing activity. • Causal analyses were not conclusive for orchestras in general. However, significant causal relationships were found for large orchestras.

29. Contributions of This Analysis • First to focus on an empirical assessment of relationships among levels of government support, marketing activities, and financial health of non-profit performing arts organizations • Measures level of financial health with a bottom-line statistic – Accumulated Operating Surplus / Deficit(Wolf 1992, Dempster 2002) • Utilizes a measurement of marketing activities in quantifiable terms • Results eliminate purely financial explanations of financial health

30. Limitations of This Analysis • To draw inferences about the industry requires extrapolation from self-selecting respondents to the entire range of U.S. professional orchestras. • The model does not specifically incorporate non-financial factors such as the concept of artistic excellence / vibrancy and the degree to which it affects level of support and income from public and private sources. Issue: How to measure non-financial factors – e.g. artistic excellence / vibrancy?

31. Managerial / Public Policy Implications • Neither government support nor marketing expenditures have achieved optimal financial results; better utilization of marketing resources is needed. • Managers should establish clear financial and non-financial objectives for marketing and evaluate the effectiveness of marketing activities in those terms • Government support agencies and managers should evaluate the effectiveness of use of government funding in terms of both government and organizational goals. • Performing arts organizations might be better served, from a financial health standpoint, when they promote working relationships with marketing directors as partners and functional co-equals with artistic directors.

32. Potential Future Research • Conduct future research to determine antecedents of financial health of nonprofit performing arts organizations. • Further segmentation and analysis of financial data • Analysis of non-financial data (e.g. governance, management, vibrancy, and artistic excellence) • Examine root theoretical foundations that may assist in explaining the interactions of government support, marketing activities, and financial health of non-profit performing arts organizations: • Cultural economics • Marketing orientation • Theories of leadership, strategy, structure, path dependency, motivation, and resource dependence

33. Potential Future Research (cont.) • Identify and incorporate alternative and improved composite measures of financial health of nonprofit arts organizations, e.g.: • Addition of balance sheet (Current Ratio) and cash measures (Wilson & Kattelus 2002) • Use / adaptation of financial ratios such as Altman’s 4-variable Z-score model for non-manufacturers (2003) • To develop a global perspective, expand the scope of study in two phases: (1) Examine professional symphony orchestras of Australia, the U.K., Canada. (2) Examine professional symphony orchestras worldwide.

34. Questionsand Feedback . . .