Impact of the COVID-19 crisis on service enterprises and their attitudes towards marketing investments

Scientific Annals of Economics and Business 69 (4), 2022, 539-556 DOI: 10.47743/saeb-2022-0021 Impact of the Covid-19 Crisis on Service Enterprises and their Attitudes Towards Marketing Investments Juříková Martina*, Ližbetinová Lenka** , Káčerková Eliška*** Abstract The service sector has become the dominant sphere of market economies over the last forty years. The maturity of a country’s economy is directly related to the maturity of services as an economic sector. The immense growth across the service sector has also put mounting pressure on the competitiveness of service enterprises and their marketing activities. The turn of the millennium has already seen the competitive struggle affected by two crises – first, an economic one and now, one caused by the Covid-19 pandemic, which has had a great impact (not only) on the service sector. The article deals with the question of how Czech service enterprises reflect on the impact of the pandemic. The article’s aim is to find out how service enterprises perceive the impact of the Covid-19 crisis depending on their size and classification within the service sector and how they approach marketing investments during a pandemic crisis. The research is focused on service enterprises (n=90) in terms of their application of marketing processes in the conditions of the Czech Republic in the period 2020-2021. The results, based on descriptive and inferential statistics (ANOVA test in conjunction with Hochberg and Games-Howell tests, Pearson’s correlation coefficient and chi-squared test), show that smaller enterprises tend to be more affected by the effects of government measures in the context of the Covid-19 crisis than medium and large enterprises. Keywords: service enterprises; marketing investment; enterprise size; Covid-19; service sector. JEL classification: M21; M31. 1. INTRODUCTION Services account for approximately two-thirds of the world economic output, making them the backbone of the global economy and the most dynamic component of international trade (WTO, 2022). With a share of 62% in 2019, the service sector was the dominant contributor to gross value added in the Czech Republic (Marek, 2020; ČSÚ, 2022). The pandemic caused by the spread of the coronavirus affected the global economy and hampered * Faculty of Multimedia Communications, Tomas Bata University in Zlín, Czech Republic; e-mail: [email protected]. ** Faculty of Technology, Institute of Technology and Business in České Budějovice, Czech Republic; e-mail: [email protected] (corresponding author). *** Faculty of Multimedia Communications, Tomas Bata University in Zlín, Czech Republic; e-mail: [email protected]. 540 Martina, J., Lenka, L., Eliška, K. economic growth in the Czech Republic, with the economic decline reaching 5.8% (Žurovec, 2021). This represents the second crisis the economy has had to overcome in the 21st century. In the Czech Republic, where the principles of the market economy were revived in the 1990s, the growth of the service sector was interrupted by the economic crisis in 2008 and 2009 and now, in 2020, by the Covid-19 crisis. In order to develop a crisis strategy, companies need to predict the possible impact of these external factors, and certain assumptions can indeed be formulated from research related to the economic crisis already overcome. However, there are no studies that look at the relationship between service marketing and the level of crisis management in services to demonstrate how marketing activities can contribute to preventing and eliminating the impact of these crises. So far, it has not been fully tested whether knowing and applying marketing principles in times of crisis may actually help keep service firms’ operations running at maximum efficiency and allow them to respond flexibly to change. Based on a content analysis of articles published since 1993, Furrer et al. (2020) indicate (from an analysis of a total of 3,177 articles) which areas are most addressed, also identifying the potential for further research. In the field of marketing, the majority of studies focus on relationship marketing, purchase behaviour and customer satisfaction. Mele et al. (2021) draw on an analysis of over 200,000 research papers using AI to categorize them with a focus on services in times of crisis (Mele et al., 2021), highlighting the need for further research areas focused on grasping the notion of ‘essential services’ or innovation and market-shaping in services. The need to examine and predict the impact of crises and crisis management issues in the service sector among service scholars and practicing service marketers has already been highlighted by Martin (2005). He also addresses the questions of whether ‘a proactive approach to crisis management is required, whether some organizations may be more crisisprone than others’, as well as the controversy over the polarity of the perception of the concept of crisis. However, it offers ‘only’ the author's view of the issue in question, unsupported by research. Due to the ongoing crisis, the topic of marketing crisis management and its impact on the success of a firm during a pandemic has not yet been explored. Likewise, research published in the field of international services marketing (Hofer & Knight, 2020) does not address marketing crisis management and its specifics in services. In a research area analysis of 942 articles published in international marketing journals, the topic of crisis management in services does not appear among either strategic or tactical marketing topics. The contribution of the present paper to the research on marketing in services is that it verifies the relationships between different service sectors and firm sizes and how much they are affected and their investments in marketing in the context of the Covid-19 crisis. The results can be used to determine the direction of the education of future and current marketers in services, focusing on the specifics of each sector and the typology of crises that may befall them. If, for example, universities are aware of these directions, they can better prepare future marketers to practice in services and thus eliminate the impact of crises on the service sector. The aim is to find out how service enterprises perceive the impact of the Covid-19 crisis depending on their size, their classification within the service sector and how they approach marketing investments during a pandemic crisis, as well as to make recommendations for effective implementation of marketing to eliminate the impact of a crisis on services. Scientific Annals of Economics and Business, 2022, Volume 69, Issue 4, pp. 539-556 541 2. THEORETICAL BACKGROUND 2.1 Service Sector To understand the common and differing elements of crisis management in services as opposed to tangible products, it is useful to first define the concept of a service and the determinants potentially involved in the implementation of both marketing and crisis management in a given sector (Ajmal et al., 2021; Lebrun et al., 2021; Ricciardelli et al., 2021; Sharma, 2021). A service is a complex product that can be defined as ‘a set of tangible and intangible elements containing functional, social and psychological benefits or advantages. The product may be an idea, a service or a good, or a combination of all three outputs’ (Pride & Ferrell, 1991; Dibb et al., 2012). For a more detailed analysis and understanding of the specifics of services and their marketing management, we can use the classification of economists Foote and Hatt (1953), who divided the service sector into: • tertiary sector - handicraft and craftwork previously carried out at home, where the material elements forming the essence of the service predominate and the material background is important mostly during the whole process of service provision (i.e. repair, hairdressing, cosmetics, but also hospitality, etc.), • quaternary sector - services facilitating and streamlining the division of labour, where the emphasis is on process procedures and activities (i.e. transport infrastructure, communications, etc.), • quinary sector - services that change and improve their recipients and are demanding of the expertise of the provider (i.e. counselling, medicine, etc.). The above breakdown also forms a basis for setting up the additional elements of the marketing mix of services, and is therefore an important determinant for the marketing management of companies across different sectors. A significant part of the literature on services marketing has been written by researchers who explore concepts in other disciplines from a perspective of their potential relevance to services. These applications are appropriate to the interdisciplinary nature of service practice (Martin, 2005). 2.2 Service Sector Response to the Pandemic Crisis In 2019, the service sector in the Czech Republic achieved a 3.8% year-on-year growth in sales, representing a slowdown in the growth trend compared to the previous year (+5.8%). With a 6.7% average growth in the EU28, the Czech Republic achieved a below-average result, confirming a long-term trend. In the past ten years, in terms of service revenue growth, service providers in the Czech Republic only surpassed the EU28 average in 2017, when the country experienced a 6.5% increase, while the EU28 average was 6.2%. The growth situation has changed dramatically with the arrival of the pandemic crisis in 2020. The Covid-19 pandemic has rapidly taken on a global dimension and, in addition to health, other aspects of life have been affected in the form of a recession, which increases the likelihood of broader social, economic and political systemic changes (International Monetary Fund, 2021; Altay et al., 2022; WTO, 2022). Up until the outbreak of the pandemic, the service sector formed the backbone of the world economy, contributing around 60% to the GDP of the Czech Republic (Marek, 2020; ČSÚ, 2022), for example. Due to the strong impact of the restrictions gradually adopted to mitigate the spread of the coronavirus in most countries, when hospitality establishments were 542 Martina, J., Lenka, L., Eliška, K. closed or their operations severely restricted, international tourism in particular was severely limited, affecting mainly accommodation and leisure facilities (Lebrun et al., 2021; Romero & Lado, 2021) but also selected modes of transport (Kicová & Poniščiaková, 2020; Sommerauerová & Chocholáč, 2020; Froněk et al., 2021). Schools (which have switched to distance learning) and selected businesses were also closed (Dvorský et al., 2021; Petráková et al., 2021; Yang et al., 2021; Gerard et al., 2022), and mass gatherings and cultural events were suspended. Some other sectors, such as healthcare, are coping with an unexpected influx of patients (Gómez-Carmona et al., 2022). The need to react flexibly to change has accelerated the process of digitisation (Majerova et al., 2020), creating new business models or introducing necessary innovations (Mura, 2020; Nastisin et al., 2021). Demand for products has gradually changed, revealing weaknesses in global supply chains (Nedeliakova et al., 2014; Kicova & Nadanyiova, 2015; Mele et al., 2021). In 2020, all service industries showed a decline in sales, especially tourism-related activities: accommodation (74.3%), air transport (71.8%), and catering and hospitality (55.3%), as well as administrative and support activities of travel agencies and other booking activities. On the other hand, in relation to online purchases, a 20% growth in sales was recorded for postal and courier activities. The year 2021 brought a recovery in the global economy, with GDP growth recorded. China and the United States were the fastest growing economies. GDP growth in the Czech Republic in 2021 (which is heavily dependent on the German economy) was positively affected by changes in GDP in the trade, transport, accommodation and hospitality industries, as well as in construction and most service industries, while manufacturing had a negative impact on quarter-on-quarter GVA growth (ČSÚ, 2022). The European Commission’s report identifies the main factors influencing the level of impact of the pandemic, which, as the report suggest, varies from sector to sector and from company to company. Among the most significant are the extent to which they are dependent on intermediate inputs from China, their flexibility to switch to alternative suppliers, the existence of inventories, or the application of ‘just-in-time’ manufacturing processes (European Commission, 2021a, 2021b). The well-being of service enterprise participants (employees and management) is at the micro level (Lorincová et al., 2021). When service providers such as tourism, hospitality and leisure service providers (Gottwald et al., 2015; Brumercikova et al., 2020), retailers, or transport (Jaros et al., 2014; Lazarevic et al., 2020; Ralevic et al., 2020) and travel companies struggle to survive due to disruptions, lockdowns or other restrictions, jobs and employment are at risk (Li et al., 2021; Hitka et al., 2022). During the pandemic, small and medium-sized retailers have been hit hard because they do not have the tools to cope with the economic shock along with high levels of uncertainty (Kabadayi et al., 2020). According to a data analysis from O2 eKasa’s project, which evaluated changes in the use of the O2 eKasa-based POS system in the Czech Republic, in the first week after a lockdown was introduced, three quarters of businesses stopped selling their goods and services. At the same time, for those businesses that continued to operate, the total number and value of sales fell to one-tenth of their usual figures. The only thing that grew was the share of contactless payments, i.e. payments by credit card, mobile phone or smart watch, up by 20% (Jungmanová, 2020). PwC’s Covid-19 CFO Pulse Survey (Storkan, 2020), in which CFOs from 21 countries participated, provides insight into their assumptions about the situation. According to the findings, up to four-fifths (79%) of Czech companies expect a decline in revenues or profits due to the Covid-19 pandemic. However, more than half (55%) of companies also believe that if the emergency measures were to end now, their business would return to normal within three months. The most common fear among Czech Scientific Annals of Economics and Business, 2022, Volume 69, Issue 4, pp. 539-556 543 CFOs is that the global economy will fall into a recession (79%), followed by concerns about financial impacts such as a lack of liquidity and capital resources (47%), and the fear of a drop in consumer sentiment and a related drop in demand (41%). The survey participants were representatives of medium and large companies, which will not be as affected by the short-term funding shortage as small entrepreneurs and sole traders. According to Storkan (2020), small and medium-sized enterprises in the Czech Republic expect a reduction in production of up to forty percent as a result of quarantine measures. This is based on a survey conducted by the Confederation of Employers’ and Business Associations among companies across segments and sizes. The categories monitored were those with less than 50, 50-250 and more than 250 employees. The most vulnerable group is hotels, restaurants and related services. For small businesses, as many as 47 percent of owners are concerned about being in secondary insolvency. Undoubtedly, the unifying element across all sectors and groups has been the general dissatisfaction with the government’s measures to date - only 21% of firms consider them sufficient. European Commission (2021a) (as part of its support efforts during the pandemic) stresses that the survival of small and medium-sized enterprises, which are hit hard by the pandemic crisis, is crucial for the economy of the EU as a whole. 2.3 Marketing Management in the Wake of the Crisis A crisis is an unexpected event that brings with it uncertainty, changes existing habits, routines and plans (Kutaic, 1938). According to Gordon-Wilson (2021), a crisis often seriously underwrites a change in consumer behaviour and creates new patterns. Published research (e.g., Weinberger & Wallendorf, 2012; Kaytaz & Gul, 2014) often focuses on consumption change in the context of crises (economic, natural disasters, pandemics, etc.). A common point present in the findings is the negative emotions individuals experience during a crisis, which they seek to mitigate by changing consumption strategies (Kemp & Kopp, 2011). There is also a tendency towards less self-control over the consumption of unhealthy snacks (cheaper goods) and alcohol (Gordon-Wilson, 2021). An important element of the marketing activities of companies in these conditions is social responsibility, by which they demonstrate their conscious and community-oriented attitude towards the situation and their consumers (Weinberger & Wallendorf, 2012). Changes in consumer behaviour during the crisis cannot be ignored as private consumption contributes significantly to gross domestic product (Kaytaz & Gul, 2014). Sarkis (2021) points out that a pandemic crisis has its own specificities compared to other crises where people begin to ‘live differently’ and thus new social and economic norms of sustainability emerge. Studies (Ajmal et al., 2021) indicate a significant reduction in economic and social activity (from a PEST analysis perspective), and, conversely, a significant impact of Covid-19 on creating technological challenges among service delivery organisations. Thus, it can be concluded that the pandemic has significantly accelerated digital transformation in the sector. According to Martin (2005), service organizations may be more crisis prone than tangible goods firms in some respects. Although all organizations should be concerned about crises and their management, some of the almost unique characteristics of services suggest that service organizations should pay particular attention to crises, as losses may be higher for them. An important question is how to strategically approach marketing management and the implementation of marketing activities in times of crisis. B2 inside’s research (B2B Monitor, 2012), drawing on a survey of 300 randomly selected companies (categorised by industry and 544 Martina, J., Lenka, L., Eliška, K. size) in the Czech Republic, focused on the impact of the crisis on marketing and overall economic stability. The results of the study show that marketing spending declined during the crisis. In retrospect, marketing and sales directors admit that cutting marketing spending was often not the right move. Just under half (46%) of marketing executives consider spending cuts to be the right thing to do. The rest either rate it negatively or fail to assess the move. Interpretation of the findings highlights the directly proportional relationship between the increase in marketing spending and the growth in company turnover. However, there is a question as to why these results were not segregated by firm size, as large firms are more sophisticated in their marketing and are less vulnerable to the crisis (Martin, 2005). This would indirectly support the results presented. Data2Decisions (Dyson, 2021) has also reached similar conclusions in its studies, arguing that firms should not cut back on marketing and promotional spending in times of crisis. Cutting advertising budgets to zero can take five years to recover. Similar results are independently reported by Kantar (2021), which states that ‘strong brands recovered 9x faster than weaker brands following the financial crash of 2008.’ 3. MATERIALS AND METHODS The aim is to find out how service firms perceive the impact of the Covid-19 crisis depending on their size and their classification within the service sector and how they approach marketing investments during a pandemic crisis. The fulfilment of the objective is based on the results of research focused on service enterprises in terms of the application of marketing processes in 2020-2021. Within the baseline set, there were 2,932,963 Czech business entities registered in 2020 (95.45% micro, 3.45% small, 0.91% medium and 0.19% large enterprises) (ČSÚ, 2022). Service enterprises were monitored separately according to their size in three basic categories – micro-enterprises (up to 10 employees), small enterprises (11-50 employees) and medium and large enterprises (more than 50 employees). The sample was selected by stratified proportional sampling in terms of service enterprise size, with 99 service-oriented businesses selected from the database of business entities (ČSÚ, 2022). Data collection was done through a questionnaire survey where the researcher personally contacted the business entity and the person in charge of marketing or the top manager/owner. Table no. 1 details the composition of the final research population. The representation of enterprises by size is approximately proportional in the research sample (n=90). The results of the chisquared test confirm (p0.001, Cramer's V = 0.743) a strong dependence of the existence of a responsible person or department for marketing on the size of the enterprise. This fact was expected and is further considered in the interpretation of the results. The sample size was tested by means of G*Power tests (for the group of F tests – ANOVA one way and with an effect size of 0.35 and α=5% the resulting test power is 0.84; for correlation the resulting test power for the two-tailed test is 0.827 and for the binomial test of one sample case it is 0.99). Cronbach’s alpha for the 4 observed responses is 0.702, and none of the items examined would increase the resulting coefficient if dropped from the set. The survey was focused on marketing management and the impact of government measures introduced in the Covid-19 crisis on service firms. To meet the objective of the paper, part of the collected data (5 responses) will be evaluated to address the topic of past turnover change and predictions for the future: Scientific Annals of Economics and Business, 2022, Volume 69, Issue 4, pp. 539-556 545 - How do you perceive the impact of the government’s Covid-19 measures on your business? Answer options: 1 strongly negative, 2 rather negative, 3 we have not felt any effect yet, 4 rather positive, 5 strongly positive. - What change in turnover has occurred between 2019-2020 due to the Covid-19 crisis? Answer options: 1 a significant decrease, 2 a slight decrease, 3 no change, 4 a slight increase, 5 a significant increase. - What turnover trends do you expect in the next 6 months? Answer options: 1 a significant decrease, 2 a slight decrease, 3 no change, 4 a slight increase, 5 a significant increase. - How do you intend to invest in marketing and promotional spending this year? Answer options: 1 we are not investing, 2 we are reducing investments, 3 no change (stagnant or we have not decided on a change yet), 4 we are increasing investments. Table no. 1 – Composition of the research sample sector of services size of the entity Total micro small medium and large Count % Count % Count % count % tertiary sector 25 51.6% 12 24.1% 12 24.4% 49 100% quaternary sector 4 12.9% 10 36.1% 14 51.1% 28 100% quinary sector 4 28.3% 7 52.9% 2 18.7% 13 100% total 33 36.7% 29 32.2% 28 31.1% 90 100% Source: authors Outcomes were achieved by processing the data using descriptive and inferential statistics. A comparison of the means of ordinal variables according to the selected factor (firm size) was made by an ANOVA test preceded by Levene’s test of homogeneity of variances in conjunction with a Hochberg or Games-Howell test (for non-homogeneous groups). The correlation of ordinal variables was tested using Pearson’s correlation coefficient, while Pearson’s chi-squared test was used to identify the association of categorical variables. Based on literary review, the following research questions can be posed: 1. Research question 1: What was the impact on service firms based on their classification (according to Foote and Hatt) within the service sector in the context of the pandemic crisis in the Czech Republic? Considering the overall impact of the crisis on service enterprises, it can be predicted that the greatest impact will be perceived by the tertiary sector (where accommodation, catering and hospitality, beauty services, etc. are classified), followed by the quaternary sector (e.g. transport services). The quinary sector (where we include travel agency services, administrative services, banking services, etc.) is expected to be the least affected. Consequently, a research hypothesis is set: 1.1. Research hypothesis 1 (RH1): Service firms’ subjective perception of the crisis depends on the company’s classification within the service sector, with the tertiary sector being the most negatively affected. 2. Research question 2: What role does firm size and service sector classification play in the Czech context in terms of the impact of the Covid-19 crisis? According to research, a higher perception of subjective influence in the case of micro and small service enterprises may be assumed, allowing us to determine the following research hypotheses: 546 Martina, J., Lenka, L., Eliška, K. 2.1. Research hypothesis 2 (RH2): Micro and small enterprises are significantly more affected by the crisis, regardless of their classification within the service sector. 2.2. Research hypothesis 3 (RH3): Larger service companies have more positive expectations for turnover in the next 6 months than smaller ones, with more than half of medium and large companies expecting only positive developments linked to the relaxing of government restrictions. 3. Research question 3: How does the management of marketing activities in service firms affect the ability to withstand the negative effects of the Covid-19 crisis? Research (B2B Monitor, 2012; Dyson, 2021; Kantar, 2021) suggests that companies that invested in marketing even during the crisis (did not reduce their investment) had higher turnover in subsequent periods. However, the question arises as to why some studies do not consider results in this context with regards to size or service sector classification. We therefore set the following research hypotheses: 3.1. Research hypothesis 4 (RH4): Despite the fact that service sectors were differently affected, a firm’s classification within the service sector does not affect marketing investment within each firm size category. This is based on the assumption that enterprises have the same interest in increasing the turnover that these investments can bring them. 3.2. Research hypothesis 5 (RH5): For medium and large enterprises, there is a relationship between investments in marketing and turnover predictions in the service sector. 4. RESULTS 4.1 Perceived Impacts of Government Restrictions on the Covid-19 Crisis Covid-19 restrictions imposed by the Czech government have mainly affected the service sector (Kulhánek, 2020; European Commission, 2021a). The first question was how service enterprises perceive the impact of government measures related to the Covid-19 crisis in relation to the size of the enterprise. Enterprises answered on a scale from 1 to 5, where 1 means strongly negative, 2 rather negative, 3 we have not felt any effect yet, 4 rather positive, and 5 strongly positive. As is demonstrated in Figure no. 1, one can anticipate a strong effect of firm size on the degree of impact of government measures on a service enterprise. The assumption is confirmed by the result of an ANOVA test at the 1% significance level (p0.001, the value of the ANOVA effect size by Eta squared is 0.171), while the subsequent Games-Howell test specifies that differences are identified between micro/small enterprises compared to medium and large enterprises (p=0.003). However, there is a reasonable suspicion that the findings may also be related to the subjects’ area of application in the service sector. An ANOVA test of means by sector classification provides information on a significant difference at the 1% significance level with an Eta size of 0.254. Upon closer examination (Figure no. 2), this difference applies to medium and large enterprises (at the 1% significance level, effect size 0.57), while according to the Games-Howell test, medium and large enterprises in the tertiary service sector (at the 5% significance level) are most affected by the restrictions. For this reason, an ANOVA test was subsequently conducted for each sector separately in terms of firm size. It was found that the difference in the perception of the impact by size is identified in the case of Scientific Annals of Economics and Business, 2022, Volume 69, Issue 4, pp. 539-556 547 the quaternary sector (p=0.011, Eta squared 0.303, a Hochberg test determined a difference between small enterprises and medium and large enterprises at p=0.010) and the quinary sector (with a high effect Eta squared of 0.885, at a significance level of 1% / p0.001). In the case of the quaternary sector, the comparison of micro and small enterprises (a Games-Howell test yielded p0.001) to medium and large enterprises shows a significant difference. Thus, it can be concluded that in the case of the tertiary service sector, the degree of perceived impact on these entities did not depend on the size of the enterprise. This can be explained by the fact that this sector was the most affected by the measures to prevent the spread of the coronavirus and the size of the enterprise thus did not represent a statistically significant effect (Marek, 2020; Žurovec, 2021; ČSÚ, 2022). Figure no. 2 presents the perception of the impact of government restrictions on service enterprises, with the worst situation in the tertiary sector regardless of the size of the enterprise. Figure no. 1 – Comparison of responses indicating the effect of government restrictions on service enterprises by size Source: own research Figure no. 2 – Comparison of responses indicating the effect of government restrictions on service enterprises by size and sector. Source: own research 554 Martina, J., Lenka, L., Eliška, K. %20Final%20conclusions%20on%20national%20solvency%20measures%20for%20SMEs%20 October%202021.pdf Foote, N. N., & Hatt, P. K. (1953). Social mobility and economic advancement. The American Economic Review, 43(2). 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