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ContentsFrom the Editor’s Desk

Guidelines for Authors

PERSPECTIVES

Economics, Politics, and Governance ....................................................................................... 1Bimal Jalan

Though India has had good economists, an operational governance structure, and a vibrant andfunctioning democracy, post-Independence economic development has not been very satisfac-tory. This paper discusses why this combination of economics, politics, and civil service did notlead to the expected results. The author feels that this may have been due to the fact that, in ourcountry, the political decision-making on economic issues is often driven by special interestsrather than the common interest of the general public. The problem, therefore, with the Indianeconomy is not that its market is less or more free but that its freedom is in the wrong domains.Improving our economic decision-making processes, removing the scope for political discre-tion, reducing unproductive expenditure, and improving the quality of governance at all levelscould rectify this. The author calls for legal reforms focusing on the interest of general public forthe administration to work with accountability. According to him, simplifying policies andprocedures should be an absolute priority.

RESEARCH

Environment-Strategy-Performance Linkages: ...................................................................... 9A Study of Indian Firms during Economic LiberalizationSougata Ray

Firms from emerging economies which transform themselves to adapt to the changing institu-tional environment during economic liberalization have generated a lot of interest amongmanagement scholars and practitioners alike. This paper presents an analysis of the corporate-strategic behaviour of firms in India. Based on existing theories, the author develops amultivariate model to explore the contingency linkages of environment, corporate strategy, andperformance. It is observed that environment played a significant role in shaping firm strategiesand performance during reforms. Environmental munificence and competitive intensity influ-enced firm strategies and performance. However, the effect of environment on firm perform-ance was moderated by firm strategies. Among the corporate strategies, scale expansion stra-tegy was found to be most effective as it yielded superior profit and market performance. Thestudy did not find support for the general belief that firms which become more focused and adoptdefensive strategic orientation perform better during deregulation.

Measuring Service Quality: SERVQUAL vs. SERVPERF Scales ...................................... 25Sanjay K Jain and Garima Gupta

Consensus still continues to elude the service quality literature as to which one of the two widelyadvocated service quality scales, viz., SERVQUAL and SERVPERF, is a better measure ofservice quality. The preoccupation of past studies has been with evaluation of psychometricsoundness of the service quality scales. No empirical work has been done to appraise thediagnostic ability of these scales in providing managerial insights for corrective actions in theevent of quality shortfalls. Based on a consumer survey of Indian fast food restaurants, this paperassesses the methodological as well as managerial soundness of the unweighted and weightedversions of both the scales and provides suggestions for their effective use by service firms infuture.

Identification of Top Performing Economies ....................................................................... 39Ravindra H Dholakia and Akhilesh S Kumar

Using seven indicators of economic performance of 187 countries, this paper identifies the top50 performers during the decades of 1981-90 and 1991-2000. Five of these indicators are the

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trend rates of growth over a decade in imports, FDI, capital formation, per capita income, andforex reserves. Average inflation rate and Human Development Index (HDI) are the remainingindicators. A comparison of the top performers of the 1980s and the 1990s suggests that highperformance in inflation and HDI are pre-conditions for a consistent high overall performanceover time. This paper also examines the inter-relationship among the indicators over time.

INTERFACES

Rekindling the Heart and the Soul of Management ........................................................... 55J Singh

It is an intriguing paradox. Over the same period that management emerged as a populardiscipline for formal study and acquired the status of a profession, there has been a steadydeterioration in the quality of life of professionals in modern organizations and a tarnishing of theimage of large firms in the society. Contrary to the cliché about people being assets, they areincreasingly being treated as liabilities. Their work life is full of stress and humiliation. Simulta-neously, an unending series of scandals involving financial frauds and other misdemeanourshave greatly damaged corporate reputation. Instead of being perceived as creators of wealth,they are more often reviled as crass exploiters pursuing selfish objectives at the expense of thecommon good. This article argues for a rekindling of the heart to make the work-life for employ-ees an enriching, rather than a demeaning, experience; and a rekindling of the soul to makeorganizations aim at more altruistic purposes than mere profits for a small band of shareholders.

Does Higher Price Signal Better Quality? .............................................................................. 67D P S Verma and Soma Sen Gupta

With differentiated products, consumers cannot have perfect information about the quality orcharacteristics of each product. They are often unable to make a clear quality comparisonamong brands. Moreover, they engage in relatively little information search even when thefinancial commitment involved is substantial. The purpose of this study is to examine the influ-ence of the price of the product on the buyers’ perception of quality of durable, semi-durable,and non-durable products. The study reveals that for a durable product like colour television,the buyers believe that the higher the price, the superior will be the quality of the product. Priceis again an important consideration while selecting a brand in case of a T-shirt, a semi-durableproduct. In case of a non-durable product like the toothpaste, the buyers pay less attention to theprice of the product. Brand loyalty, product features, and brand image take precedence overprice. Hence, price-quality relationship is found to be somewhat weaker for toothpaste incomparison to the other two products.

Governance of Higher Education Institutions ...................................................................... 79I M Pandey

This paper is based on the reflections of the author on issues of autonomy, accountability, andgovernance in higher education institutions (HEIs). Autonomy is the unrestrained freedom ofaction within the established norms of an institution. No institution can have effective institu-tional and academic autonomy without financial autonomy. Autonomy means accountability.All institutions, including those of higher education, are accountable to its stakeholders inparticular and society in general. The institutions should strive to strike a balance betweenstakeholders’ needs, societal demands, and institutional autonomy. Governance includes bothinternal as well as external factors that affect the functioning of the decision-makers and makean impact on their performance. The author argues that the issues of autonomy and accountabil-ity are, in fact, related to the governance of HEIs.

COLLOQUIUM

Social Context of Management Education:Institution Building Experiences at IIMs .............................................................................. 85I G Patel, Samuel Paul, Pradip N Khandwalla, Amitava Bose, K R S Murthy, N Vittal,Rishikesha T Krishnan, and Arun Kumar JainAnil K Gupta (Coordinator)

This panel discussion addresses the broader issue of institution building in the context of IIMs’contributions to its stakeholders and the society in general and focuses on the challenges ahead.

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The issues addressed here are: i) What are the processes through which IIMs have defined theirgoals and directions over the years? ii) Is this impression true that IIMs cater primarily to privatelarge corporate sector? iii) What initiatives have been introduced in the recent years to gener-ate greater social, ethical, and professional accountability among the students and executivestrained at IIMs? iv) Is it right to believe that IIMs are elitist because of the life style of faculty,nature of working culture, and kind of outputs that they produce? v) Do IIMs have any role toplay in facilitating, empowering or serving the small-scale industries, unorganized/under-man-aged sectors, and other civil society organizations? vi) What role do IIMs see for themselves inmaking India a developed nation?

MANAGEMENT CASE

Sarvodaya Samiti ...................................................................................................................... 111Debasis Pradhan

This case presents the situation faced by Pradip Mohanty, Coordinator of Sarvodaya Samiti, anNGO, which is involved in the production, processing, and marketing of honey. He is con-cerned about the decision the Samiti should take on joining the proposed consortium as this hasimplications for its stakeholders. He is also in a dilemma whether the Samiti should retain thebrand of honey called ‘Sarvodaya Samiti’ and market the same independently. The casepresents several policy/regulatory, strategic, and marketing issues and aims at sensitizing thediscussants to the issues in rural marketing.

DIAGNOSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119

The diagnoses featured in this issue pertain to the Management Case titled ABC Limited:Agriculture and Domestic Pumps Division by Girish Kumar Agrawal and J Rajasekar whichwas published in the October-December 2003 issue of Vikalpa.

Case Analysis IMark Neal and Richard TanseyCase Analysis IINarendar V RaoCase Analysis IIIS M MehtaCase Analysis IVUpinder DharCase Analysis VSalma Ahmed and Ashfaque KhanCase Analysis VIAbhijeet, Ankur, and Satyaprakash

BOOK REVIEWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133An Encounter with Higher Education: My Years with LSEDwijendra TripathiAn Introduction to Data Envelopment Analysis: A Tool for Performance MeasurementBharat Bhushan VermaManagerial Economics: Theory and ApplicationsNikhil Kashyab Balaraman and Mukundan Devarajan

ABSTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141Mitali Sarkar

BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157Service Quality – IIK Manjunatha

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Should firms maximize profits ? Finance theory and financial ana-

lysts generally prescribe that firms should aim at profit or (more

appropriately) wealth maximization for owners (shareholders in

the case of companies). For the listed companies, the wealth of sharehold-

ers is reflected in the market value of their shareholdings. Is there a justi-

fication for profit or wealth maximization?

In a market economy, price system is the most powerful instrument

of signalling what goods and services the society wants. The demand and

supply conditions and the competitive forces determine the prices and

help allocating economic resources to various productive activities.

Would profit maximization and the price system in a free market

economy serve the interests of the society? Adam Smith gave the answer

many years ago: “(The businessman), by directing... industry in such a

manner as its produce may be of greater value... intends only his own gain,

and he is in this, as in many other cases, led by an invisible hand to

promote an end which was not part of his intention... pursuing his own

interest he frequently promotes that of society more effectually than he

really intends to promote it.” Following Smith’s logic, it is argued that

under the conditions of free competition, businessmen pursuing the ob-

jective of profit maximization also serve the interest of the society. It is also

assumed that when individual firms pursue the interest of maximizing

profits, the society’s resources are efficiently allocated and utilized.

Profit maximization, as a business objective, developed in the early

19th century when the characteristic features of the business structure

were self-financing, private property, and single entrepreneurship. The

focus of the entrepreneur was on enhancing his or her individual wealth

and personal power which the profit maximization objective could easily

satisfy. The modern businesses are characterized by limited liability, a

divorce between management and ownership, and widely distributed

shareholdings. Managers, who are the agents of owners, command the

decision-taking authority. Managers, being subservient to owners, ought

to act in the interest of their principals — the shareholders. In practice,

managers do not necessarily act in the best interest of shareholders and

instead pursue their own personal goals (in the form of maximizing their

salaries and perks, etc.) at the cost of shareholders, or may play safe and

create only satisfactory wealth for shareholders. They may avoid taking

From the Editor’s Desk

v

risky investment and financing decisions that may otherwise be needed to

maximize the shareholders’ wealth. Such ‘satisficing’ behaviour of man-

agers will frustrate the objective of profit or wealth maximization. Further,

a company is a complex organization consisting of multiple stakeholders

such as employees, debt-holders, consumers, suppliers, government, and

society. Managers in practice may, thus, perceive their role as reconciling

conflicting objectives of stakeholders which could mean compromising

with the objective of shareholders’ wealth maximization.

Many management thinkers like Robert Anthony consider profit maxi-

mization as unrealistic, inappropriate, and immoral. It is also feared that

profit maximization behaviour in a market economy may tend to produce

goods and services that are wasteful and unnecessary from the larger

society’s point of view. Also, it might lead to inequality of income and

wealth. It is for these reasons that some people make a case for the

government’s intervention in business. The price system and, therefore,

the profit maximization principle may also not work due to imperfections

in practice. Oligopolies and monopolies are common phenomena of mo-

dern economies. Firms producing the same goods and services differ

substantially in terms of technology, costs, and capital. In view of such

conditions, it is difficult to have a truly competitive price system, and thus,

it is doubtful if the profit-maximizing behaviour will lead to the optimum

social welfare.

In practice, missions or basic purposes, which include social respon-

sibility, drive the business goals or objectives. They direct the firm’s ac-

tions. The firm designs its strategy around such basic objectives and,

accordingly, defines its markets, products, and technology. The first step

in making a decision is to see that it is consistent with the firm’s strategy

and passes through the policy screening. The wealth (or profit) maximiza-

tion is the second-level criterion ensuring that the decision meets the

minimum standard of economic performance. A number of management

thinkers feel that the company management is not only an agent of owners

but also a trustee of the society. It is the responsibility of the management

to seriously discharge its responsibility to the society and become a good

corporate citizen. Given the importance of thinking beyond profit or wealth

maximization, we would like the industry leaders and academicians to

debate this issue to get multiple perspectives.

Indian Institute of Management I M PandeyAhmedabad Editor

Vikalpa: The Journal for Decision Makers is a peer-reviewed journal. Vikalpa welcomesoriginal papers from both academicians and practitioners on management, business, andorganization issues. Papers, based on theoretical or empirical research or experience, shouldillustrate the practical applicability and/or policy implications of work described.

Manuscript The author should send three copies of the manuscript. The text should be double-spaced onA4 size paper with one-inch margins all around. The author’s name should not appearanywhere on the body of the manuscript to facilitate the blind review process. The authorshould also send a soft copy of the manuscript in MS Word or e-mail the same to VikalpaOffice at [email protected]

The manuscript should accompany the following on separate sheets: (1) An abstract of80-100 words; (2) An executive summary of about 500 words along with five key words, and(3) A brief biographical sketch (60-80 words) of the author describing current designationand affiliation, specialization, number of books and articles in refereed journals, and mem-bership on editorial boards and companies, etc.

Vikalpa has the following features:Perspectives presents emerging issues and ideas that call for action or rethinking bymanagers, administrators, and policy makers in organizations. Recommended lengthof the article: 12,000 words.Research includes research articles that focus on the analysis and resolution of mana-gerial and academic issues based on analytical and empirical or case research. Recom-mended length of the article: 20,000 words.Interfaces presents articles focusing on managerial applications of managementpractices, theories, and concepts. Recommended length of the article: 10,000 words.Colloquium includes debate on a contemporary topic. Both academicians and prac-titioners discuss the topic.Management Case describes a real-life situation faced, a decision or action taken byan individual manager or by an organization at the strategic, functional or operationallevels.Diagnoses presents analyses of the management case by academicians and practition-ers. The case problems are examined, their causes are analysed, and issues of rel-evance are discussed.Book Reviews covers reviews of current books on management.Abstracts includes summaries of significant articles of management interest pub-lished in Indian and international journals particularly those focusing on emergingeconomies. (Authors desirous of having their publications considered for inclusionin this feature may please send reprints of their articles to Vikalpa Editorial Office).

All tables, charts, and graphs should be given on separate sheets with titles. Wherevernecessary, the source should be indicated at the bottom. Number and complexity of suchexhibits should be as low as possible. Endnotes, italics, and quotation marks should be keptto the minimum.

References should be complete in all respects and arranged in alphabetical order.(a) In the text, the references should appear as follows: Dayal (2002) has shown… or

Recent studies (Ramnarayan, 2002; Murthy, 2001) indicate...(b) Journal references should be listed as follows: Khandwalla, P N (2001). “Creative

Restructuring,” Vikalpa, 26(4), 3-18.(c) Books should be referred to as follows: Sugandhi, R K (2002). Business to Business

Marketing, New Delhi: New Age International.Copyright Wherever copyrighted material is used, the authors should be accurate in reproduction and

obtain permission from copyright holders, if necessary. Articles published in Vikalpa shouldnot be reproduced or reprinted in any form, either in full or in part, without prior writtenpermission from the Editor.

Review Process Two or more referees review all contributions by following the ‘double blind’ system. Thereview process usually takes about three months to one year. Vikalpa reserves the right ofmaking editorial amendments in the final draft of the manuscript to suit the journal’srequirements.

Electronic Copy The author must send an electronic version of the manuscript in MS Word once the paperis accepted for publication.

Proofs Correspondence and proofs for correction will be sent to the first author unless otherwiseindicated.

Reprints The author will receive 20 reprints free of charge.

Guidelines for Authors

Economics, Politics, andGovernance*

Bimal Jalan

This paper discusses the dynamics of economics, politics, and governance and itsimplications for the Indian economy in general and the governance issues of educa-tional institutions in particular.

Independent India was founded on a democratic framework and an operationalgovernance structure. The vision was to attain the specific economic and social goals thatthe country had set for itself. What is puzzling is the fact that despite the idealcombination of economics, politics, and civil service, the expected results were notachieved. What might have happened is the development of a substantial gap betweenthe economically sound and the politically feasible policies, on the one hand, and thedisharmony between the different levels of the administrative machinery, on the other.

The author agrees with the renowned economist, Hanson, who found an answer tothe problem not in the theory of planning or the people making the plans but with theunrealistic assumptions about the likely responses of the people. For instance, it wasassumed that the people elected to power, the citizens of the country, and the labour andmanagement of the public enterprises would all work selflessly to achieve the economicobjectives of the country. In reality, however, regional and sectional interests dominatedthe political and economic decisions making the Indian economy self-centric, narrow,and wasteful. The channelization of economic benefits to the special interest groups ledto the lop-sided distribution of wealth. To add to this was the political corruption whichwas accepted as an unavoidable feature of the electoral process. Another blow camefrom the public sector enterprises which, instead of generating public savings, led to theaccumulation of internal public debt and lower investment. What is unfortunate is thatall this continued for a long time despite the realization that they were going against thebasic assumptions of the post-Independence policy framework.

Taking the issue of fee determination in the case of IIMs, the author feels that it is againa complex interplay of the three elements — economics, politics, and governance. Theeconomic issue from the public policy point of view is: why the larger subsidy frompublic funds and for whose benefit? While it is a popular political move to grantsubsidies, it is a matter of conscious political choice as to which target group should getthe benefit.

Towards making India’s vision a reality, the author suggests the adoption of pragmaticand flexible approaches with the contemporary realities in mind. The steps wouldinclude:

simplifying administrative proceduresmanaging fiscal deficit through fiscal policy changesensuring accountability through legal reformsavoiding bureaucratic interferenceeliminating administrative discretion.

While a lot needs to be done in all these areas, the author is confident that withthe economic potential of the country and the innate ability of the people of thiscountry, it would definitely be possible to realize the full potential within the nexttwo decades.

KEY WORDS

Governance

Development Strategy

Economic Policy

Post-Independence Planning

Bureaucratic Interference

Executive Summary

*This paper is based on the Convocation Address by Bimal Jalan on 3rd April, 2004 at Indian Instituteof Management, Ahmedabad.

VIKALPA • VOLUME 29 • NO 2 • APRIL - JUNE 2004 1

presents emerging issues and ideas that callfor action or rethinking by managers,administrators, and policy makers inorganizations

P E R S P E C T I V E S

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Ever since Independence, India has been fortu-nate in having a string of top economists toadvise the government in the process of planning

and economic policy formulation — among them arewell known names like Mahalanobis, Pitambar Pant,Lakdawala, Sukhamoy Chakravarty, I G Patel, Raj Krish-na, Manmohan Singh, and several others. On the poli-tical side, we can rightfully take pride in our vibrant andfunctioning democracy. India was ruled by a single partywith repeated mandates from the people for nearly 50years after Independence with some brief interruptions.During this period, there were a number of short-livedgovernments with varying mandates which neverthe-less did their best to serve the country under difficultcircumstances. Now, we have a multi-party coalitiongovernment with vast differences in ideology and po-litical beliefs among its constituents which has been inpower for six years. In respect of governance, the ad-ministrative structure of India, with the so-called ‘steel-frame’ of a permanent bureaucracy, has been the envyof the post-colonial developing world. Even after allow-ing for a considerable rusting and weakening of theframe, the governance structure at the centre, states,districts, and panchayats still remains largely intact.

Thus, we have had a fine combination of good eco-nomists, an operational governance structure, and afunctioning democracy — all working together. Yet, theresults on the ground in terms of social or economicdevelopment over the long period since Independence— leaving aside the most recent period — were ratherdisappointing. For the first 50 years after Independence,India lurched from one crisis to another. The countryalso had low growth, low literacy, and an abundanceof poverty. The vision outlined in 1956, at the beginningof the Second Plan, of a poverty-free India with fullemployment in 25 years, i.e., by 1981, still eludes us.

The issue here is why this combination of econo-mics, politics, and civil service did not lead to the kindof results that the people of our country could havelegitimately expected. This is what I propose to discusshere.

WHAT WENT WRONG? A DIAGNOSIS

My feeling is that, while on the surface, the three ele-ments were working together, in a more fundamentalsense, the reality was vastly different. Despite appear-ances to the contrary, there was, in fact, a substantialgap between what was considered to be economically

sound and what was found to be politically feasible.Economic strategy seldom reflected our political or socialrealities. Similarly, the administrative implications ofthe policies, launched with great conviction, were sel-dom considered and, even when considered, did notaffect the actual evolution of economic policies or pro-grammes on the ground.

Post-Independence Strategization: A Recap

To illustrate the point, let me begin by referring to theMahalanobis-Nehru development strategy which dom-inated our post-Independence economic policies foralmost 40 years. Several of these policies have under-gone a drastic change after 1991. However, it is strikingthat despite many problems and tribulations, the basicframework of economic policies introduced soon afterIndependence remained intact for as long as four de-cades and more.

The basic elements of the post-Independence eco-nomic strategy are too well known to need repetition.During the colonial period, the Indian nationalist move-ment had given a very high priority to making Indiaeconomically independent — in addition to politicalindependence — through aggressive import substitu-tion and reduction in India’s dependence on foreigntrade and foreign investment. Also, based on the Sovietexperience, it was believed that economic independenceand high domestic savings could be achieved only if the‘commanding heights’ of the economy were in the handsof the public sector. It was assumed that if the meansof production were owned by the state, all the valueadded in production will flow to the people. Further,if consumption was discouraged, public savings wouldautomatically increase. These savings could then be usedfor further investment and growth and India could sooncatch up with the developed world.

This was the most heart-warming economic vision,supported by the leading economists of that time andwidely accepted academic models of savings, invest-ment, and growth. Unfortunately, it did not pay ade-quate attention to the political and administrative im-plications of the favoured strategy. The political as-sumption was that the representatives of the people,freely elected to power, will selflessly promote the greatestgood of the greatest number. In public enterprises, inthe absence of private capitalists, labour and manage-ment were expected to work together in harmony with-out political interference in line with national priorities

2 ECONOMICS, POLITICS, AND GOVERNANCE

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as laid down by the planners. Another important as-sumption was that India was one, and as was the caseduring the struggle for political independence, all Indiancitizens will work selflessly without sectional intereststo achieve the country’s economic objectives.

The Ground Realities

The reality has proved to be vastly different. The po-litical decision-making on economic issues in our coun-try, as indeed in most democracies, is often driven byspecial interests rather than the common interests of thegeneral public. These special interests are also morediverse in India than in other more developed and matureeconomies. Thus, there are special regional interests, notonly among states, but also within states, depending onthe electoral strength of the party in power in differentparts of the state. Economic policy making at the politicallevel is further affected by occupational divide (e.g. farmvs. non-farm), the size of enterprise (e.g. large vs. small),caste, religion, political affiliations of trade unions orasset class of power-wielders, and a host of other divi-sive factors. As a result, most of the economic benefitsof specific government decisions are likely to flow to aspecial interest group or, as in Mancur Olson’s famousphrase, to ‘distributional coalitions.’ These coalitions arealways more interested in influencing the distributionof wealth and income in their favour, rather than in thegeneration of additional output which has to be sharedwith the rest of the society.

Also, the delivery of government benefits to specialgroups has given rise to a whole process of bargainingand conflict resolution among various interests. As aresult, a large number of middlemen have emerged acrossthe political spectrum. Further, as elections have becomemore expensive and more frequent with uncertain timeperiod during which funds can be collected in differentstates, there is a greater tolerance of political corruptionas an unavoidable feature of the electoral process.

Thus, contrary to what was envisaged by the found-ing fathers of our republic, and contrary to the visionof our planners, the political-economic balance, in actualpractice, has turned out to be self-centric, narrow, andwasteful. There are two interesting questions:• How did the stranglehold of special interests last

so long?• Where were the majority of the people who did not

gain sufficiently from the economic bargainingprocess?

The answers are not difficult to find. The simple factis that the so-called majority is fractured into a largenumber of sub-groups of individuals who are dividedamong themselves by several factors (such as caste,religion, location or occupation), while special interestsare united in protecting their share of the economicoutput. This is really why the so-called ‘haves’ are somuch more powerful than the ‘have-nots’ in our society.It is, for example, the trade union of employed persons(or the ‘haves’) which is likely to go on strike when itseconomic interests are threatened rather than the vastmajority of the unemployed (or the ‘have-nots’) acrossthe country.

What I have said so far about the power of specialinterests in determining political economy outcomes isnot an argument in favour of unfettered free markets orthe need for an economy without government regula-tions and laws. The issue here is not ‘markets vs. gov-ernment.’ It is that the political priorities are distinctfrom priorities laid down by the economists and experts.Thus, the problem with the Indian economy is not thatits market is less or more free but that its freedom is inthe wrong domains. It is common knowledge that, inmost parts of India, government permissions, regulatoryapprovals or licences can be purchased at a price. Inthese domains, the problem is that of excessive marketi-zation. On the other hand, in other areas where themarket ought to be more free (for example, the labourmarket or international trade), India is strapped inbureaucratic red tape.

Two more caveats are necessary in considering thepower of dominant coalitions in determining economicpolicy outcomes in our country. The point is not thatthese coalitions always emerge as winners in determin-ing the direction of public policy or that all politicianspander only to special interests. There are honourableexceptions and there certainly are leaders who giveprimacy to the general public interests. But, they arelikely to be exceptions rather than the rule. They are alsolikely to face considerable hurdles in successfully pur-suing economic policies that adversely affect the specialinterests of the organized groups. Similarly, there aresituations (such as war, a natural catastrophe or reli-gious conflict) when a unity of purpose emerges amongall sections of the people to promote the common good.

Another important assumption in the choice of post-Independence development strategy was that the publicsector enterprises would generate public savings which


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could be used for higher levels of investment. However,instead of generating savings, the public sector soonbecame a drain on public savings. Despite commandingthe ‘commanding heights,’ public sector savings are nownegative by as much as four per cent of GDP. Thesenegative savings have led to fast accumulation of inter-nal public debt and lower investment than would havebeen the case otherwise. In the annals of developmenthistory, it is hard to find another example of a perfectlysensible idea — the need for higher public investmentfor greater public good — leading to exactly the oppositeresult, i.e., higher public consumption with diminishingreturns for the public.

I now focus on the third aspect, namely, the gov-ernance structure for the delivery of public services tothe people. As mentioned above, eminent economistshave advised us, from time to time, on what shouldideally be the country’s development priorities andelected political leaders have taken their own policydecisions on various economic issues according to theirpolitical perceptions. These policy and other decisions,once taken, have to be implemented through the multi-level administrative structure at the centre, states, dis-tricts, and villages. The basic premise of India’s plansas well as the early development literature was that therequired administrative response would be forthcomingin abundant measure. The system of administration atdifferent levels was expected to work in complete har-mony delivering savings and investments as postulatedand implementing programmes as scheduled.

It must be said to the credit of our planners that theSecond Plan did ask itself the question whether the civilservice would prove equal to the tasks assigned to it bythe Plan. The Third Plan too explicitly recognized thatthe administrative machinery had become strained andthe available personnel to implement the plan were notadequate in quality and number. The subsequent Plans,particularly the Seventh Plan, sounded a note of desper-ation about widespread administrative inefficiencies andbottlenecks that were slowing down the economy.However, this desperation was not reflected in actualplanning. We went on adding newer, larger, and morecomprehensive schemes to tackle national problems invirtually every walk of life calling for greater and greateradministrative involvement.

In fact, as perceived needs and requirements of theeconomy became greater and resources shrank, theadministrative process became even more complex,

requiring more people to perform the same task. As aresult, there are more people employed by the govern-ment in what statisticians euphemistically call ‘commu-nity and personal services’ than in the public sectormanufacturing enterprises or the private organizedsector. To bring about this sort of result, some kind ofan ‘invisible’ dominant coalition has certainly been atwork. One has to recall the functioning of the exchangecontrol system in the past to appreciate how far removedpolicy planning was from the administrative realities.Or, consider the urban ceiling laws which were sup-posed to free excess or surplus land for public housingand other uses. Even after 30 years, hardly anything hasbeen acquired and these laws, instead of increasing thesupply of affordable housing, have simply frozen theavailability.

It is not that the problems were not understood orthat people who ran the system were ill-motivated. Itis an unfortunate fact of administrative and political lifethat systems and programmes, once introduced, acquirea momentum of their own because of the benefits andpatronage that they provide to some sections of thepeople, including those who administer the programmes.When implementation problems occur, inefficiencies areidentified or misuses are detected, the response normal-ly is to add one more step or one more level to theadministrative chain.

More than 40 years ago, a well-known economist,A H Hanson, a sympathetic observer of the Indian scene,felt compelled to ask this question: “Men are able, theorganization is adequate, the procedures are intelligent-ly devised. Why then have the Plans since 1956 sopersistently run into crisis?” This question was askedin 1963. Many of us are probably still asking the samequestion. Hanson’s answer to his own question is alsorelevant. In his view, the real problem was not with thetheory of planning or the people who were making theplans but with the unrealistic assumptions about theway people and societies were likely to respond. Toomany of the government’s assumptions about economicbehaviour were simply unrealistic and differed from theway in which people acted in their own or in theirgroups’ interests.

Drawing a Parallel: The IIM Fee Issue

The IIM fee issue also vividly illustrates the interplayof these three elements — economics, politics, and gov-ernance. From a purely economic point of view, the


4

critical issue is not the fees that the IIM charges but theentry policy and the cost per student. If the entry iscompetitive and a particular level of cost, after duescrutiny, is found to be justified, then any teachinginstitution — through pricing, endowment, subsidy ora combination of these — has to recover the cost. Other-wise, it will either go out of business or the quality ofits output will deteriorate. Now, let us assume that thegovernment, in its wisdom, decides to further subsidizeand reduce the fees that a particular institution chargesto cover its costs. Then the economic issue from thepublic policy point of view is: why this larger subsidyfrom public funds and for whose benefit?

This is where political considerations come in. It isalways a popular move to say that no one, irrespectiveof income, should have to pay for the use of water,electricity, food, and education including higher educa-tion. However, no government in the world has theability to subsidize everyone and everything. Therefore,the political leadership has to choose among variouskinds of subsidies and target groups. If the governmentdecides to subsidize specialized technical or manage-ment education by more than what is necessary, fromthe public interest point of view, it is legitimate for thepublic to ask: why should the government increasesubsidy even for those who can pay? In the parlanceof public choice theory, an across-the-board subsidy ofthis kind, irrespective of the need for it, leads to ‘perverseequity.’ Instead of making government expenditure moreequitable for the society as a whole, an across-the-boardsubsidy of this type makes the system more inequitableand less progressive.

The economics and politics of the decision are linkedalso to the governance aspects. Who should govern theIIMs — their own managements or the ruling govern-ment? How this complex interplay of economics, poli-tics, and governance will affect the IIMs is not yet clear.However, in the light of our past experiences in so manyother spheres of our national life, I would be surprisedif the outcome of the present controversy turned out tobe beneficial, either for students or for the people.Personally, I feel sad at the confrontation among differ-ent constituents particularly at the level to which thisdebate has deteriorated because of excessive interven-tion. The question is not only whether governmentalintervention on an issue of this type is right or wrong.But, the whole tone and tenor of the official position isa matter of concern for the future health of our polity.

PRAGMATIC PRESCRIPTIONS

Looking at our development experiences, it is estab-lished — beyond reasonable doubt — that our pasteconomic strategy seldom reflected political realities.Similarly, governance or administrative implications ofdevelopment or public expenditure policies were sel-dom taken into account in framing those policies. Thisis about the past. What about the present and the future?Isn’t India shining? It has one of the highest rates ofgrowth, highest foreign exchange reserves, relativelymoderate inflation, and commanding heights in IT andsome other sectors. The process of liberalization andeconomic reforms, launched in 1991, and pursued ac-tively in recent years, has yielded positive results, re-moved some of the structural rigidities, and createdpotential for higher growth. At the same time, it will bea mistake to be complacent about our recent successes.These gains can disappear very quickly unless a strongerprogramme is launched in the next few years to furtherimprove our economic decision-making processes, re-move scope for political discretion, reduce unproductiveexpenditure, and improve the quality of governance atall levels. The system must be made to work in theinterests of the public in general, rather than the few,including those who are supposed to serve the public,namely, government servants and elected representa-tives.

To achieve the above objective, we need to moveon a number of fronts. In the area of economic policy,we need to avoid ‘ideological certainty.’ As pointed outby Hirschman* in a highly perceptive essay on theexperiences of Latin American countries, the blame foreconomic disasters in several of these countries lay notin the use of policies considered by economic theoriststo be wrong but in the blind pursuit of policies consi-dered by theorists to be right — of the structuralistvariety in the 1960s and of the neo-classical persuasionin the 1970s and 1980s.Development economists tendedto take ideological positions (both left and right) on suchmatters as planning, market mechanism, foreign invest-ment, inflation, rule of the state, and so on. Although,in India, in view of our democratic tradition, publicpolicy makers may not have gone to the same extremesas in Latin America, there is little doubt that, as men-tioned above, for a very long time after Independence,


* Hirschman, A O (1987). “The Political Economy of Latin AmericanDevelopment: Seven Exercises in Retrospection,” Latin American ResearchReview, 22(3).

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there was a strong tendency among our economic think-ers to ignore political and administrative realities. Oflate, fortunately, there has been a shift from ideologicalcertainty to a more questioning and pragmatic attitude.This has yielded favourable results, for example, in India’sexternal sector management. For the first time, after 50years of Independence, the balance of payments con-straint or fear of periodic crises is no longer a factor indetermining our economic policy. While framing theeconomic policies in other areas also, we must adoptsimilar pragmatic and flexible approaches which takeinto account contemporary realities.

Simplifying Administrative Procedures

Final decisions on policy matters must continue to bemade by political authorities who are accountable to thepeople through the Parliament and legislatures. How-ever, there should be a clear distinction between deci-sions on policy and their implementation. Once policydecisions are made, they have to be left to professionaladministrators without political interference but withdue accountability. To implement such a division ofwork responsibility, it is essential to avoid governmentalmicro-management and remove procedural bottlenecksand case-by-case considerations of applications by in-dividuals and organizations. Simplifying policies andprocedures is an absolute priority. The scope for politicalor administrative discretion must be eliminated for allbut for the very few large cases which have economy-wide implications. The detailed case-by-case approachto policy implementation is an important hurdle in thecountry’s economic life. Although there has been someprogress towards simplifying procedures in the lastdecade, it is not enough. Similarly, in the interest oftransparency, there should be full disclosure of financialdecisions by multifarious agencies on a daily basis ratherthan annually in aggregate form. There is no reason why,except in matters of national security, all decisions madeat the ministerial or secretarial level cannot be put upon a notice board in the concerned ministry on a regularbasis.

Managing Fiscal Deficit throughFiscal Policy Changes

It is ironical that higher deficits over time have notresulted in increasing the government’s ability to spendwhere higher expenditure is required, for example, inthe maintenance or expansion of public services. Most

of the government expenditure is now committed toservicing past debt or meeting salary and other pastcommitments. We now have a high fiscal deficit withoutfiscal empowerment. A wholesale change in the govern-ment’s fiscal policy and making it more responsive tochanging requirements are now essential. This is a mostdifficult task in view of the dead weight of the past butit can no longer be avoided.

Ensuring Accountability through Legal Reforms

For the administration to work with accountability, weurgently need legal reforms to focus sharply on theinterests of the public and not only those of the publicservant in the functioning of the governmental and publicdelivery systems. Clear mechanisms for establishingaccountability for performance are essential, and all formsof special protection for persons working in governmentor public sector agencies (except for the armed forcesor agencies engaged in the maintenance of law andorder) deserve to be eliminated.

Avoiding Bureaucratic Interference

Many of our public institutions — including academicinstitutions and non-governmental organizations (NGOs)— have to necessarily depend on the government forannual grants to meet a part of their essential expend-iture. As they use public funds, their accountability forperformance is essential. However, as the present un-savoury controversy affecting the IIMs has vividly il-lustrated, it has to be ensured that there is arm’s lengthrelationship between government and autonomouspublic institutions of national importance. Damageinflicted by unwarranted political or bureaucratic inter-ference can cause permanent damage to an institutionwithin a very short period and has to be avoided inpublic interest. The best way of enforcing accountabilityfor performance is to set up appropriate annual auditmechanisms by outside professionals and periodic re-views of academic performance, say, every five years,by a review committee of experts or peer groups.

Eliminating Administrative Discretion

In taxation and other financial areas, administrativediscretion or reliance on inspectors and searches has tobe eliminated except under well-defined circumstancesinvolving high crimes such as treason, terrorism, andsmuggling or money laundering on a scale which affectsnational security or economic stability. There is clear and


6

irrefutable evidence from our past experience that ad-ministrative discretion has not led to an improvementin fiscal receipts or better compliance with laws. On theother hand, such powers and the impunity with whichthey can be used have become serious sources of cor-ruption in society.

LOOKING FORWARD

There is a great deal to be done in all these areas.Notwithstanding our past performance, I am sanguine

about India’s economic potential and our ability toachieve high growth with financial stability. The reasonfor this confidence is that, despite problems in govern-ance, the innate ability of our people is immense andhas been demonstrated beyond reasonable doubt. Theopen, participative, and democratic system ensures thata change, where necessary, can be delayed, but it cannotbe avoided altogether. If we act now, and if we are ableto realize our full potential in the next 20 years, India’spoverty would become a distant memory.


If ... I can by any lucky chance, in these days of evil,rub out one wrinkle from the brow of careor beguile the heavy heart of one moment of sorrow,

if I can now and then penetrate through the gatheringfilm of misanthropy,

prompt a benevolent view of human nature,

and make my reader more in good humor with his fellowbeings and himself,

surely, surely, I shall not then have written entirely invain.

Washington Irving

Bimal Jalan, an Economist by profession, was educated in thePresidency College, Calcutta, Cambridge, and Oxford universities.Currently a Rajya Sabha Member, he was the Governor of ReserveBank of India from November 1997 to September 2003. He wasthe Chief Economic Adviser to the Union Government in the1980s; Banking Secretary between 1985 and 1989; FinanceSecretary, Ministry of Finance, Government of India, and Chairmanof the Economic Advisory Council to the Prime Minister betweenJanuary 1991 and September 1992. He has served as the Executive

Director representing India on the Boards of the InternationalMonetary Fund and the World Bank. At the time of his appointmentas the Governor of the Reserve Bank, he was the Member-Secretary,Planning Commission in New Delhi. He has authored India’sEconomic Crisis: The Way Ahead and edited The Indian Economy:Problems and Prospects. His latest book India’s Economic Policy:Preparing for the Twenty-first Century examines some of the criticalpolicy choices for India at the present juncture.e-mail: [email protected]

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Environment-Strategy-PerformanceLinkages: A Study of Indian Firmsduring Economic Liberalization

Sougata Ray

How firms from emerging economies transform themselves to adapt to the changinginstitutional environment during economic liberalization has generated a lot of interestamong management scholars and practitioners alike. This paper presents an analysis ofthe corporate strategic behaviour of firms in India, a giant emerging economy undergoingeconomic reforms over the last one decade. Based on existing theories, a multivariatemodel has been developed to explore the contingency linkages of environment,corporate strategy, and performance. The model has been empirically verified in LISRELframework using primary and secondary data for 111 firms mainly belonging to the listof top 500 firms in India. The major observations emerging from the analysis are asfollows:

Environment played a significant role in shaping firm strategies and performanceduring reforms.Environmental munificence and competitive intensity influenced firm strategiesand performance as hypothesized.Availability of high growth and profit opportunities across industries, easieraccess to resources in the international market, improvement in the supplysituation, etc., had the greatest influence on the strategic behaviour of firms in theliberalized era.Firms facing intense competition and demanding customers reorganized thebusiness portfolio by divesting some businesses and moving into more promisingunrelated businesses, cut down the organization flab through downsizing, andpromoted greater sharing of resources within.Firms having better environment-strategy ‘fit’ achieved superior performance.The effect of environment on firm performance was moderated by firm strategies.This conforms to the general principle of contingency theory derived based onthe developed economy institutional framework.Among the corporate strategies, scale expansion strategy was found to be themost effective, as it yielded superior profit and market performance. Scaleexpansion benefited firms not only in gaining advantage due to economy of scalebut also in using more modern technology and equipments.The strategy of product-market diversification did not have any significant effecton profitability. However, it resulted in poor market performance as observedfrom the significant negative influence of business scope on market return. Thisindicates that investors were generally wary of diversification moves by firms.Increased diversity in operation did not have any significant negative impact onperformance. Therefore, unrelated diversification per se did not harm firms, atleast, in the short run.

The study does not support the earlier observations by researchers that firms withfocused strategy and adopting defensive strategic orientation perform better duringderegulation of industries in both developed and emerging economies. In fact, it canbe observed that, during economic liberalization in India, firms that recognized thefavourable and unfavourable changes in the environment early and increased theirscale of business and diversified into deregulated industries selectively but aggressivelyachieved superior performance.

KEY WORDS

Economic Liberalization

Corporate Strategy

Contingency Theory

Strategic Adaptation

Executive Summary

R E S E A R C Hincludes research articles that focus on theanalysis and resolution of managerial andacademic issues based on analytical andempirical or case research


9

One of the prime concerns for strategic manage-ment as a field of inquiry is the phenomenon

of strategic adaptation of firms, i.e., how firmsachieve a proper ‘fit’ with the environment throughchanges in strategy (Summer et al., 1990; Zajac, Kraatzand Bresser, 2000). During the past two and a half de-cades, a number of countries like India has been movingfrom an insular command and plan-oriented economytowards increasingly liberalized, globalized, and mar-ket-oriented economy. With the legacy of a socialisticand planning-oriented institutional framework, the eco-nomic transformation in some of these countries presentsa unique business environment for firms that is distinctfrom what a typical Western firm would encounter andmight need unique adaptive responses (Luo and Peng,1999; Peng and Hearth, 1996). Although, recently, somenotable studies on the subject have been reported, firm-level studies on the impact of economic reforms inemerging economies are still very limited (Hoskissonet al., 2000).

Studies by Manimala (1996) and Ray (1998) havereported that Indian firms recognized significant chan-ges in the business environment during economic lib-eralization. Overall, economic liberalization in India hasled to a more munificent environment characterized byopportunities for higher growth and return, greater avail-ability of various resources, and easier access to theinternational market. It has provided improved infra-structure, better institutional support, and lower regu-latory interference and hurdles. It has also resulted inan intensely competitive market with increased foreignand domestic competition and sophisticated and de-manding customers.

It has also been observed that in response to theseemerging opportunities and threats, a large majority offirms aimed for higher growth and return; increased thescale of operation; diversified into new products andbusiness lines; expanded the geographical base in do-mestic and international markets; offered a wider rangeof products to their customers, catered to many new anddiverse customer segments; introduced foreign techno-logy and emphasized modernization of plants and equip-ment, and increased the sharing of resources acrossdepartments, divisions, and business units within thefirm (Ray and Dixit, 2000).

However, under what environmental contingencies,which of the strategies resulted in superior performancewould be of prime interest for management scholars and

practitioners. In this paper, we propose a multi-level,multivariate model based on theories primarily devel-oped in the Western context, linking environment withcorporate strategy and performance. We carried out anempirical verification of the research model using firm-level primary and secondary data. We also discuss theimplications of the results for theory and practice.

THEORY, CONSTRUCTS, AND LATENTVARIABLES OF RESEARCH MODEL

It is understood that economic liberalization would leadto changes in different attributes of the firms’ businessenvironment. Being open systems, firms need to adaptto changing environment through changes in strategy(Katz and Kahn, 1966). However, this adaptation can beeither environmentally determined as viewed from theperspectives of population ecology (Aldrich, 1979;Hannan and Freeman, 1977) and institutional theory(DiMaggio and Powell, 1983, 1991; Scott, 1987) or mana-gerially controlled as viewed from a strategic choiceperspective (Child, 1972, 1997; Weick, 1979, etc.) accord-ing to which strategic decisions in firms are made bythe top managers or the dominant coalitions (Child,1972) who choose strategies guided by their perceptionsof the environment (Child and Keiser, 1981).

By adopting a middle ground, strategic contingencytheory (Hofer, 1975; Thompson, 1967) outlines an activebut relatively limited role for managers to respond tothe changing environment by continuously adapting tothe emerging contingencies. Viewing firms as a totalsystem, it observes that managers are only a componentof the system which is technically constrained by theenvironment (Astley and Fombrun, 1983; Bourgeois,1984). The focus of managerial decision-making is notprimarily on choice but on gathering correct informationabout changes in the environment and examining theconsequences of alternative responses because strategicchoices among contingencies are more consequential(Astley and Van de Ven, 1983; Venkatraman, 1989). Inother words, in a given environment, a limited set ofstrategies are effective and strategic choices moderatethe relationship between environment and firm per-formance.

Business Environment

A firm’s environment has been defined as the aggregateof those external factors that have impacts or the poten-tial to have impacts on its functioning (Thompson, 1967;

10 ENVIRONMENT-STRATEGY-PERFORMANCE LINKAGES

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Emery and Trist, 1965). Environment is also the sourceof constraints, contingencies, problems, and opportuni-ties that effect the terms on which an organization trans-acts business (Khandwalla, 1977). Three environmentallatent variables, namely, munificence, competitive in-tensity, and environmental efficiency are included in themodel.

Munificence is governed by the presence of variousopportunities and resources in the environment and thecompetition among firms for those opportunities andresources (Castrogiovami, 1991). Being a source of in-formation and other form of resources, environment hascertain governing influences on the strategic choicesmade by a firm (Pfeffer and Salancik, 1978). There aremany possible sources of environmental influence suchas bargaining power of customers, intensity of compe-tition, and regulatory influence which can broadly beclassified as intensity of market forces and regulatoryintensity. In a more regulated environment, the role ofmarket diminishes as the government, rather than themarket, regulates the behaviour of firms (Desai, 1993;Dill, 1958). With increased regulatory intensity, theintensity of market forces is likely to diminish and viceversa, as regulation and market forces often work atcross-purposes. A dimension called competitive inten-sity is slated to capture the net effect of the oppositeeffect of market and regulatory forces.

For conducting business, a firm has to transactdirectly with many individuals and government andnon-government institutions and organizations. Politi-cal turmoil, transport and other forms of strike, etc., poseproblems, create uncertainty, and influence transactioncosts incurred by a firm. This attribute of the environ-ment is termed as environmental efficiency. Some au-thors (Kogut, 1991; Porter, 1990, etc.) have consideredinstitutional environment in a country as major constit-uents of national environment of a firm. However, thesefactors have hardly been incorporated in the operation-alization of the environment by mainstream organiza-tional researchers (Peng and Heath, 1996).

Corporate Strategy

The most critical choices in corporate strategy are thechoice of businesses (scope or configuration) — whichproduct and customer to serve and how to manage theinterlinkages of different businesses (organization) tobetter utilize corporate resources (Goold, Campbell andAlexander, 1996). Therefore, strategic management at

the corporate level mainly involves one of the followingfour activities: portfolio management, restructuring,transferring skills, and sharing activities across busi-nesses (Porter, 1987). We have included five key dimen-sions of corporate strategy — business scope, geograph-ical scope, scale of operation, diversity of operation, andsharing of resources. The changes in these dimensionstogether constitute the corporate strategic behaviour offirms during economic liberalization.

Strategy literature has identified three dimensionsrelated to scope such as vertical scope, product scope,and geographical scope (Barney, 1998). Vertical scopeand product scope respectively indicate the vertical andhorizontal spreads of product market choices and to-gether outline the total domain or scope of business ofa firm (Ansoff, 1965). Geographical scope capturesgeographical spread of both factor and product markets.Firms are also concerned about decisions regarding howmuch to produce, how many manufacturing and otherfacilities that would need to be set up, and the size ofthe organization in terms of structure and number ofemployees, etc. Scale of operation, which subsumes bothsize of operation and size of organization, captures thisfacet of corporate strategy.

Moreover, there are similarities and differences invarious aspects such as suppliers, customers, technol-ogy, and regulatory agencies across different lines ofbusinesses, geographical markets, and product lines.The more the number of customer segments covered,higher is the requirement of knowledge and informationprocessing about customers to design appropriatemarketing mix. The more the products produced by afirm, the wider the complexity and variety of designsand production processes (Thompson, 1967). The com-plexity in management also increases with technicalintricacy of products and processes (Mintzberg, 1979).All these add to a different dimension of corporatestrategy called diversity of operation.

Finally, another dimension of corporate strategy,called sharing of resources, indicates the common useof tangible and intangible resources by different consti-tuents of a firm either simultaneously or sequentially orboth. The constituents may be different business units,divisions or departments. The single business firms alsohave geographical or product divisions, regional officesand departments which need exchanging and sharingof resources for effective functioning and deriving syn-ergy.


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Performance

Performance is a difficult concept both in terms ofdefinition and measurement (Keats and Hitt, 1988; Meyerand Gupta, 1994). Being consistent with the literature,we have used both accounting-based operating andmarket-based performance measures. The indicators ofoperating performance used are profitability measuressuch as return on sales, return on assets, and return onnet worth. The indicator for market-based measures ofperformance used is market return adjusted for marketrisk.

PROPOSITIONS FOR THEMULTIVARIATE MODEL

The following section develops propositions linkingvarious variables identified above.

Effect of Environment on Corporate Strategyand Performance

Economic liberalization provides easier and more eco-nomical access to various resources and better businessopportunities to most firms. This leads to higher envi-ronmental munificence (Aldrich, 1979; Pfeffer and Salan-cik, 1978)). Munificent environment creates conditionfor growth and profit (Dess and Beard, 1984). With theincrease in environmental munificence, managers per-ceive more opportunities and aspire for more growth inrevenue and also aim at achieving higher return oninvestment. It also helps generate organizational slackto support excess manpower and larger organization.Growth is easier to achieve in a resource-rich environ-ment where funds for expansion and diversification areavailable in plenty at a reasonable cost and technologyand materials are accessible.

As the regulatory entry barriers are removed, firmsthat spot the opportunity for diversification enter newindustries. The relaxation of licensing requirements anddilution of anti-trust policies such as Monopoly andRestrictive Trade Practices Act coupled with expecteddemand surge facilitate enhancing of production capac-ity, modernization of plants and equipment, and strength-ening of marketing and distribution networks in thepresent lines of business. Munificence in the domesticenvironment allows firms to become more competitiveand spread operations in other more profitable geo-graphical markets (Vernon, 1966). The strategic initia-tives of modernization and expansion help firms attainthe critical scale, reduce cost, and improve quality es-

sential for becoming globally competitive. These firmswith improved global competitiveness improve theirdomestic presence and get a better foothold in the in-ternational market. Further, after substantial devalua-tion of the rupee, exports become a more profitableproposition than domestic sales. So, managers find iteasier to generate funds from the capital market forexport-oriented ventures. Also, thrust by the govern-ment on boosting exports makes funds more easilyavailable for export-led ventures even from the lendingagencies.

Caves (1981) suggested that, in a munificent envi-ronment, firms would tend to reduce or balance overallrisk through diversification which will result in enhancedperformance. Greater opportunity for diversification innew industries helps firms reduce their risks in theexisting business. The newly found opportunities indifferent markets entice firms to reach to more numberof geographical markets and cater to a wider range ofcustomer segments. However, distribution of risks acrossbusinesses and geographical markets with higher envi-ronmental munificence enhances firms’ performance(Keats and Hitt, 1988). This also suggests that strategymediates the relationship between perceived munifi-cence and performance of firms. Therefore, greaterenvironmental munificence motivates firms to increasethe scale of operation, business scope, and geographicalscope which, in turn, help achieve superior performance.In other words, the indirect and total effect of environ-mental munificence on profitability will be positive.Thus, it is proposed that:Hypothesis 1A: Greater the increase in environmental

munificence, greater will be the increasein scale of operation, business scope,and geographical scope.

Hypothesis 1B: The effect of the change in environ-mental munificence on firm’s profita-bility and market performance will bepositive but indirect, being moderatedby the corporate strategies.

Increased bargaining power of customers and com-petitive intensity reduce profitability, increase the riskof remaining in the present business, and force firms tolook for opportunities in other industries to reducedependencies in the existing business (Hannan andFreeman, 1977; Keats and Hitt, 1988). However, increas-ing awareness and demand of customers forces firms toconcentrate on the main line of business and reduce the


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business scope and diversity. Studies showed that thehighly diversified giant US firms being faced with in-tense competition were forced to divest many of theirbusinesses to reduce the size of the corporate portfolioof businesses and to reorganize themselves around thecore businesses (Markides, 1995).

Increased demand of customers for higher value formoney puts pressure on firms to improve the main lineof business. Firms cut costs to become more competitiveand give higher value for money to customers, be moreproductive, provide speedy delivery of products andservices, and take faster decisions to beat competition.This requires a leaner organization through reductionof excess manpower and overheads. Moreover, forbecoming more responsive to the market forces, firmsflatten the organization structure by reducing layers ofdecision-making. The extent of competition and lack ofprofit in the principal forces firms to diversify into newindustries (Delios and Beamish, 1999).

Higher market pressure owing to greater customerdemand and competitive pressure in the existing linesof business lead to reduction in profit margin and overallprofit. To maintain growth and profitability, firms di-versify into more profitable industries (Stimpert andDuhaime, 1997). This leads to greater business scope.However, if the prospects for growth and profitabilitywithin related industries are limited, diversification ismade into unrelated areas (Bowman, 1982). Within theexisting business domains, firms offer a wider productrange to satisfy customer needs and gain competitiveadvantage. They cater to wider customer segments tomaintain and expand market share. Diversity of oper-ation increases as firms add new features and bring inmore varieties in products, explore new customer seg-ments, and diversify into unrelated industries. Highlycompetitive situation demands better coordination andmore exchange of resources among different businessunits and divisions as these help reduce cost and becomemore responsive to customer needs. While highly com-petitive industry environment reduces the profit-earn-ing potential of the firm, the strategies adopted by firmsmediate the relationship between perceived competitiveintensity resulting in a negative indirect and total effecton performance. Thus, it is proposed that:Hypothesis 2A: Greater the increase in competitive in-

tensity, greater will be the increase inbusiness scope, diversity of operation,and sharing of resources.

Hypothesis 2B: Greater the increase in competitive in-tensity, lower will be the increase inscale of operation.

Hypothesis 2C: The effect of the change in competitiveintensity on firm’s profitability andmarket performance will be negativebut indirect, being moderated by thecorporate strategies.

Environmental efficiency directly contributes toreduction of uncertainty faced by firms. The greater thedegree of improvement in infrastructure and institutionsthe lower is the extent of uncertainty faced by firms.Uncertain product demand and input supply createcontingencies for diversification (Beattie, 1980; Caves,1980; Chandler, 1962). Recognition and bureaucraticprocedures delay implementation of strategic decisionsof firms and create complexity in boundary spanningactivities (Thompson, 1967). High degree of regulationcreates complexity for managers in strategic decision-making as they have to devise strategies and systemsto monitor, decipher, and counter regulatory changes.The reduction of regulatory control reduces the com-plexity of task environment (Khandwalla, 1977) and inthe process helps reduce complexity in operation. As aresult, diversity in the firm’s operation increases. Thomp-son (1967) observes that high performing firms createbuffer of excess capacity under uncertainty to avoidadverse effect on operating performance. Therefore, firms’strategies will moderate the extent to which firms willbenefit from the more efficient environment. In otherwords, the effect of perceived environmental efficiencyon profitability will be moderated by the strategiesadopted by firms and will have a positive, indirect, andtotal effect. Thus, it is proposed that:Hypothesis 3A: Greater the increase in environmental

inefficiency, greater will be the increasein business scope and diversity ofoperation.

Hypothesis 3B: The effect of the change in environmen-tal efficiency on firm’s profitability willbe positive but indirect, being moder-ated by the corporate strategies.

Effect of Corporate Strategy on Performance

Firms that are willing and able to change to more ef-fective strategies in an emerging environment shouldperform better than those firms which are unable orunwilling to adopt appropriate strategies (Forte et al.,


13

2000). The relationship between different dimensions ofcorporate strategies and performance has been wellresearched. Scale expansions or horizontal expansions(Ansoff, 1965) are by and large more successful thanother strategies for generating higher return (Pennings,Barkema and Dooma, 1994). In fact, microeconomicstheory provides a strong basis for the potential effect onscale of operation. Increase in scale helps firms reduceper unit cost of production up to a point. This has a dualbenefit (Porter, 1980). Lowering of cost of productionprovides competitive advantage and boosts up salesgrowth. The benefits of scale are realized from everyactivity of a firm’s value chain (Porter, 1985). As firmsin India historically operate at sub-optimal scales (Desai,1993), the expansion of scale of operation improvesprofitability and the firms adopting the strategy of scaleexpansion are viewed favourably by stock investors.

The diversification-profitability link, although awell-explored research topic in strategic management,remains inconclusive (Datta, Rajagopalan and Rasheed,1991). Diversification has been the oft-adopted route forgrowth and spreading of risk across market (Luffmanand Reed, 1982; Rumelt, 1974). Diversification into newindustries and product lines helps firms reduce risk inthe existing business domain. Profits are easier to achieveif risks are distributed across businesses and geograph-ical markets with higher environmental munificence(Keats and Hitt, 1988). Although long history of researchon diversification fails to provide any conclusive evi-dence, it is generally believed that related diversificationgenerates greater earnings than unrelated diversifica-tion (Markides and Williamson, 1994; Varadarajan andRamanujam, 1989). The oft-cited reasons are that firmsoften face difficulties in integrating diverse marketmechanisms, technologies, products, skills, and otherspecialized resources of the unrelated business withthose of existing businesses. Restructuring of a largenumber of diversified corporations around the world inthe nineties rising on the wave of the concept of corecompetencies (Prahalad and Hamel, 1990) symbolizesthis dominant belief of the modern era that conglome-rates fail to perform.

However, some authors in recent years have arguedthat in the emerging markets such as India, focusing oncore competencies is not necessary and unrelated diver-sification may not lead to under-performance (Khannaand Palepu, 1997, 2000; Khanna and Rivkin, 2001). Theirmain argument is that markets and institutions are not

well developed in these countries and hence a conglome-rate can add value in dealing with capital, labour, andproduct markets and make better utilization of regula-tory framework and enforcement of contracts. In theabsence of a well developed market, the corporateheadquarters can play the role of an efficient market andcorporate brands can be more easily and effectivelyutilized on a large array of businesses where entry inthe business is more difficult than competing in thebusiness.

This contention of imperfect and under-developedemerging market did not stand the recent empiricalscrutiny (Kakani, 2000; Kakani and Ramachandran, 2001).Underlying the debate of non-focus conglomerate strat-egies in the emerging markets is the assumption that therole of corporate advantage in shaping the competitiveadvantage in the individual businesses is overbearinglyhigh and better management of the individual business-es may not be very critical in a less competitive market.However, when industries are highly competitive, whichmost Indian industries are fast becoming, this crucialassumption is challenged. Generalized corporate resour-ces such as raising capital or relationship with regulatorsno longer add so much value that the company canperform in a large array of businesses even in the absenceof a well-developed competitive advantage at the busi-ness level.

Any form of diversification, even if it is closelyrelated to the existing business domain, adds to diversityin operation because the markets and products are notthe same. However, in related business domains, man-agers are more familiar with supplier and customerprofiles which help them cater to the needs of the marketbetter and avoid costly mistakes. Relatedness also facil-itates firms to share intangible resources and derive thebenefits of synergy (Bettis, 1981). When a firm has anumber of business units and divisions, it can attemptto exploit the scope economies accrued due to sharingof cost at some parts of the value chain (Porter, 1985).Thus, higher sharing of resources helps firms gain costadvantage and achieve higher profit. However, the extentto which scope economies are achievable depends on thefungibility of the existing assets across business andproduct lines (Barney, 1991). Moreover, conceiving andimplementing radically new projects may require spe-cific skills to be developed at several stages of valuechain which, in turn, require time and investments andmake firms more vulnerable. Hence, stock investors find


14

diversification a riskier strategy than scale expansionand penalize firms. Thus, we propose that, while in-crease in business scope due to careful diversificationinto profitable industries has a favourable impact on theprofitability of the firm, greater diversity of operationdue to unrelated diversification will lead to lower pro-fitability and erosion of market value.

The linkage of geographical scope and performanceis established in strategy literature (Delios and Beamish,1999). The ability to source lower cost of inputs and theopportunity to exploit proprietary assets across a greaternumber of markets and at a lower marginal cost yieldsa distinct benefit (Kim et al., 1993). Geographical disper-sion is an effective strategy for risk dispersion (Kim,Hwang and Burgers, 1989). By covering a wider geograph-ical market even within the country, firms can spreadthe risk in the existing business and create new niches.In the face of heightened competition in the domesticmarket, firms may prefer geographical expansion toforeign markets instead of diversification (Buhner, 1987).Earlier researchers (Delios and Beamish, 1999; Hitt,Hoskisson and Kim, 1997; Tallman and Li, 1996) foundpositive influence of geographical scope on firms’ prof-itability. This strategy is valued highly by stock inves-tors and has a favourable impact on market perform-ance. So, the following relationships of various corpo-rate strategy dimensions with performance are proposed:Hypothesis 4A: Greater the increase in scale of opera-

tion, higher will be the profitability andmarket performance.

Hypothesis 4B: Greater the increase in geographicalscope, higher will be the profitabilityand market performance.

Hypothesis 4C: Greater the increase in diversity ofoperation, lower will be the profitabil-ity and market performance.

Hypothesis 4D: Greater the increase in business scopeand sharing of resources, higher will bethe profitability.

Hypothesis 4E: Greater the increase in business scope,lower will be the market performance.

Hypothesis 4F: Greater the increase in sharing of re-sources, higher will be the profitability.

METHODOLOGY AND SAMPLE

Model Identification

The research model summarizing the propositions ispresented in Figure 1. The underlying causal assump-tion of the model has been that changes in environmentinfluence the strategies which, in turn, influence per-formance of firms. The research model has been testedwith a sample of firms in India in LISREL framework(Joreskog and Sorbom, 1993). India provides the perfectsetting for testing the research model as a sustainedpolicy and administrative reforms, popularly known aseconomic liberalization, have been vigorously pursuedhere since 1991.

The integrated structural equation model consistsof ten composites of observed variables corresponding

Figure 1: Proposed Research Model

+

+

+

+

Munificence

Competitive intensity

Environmental efficiency

Scale of business

Business scope

Geographic scope

Diversity ofoperation

Sharing of resources

Profitability

Market performance

+ +

+

+

+

+

+ +

+

+

-

-

--

--

+

+

-

-Geographic

scope


15

to three latent environmental constructs: munificence,competitive intensity, and environmental efficiency. Op-portunity, availability of resources from internationalmarket, availability of funds, and bargaining power ofsuppliers are the composite observed variables for thelatent construct munificence. Intensity of competitionand bargaining power of customers are the observedvariables for the latent construct competitive intensity.As per our earlier discussion, we have specified regu-latory control to load on both competitive intensity andenvironmental efficiency. Two composite variables cre-ated from six institutional efficiency items and uncer-tainty were the three observed variables for the latentconstruct environmental efficiency.

There are ten observed variables for five latentcorporate strategy variables. All these variables capturethe extent of change that has taken place in each of thestrategy dimensions during the post-liberalization pe-riod. For example, the observed variables for indicatorsof the latent construct scale of business are the changein scale of operation, organizational scale, number ofemployees, and total assets. Similarly, the change indomestic scope and international scope together consti-tute the latent construct change in geographical scope.Along with the change in product-market scope, asreported by firms, we have included an objective indi-cator — change in business line — to capture the latentconstruct change in business scope of firms. There is oneobserved variable each for diversity of operation andsharing of resources. All the observed variables that arederived from the survey data as reported by firms arethe composite of multi-items scales with Cronbach Alpharanging from 0.7 to 0.86. Three indicators used forprofitability-performance are return on sales, return onassets, and return on net worth. The indicator for market-based measures of performance is the market returnadjusted for market risk.

The empirical verification of the model requiredsystematic measurement of change in the businessenvironment of firms during economic reforms, identi-fication of the change in corporate strategies of firms,and recording of performance of firms. Required datafor environment and strategy variables for Indian firmswere not available from the secondary sources. So, alarge sample survey design was adopted and primarydata were collected through a structured questionnaire.These were verified wherever possible by informationfrom the published documents and secondary sources

such as the Centre for Monitoring Indian Economy (CMIE)database, Stock Exchange Directory, business magazineslike Business World, Business Today, and Business India,and newspapers like The Economic Times, Business Stan-dard, and Financial Express.

Survey Instrument Design

An initial list of items that correspond to various dimen-sions of environment, organizational resources, andcorporate strategy was generated based on the exhaus-tive review of literature and interview with managers.The list was independently evaluated by the principalresearcher and five others familiar with the literature inthe field for their face/content validity. A survey instru-ment was prepared based on the final list of items. Thequestionnaire had undergone a couple of rounds of pre-tests with a group of participants attending ExecutiveDevelopment Programmes at the Indian Institute ofManagement, Ahmedabad, to improve the item wordingand to ensure that items were also well understood bythe target respondents. The survey instrument was fi-nally pre-tested with multiple respondents belonging tosix firms from the targeted population. There were nosignificant differences in responses of multiple respond-ents from the same firm.

Most of the questions were sought to be answeredon a seven-point semantic rating scale as if they wereinterval data. It was expected that use of semantic scalesfor some variables may lead to certain measurementerror, but in the absence of readily quantifiable proxies,this method served our purpose quite well. The notionthat judgements of knowledgeable respondents aboutvariables is at least as likely to produce useful answersas quantitative estimates is well accepted by researchers(Levin, 1987).

Sampling and Data Collection

The data for the study were collected from firms in India.The state and privately-owned firms that were listed inthe major stock exchanges in India and also appearedin the list of top 500 firms as compiled by The EconomicTimes and Business Standard comprised the primarypopulation for the survey. The rankings by these maga-zines have been made on the basis of net sales, i.e.,income excluding excise duty, octroi, sales tax, cashdiscounts, rebates or commissions paid on sales. Firmsfrom the service industries such as financing, banking,software, leasing, trading, hotel, and tourism were


16

excluded to bring more homogeneity in the sample.Though these industries have also shown high dyna-mism during economic reforms and are worth studying,because of inherent differences in issues and concernsas compared to firms from manufacturing industries, itwas decided to exclude them from the present study.To ensure a reasonably large variation in size, another100 firms randomly selected from the list of top 1000firms as compiled by the Business Standard were alsoincluded in the final population. As previous experien-ces of firm-level survey research in India indicated typi-cally very low response rate ranging from 6-12 per cent,it also helped increase the probability of achieving higherfinal sample size.

As a preparatory step, a letter of invitation toparticipate in the study along with a one- page abstractof the research proposal was sent to the chief executiveofficers of 511 firms with diverse geographical spreadand across a wide range of industries. While 15 firmsdeclined for reasons of company policy and paucity oftime, 169 firms expressed their willingness to participatein the survey. As prior experiences in India showed thatonly in about half of the cases, initial agreement mate-rialized to final response (Khandwalla, 1985), question-naires were also sent to the other remaining firms whodid not respond to our first letter making the final tallyto 496.

The questionnaire and accompanying letters ad-vised that only top level executives, i.e., either the chiefexecutive officer himself or a very senior level executiveshould complete the questionnaire. This was to ensurethat only those persons familiar with the business en-vironment in India for at least a decade and the issuesof strategic importance to the firms would complete thequestionnaires. As strategic decisions are taken basedon the perception of the dominant coalition in a firm,it was assumed that response from a top level executivewho is a part of the dominant coalition would be a goodproxy. Though there are problems associated with this

key informant approach (Philips, 1981; Huber and Power,1985), it is an accepted norm in strategy research.

The survey was conducted in late 1996 and early1997. After several reminder letters, personal visits, andtelephone calls, 118 responses and 9 declines were re-ceived. Out of 118 responses, 111 were found to be usablemaking the effective response rate to 23 per cent. Thisis much better in comparison to those of earlier studiesin India and quite reasonable for such target populationin any other context. This paper reports on the data from111 firms. Table 1 presents the summary sample char-acteristics. The size of sampled firms in terms of netsales, net assets, and number of employees showed widevariations reflecting a huge range of size. The samplealso carried a good mix of state-owned public sectorenterprises and privately-owned Indian and foreignfirms. This mix is important because all three types offirms have significant contributions to the total indus-trial output of India. A wide range of industries, bothprofitable and loss-making firms, was covered by thesample. Accordingly, we rule out the possibility of sys-tematic non-response bias in the sample.

We measured the profitability performance of firmsas six years average between April 1993 and March 1999.Market performance was measured as the average marketreturn adjusted for risk between April 1993 and March1997. Profitability from 1993 onwards was taken toaccommodate the lag effect of strategy on performance.Data on financial and market performance were ob-tained from the electronic data base of the CMIE.

ANALYSIS AND RESULTS

A nested model approach as suggested by Anderson andGerbing (1988) has been followed to test the hypothesesconcerning the structural relationships among variables.The first model is the measurement model with the pathsbetween observed variables and associated latent con-structs freed and latent constructs allowed to correlatefreely. After the measurement model, the theoretical

Table 1: Sample Characteristics

Variable Mean Standard Deviation Minimum Maximum

Net sales (Rs in million) 7923.09 16654.07 236.6 125261.6Total assets (Rs in million) 9674.06 16242.57 258.1 85746.03Net worth (Rs in million) 4359.87 1703.10 -215.01 43124.02Net profit (Rs in million) 507.44 1475.32 -1147.5 9974.01Number of employees 4252.36 6955.98 74 49739Number of business lines 3.19 2.34 1 11Age (Years) 40.95 26.26 10 143


17

model, with all paths not specifically hypothesized toexist fixed to zero, has been fitted with the data. Theinitial model indicated a poor fit with the data. Follow-ing the suggestion by Joreskog and Sorbom (1993), aftersuccessive examination of the normalized residuals,semleaf plots, and modification indexes, an attempt wasmade in steps to develop the best fitting model by deletingnon-significant paths and allowing the measurementerrors to correlate when theoretically justified and sig-nificant drops in chi-square occurred. The overall fit ofthe final model to the data was respectable with CFI =0.941, IFI = 0.945 and NNFI = 0.930. The value in excessof 0.9 signifies a good data model fit (Mueller, 1996). Theratio of chi-square and degrees of freedom was also quitesmall. Moreover, RMSEA is 0.0425 and p value for testof close fit (RMSEA < 0.05) is non-significant (p = 0.733).It was observed that as the number of latent constructsincluded in a model increases, the data model fit decreas-es in spite of strong theoretical support (McAllister,1995; Niehoff and Moorman, 1993). Hence, for our model,which included as many as ten latent variables and 24observed variables, the achieved model fit was veryreasonable.

The measurement model shows that all factor load-ings of latent variables on respective observed variablesas specified are significant, values are higher than 0.35in all cases, and are also consistent between the mea-surement model and a final model. The significant factorloadings are good evidence of convergent validity of thelatent constructs. Maximum likelihood standardizedestimates and t-statistics of each of the significant struc-tural parameters of the final model are summarized inFigure 2. A comparison of Figure 1 and Figure 2 wouldreveal that only seven out of 16 hypothesized directpaths (indicated by firm lines) and three out of sixhypothesized indirect paths (indicated by dotted lines)were significant. The structural paths, which showedsignificant total effects, are shown in Table 2. The totaleffect of one variable on the other is arrived at by simplysumming the direct and all indirect effects.

It is observed that, as hypothesized, change in en-vironmental munificence has a significant direct posi-tive impact on change in scale of business, businessscope, and geographical scope. It also has significanttotal positive effect on all corporate strategy dimensions,viz., change in business scope, scale of business, geo-graphical scope, diversity of operation, sharing of re-sources, and profitability of firms. Similarly, as hypothe-

sized, change in competitive intensity has significantdirect negative effect on change in business scope.However, contrary to our hypotheses, change in com-petitive intensity is found to have a direct positive effecton change in diversity of operation. It also has significanttotal negative effect on change in business scope, scaleof business, and profitability, and positive total effecton change in diversity of operation and sharing of re-sources. Change in environmental efficiency has nosignificant effect on any of the corporate strategy dimen-sions. However, it has significant positive total effect onprofitability.

Among the corporate strategy dimensions, onlychange in scale of business and business scope has animpact on performance of firms. While change in scaleof business has direct positive effect on both profitabilityand market performance, business scope has directnegative effect on market performance. However, thoughboth increased scale of business as well as business scopehave resulted in significant total positive effects onprofitability, their effects on market performance are inopposite directions. The remaining paths linking theother strategy dimensions and performance variablesare found to be insignificant.

DISCUSSION AND CONCLUSIONS

Results of SEM indicate that environment as a whole hasa pervasive influence on strategic responses and per-formance of firms mostly in the hypothesized direction.

Table 2: Estimates of Structural Paths with SignificantTotal Effect

Structural Path Total Effect

Munificence ——> Business scope 0.421 (2.873)Munificence ——> Scale of business 0.358 (2.565)Munificence ——> Geographical scope 0.558 (3.563)Munificence ——> Diversity of operation 0.392 (3.052)Munificence ——> Sharing of resources 0.247 (3.192)Munificence ——> Profitability 0.139 (2.395)Competitive intensity ——> Business scope -0.295 (-2.239)Competitive intensity ——> Scale of business -0.221 (-2.244)Competitive intensity ——> Diversity of operation 0.349 (2.731)Competitive intensity ——> Sharing of resources 0.220 (2.901)Competitive intensity ——> Profitability -0.088 (-2.260)Environmental efficiency ——> Profitability 0.197 (2.099)Business scope —> Profitability 0.349 (3.428)Scale of business—> Profitability 0.388 (2.758)Scale of business —> Market performance 0.873 (2.679)

Note: Figures in bracket shows the corresponding t-value. t > 3indicates statistical significance at p < 0.001; t > 2.59 indicatesstatistical significance at p < 0.01; and t > 1.96 indicatesstatistical significance at p < 0.05.


18

It is observed that availability of high growth and profitopportunities across industries, easier access to resour-ces in the international market, improvement in thesupply situation, etc., had the greatest influence on thestrategic behaviour of firms in the liberalized era. Firmsthat recognized these favourable changes in the envi-ronment and increased their scale of business and di-versified into deregulated industries selectively achievedsuperior performance.

Similarly, firms facing intense competition and de-manding customers reorganized their business portfolioby divesting some businesses and moving into morepromising unrelated businesses, cut down the organi-zation flab through downsizing, and promoted greatersharing of resources within. Along with opportunities,economic liberalization also posed threats to firms interms of more domestic and foreign competition andincreasingly demanding customers. Being exposed toforeign goods, Indian customers became increasinglyaware of alternatives and choosy and started demandinghigher value for money. As a result, firms were forcedto concentrate more on their main lines of business. Theyprobably raised funds by divesting non-core and lessprofitable product and business lines to improve themain business, resulting in a decrease in business scope.

Higher competitive pressure in the existing lines ofbusiness perhaps led to reduction in profit margin andoverall return on investment. To maintain profitability,

firms vacated some of the less profitable markets anddiversified to more profitable unrelated industries. Firmswere catering to diverse customer segments to retain theoverall market share and offering greater product rangeto satisfy customer needs and beat competition. There-fore, the diversity of operation increased significantlyfor firms perceiving high degree of competitive intensityduring reforms.

Similarly, in the liberalized era, faster clearance ofproject proposals, simplification of procedures for im-porting and exporting goods, and smoother dealing withthe government departments and financial institutionsled to improved environmental efficiency for most firms.This resulted in lower transaction cost, reduced admin-istrative overheads, and improved profitability. Also,reduction in political strikes and agitation that usuallydisrupt business operations helped firms improve effi-ciency and earn higher profits.

Increased scale of business was found to havegenerated higher profit for firms. The increase in scalein operation in the liberalized era was often associatedwith technology upgradation and modernization ofmanufacturing facilities. As a result, firms adopting scaleexpansion strategies not only had the scale advantagebut also emerged technologically more sophisticated todeliver better quality products to customers. Increaseddiversity in operation did not have any significantnegative impact on performance. Therefore, the general

Figure 2: Estimated Structural Model

Scale ofbusiness

Munificence

Competitiveintensity

Environmentalefficiency

Businessscope

Geographicscope

Diversity ofoperation

Sharing ofresources

Profitability

Marketperformance

0.358(2.565)

0.421(2.836)

0.557(3.740)

–0.088(–2.260)

0.139(2.395)

0.197(2.099)

0.873(2.679)

++

++

++

+

+

–

0.388(3.358)

–0.468(–2.026)

0.450(3.061)

–0.295(–2.239)


19

prescription that concentrating on core competenciesand core businesses would yield superior performancedid not find support. This implies that unrelated diver-sification per se might not be detrimental to firms, atleast, in the short run.

One must notice that underlying the debate of non-focus conglomerate strategies of business groups in theemerging markets (Kakani and Ramachandran, 2001;Khanna and Palepu, 1997) is the assumption that the roleof corporate advantage in shaping the competitive ad-vantage in the individual businesses is overbearinglyhigh. Gaining access to industries and capital back upto gain a foothold in those industries may be more criticalthan better management of the individual businesses.This assumption is justified in a less competitive market.However, when industries are highly competitive, whichmost Indian industries are fast becoming, this crucialassumption will be challenged. At least the stock inves-tors were wary of such moves by firms as observed fromthe significant negative influence of business scope onmarket return.

In a highly competitive market, generalized corpo-rate capabilities such as raising and allocating capitalor relationship with regulators no longer add so muchvalue that the company can perform in a large array ofbusinesses even in the absence of a well-developedcompetitive advantage at the business level. Managersin the liberalized environment need to be selective indiversification moves. During initial years of economicreforms, the inefficiencies of managing unrelated busi-nesses by diversified firms might be shielded by thepresence of high growth and profit opportunities in alarge number of recently deregulated industries. Onlya few public sector firms had prior experience and skillsin those industries. Thus, all new entrants would getsome time to exploit the growth and profit opportuni-ties. However, eventually, those firms which can achievethe economies of scale early by aggressively expandingthe scale of operation, developing the required skills forthe new businesses faster, and extracting some benefitof synergy from the existing business by transferringtangible and intangible resources are likely to withstandthe emerging competitive pressure and achieve sus-tained success.

Though, on the whole, all firms faced pressure onprofitability, firms which made the right strategic chan-ges could reduce the adverse impact of the intenselycompetitive environment. In other words, firms having

better environment-strategy ‘fit’ achieved superior per-formance. This conforms to the general principle ofcontingency theory (Hofer, 1975; Venkatraman, 1989)derived based on the developed economy institutionalframework. However, the observation that firms in Indiathat assessed the changing environment properly andchanged their strategies aggressively in the liberalizedera performed better is in contrast to the findings ofstudies during deregulation of industries in the devel-oped economies (e.g., Mahon and Murray, 1980; Smithand Grimm, 1987). It also differs from the findings ofthe study of Chinese electronics firms by Tan and Litschert(1994). These studies reported that firms which hadbecome more focused and adopted defensive strategicorientation performed better.

The plausible explanation lies in understanding thateconomic liberalization is fundamentally different fromindustry deregulation (Ray, 2003). Although those firmsoperating in an industry undergoing deregulation mayhave greater competitive strategy options, they areunlikely to have fresh opportunities to start new busi-nesses or venture into new industries or geographies.In fact, researchers (Darroch, 1992; Mahon and Murray,1980; Smith and Grimm, 1987) have observed that,within a deregulated industry, firms faced greater com-petitive pressure after deregulation and hence shiftedfrom an unfocused to a focused strategy. Economic lib-eralization, unlike industry deregulation, consists of notonly deregulation of a number of industries, but alsoleads to a number of economy-wide policy and admin-istrative reforms cutting across sectors such as trade,banking, and commerce, and capital and labour mar-kets. The sheer magnitude and scope of changes in theeconomy create a different set of environmental contin-gencies that are quite different from those under priva-tization and deregulation of selected industries in amarket-driven economy. Therefore, perceived changesin the environment and the resulting responses by firmsin an industry due to industry deregulation in a mar-ket-driven economy are likely to be different from thosefirms which operated in a controlled economy for longthat is subjected to deregulation and liberalization as awhole.

The results clearly indicate that firms which hadbetter environment-strategy ‘fit’ achieved superior per-formance. This is a pointer to the increasingly importantrole of strategic management in Indian firms. In a fastchanging competitive environment, early recognition of


20

opportunities and threats, right identification of custom-ers’ needs, and effectively serving them with qualityproducts become the key to success. With the diminish-ing influence of regulatory authorities, the responsibilitynow lies with strategic managers to scan the environ-ment, identify the opportunities and resources, under-stand the demand of customers and be aware of thepotential threat of competition, and formulate andimplement the right mix of strategies expeditiously.Better recognition of the changes in the environment bymanagers and acting on them by positioning the firmin profitable niches and acquiring, building, and lever-aging resources hold the key to superior performance.All these, however, indicate the increased importanceof environment scanning and strategic planning systemsand the critical role of managers in charge of boundaryspanning activities such as marketing, corporate finance,and outsourcing in strategic decision-making of firms.

Economic liberalization is a long-drawn process andevolves through several phases being subjected to suc-cessive generation of reforms. We have taken a snapshotpicture of strategic adaptation of firms during earlyphases of economic liberalization. However, much moreresearch is needed to validate and complement this studyand get a complete understanding of strategic behaviourof firms during liberalization and globalization of eco-nomies with a long history of regulation and protection.Longitudinal research studying the co-evolutionarydynamics of firms and environment during the last onedecade based on time series data and descriptive casestudies would be very useful to complement this study.Moreover, similar studies perhaps with a larger sampleand in different liberalizing economy contexts woulddefinitely provide more credence to this study and alsoenrich the research tradition of environment-strategy-performance.

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Acknowledgements • This research was supported by grants fromIndian Institute of Management, Ahmedabad and P D AgarwalFoundation for Management Research. The author expresses hisgratitude to Professors Shekhar Chaudhuri, J S Chhokar, M R Dixit,P N Khandwalla, Arie Lewin, Maria Sakakibara and the anonymousreviewers of Academy of Management Meeting 2003 and Vikalpafor their helpful comments and suggestions.

Sougata Ray is an Associate Professor in the Strategic ManagementGroup at Indian Institute of Management, Calcutta. He specializesin the broad areas of strategy, international management, andentrepreneurship. He has contributed a number of research papersand case studies to reputed journals, books (edited volumes), andconferences in Asia, North America, and Europe on topics suchas corporate responses to economic reforms, global competitionand strategy of firms from developing nations, entry strategies ofmultinational firms in emerging markets, competition, strategyand entrepreneurship in high technology and emerging industries.He serves as a member of the Editorial Board of Decision, a journalpublished by IIM, Calcutta.e-mail: [email protected]


23

Measuring Service Quality:SERVQUAL vs. SERVPERF Scales

Sanjay K Jain and Garima Gupta

Quality has come to be recognized as a strategic tool for attaining operational efficiencyand improved business performance. This is true for both the goods and services sectors.However, the problem with management of service quality in service firms is that qualityis not easily identifiable and measurable due to inherent characteristics of services whichmake them different from goods. Various definitions of the term ‘service quality’ havebeen proposed in the past and, based on different definitions, different scales formeasuring service quality have been put forward. SERVQUAL and SERVPERF constitutetwo major service quality measurement scales. The consensus, however, continues toelude till date as to which one is superior.

An ideal service quality scale is one that is not only psychometrically sound but is alsodiagnostically robust enough to provide insights to the managers for corrective actionsin the event of quality shortfalls. Empirical studies evaluating validity, reliability, andmethodological soundness of service quality scales clearly point to the superiority of theSERVPERF scale. The diagnostic ability of the scales, however, has not been explicitlyexplicated and empirically verified in the past.

The present study aims at filling this void in service quality literature. It assesses thediagnostic power of the two service quality scales. Validity and methodologicalsoundness of these scales have also been probed in the Indian context — an aspect whichhas so far remained neglected due to preoccupation of the past studies with serviceindustries in the developed world.

Using data collected through a survey of consumers of fast food restaurants in Delhi,the study finds the SERVPERF scale to be providing a more convergent and discriminant-valid explanation of service quality construct. However, the scale is found deficient inits diagnostic power. It is the SERVQUAL scale which outperforms the SERVPERF scaleby virtue of possessing higher diagnostic power to pinpoint areas for managerialinterventions in the event of service quality shortfalls.

The major managerial implications of the study are:Because of its psychometric soundness and greater instrument parsimoniousness,one should employ the SERVPERF scale for assessing overall service quality of afirm. The SERVPERF scale should also be the preferred research instrument whenone is interested in undertaking service quality comparisons across serviceindustries.On the other hand, when the research objective is to identify areas relating toservice quality shortfalls for possible intervention by the managers, the SERVQUALscale needs to be preferred because of its superior diagnostic power.

However, one serious problem with the SERVQUAL scale is that it entails giganticdata collection task. Employing a lengthy questionnaire, one is required to collect dataabout consumers’ expectations as well as perceptions of a firm’s performance on eachof the 22 service quality scale attributes.

Addition of importance weights can further add to the diagnostic power of theSERVQUAL scale, but the choice needs to be weighed against the additional task of datacollection. Collecting data on importance scores relating to each of the 22 service attributesis indeed a major deterrent. However, alternative, less tedious approaches, discussed to-wards the end of the paper, can be employed by the researchers to obviate the data col-lection task.

KEY WORDS

Service Quality

Measurement of Service Quality

Service Quality Scale

Scale Validity and Reliability

Diagnostic Ability of Scale

Executive Summary



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Quality has come to be recognized as a strategictool for attaining operational efficiency andimproved business performance (Anderson and

Zeithaml, 1984; Babakus and Boller, 1992; Garvin, 1983;Phillips, Chang and Buzzell, 1983). This is true for theservices sector too. Several authors have discussed theunique importance of quality to service firms (e.g.,Normann, 1984; Shaw, 1978) and have demonstrated itspositive relationship with profits, increased market share,return on investment, customer satisfaction, and futurepurchase intentions (Anderson, Fornell and Lehmann1994; Boulding et al., 1993; Buzzell and Gale, 1987; Rustand Oliver, 1994). One obvious conclusion of these studiesis that firms with superior quality products outperformthose marketing inferior quality products.

Notwithstanding the recognized importance ofservice quality, there have been methodological issuesand application problems with regard to its operation-alization. Quality in the context of service industrieshas been conceptualized differently and based on dif-ferent conceptualizations, alternative scales have beenproposed for service quality measurement (see, forinstance, Brady, Cronin and Brand, 2002; Cronin andTaylor, 1992, 1994; Dabholkar, Shepherd and Thorpe,2000; Parasu- raman, Zeithaml and Berry, 1985, 1988).Despite considerable work undertaken in the area, thereis no consensus yet as to which one of the measurementscales is robust enough for measuring and comparingservice quality. One major problem with past studieshas been their preoccupation with assessing psycho-metric and methodological soundness of service scalesthat too in the context of service industries in the de-veloped countries. Virtually no empirical efforts havebeen made to evaluate the diagnostic ability of thescales in providing managerial insights for correctiveactions in the event of quality shortfalls. Furthermore,little work has been done to examine the applicabilityof these scales to the service industries in developingcountries.

This paper, therefore, is an attempt to fill this existingvoid in the services quality literature. Based on a surveyof consumers of fast food restaurants in Delhi, this paperassesses the diagnostic usefulness as well as the psycho-metric and methodological soundness of the two widelyadvocated service quality scales, viz., SERVQUAL andSERVPERF.

SERVICE QUALITY: CONCEPTUALIZATIONAND OPERATIONALIZATION

Quality has been defined differently by different au-thors. Some prominent definitions include ‘conformanceto requirements’ (Crosby, 1984), ‘fitness for use’ (Juran,1988) or ‘one that satisfies the customer’ (Eiglier andLangeard, 1987). As per the Japanese production phi-losophy, quality implies ‘zero defects’ in the firm’sofferings.

Though initial efforts in defining and measuringservice quality emanated largely from the goods sector,a solid foundation for research work in the area was laiddown in the mid-eighties by Parasuraman, Zeithaml andBerry (1985). They were amongst the earliest researchersto emphatically point out that the concept of qualityprevalent in the goods sector is not extendable to theservices sector. Being inherently and essentially intan-gible, heterogeneous, perishable, and entailing simulta-neity and inseparability of production and consump-tion, services require a distinct framework for qualityexplication and measurement. As against the goods sectorwhere tangible cues exist to enable consumers to eva-luate product quality, quality in the service context isexplicated in terms of parameters that largely comeunder the domain of ‘experience’ and ‘credence’ prop-erties and are as such difficult to measure and evaluate(Parasuraman, Zeithaml and Berry, 1985; Zeithaml andBitner, 2001).

One major contribution of Parasuraman, Zeithamland Berry (1988) was to provide a terse definition ofservice quality. They defined service quality as ‘a globaljudgment, or attitude, relating to the superiority of theservice’, and explicated it as involving evaluations of theoutcome (i.e., what the customer actually receives fromservice) and process of service act (i.e., the manner in whichservice is delivered). In line with the propositions putforward by Gronroos (1982) and Smith and Houston(1982), Parasuraman, Zeithaml and Berry (1985, 1988)posited and operationalized service quality as a differ-ence between consumer expectations of ‘what they want’and their perceptions of ‘what they get.’ Based on thisconceptualization and operationalization, they proposeda service quality measurement scale called ‘SERVQUAL.’The SERVQUAL scale constitutes an important land-mark in the service quality literature and has beenextensively applied in different service settings.

26 MEASURING SERVICE QUALITY: SERVQUAL vs. SERVPERF SCALES

26

Over time, a few variants of the scale have also beenproposed. The ‘SERVPERF’ scale is one such scale thathas been put forward by Cronin and Taylor (1992) inthe early nineties. Numerous studies have been under-taken to assess the superiority of two scales, but con-sensus continues to elude as to which one is a betterscale. The following two sections provide an overviewof the operationalization and methodological issuesconcerning these two scales.

SERVQUAL Scale

The foundation for the SERVQUAL scale is the gapmodel proposed by Parasuraman, Zeithaml and Berry(1985, 1988). With roots in disconfirmation paradigm,1

the gap model maintains that satisfaction is related tothe size and direction of disconfirmation of a person’sexperience vis-à-vis his/her initial expectations (Church-ill and Surprenant, 1982; Parasuraman, Zeithaml andBerry, 1985; Smith and Houston, 1982). As a gap ordifference between customer ‘expectations’ and ‘percep-tions,’ service quality is viewed as lying along a con-tinuum ranging from ‘ideal quality’ to ‘totally unaccept-able quality,’ with some points along the continuumrepresenting satisfactory quality. Parasuraman, Zeith-aml and Berry (1988) held that when perceived or ex-perienced service is less than expected service, it impliesless than satisfactory service quality. But, when per-ceived service is less than expected service, the obviousinference is that service quality is more than satisfactory.Parasuraman, Zeithaml and Berry (1988) posited thatwhile a negative discrepancy between perceptions andexpectations — a ‘performance-gap’ as they call it —causes dissatisfaction, a positive discrepancy leads toconsumer delight.

Based on their empirical work, they identified a setof 22 variables/items tapping five different dimensionsof service quality construct.2 Since they operationalizedservice quality as being a gap between customer’s ex-pectations and perceptions of performance on thesevariables, their service quality measurement scale iscomprised of a total of 44 items (22 for expectations and22 for perceptions). Customers’ responses to their ex-pectations and perceptions are obtained on a 7-pointLikert scale and are compared to arrive at (P-E) gapscores. The higher (more positive) the perception minusexpectation score, the higher is perceived to be the levelof service quality. In an equation form, their operation-alization of service quality can be expressed as follows:

∑=

−=k

1jijiji )EP(SQ (1)

where: SQi = perceived service quality of indivi-dual ‘i’

k = number of service attributes/items P = perception of individual ‘i’ with res-

pect to performance of a service firmattribute ‘j’

E = service quality expectation for at-tribute ‘j’ that is the relevant norm forindividual ‘i’

The importance of Parasuraman, Zeithaml andBerry’s (1988) scale is evident by its application in anumber of empirical studies across varied service set-tings (Brown and Swartz, 1989; Carman, 1990; Kassimand Bojei, 2002; Lewis, 1987, 1991; Pitt, Gosthuizen andMorris, 1992; Witkowski and Wolfinbarger, 2002; Young,Cunningham and Lee, 1994). Despite its extensive ap-plication, the SERVQUAL scale has been criticized onvarious conceptual and operational grounds. Some majorobjections against the scale relate to use of (P-E) gapscores, length of the questionnaire, predictive power ofthe instrument, and validity of the five-dimension struc-ture (e.g., Babakus and Boller, 1992; Cronin and Taylor,1992; Dabholkar, Shepherd and Thorpe, 2000; Teas, 1993,1994). Since this paper does not purport to examinedimensionality issue, we shall confine ourselves to adiscussion of only the first three problem areas.

Several issues have been raised with regard to useof (P-E) gap scores, i.e., disconfirmation model. Moststudies have found a poor fit between service qualityas measured through Parasuraman, Zeithaml and Ber-ry’s (1988) scale and the overall service quality measureddirectly through a single-item scale (e.g., Babakus andBoller, 1992; Babakus and Mangold, 1989; Carman, 1990;Finn and Lamb, 1991; Spreng and Singh, 1993). Thoughthe use of gap scores is intuitively appealing and con-ceptually sensible, the ability of these scores to provideadditional information beyond that already containedin the perception component of service quality scale isunder doubt (Babakus and Boller, 1992; Iacobucci,Grayson and Ostrom, 1994). Pointing to conceptual,theoretical, and measurement problems associated withthe disconfirmation model, Teas (1993, 1994) observedthat a (P-E) gap of magnitude ‘-1’ can be produced insix ways: P=1, E=2; P=2, E=3; P=3, E=4; P=4, E=5; P=5,E=6 and P=6, E=7 and these tied gaps cannot be con-


27

strued as implying equal perceived service qualityshortfalls. In a similar vein, the empirical study by Peter,Churchill and Brown (1993) found difference scores beingbeset with psychometric problems and, therefore, cau-tioned against the use of (P-E) scores.

Validity of (P-E) measurement framework has alsocome under attack due to problems with the conceptu-alization and measurement of expectation component ofthe SERVQUAL scale. While perception (P) is definableand measurable in a straightforward manner as the con-sumer’s belief about service is experienced, expectation(E) is subject to multiple interpretations and as such hasbeen operationalized differently by different authors/researchers (e.g., Babakus and Inhofe, 1991; Brown andSwartz, 1989; Dabholkar et al., 2000; Gronroos, 1990;Teas, 1993, 1994). Initially, Parasuraman, Zeithaml andBerry (1985, 1988) defined expectation close on the linesof Miller (1977) as ‘desires or wants of consumers,’ i.e.,what they feel a service provider should offer rather thanwould offer. This conceptualization was based on thereasoning that the term ‘expectation’ has been useddifferently in service quality literature than in the cus-tomer satisfaction literature where it is defined as aprediction of future events, i.e., what customers feel aservice provider would offer. Parasuraman, Berry andZeithaml (1990) labelled this ‘should be’ expectation as‘normative expectation,’ and posited it as being similarto ‘ideal expectation’ (Zeithaml and Parasuraman, 1991).Later, realizing the problem with this interpretation,they themselves proposed a revised expectation (E*)measure, i.e., what the customer would expect from‘excellent’ service (Parasuraman, Zeithaml and Berry,1994).

It is because of the vagueness of the expectationconcept that some researchers like Babakus and Boller(1992), Bolton and Drew (1991a), Brown, Churchill andPeter (1993), and Carman (1990) stressed the need fordeveloping a methodologically more precise scale. TheSERVPERF scale — developed by Cronin and Taylor(1992) — is one of the important variants of the SERV-QUAL scale. For, being based on the perception com-ponent alone, it has been conceptually and methodolog-ically posited as a better scale than the SERVQUAL scalewhich has its origin in disconfirmation paradigm.

SERVPERF Scale

Cronin and Taylor (1992) were amongst the researcherswho levelled maximum attack on the SERVQUAL scale.

They questioned the conceptual basis of the SERVQUALscale and found it confusing with service satisfaction.They, therefore, opined that expectation (E) componentof SERVQUAL be discarded and instead performance(P) component alone be used. They proposed what isreferred to as the ‘SERVPERF’ scale. Besides theoreticalarguments, Cronin and Taylor (1992) provided empir-ical evidence across four industries (namely banks, pestcontrol, dry cleaning, and fast food) to corroborate thesuperiority of their ‘performance-only’ instrument overdisconfirmation-based SERVQUAL scale.

Being a variant of the SERVQUAL scale and con-taining perceived performance component alone, ‘per-formance only’ scale is comprised of only 22 items. Ahigher perceived performance implies higher servicequality. In equation form, it can be expressed as:

∑=

=k

1jiji PSQ (2)

where: SQi = perceived service quality of indi-vidual ‘i’

k = number of attributes/items P = perception of individual ‘i’ with

respect to performance of a servicefirm on attribute ‘j’

Methodologically, the SERVPERF scale representsmarked improvement over the SERVQUAL scale. Notonly is the scale more efficient in reducing the numberof items to be measured by 50 per cent, it has also beenempirically found superior to the SERVQUAL scale forbeing able to explain greater variance in the overallservice quality measured through the use of single-itemscale. This explains the considerable support that hasemerged over time in favour of the SERVPERF scale(Babakus and Boller, 1992; Bolton and Drew, 1991b;Boulding et al., 1993; Churchill and Surprenant, 1982;Gotlieb, Grewal and Brown, 1994; Hartline and Ferrell,1996; Mazis, Antola and Klippel, 1975; Woodruff, Ca-dotte and Jenkins, 1983). Though still lagging behind theSERVQUAL scale in application, researchers have in-creasingly started making use of the performance-onlymeasure of service quality (Andaleeb and Basu, 1994;Babakus and Boller, 1992; Boulding et al., 1993; Bradyet al., 2002; Cronin et al., 2000; Cronin and Taylor, 1992,1994). Also when applied in conjunction with the SERV-QUAL scale, the SERVPERF measure has outperformedthe SERVQUAL scale (Babakus and Boller, 1992; Brady,Cronin and Brand, 2002; Cronin and Taylor, 1992;


28

Dabholkar et al., 2000). Seeing its superiority, evenZeithaml (one of the founders of the SERVQUAL scale)in a recent study observed that “…Our results are in-compatible with both the one-dimensional view of ex-pectations and the gap formation for service quality.Instead, we find that perceived quality is directly influ-enced only by perceptions (of performance)” (Bouldinget al., 1993). This admittance cogently lends a testimonyto the superiority of the SERVPERF scale.

Service Quality Measurement:Unweighted and Weighted Paradigms

The significance of various quality attributes used in theservice quality scales can considerably differ acrossdifferent types of services and service customers. Secu-rity, for instance, might be a prime determinant of qualityfor bank customers but may not mean much to customersof a beauty parlour. Since service quality attributes arenot expected to be equally important across serviceindustries, it has been suggested to include importanceweights in the service quality measurement scales (Croninand Taylor, 1992; Parasuraman, Zeithaml and Berry,1995, 1998; Parasuraman, Berry and Zeithaml, 1991;Zeithaml, Parasuraman and Berry, 1990). While theunweighted measures of the SERVQUAL and theSERVPERF scales have been described above vide equa-tions (1) and (2), the weighted versions of the SERV-QUAL and the SERVPERF scales as proposed by Croninand Taylor (1992) are as follows:

∑=

−=k

1jijijiji )EP(ISQ (3)

∑=

=k

1jijiji )P(ISQ (4)

where: Iij is the weighting factor, i.e., importanceof attribute ‘j’ to an individual ‘i.’

Though, on theoretical grounds, addition of weightsmakes sense (Bolton and Drew, 1991a), not much im-provement in the measurement potency of either scalehas been reported after inclusion of importance weights.Between weighted versions of two scales, weightedSERVPERF scale has been theoretically posited to besuperior to weighted SERVQUAL scale (Bolton and Drew,1991a).

As pointed out earlier, one major problem with thepast studies has been their preoccupation with assess-ment of psychometric and methodological soundness of

the two scales. The diagnostic ability of the scales hasnot been explicitly explicated and empirically investi-gated. The psychometric and methodological aspects ofa scale are no doubt important considerations but onecannot overlook the assessment of the diagnostic powerof the scales. From the strategy formulation point ofview, it is rather the diagnostic ability of the scale thatcan help managers in ascertaining where the qualityshortfalls prevail and what possibly can be done to closedown the gaps.

METHODOLOGY

The present study is an attempt to make a comparativeassessment of the SERVQUAL and the SERVPERF scalesin the Indian context in terms of their validity, abilityto explain variance in the overall service quality, powerto distinguish among service objects/firms, parsimonyin data collection, and, more importantly, their diagnos-tic ability to provide insights for managerial interven-tions in case of quality shortfalls. Data for making com-parisons among the unweighted and weighted versionsof the two scales were collected through a survey of theconsumers of the fast food restaurants in Delhi. The fastfood restaurants were chosen due to their growingfamiliarity and popularity with the respondents understudy. Another reason was that the fast food restaurantservices fall mid way on the ‘pure goods - pure service’continuum (Kotler, 2003). Seldom are the extremes foundin most service businesses. For ensuring a greater gen-eralizability of service quality scales, it was considereddesirable to select a service offering that is comprisedof both the good (i.e., food) and service (i.e., preparationand delivery of food) components. Eight fast food res-taurants (Nirulas, Wimpy, Dominos, McDonald, PizzaHut, Haldiram, Bikanerwala, and Rameshwar) rated asmore familiar and patronized restaurants in differentparts of Delhi in the pilot survey were selected.

Using the personal survey method, 300 studentsand lecturers of different colleges and departments ofthe University of Delhi spread all over the city of Delhiwere approached. The field work was done duringDecember 2001-March 2002. After repeated follow-ups,only 200 duly filled-in questionnaires could be collectedconstituting a 67 per cent response rate. The sample wasdeliberately restricted to students and lecturers of DelhiUniversity and was equally divided between these twogroups. The idea underlying the selection of these twocategories of respondents was their easy accessibility.


29

Quota sampling was employed for selecting respon-dents from these two groups. Each respondent was askedto give information about two restaurants — one ‘mostfrequently visited’ and one ‘least frequently visited.’ Atthe analysis stage, collected data were pooled togetherthus constituting a total of 400 responses.

Parasuraman, Zeithaml and Berry’s (1988) 22-itemSERVQUAL instrument was employed for collecting thedata regarding the respondents’ expectations, percep-tions, and importance weights of various service at-tributes. Wherever required, slight modifications in thewording of scale items were made to make the question-naire understandable to the surveyed respondents. Someof the items were negatively worded to avoid the prob-lem of routine ticking of items by the respondents. Inaddition to the above mentioned 66 scale items (22 eachfor expectations, perceptions, and importance rating),the questionnaire included items relating to overallquality, overall satisfaction, and behavioural intentionsof the consumers. These items were included to assessthe validity of the multi-item service quality scales usedat our end. The single-item direct measures of overallservice quality, namely, ‘overall quality of these restau-rants is excellent’ and overall satisfaction, namely, ‘over-all I feel satisfied with the services provided’ were used.Cronin and Taylor (1992) have used similar measuresfor assessing validity of multi-item service quality scales.Behavioural intentions were measured with the help ofa 3-item scale as suggested by Zeithaml and Parasur-aman (1996) and later used by Brady and Robertson(2001) and Brady,Cronin and Brand (2002).3

Excepting importance weights and behaviouralitems, responses to all the scale items were obtained ona 5-point Likert scale ranging from ‘5’ for ‘strongly agree’to ‘1’ for ‘strongly disagree.’ A 4-point Likert scaleanchored on ‘4’ for ‘very important’ and ‘1’ for ‘notimportant’ was used for measuring importance weights

of each item. Responses to behavioural intention itemswere obtained using a 5-point Likert scale ranging from‘1’ for ‘very low’ to ‘5’ for ‘very high.’

FINDINGS AND DISCUSSION

Validity of Alternative Measurement Scales

As suggested by Churchill (1979), convergent and dis-criminant validity of four measurement scales wasassessed by computing correlations coefficients for dif-ferent pairs of scales. The results are summarized inTable 1. The presence of a high correlation betweenalternate measures of service quality is a pointer to theconvergent validity of all the four scales. The SERVPERFscale is, however, found having a stronger correlationwith other similar measures, viz., SERVQUAL andimportance weighted service quality measures.

A higher correlation found between two differentmeasures of the same variable than that found betweenthe measure of a variable and other variable implies thepresence of discriminant validity (Churchill, 1979) inrespect of all the four multi-item service quality scales.Once again, it is the SERVPERF scale which is foundpossessing the highest discriminant validity.

SERVPERF is, thus, found providing a more con-vergent as well as discriminant valid explanation ofservice quality.

Explanatory Power of AlternativeMeasurement Scales

The ability of a scale to explain the variation in theoverall service quality (measured directly through asingle-item scale) was assessed by regressing respond-ents’ perceptions of overall service quality on its corre-sponding multi-item service quality scale. Adjusted R2

values reported in Table 2 clearly point to the superiorityof SERVPERF scale for being able to explain greater

Table 1: Alternate Service Quality Scales and Other Measures — Correlation Coefficients

SERVQUAL SERVPERF Weighted Weighted Overall Overall Behavioural(P-E) (P) SERVQUAL SERVPERF Service Satisfaction Intentions

I (P-E) I (P) Quality

SERVQUAL (P-E) 1.000

SERVPERF (P) .735 -

Weighted SERVQUAL I(P-E) .995 .767 -

Weighted SERVPERF I(P) .759 .993 .772 -

Overall service quality .416 .544 .399 .531 -

Overall satisfaction .420 .557 .425 .554 .724 -

Behavioural intentions .293 .440 .308 .459 .570 .528 1.000


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proportion of variance (0.294) in the overall service qualitythan is the case with other scales. Addition of importanceweights is not able to enhance the explanatory powerof the SERVPERF and the SERVQUAL scales. The resultsof the present study are quite in conformity with thoseof Cronin and Taylor (1992) who also found addition ofimportance weight not improving the predictive abilityof either scale.

Discriminatory Power of AlternativeMeasurement Scales

One basic use of a service quality scale is to gain insightas to where a particular service firm stands vis-à-visothers in the market. The scale that can best differentiateamong service firms obviously represents a better choice.Mean quality scores for each restaurant were computedand compared with the help of ANOVA technique todelve into the discriminatory power of alternative meas-urement scales. The results presented in Table 3 showsignificant differences (p < .000) existing among meanservice quality scores for each of the alternate scales. Theresults are quite in line with those obtained by usingsingle-item measures of service quality. The results thusestablish the ability of all the four scales to be able todiscriminate among the objects (i.e., restaurants), and assuch imply that any one of the scales can be used formaking quality comparisons across service firms.

Parsimony in Data Collection

Often, ease of data collection is a major considerationgoverning the choice of measurement scales for studiesin the business context. When examined from this per-spective, the unweighted performance-only scale turnsout to be the best choice as it requires much less infor-mational input than required by the other scales. Whilethe SERVQUAL and weighted service quality scales(both SERVQUAL and the SERVPERF) require data oncustomer perceptions as well as customer expectationsand/or importance perceptions also, the performance-only measure requires data on customers’ perceptionsalone, thus considerably obviating the data collectiontask. While the number of items for which data arerequired is only 22 for the SERVPERF scale, it is 44 and66 for the SERVQUAL and the weighted SERVQUALscales respectively (Table 4). Besides making the ques-tionnaire lengthy and compounding data editing andcoding tasks, requirement of additional data can haveits toll on the response rate too. This study is a case inpoint. Seeing a lengthy questionnaire, many respon-dents hesitated to fill it up and returned it on the spot.

Diagnostic Ability of Scales in ProvidingInsights for Managerial Interventionand Strategy Formulation

A major reason underlying the use of a multi-item scalevis-à-vis its single-item counterpart is its ability to pro-vide information about the attributes where a given firmis deficient in providing service quality and thus needsto evolve strategies to remove such quality shortfallswith a view to enhance customer satisfaction in future.When judged from this perspective, all the four servicequality scales, being multi-item scales, appear capableof performing the task. But, unfortunately, the scales

Table 2: Explanatory Power of Alternative Service Scales— Regression Results

Measurement Scale R2 Adjusted R2

(Independent Variable)

SERVQUAL (P-E) .173 .171SERVPERF (P) .296 .294Weighted SERVQUAL I(P-E) .159 .156Weighted SERVPERF I(P) .282 .280

Note: Dependent variable = Overall service quality.

Table 3: Discriminatory Power of Alternate Scales — ANOVA Results

Restaurant SERVPERF Weighted SERVQUAL Weighted Overall(P) SERVPERF I (P) (P-E) SERVQUAL I (P-E) Service Quality

Nirulas 3.63 3.67 -0.28 -0.31 4.04Wimpy’s 3.41 3.44 -0.64 -0.58 3.46Dominos 3.40 3.50 -0.45 -0.41 3.52McDonalds 3.72 3.78 -0.21 -0.20 4.23Pizza Hut 3.64 3.72 -0.24 -0.29 4.00Haldiram 3.55 3.51 -0.40 -0.50 3.72Bikanerwala 3.38 3.41 -0.57 -0.62 3.65Rameshwar 3.19 3.30 -0.58 -0.58 3.19Overall mean 3.55 3.61 -0.37 -0.38 3.86F-value (significance level) 6.60 5.31 4.25 3.40 6.77

(p <.000) (p <.000) (p <.000) (p <.002) (p<.000)


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differ considerably in terms of the areas identified forimprovement as well as the order in which the identifiedareas need to be taken up for quality improvement. Thisasymmetrical power of the four scales can be probed intoby taking up four typical service attributes, namely, useof up-to-date equipment and technology, prompt res-ponse, accuracy of records, and convenience of operat-ing hours as being tapped in the study vide scale items1, 11, 13, and 22 respectively. The performance of arestaurant (name disguised) on these four scale itemsis reported in Table 5.

An analysis of Table 5 reveals the following find-ings. When measured with the help of ‘performance-only’ (i.e., SERVPERF) scale, scores in column 3 showthat the restaurant is providing quality in respect ofservice items 1, 13, and 22. The mean scores in the rangeof 3.31 to 3.97 for these items are a pointer to this in-ference. The consumers appear indifferent to the pro-vision of service quality in respect of item 11. However,when compared with maximum possible attainable valueof 5 on a 5-point scale, the restaurant under consider-ation seems deficient in respect of all the four serviceareas (column 5) implying managerial intervention inall these areas. In the event of time and resource con-straints, however, the management needs to prioritizequality deficient areas. This can be done in two ways:either on the basis of magnitude of performance scores

(scores lower in magnitude pointing to higher priorityfor intervention) or on the basis of magnitude of theimplied gap scores between perceived performance (P)and maximally attainable score of 5 (with higher gapsimplying immediate interventions). Judged anyway, theservice areas in the descending order of interventionurgency are 11, 22, 13, and 1 (see columns 3 and 5). Themanagement can pick up one or a few areas for man-agerial intervention depending upon the availability oftime and financial resources at its disposal. If importancescores are also taken into account as is the case with theweighted SERVPERF scale, the order of priority getschanged to 11, 13, 22, and 1.

In the case of the SERVQUAL scale requiring com-parison of customers’ perceptions of service perform-ance (P) with their expectations (E), the areas with zeroor positive gaps imply either customer satisfaction ordelight with the service provision and as such do notcall for any managerial intervention. But, in the areaswhere gaps are negative, the management needs to dosomething urgently for improving the quality. Whenviewed from this perspective, only three service areas,namely, 13, 11, and 1 having negative gaps, call formanagerial intervention and in that order as determinedby the magnitude of gap scores shown in column 9 ofTable 5. Taking into account the importance scores alsoas is the case with the weighted SERVQUAL scale, orderof priority areas gets changed to 11, 13, and 1 (see column10).

We thus find that though all the four multi-itemscales possess diagnostic power to suggest areas formanagerial actions, the four scales differ considerablyin terms of areas suggested as well as the order in whichthe actions in the identified areas are called for. The moot

Table 4: Number of Items Contained in Service QualityMeasurement Scales

Scale Number of Items

SERVQUAL (P-E) 44SERVPERF (P) 22Weighted SERVQUAL I(P-E) 66Weighted SERVPERF I(P) 44

Table 5: Areas Suggested for Quality Improvement by Alternate Service Quality Scales

Scale Item Performance Maximum Gap Importance I(P) or Expectation Gap (P-E) I(P-E) orItem Description (P) or Score (P-M) Score (I) Weighted Score or Weighted

SERVPERF SERVPERF (E) SERVQUAL SERVQUALScore Score

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

1. Use of up-to-dateequipment and technology 3.97 5.00 -1.03 4.28 16.99 4.37 -0.40 -1.71

11. Prompt response 3.08 5.00 -1.92 4.09 12.60 3.57 -0.49 -6.0113. Accuracy of records 3.51 5.00 -1.49 3.67 12.88 4.05 -0.54 -1.9822. Operating hours

convenient to all 3.31 5.00 -1.69 4.05 13.37 3.04 -0.27 -1.09

Action areas inorder of priority 11, 22, 13, 1 11, 22, 13, 1 11, 13, 22, 1 13, 11, 1 11, 13, 1

Note: Customer expectations, perceptions, and importance for each service quality item were measured on a 5-point Likert scale rangingfrom 5 for ‘strongly agree’ to 1 for ‘strongly disagree.’


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point, therefore, is to determine which scale providesa more pragmatic and managerially useful diagnosis.From a closer perusal of the data provided in Table 4,it may be observed that the problem of different areasand different ordering suggested by the four scales iscoming up basically due to different reference pointsused explicitly or implicitly for computing the servicequality shortfalls. While it is the maximally attainablescore of 5 on a 5-point scale that presumably is servingas a reference point in the case of the SERVPERF scale,it is customer expectation for each of the service areathat is acting as a yardstick under the SERVQUAL scale.Ideally speaking, the management should strive for at-taining the maximally attainable the performance level(a score of 5 in the case of 5-point scale) in all thoseservice areas where the performance level is less than5. This is exactly what the SERVPERF scale-based anal-ysis purports to do. However, this is tenable only undersituations when there are no time and resource con-straints and it can be assumed that all the areas areequally important to customers and they want maximal-ly possible quality level in respect of each of the serviceattributes. But, in a situation where the managementworks under resource constraints (this usually is thecase) and consumers do not equally importantly wantmaximum possible service quality provision, the man-agement needs to identify areas which are more criticalfrom the consumers’ point of view and call for imme-diate attention. This is exactly what the SERVQUALscale does by pointing to areas where firm’s performanceis below the customers’ expectations.

Between the two scales, therefore, the SERVQUALscale stands to provide a more pragmatic diagnosis ofthe service quality provision than the SERVPERF scale.4

So long as perceived performance equals or exceedscustomer expectations for a service attribute, the SERV-QUAL scale does not point to managerial interventiondespite performance level in respect to that attributefalling short of the maximally attainable service qualityscore. Service area 22 is a case in point. As per theSERVPERF scale, this is also a fitting area for managerialintervention because the perceived performance level inrespect of this attribute is far less than the maximallyattainable value of 5. This, however, is not the case withthe SERVQUAL scale. Since the customer perceptionsof a restaurant’s performance are above their expecta-tion level, there seems to be no ostensible justificationin further trying to improve the performance in this area.

The customers are already getting more than their ex-pectations; any attempt to further improve the perform-ance in this area might drain the restaurant owner ofthe resources needed for improvement in other criticalareas. Any such effort, moreover, is unlikely to add tothe customers’ delight as the customers themselves arenot desirous of having more of this service attribute asrevealed by their mean expectation score which is muchlower than the ideally and maximally attainable scoreof 5.

If importance scores are also taken into consider-ation, the weighted versions of both the scales providemuch more useful insights than those provided by theunweighted counterparts. Be it the SERVQUAL or theSERVPERF scale, the inclusion of weights does representimprovement over the unweighted measures. By incor-porating the customer perceptions of the importance ofdifferent service attributes in the analysis, the weightedservice quality scales are able to more precisely directmanagerial attention to deficient areas which are morecritical from the customers’ viewpoint and as such needto be urgently attended to. It may, furthermore, beobserved that between the weighted versions of theSERVPERF and the SERVQUAL scales, the weightedSERVQUAL scale is much more superior in its diagnos-tic power. This scale takes into account not only themagnitude of customer defined service quality gaps butalso the importance weights that customers assign todifferent service attributes, thus pointing to such servicequality shortfalls as are crucial to a firm’s success in themarket and deserve immediate managerial intervention.

CONCLUSIONS, IMPLICATIONS, ANDDIRECTIONS FOR FUTURE RESEARCH

A highly contentious issue examined in this paper re-lates to the operationalization of service quality con-struct. A review of extant literature points to SERV-QUAL and SERVPERF as being the two most widelyadvocated and applied service quality scales. Notwith-standing a number of researches undertaken in the field,it is not yet clear as to which one of the two scales isa better measure of service quality. Since the focus ofthe past studies has been on an assessment of the psy-chometric and methodological soundness alone of theservice quality scales — and that too in the context ofthe developed world — this study represents a pioneer-ing effort towards evaluating the methodological sound-ness as well as the diagnostic power of the two scales


33

in the context of a developing country — India. A surveyof the consumers of the fast food restaurants in the Delhiwas carried out to gather the necessary information. Theunweighted as well as the weighted versions of theSERVQUAL and the SERVPERF scales were compara-tively assessed in terms of their convergent and discri-minant validity, ability to explain variation in the overallservice quality, ease in data collection, capacity to dis-tinguish restaurants on quality dimension, and diagnos-tic capability of providing directions for managerialinterventions in the event of service quality shortfalls.

So far as the assessment of various scales on the firstthree parameters is concerned, the unweighted perform-ance-only measure (i.e., the SERVPERF scale) emergesas a better choice. It is found capable of providing a moreconvergent and discriminant valid explanation of serv-ice quality construct. It also turns out to be the mostparsimonious measure of service quality and is capableof explaining greater proportion of variance present inthe overall service quality measured through a single-item scale.

The addition of importance weights, however, doesnot result in a higher validity and explanatory powerof the unweighted SERVQUAL and SERVPERF scales.These findings are quite in conformity with those ofearlier studies recommending the use of unweightedperception-only scores (e.g., Bolton and Drew, 1991b;Boulding et al., 1993; Churchill and Surprenant, 1982;Cronin, Brady and Hult, 2000; Cronin and Taylor, 1992).

When examined from the point of view of the powerof various scales to discriminate among the objects (i.e.,restaurants in the present case), all the four scales standat par in performing the job. But in terms of diagnosticability, it is the SERVQUAL scale that emerges as a clearwinner. The SERVPERF scale, notwithstanding its su-periority in other respects, turns out to be a poor choice.For, being based on an implied comparison with themaximally attainable scores, it suggests interventioneven in areas where the firm’s performance level isalready up to customer’s expectations. The incorpora-tion of expectation scores provides richer informationthan that provided by the perception-only scores thusadding to the diagnostic power of the service qualityscale. Even the developers of performance-only scalewere cognizant of this fact and did not suggest that itis unnecessary to measure customer expectations in serv-ice quality research (Cronin and Taylor, 1992).

From a diagnostic perspective, therefore, (P-E) scale

constitutes a better choice. Since it entails a direct com-parison of performance perceptions with customer ex-pectations, it provides a more pragmatic diagnosis ofservice quality shortfalls. Especially in the event of timeand resource constraints, the SERVQUAL scale is ableto direct managerial attention to service areas which arecritically deficient from the customers’ viewpoint andrequire immediate attention. No doubt, the SERVQUALscale entails greater data collection work, but it can beeased out by employing direct rather than computedexpectation disconfirmation measures. This can be doneby asking customers to directly report about the extentthey feel a given firm has performed in comparison totheir expectations in respect of each service attributerather than asking them to report their perception andexpectation scores separately as is required under theSERVQUAL scale (for a further discussion on this aspect,see Dabholkar, Shepherd and Thorpe, 2000).

The addition of importance weights further adds tothe diagnostic power of the SERVQUAL scale. Thoughthe inclusion of weights improves the diagnostic abilityof even the SERVPERF scale, the scale continues to sufferfrom its generic weakness of directing managerial atten-tion to such service areas which are not at all deficientin the customer’s perception.

In overall terms, we thus find that while theSERVPERF scale is a more convergent and discriminantvalid explanation of the service construct, possessesgreater power to explain variations in the overall servicequality scores, and is also a more parsimonious datacollection instrument, it is the SERVQUAL scale whichentails superior diagnostic power to pinpoint areas formanagerial intervention. The obvious managerial impli-cation emanating from the study findings is that whenone is interested simply in assessing the overall servicequality of a firm or making quality comparisons acrossservice industries, one can employ the SERVPERF scalebecause of its psychometric soundness and instrumentparsimoniousness. However, when one is interested inidentifying the areas of a firm’s service quality shortfallsfor managerial interventions, one should prefer theSERVQUAL scale because of its superior diagnosticpower.

No doubt, the use of the weighted SERVQUAL scaleis the most appropriate alternative from the point ofview of the diagnostic ability of various scales, yet a finaldecision in this respect needs to be weighed against thegigantic task of information collection. Following Cro-


34

nin and Taylor’s (1992) approach, one requires collectinginformation on importance weights for all the 22 scaleitems thus considerably increasing the length of thesurvey instrument. However, alternative approaches doexist that can be employed to overcome this problem.

One possible alternative is to collect informationabout the importance weights at the service dimensionrather than the individual service level. This can beaccomplished by first doing a pilot survey of the re-spondents using 44 SERVQUAL scale items and thenperforming a factor analysis on the collected data foridentifying service dimensions. Once the service dimen-sions are identified, a final survey of all the samplerespondents can be done for seeking information inrespect of the 44 scale items as well as for the importanceweights for each of the service quality dimensions iden-tified during the pilot survey stage. Addition of onemore question seeking importance information will onlyslightly increase the questionnaire size. The importanceinformation so gathered can then be used for prioritizingthe quality deficient service areas for managerial inter-vention. Alternatively, one can employ the approachadopted by Parasuraman, Zeithaml and Berry (1988).Instead of directly collecting information from the re-spondents, they derived importance weights by regress-ing overall quality perception scores on the SERVQUALscores for each of the dimensions identified through theuse of factor analysis on the data collected vide 44 scaleitems. Irrespective of the approach used, the data col-lection task will be much simpler than required as perthe approach employed by Cronin and Taylor (1992) forgathering data in connection with the weighted SERV-QUAL scale.

Though the study brings to the fore interestingfindings, it will not be out of place to mention here someof its limitations. A single service setting with a fewrestaurants under investigation and a small database ofonly 400 observations preclude much of the generali-zability of the study findings. Studies of similar kind

with larger sample sizes need to be replicated in differ-ent service industries in different countries — especiallyin the developing ones — to ascertain applicability andsuperiority of the alternate service quality scales.

Dimensionality, though an important considerationfrom the point of view of both the validity and reliabilityassessment, has not been investigated in this paper dueto space limitations. It is nonetheless an important issuein itself and needs to be thoroughly examined beforecoming to a final judgment about the superiority of theservice quality scales. It is quite possible that the con-clusions of the present study might change if the dimen-sionality angle is incorporated into the analysis. Studiesin future may delve into this aspect.

One final caveat relates to the limited power of boththe unweighted and the weighted versions of the SERV-QUAL and the SERVPERF scales to explain variationspresent in the overall service quality scores assessedthrough the use of a single-item scale. This casts doubtson the applicability of multi-item service quality scalesas propounded and tested in the developed countriesto the service industries in a developing country like India.Though regressing overall service quality scores onservice quality dimensions might somewhat improve theexplanatory power of these scales, we do not expect anyappreciable improvement in the results. The poor explan-atory power of the scales in the present study might havearisen either due to methodological considerations suchas the use of a smaller sample or a 5-point rather thana 7-point Likert scale employed by the developers ofservice quality scales in their studies or else — as is morelikely to be the case — the problem has arisen due tothe inappropriateness of items contained in the servicequality scales under investigation in the context of thedeveloping countries. Both these aspects need to bethoroughly examined in future researches so as to be ableto arrive at a psychometrically as well as manageriallymore useful service quality scale for use in the serviceindustries of the developing countries.

ENDNOTES1. Customer satisfaction with services or perception of

service quality can be viewed as confirmation or dis-confirmation of customer expectations of a service offer.The proponents of the gap model have based theirresearches on disconfirmation paradigm which main-tains that satisfaction is related to the size and directionof the disconfirmation experience where disconfirma-tion is related to the person’s initial expectations. For

further discussion, see Churchill and Surprenant, 1982and Parasuraman, Zeithaml and Berry, 1985.

2. A factor analysis of 22 scale items led Parasuraman,Zeithaml and Berry (1988) to conclude that consumersuse five dimensions for evaluating service quality. Thefive dimensions identified by them included tangibility,reliability, responsiveness, assurance, and empathy.

3. The scale items used in this connection were: “The


35

probability that I will use their facilities again,” “Thelikelihood that I would recommend the restaurants toa friend,” and “If I had to eat in a fast food restaurantagain, the chance that I would make the same choice.”

4. Even though a high correlation (r=0.747) existed be-

tween (P-M) and (P-E) gap scores, the former cannotbe used as a substitute for the latter as on a case by casebasis, it can point to initiating actions even in such areaswhich do not need any managerial intervention basedon (P-E) scores.

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Spreng, R A and Singh, A K (1993). “An Empirical Assess-ment of the SERVQUAL Scale and the Relationshipbetween Service Quality and Satisfaction,” in Peter, DW, Cravens, R and Dickson (eds.), Enhancing KnowledgeDevelopment in Marketing, Chicago, IL: American Mar-keting Association, 1-6.

Teas, K R (1993). “Expectations, Performance Evaluation,and Consumer’s Perceptions of Quality,” Journal ofMarketing, 57(October), 18-34.

Teas, K R (1994). “Expectations as a Comparison Standardin Measuring Service Quality: An Assessment of Reas-sessment,” Journal of Marketing, 58(January), 132-39.

Witkowski, T H and Wolfinbarger, M F (2002). “Compar-ative Service Quality: German and American Ratingsacross Service Settings,” Journal of Business Research, 55(11), 875-81.

Woodruff, R B, Cadotte, E R and Jenkins, R L (1983).“Modelling Consumer Satisfaction Processes UsingExperience-based Norms,” Journal of Marketing Research,20(August), 296-304.

Young, C, Cunningham, L and Lee, M (1994). “AssessingService Quality as an Effective Management Tool: TheCase of the Airline Industry,” Journal of Marketing Theoryand Practice, 2(Spring), 76-96.

Zeithaml, V A, Parasuraman, A and Berry, L L (1990).Delivering Service Quality: Balancing Customer Percep-tions and Expectations, New York: The Free Press.

Zeithaml, V A and Parasuraman, A (1991). “The Natureand Determinants of Customer Expectation of Service,”Marketing Science Institute Working Paper No. 91-113,Cambridge, MA: Marketing Science Institute.

Zeithaml, V A and Parasuraman, A (1996). “The BehavioralConsequences of Service Quality,” Journal of Marketing,60(April), 31-46.

Zeithaml, V A and Bitner, M J (2001). Services Marketing:Integrating Customer Focus Across the Firms, 2nd Edition,Boston: Tata-McGraw Hill.

Sanjay K Jain is Professor of Marketing and International Businessin the Department of Commerce, Delhi School of Economics,University of Delhi, Delhi. His areas of teaching and researchinclude marketing, services marketing, international marketing,and marketing research. He is the author of the book titled ExportMarketing Strategies and Performance: A Study of Indian Textilespublished in two volumes. He has published more than 70 researchpapers in reputed journals including Journal of Global Marketing,Malaysian Journal of Small and Medium Enterprises, Vikalpa,

Business Analyst, etc. and also presented papers at various nationaland international conferences.e-mail: [email protected]

Garima Gupta is a Lecturer of Commerce in Kamla Nehru Col-lege, University of Delhi, Delhi. She is currently pursuing herdoctoral study in the Department of Commerce, Delhi School ofEconomics, University of Delhi, Delhi.e-mail: [email protected]


37

Identification of TopPerforming Economies

Ravindra H Dholakia and Akhilesh S Kumar

In the era of globalization and liberalization, important investment and businessdecisions have to carefully consider long-term performance and prospects of differentnational economies. National governments would also compete with one another onthe strength of their economic performance and policies. Several organizations makeregular efforts to evaluate prospects and rank countries for different purposes butresearch identifying the top performing economies considering different dimensions oftheir long-term performance is conspicuous by its absence.

Using seven indicators of economic performance of 187 countries, this paperidentifies the top 50 performers during the decades of 1981-90 and 1991-2000. Five ofthese indicators are the trend rates of growth over a decade in imports, foreign directinvestment (FDI), capital formation, per capita income, and forex reserves. Averageinflation rate and Human Development Index (HDI) are the remaining indicators. Theselected indicators are very distinct from one another not only during the decade ofeighties but also during the nineties. It is found that economic performance of countries,which was already specialized in a few dimensions, is becoming more specialized andfocused during the nineties when compared to the eighties. This paper also examines theinter-relationship among the indicators over time.

This study has generated findings for national policy making and for businesses toassess macroeconomic prospects. There are 26 common countries in the two sets of top50 performers during the eighties and the nineties. High performance on the consumerinflation and/or human development front has emerged practically as a pre-condition forconsistently good overall performance. On this count, it appears that a large number ofthe new entrants to the club of 50 top performers during the nineties are not likely to holdon to their position in the coming decade. Such emerging economies may prove to berisky. The experience of the eighties and the nineties suggests that high inflation duringa decade does not deter the solid real economic performance on other dimensions duringthe same decade but may create problems of maintaining consistency of relativeperformance over time, if not checked. For predicting the overall performance ofcountries, past performance does not help in general. However, three indicators, viz.,growth of per capita income, growth of FDI, and HDI can be predicted to some extentthrough past performance on various dimensions. The findings suggest the following:

A trade-off exists between high inflation and future high growth and between highinflation and future high HDI.Long-term growth of investment may negatively affect the future long-term growth ofoutput and long-term growth of forex reserves may negatively affect future long-termgrowth of FDI in a country. Growth causes human capital and not vice-versa.Based on the prediction of partial performance, the study identifies 15 economieslikely to be among the top 50 performers in the first decade of the 21st century. Sincefour of the seven performance indicators do not depend on past performance, theremaining 35 top performers may spring genuine surprises.Economic environment and policies of countries during the decade would decidetheir relative performance.

KEY WORDS

Emerging Economies

Economic Indicators

Cross-country Regression

International Ranking

Economic Development

Executive Summary



39

In the era of greater liberalization and globalization,top performing economies of the world need to becarefully identified. This is important for the busi-

ness strategy of the existing and potential multinationalcorporations as well as the policy decisions of the go-vernments in different countries. Of late, several organ-izations have been conducting similar exercises regular-ly (The Economist, 1999; World Economic Forum, 1999,2002, and 2003; International Finance Corporation, 1999;World Bank, 1999, 2002, 2003, etc). Some of these exer-cises use only the published macroeconomic data avail-able readily from secondary sources (e.g., The Econo-mist, 1999; International Finance Corporation, 1999;Global Edge, 2002; and World Bank, 2003), whereas theothers combine them with specially conducted surveysin the participating countries (e.g., World EconomicForum, 1999, 2002, and 2003). Moreover, the preciseobjectives and focus of these exercises also differ. Someof them focus on the better performers amongst emerg-ing markets only (e.g. The Economist, 1999; Internation-al Finance Corporation, 1999; Global Edge, 2002), whilethe others identify the most competitive and technolog-ically advanced economies (e.g., World Economic Fo-rum, 1999, 2002, and 2003).

The emerging economies, or more precisely, theemerging market economies, are generally identified onthree criteria, viz., (i) low income or ‘developing coun-try’ status, (ii) high economic growth, and (iii) govern-ment policies leading to greater opening of the economyto domestic and global market forces (Arnold and Quelch,1998; Hoskisson et al., 2000). The Economist (1999) cur-rently identifies two distinct sets, viz., emerging eco-nomies and developed countries where size is also oneof the criteria. In 1995, it had suggested grouping ofcountries into ‘paralysed’ (the poor economies), ‘pro-gressing’ (the emerging economies), and ‘paranoid’ (therich countries terrified by competition from the progres-sives). However, it soon realized that these groupingswould not remain stable over time, given the ever-chang-ing nature of the global forces. It, therefore, decided toidentify two sets based on economic expansion throughsound policies followed by countries with absolute sizeof the economy playing an important role. The Interna-tional Finance Corporation (1999) identified 51 rapidlygrowing developing countries as emerging economiesand Hoskisson et al. (2000) added 13 transition econo-mies in the former USSR to make a list of 64 emergingmarket economies. All developed countries were ex-

cluded from their list.There is, however, no serious effort at identifying

the top performing economies in the world over a period,say a decade, irrespective of the level of their develop-ment. We need to consider the economic performanceof different countries on various dimensions relevant forcorporate business strategies and government policies.In this paper, we make an attempt in this direction byfirst considering a set of relevant indicators of economicperformance over a decade and then identifying the top50 economies with the help of those indicators. We reportthe results of this exercise for the decades of the eightiesand the nineties and examine their similarities andimplications. We also discuss the possibility of predict-ing a set of top performers for the next decade.

INDICATORS OF PERFORMANCE OVER ADECADE

Growth of Imports (Gimpgs)

Since business interests are linked to the market, we lookfor performance indicators primarily connected with themarkets. We, therefore, consider the international tradeof a country to get our first indicator of performance.Imports of goods and services into an economy providethe rest of the world with the market opportunities todo business with the country. While the size of importsdetermines the importance of the economy, its rate ofgrowth over a fairly long period, say a decade, wouldreflect the performance of the economy. It is not the sizebut the rate of expansion that provides the businessopportunity. We expect a performing economy to havea consistently high growth of imports. If a performingeconomy shows a low growth of imports, it implies thepresence of either domestic distortions or restrictivetrade policies as in the case of Japan (Teramishi, 1992),Malta (Bonnici, 2002), Cyprus, Panama, etc. Both re-present negative aspects of the economic performanceof a country. On the other hand, if the growth of importsis high on a sustained basis in a country not performingwell on other fronts, e.g., Brazil, Ghana, Mexico, Turkey,etc., it may reflect a long-term strategy for growth basedon the correction of domestic distortion. A period as longas a decade would hopefully ensure that short-term andtemporary factors do not unduly influence the results.

Growth of Foreign Direct Investment (Gfdi)

The second indicator could be the ability of the economy

40 IDENTIFICATION OF TOP PERFORMING ECONOMIES

40

to attract foreign capital. Trade liberalization is certainlyan important dimension of globalization but factorsflowing across the border are also an integral part of theconcept as accepted by the World Trade Organizationand its agreements on investment and services (Goyaland Mohd, 2001). Since capital is fungible and relativelymore mobile across nations, the net inflows of the foreigndirect investment (FDI) during a year would again reflectthe level of development of an economy. Growth in theseflows over a decade would reveal changing perceptionsof the global community and fundamental changes takingplace in the structure and policies in the economy. Verylow growth of FDI over a decade would indicate eitherrelative stagnation and saturation of the growth pros-pects of the economy in the foreigners’ perception orpresence of policies discouraging FDI. These are bothnegative aspects of economic performance. High growthof FDI like high growth of imports gives extra weightto the globally emerging markets.

Growth of Gross Capital Formation (Ggcf)

The third criterion identifying the top performers is toconsider the total capital investment or capital formationundertaken in the economy. The gross capital formation(GCF) during a year reflects the level of developmentof an economy. The growth of real GCF over a decadereveals the rate of acceleration in the productive capacityand thereby indicates the maximum growth the eco-nomy is capable of achieving. It is possible to argue thatan economy can grow over time mainly through sus-tained technical progress and may not, therefore, requirevery high growth of GCF1. However, most of the tech-nical advances over a long time require fresh doses ofcapital (Nelson, 1964). A high rate of technical progresson a sustained basis would lead to a high rate of ob-solescence and hence a high rate of depreciation. Thegross investment would, therefore, show high growth.Thus, a performing economy is not likely to show lowgrowth of GCF.

Growth of Per Capita Gross Domestic Product(Ggdppc)

The next criterion could be the size of the market asmeasured by the per capita purchasing power generatedin the system. Per capita real gross domestic product (GDPpc) is usually taken to reflect the level of developmentof a country. Its rate of growth sustained over a decadewould be an undisputed indicator of economic perfor-

mance of an economy. All the studies cited earlier haveconsidered an indicator measuring economic expansion.We propose to consider GDP and not GNP because wewould like to emphasize the productive capacity andresource efficiency in a geographical region rather thanincome accruing to the resources of a country. Secondly,the economic performance should be measured over timeafter adjusting for population growth.

Inflation (INF)

Another criterion for measuring the economic perfor-mance of the economies is price stability. Low inflationis one of the long-term policy objectives in almost allthe countries. The lower the consumer price inflation,the better the investment and business climate in a country(Barro, 1997). A low average rate of inflation in a countryimplies that the relative prices of commodities tend toremain more or less stable. The relative demand forcommodities would then be determined by the growthof income and change in tastes and preferences. Sinceboth are reasonably predictable, business uncertaintiesand risks are lower. High inflation, on the contrary, leadsto greater business uncertainties and risks. Inflation isa distinct aspect of the economic performance of a countryand should be included as a performance criterion togive due consideration to the business climate andsentiments.

Growth of Forex Reserves (Gfr)

Yet another performance indicator is the net result ofthe balance of payments of the country. The net effectof the current account and capital account is on the totalreserves of foreign currency in the economy. There areseveral countries that have been aggressively pursuingthe policy of accumulating foreign exchange reserves intheir central monetary authority so that the currencycrisis or any such threat to the stability of their financialsystem can be effectively tackled if the need arises (Jalan,2002; Kapur and Patel, 2003). In the light of the expe-rience of the currency and financial crises during the lastdecade, the behaviour of the total reserves of foreigncurrencies in the country assumes a special significanceas an indicator of the performance of the economy. Itbasically acts like a signal of the market power of thecountry’s central monetary authority in the forex mar-ket. Again, it is not the level but the growth of reservesthat reflects the economic performance of the countryover a decade.


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Human Development Index (HDI)

Finally, we consider the performance of an economy interms of its past developmental efforts, specific pointsof advantage gained through deliberate developmentstrategy or available through natural endowments, giftsor coincidences. All these factors get converted into thedevelopment of human resources in the country. HDIis based on the achievements of the economy on edu-cation, health, and income. It is a reasonably compre-hensive measure of the level of human development ina country in relation to other countries (UNDP, 2002).The level of HDI once attained is likely to sustain itselfover time. Rapid improvements are possible but drasticreductions are unlikely. Since the level of HDI generallysignals the quality of human resources in a country, itmay also reflect the ability to generate innovations, absorbtechnical progress, and adapt to changing businessenvironments. All these factors are likely to determinethe potential of the country for economic growth andadvancement. We, therefore, take the level of HDI pre-vailing in a country at the mid-point of the decade asan important indicator of economic performance overthe decade.

Based on various aspects of the economic perfor-mance of a country relevant from the business angle, wehave identified seven different indicators. Except forHDI, all the other indicators are annual rates of growthover a decade2. For consumer price inflation, an arith-metic average of the annual rate is taken over the rele-vant decade. For the remaining five indicators, semi-logarithmic time trend rate is estimated for the twodecades. All these seven indicators are calculated for allthe countries3 for the decades 1981-90 and 1991-2000.

How distinct are these seven indicators chosen toreflect the economic performance of countries? Theyappear to be quite distinct and represent different di-mensions of the economic performance of countriesduring the eighties and the nineties. Tables 1 and 2 reportthe correlation matrices among these seven indicatorsfor the eighties and the nineties respectively4. It is evidentthat none of the correlations is very high and substantialwhere r-squared exceeds 0.5. In fact, for most of the pairs,r-squared is less than 0.1, and for several pairs, r-squaredis less than 0.01. Thus, the chosen seven indicators havecaptured quite well the distinct dimensions of the eco-nomic performance of the countries during the last twodecades. Moreover, the two tables also show a generalweakening of the correlations during the nineties when

compared with the eighties for all indicators exceptinflation. This is an interesting finding because it meansthat the economic performance of countries, which wasalready specialized on a few dimensions, is becomingmore specialized and focused during the nineties whencompared to the eighties. It suggests that the develop-ment goals, targets, and strategies are becoming sharperand narrowly focused over time.

This has an important implication for the identifi-cation of the top performers because the standardmethods of combining different indicators attaching‘some uniform weights’ become invalid and even con-ceptually challengeable. Thus, different popular meth-ods like using equal weights to ranking of individualindicators or statistically derived weights through theprincipal component method (Desilva, Thattil andGamini, 2000; Biswas and Caliendo, 2002; Güveli, 2000)or equal weights after converting the indicators intoindices as in PQLI (Morris, 1979) and HDI (UNDP, 2002)

Table 1: Correlation Matrix among the Seven Indicators —1980s

Ggcf Gimpgs Gfdi Gfr INF HDI

Ggdppc 0.68084 0.55525 0.16520 0.40805 0.29126 0.34090(132) (130) (103) (134) (131) (123)

Ggcf 0.62415 0.20253 0.50281 0.13590 0.04504(127) (95) (119) (117) (111)

Gimpgs 0.12082 0.42460 0.10950 0.31355(97) (123) (123) (109)

Gfdi 0.16193 0.00308 0.35334(105) (99) (87)

Gfr 0.10554 0.12514(128) (109)

INF 0.01486(108)

Note: Numbers in parentheses are the numbers of observations(countries).

Table 2: Correlation Matrix among the Seven Indicators—1990s

Ggcf Gimpgs Gfdi Gfr INF HDI

Ggdppc 0.53666 0.57737 0.08711 0.02706 0.34676 0.15655(55) (58) (55) (164) (159) (139)

Ggcf 0.61736 0.14944 0.04251 0.09696 0.02863(153) (141) (151) (148) (130)

Gimpgs 0.08429 0.01682 0.28562 0.15748(144) (154) (151) (131)

Gfdi 0.13574 0.02729 0.02901(151) (148) (132)

Gfr 0.01629 0.08516(160) (133)

INF 0.06286(133)

Note: Numbers in parentheses are the numbers of observations(countries).


42

are all meaningless in the light of our findings. Countrieshaving different perceptions attach different importanceto various dimensions of economic performance. Anyuniform scale of weights cannot do justice to all. We,therefore, need a different approach.

IDENTIFYING THE TOP PERFORMERS

If the economic performance of countries is consideredalong one dimension and with one indicator, the rank-ings are generally non-controversial. However, whenthere are several dimensions and multiple indicators,overall rankings would be problematic. But, in order toidentify a certain number of top performers, we may notneed precise overall rankings of countries. This is be-cause if our objective is to identify the 50 top overallperformers, we can first identify the top 50 countries ineach of the seven indicators by awarding one point each.We would then emerge with seven different sets of 50countries each. The countries that are common to all theseven sets are necessarily among the top 50 overallperformers. This would be a sub-set comprising of onlya small number of countries if at all. During the nineties,for example, there was no such country and during theeighties, there were only three such countries. We may,then, consider countries present in six out of the sevensets. These countries are among the top 50 performersin six out of the seven dimensions. Again the numberof such countries is likely to be small, e.g., only eightsuch countries in the eighties and two in the nineties.We can, then, consider the countries appearing in anyfive sets, four sets and so on. Table 3 provides thedistribution of 187 countries considered in this studyaccording to their score that shows the number of setsthey appear in during the eighties and the nineties.

Some interesting patterns of economic performanceof countries emerge from Table 3. The number of all-round performers scoring at least five points has sharplyreduced to 12 during the nineties compared to 25 duringthe eighties. But, at the same time, the number of coun-tries with a score of two or more has increased from 82

in the eighties to 96 in the nineties. An average countryduring the eighties had a score of one or none whereas,during the nineties, it had two or more. However, amongthe top performers, the shift appears to be in the reversedirection — an average top performer having a score offour or more during the eighties to only three duringthe nineties.

We may return to our question of how to select thetop 50 overall performers if the distribution of thecountries is as given in Table 3. We can readily see thatthere are 39 countries in the eighties and 30 countriesin the nineties with a score of four or more but thereare 56 countries in the eighties and 66 countries in thenineties with a score of three or more. Therefore, we haveto select 11 out of 17 countries in the eighties and 20 outof 36 countries in the nineties with a score of three tocomplete the list of 50 top overall performers in eachdecade. In order to select those countries, the indicatorsare converted into the corresponding indices with thebest value in the indicator during a decade as 100 andthe worst value as zero from among all the 187 countries.This exercise is done only for those indicators where thecountry ranks in the top 50. Then, the index values forall the three indicators in each of the 17 countries in theeighties and 36 countries in the nineties are added toarrive at the rankings of those countries so as to select11 countries in the eighties and 20 countries in thenineties5. The top 50 overall performers so identified arepresented in Tables 4 and 5 respectively along with theirrankings in the seven indicators and the total score.

The advantage of this method over the other meth-ods is that non-availability of data on one, two or threeindicators for a country does not disqualify the countryfrom being effectively considered. Actually, Tables 4 and5 clearly bring out that there are several countries amongthe top 50 performing economies in the world where thedata on some of the seven indicators are not availableor reported. Methodological requirements of compre-hensive data availability should not come in the way ofrecognizing their superior performance on other fronts.The only assumption we have to make about the non-availability of an indicator value in a country is that thecountry does not rank among the top 50 in that particularindicator during the decade. It is certainly not as restric-tive an assumption or a procedure as dropping thecountry altogether from the analysis, a common practicein other similar exercises.

Table 3: Distribution of Countries According to theirScores during the Eighties and the Nineties

Score* 7 6 5 4 3 2 1 0

No. of countries during the eighties 3 8 14 14 17 26 52 53No. of countries during the nineties 0 2 10 18 36 30 48 43

*If a country appears in one set during the decade, it gets a scoreof one. The score of five, for instance, means that the country isin top 50 countries in five out of seven indicators during the decade.


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Table 4: Top 50 Countries on Overall Economic Performance during the Eighties

No. Country Ggdppc Ggcf Gimpgs Gfdi Gfr INF HDI Score@Rank Rank Rank Rank Rank Rank Rank

1 Japan 27 29 25 21 33 7 4 7

2 Korea, Rep. 3 4 6 17 20 47 39 7

3 United Kingdom 36 23 20 11 39 49 18 7

4 Belize 47 6 51 14 10 27 48 6

5 Canada 60 34 19 13 25 43 1 6

6 Denmark 66 35 48 4 31 42 8 6

7 Finland 41 55 39 7 23 50 12 6

8 Spain 40 24 12 29 22 75 20 6

9 St. Kitts and Nevis 2 1 29 12 26 20 6

10 St. Vincent and the Grenadines 14 22 46 20 30 32 6

11 Thailand 9 8 5 28 14 30 61 6

12 Antigua and Barbuda 5 10 21 35 48 5

13 Belgium 59 42 47 37 53 18 10 5

14 China 1 5 15 27 49 87 79 5

15 Dominica 26 36 5 17 34 5

16 Luxembourg 16 17 30 31 17 5

17 Malta 22 12 16 71 90 9 33 5

18 Mauritius 12 9 3 8 1 69 59 5

19 Portugal 33 51 17 19 6 102 34 5

20 Singapore 17 67 49 44 8 36 5

21 St. Lucia 8 16 11 77 19 28 5

22 Sweden 55 31 41 23 37 61 8 5

23 Switzerland 75 48 38 37 68 18 5 5

24 Turkey 38 27 10 25 29 121 67 5

25 United States 44 54 18 44 51 35 2 5

26 Australia 63 59 34 39 36 67 12 4

27 Botswana 6 3 7 68 4 81 73 4

28 Chad 31 8 106 11 12 117 4

29 Costa Rica 95 21 14 51 40 116 41 4

30 Cyprus 13 56 54 79 46 36 26 4

31 France 65 53 45 32 82 46 10 4

32 Grenada 10 38 71 24 89 38 4

33 Hong Kong, China 11 50 2 66 25 4

34 India 29 25 31 35 120 72 97 4

35 Italy 49 63 27 67 45 77 19 4

36 Macao, China 25 18 23 3 76 4

37 Mali 137 46 24 50 18 118 4

38 Netherlands 67 52 49 33 73 11 6 4

39 Seychelles 21 7 1 56 99 15 4

40 Austria 61 60 42 52 74 22 15 3

41 Burkina Faso 91 14 72 93 24 3 121 3

42 Chile 35 11 61 58 69 108 42 3

43 Dominican Republic 90 33 4 47 123 114 65 3

44 Germany 53 64 58 34 81 13 14 3

45 Greece 97 85 43 62 34 106 22 3

46 Ireland 37 89 35 94 61 64 21 3

47 New Zealand 96 77 56 30 21 82 16 3

48 Norway 50 82 74 36 55 63 6 3

49 Panama 152 129 111 3 100 5 44 3

50 Swaziland 24 69 50 16 57 96 85 3

@The number of indicators in which the country is in top 50.Sources: (1) World Development Indicators 2002 (on CD ROM).

(2) International Financial Statistics 2003 (online: http://ifs.apdi.net).(3) Human Development Report 2002 (online: http://hdr.undp.org).


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Table 5: Top 50 Countries on Overall Economic Performance during the Nineties

No. Country Ggdppc Ggcf Gimpgs Gfdi Gfr INF HDI Score@Rank Rank Rank Rank Rank Rank Rank

1 Ireland 4 14 6 22 131 30 21 6

2 Poland 8 8 4 26 17 129 39 6

3 Australia 38 40 37 124 117 18 2 5

4 Croatia 26 29 90 16 9 154 41 5

5 India 18 24 27 27 23 87 102 5

6 Korea, Rep. 17 119 30 34 40 62 28 5

7 Lithuania 159 22 48 9 10 145 43 5

8 Slovak Republic 32 18 13 61 26 90 33 5

9 Trinidad and Tobago 49 6 28 89 36 66 42 5

10 Uganda 24 21 5 7 15 105 125 5

11 United States 53 26 26 35 145 32 4 5

12 Vietnam 5 5 2 86 29 45 88 5

13 Bangladesh 36 23 22 4 150 63 116 4

14 Canada 66 55 47 40 84 13 1 4

15 Chile 9 30 23 57 92 94 37 4

16 Denmark 67 47 73 39 87 15 16 4

17 Finland 31 77 51 19 124 10 15 4

18 Hungary 44 12 9 134 80 117 38 4

19 Israel 68 94 44 48 39 96 22 4

20 Japan 104 124 94 38 46 2 7 4

21 Luxembourg 20 45 83 155 16 13 4

22 Maldives 7 39 32 118 24 78 72 4

23 Malta 25 127 119 42 135 34 30 4

24 New Zealand 73 32 49 138 125 8 18 4

25 Nicaragua 103 9 19 23 35 156 95 4

26 Romania 120 143 38 15 48 151 48 4

27 Singapore 13 38 117 89 7 26 4

28 Slovenia 27 10 53 116 11 107 28 4

29 Uruguay 56 71 41 14 43 139 35 4

30 Yemen, Rep. 42 19 46 22 132 119 4

31 Armenia 127 42 159 8 5 160 70 3

32 Austria 84 103 72 49 116 21 14 3

33 Bahamas, The 115 5 83 28 34 3

34 Belgium 78 93 95 44 148 11 2 3

35 Bosnia and Herzegovina 2 3 3 3

36 Cyprus 33 140 135 132 119 47 25 3

37 Czech Republic 86 44 7 54 66 79 31 3

38 Equatorial Guinea 1 2 1 74 100 98 3

39 Georgia 178 1 17 6 163 140 3

40 Germany 100 113 85 12 151 19 16 3

41 Malaysia 22 90 39 151 96 44 53 3

42 Netherlands 62 89 80 47 161 26 8 3

43 Norway 37 54 76 59 112 24 4 3

44 Panama 80 20 100 53 102 5 50 3

45 Seychelles 108 36 8 82 140 20 3

46 Spain 52 86 33 126 157 49 20 3

47 Sudan 6 1 13 148 112 3

48 Sweden 72 88 60 36 159 23 4 3

49 Switzerland 117 110 91 44 137 11 11 3

50 United Kingdom 54 65 57 50 144 35 10 3

@The number of indicators in which the country is in top 50.Sources: As cited in Table 4.


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Top 50 Performers of the Eighties and the Nineties

A comparison of the top 50 performers during the eight-ies and the nineties is interesting. Twenty-six countriesare common to both the lists. Twenty-four countries outof the top 50 during the eighties dropped out of the listto make room for 24 new entrants during the nineties.Out of the 24 emerging top performers during the nine-ties, as many as 13 countries had serious problems aboutdata availability during the eighties. It is difficult to saywhether they would have made it into the top 50 per-formers in the eighties if satisfactory data had beenavailable on all indicators during the eighties. Ignoringthe problem of data availability, however, it is importantto compare the performance of all these 74 countries overtwo decades. Table 6 provides comparison in terms ofthe seven indicators between the two decades for eachof the 26 countries common to both the lists.

Table 6 reveals that in only five countries, viz.,Australia, Chile, India, Ireland, and New Zealand, hasthe country score increased during the nineties over theeighties. In another five countries, it has remained thesame and in the remaining 16 countries, it has fallen.Thus, although the 26 countries appear to have main-tained their status as belonging to the top 50 performersin the eighties and the nineties, the relative performancein 16 of them has actually deteriorated over the years.A closer look at Table 6 reveals that, while the absoluteperformance in terms of most of the seven indicators hasdeteriorated for several of these 16 countries, it hasactually improved for Denmark, Finland, and the Neth-erlands in spite of their relative performance going down.The trend rate of growth of per capita real GDP hasincreased from the eighties to the nineties only in nineout of these 26 common top performers during the twodecades.

Another distinctive feature of the 26 common coun-tries emerging clearly from Table 6 is that except India,the others have very high performance on the inflationand/or HDI front. Among this group of consistent per-formers, India is the only country with poor performanceon both these counts. Except India, all countries showimprovement in terms of inflation, while on the HDIfront, all countries show clear improvement. It appearsthat high level of human development with good controlover consumer inflation is almost a pre-condition forconsistently high overall economic performance6. Noneof the other five indicators generates such a close asso-ciation.

Those 24 countries that dropped out of the list of50 top performers during the nineties from the list ofthe eighties indicate an all-round deteriorated perform-ance except HDI (Table 7). In HDI, there is a clearimprovement in all the countries.

Table 7 shows that in 18 out of 24 countries, the trendrate of growth in per capita real GDP has fallen sharplyduring the nineties compared to the eighties. The pre-sence of China among these 24 countries is somewhatsurprising because it has experienced absolute improve-ment in all but two indicators and yet it has lost its placerelative to the others. However, drawing from our earlierdiscussion, we can argue that China is not performingvery well relatively on both HDI and inflation and hencemay not be able to maintain consistently high overalleconomic performance. In fact, out of the performers ofthe eighties, there are only two countries, viz., Franceand Belize, that have high performance on HDI andinflation and yet failed to maintain consistently highrelative overall economic performance during the nine-ties.

The group of emerging performers of the ninetiesis presented in Table 8. Non-availability of data for theeighties in the case of 11 out of the 24 countries makesit difficult to draw meaningful conclusions. Some ofthose countries could have been among the top 50countries if satisfactory data had been available for theeighties. From the available data, however, we can saythat several of these new entrants to this club of 50 arerelatively shaky in the sense that they may not be ableto hold on to their membership in the coming decade.This is because their performance on HDI and inflationfront is relatively not high and far from what is required.Thus, Armenia, Bangladesh, Bosnia, Equatorial Guinea,Georgia, Maldives, Nicaragua, Sudan, Uganda, andYemen will have to be extra cautious and make extraefforts to maintain their relative performance over thenext decade.

The key to success in these economies appears tobe control of inflation because they are lagging far behindin terms of HDI, the other critical indicator. Malaysia,the Bahamas, and Trinidad and Tobago, on the otherhand, are very likely to maintain their relative perform-ance during the next decade. All other countries on thelist have to tackle the problem of high inflation in theireconomy to achieve stability and consistency of perform-ance. It is indeed surprising that all the emerging per-formers of the nineties except the Bahamas, Malaysia,


46

Table 6: Comparison of Performance of 26 Common Countries during the Eighties and the Nineties

No. Nations GDP pc GCF Imp GS FDI TR INF HDI Score

1 Australia 80s 0.0216 0.0346 0.0576 0.1965 0.1312 8.1277 0.873 490s 0.0300 0.0701 0.0842 0.0675 0.0515 2.2212 0.927 5

2 Austria 80s 0.0221 0.0331 0.0506 0.1265 0.0395 3.5296 0.867 390s 0.0172 0.0207 0.0584 0.2592 0.0532 2.3185 0.909 3

3 Belgium 80s 0.0225 0.0495 0.0482 0.2032 0.0755 3.4088 0.875 590s 0.0187 0.0308 0.0452 0.2734 -0.0069 1.9597 0.927 3

4 Canada 80s 0.0222 0.0560 0.0785 0.3591 0.1681 5.9693 0.906 690s 0.0223 0.0566 0.0778 0.2923 0.1043 1.9968 0.932 4

5 Chile 80s 0.0321 0.0907 0.0357 0.0942 0.0447 20.4466 0.754 390s 0.0477 0.0803 0.0999 0.2398 0.0844 9.5399 0.811 4

6 Cyprus 80s 0.0529 0.0386 0.0442 0.0207 0.0932 4.8960 0.821 490s 0.0316 -0.0321 0.0019 0.0333 0.0501 3.8301 0.866 3

7 Denmark 80s 0.0204 0.0552 0.0479 0.5453 0.1407 5.9457 0.883 690s 0.0221 0.0615 0.0579 0.2942 0.1013 2.1377 0.907 4

8 Finland 80s 0.0295 0.0387 0.0519 0.4559 0.1784 6.7690 0.873 690s 0.0324 0.0414 0.0737 0.3746 0.0414 1.8628 0.908 4

9 Germany 80s 0.0237 0.0284 0.0387 0.2234 0.0245 2.6323 0.868 390s 0.0118 0.0132 0.0519 0.4441 -0.0153 2.2454 0.907 3

10 India 80s 0.0354 0.0653 0.0599 0.2109 -0.0821 8.8793 0.473 490s 0.0431 0.0831 0.0959 0.3470 0.2310 9.0508 0.545 5

11 Ireland 80s 0.0315 -0.0063 0.0574 -0.1125 0.0553 7.8471 0.846 390s 0.0684 0.1079 0.1358 0.3568 0.0351 2.5392 0.894 6

12 Japan 80s 0.0360 0.0601 0.0654 0.2997 0.1382 2.0582 0.893 790s 0.0101 -0.0007 0.0453 0.2978 0.1852 0.8345 0.923 4

13 Korea,Rep. 80s 0.0761 0.1200 0.1126 0.3467 0.1871 6.3942 0.774 790s 0.0433 0.0041 0.0904 0.3124 0.1990 5.0970 0.852 5

14 Luxembourg 80s 0.0481 0.0733 0.0622 4.4578 0.860 590s 0.0396 0.0631 0.0523 -0.0207 2.1842 0.912 4

15 Malta 80s 0.0397 0.0870 0.0816 0.0580 0.0044 2.2998 0.793 590s 0.0381 -0.0032 0.0200 0.2839 0.0275 2.8937 0.850 4

16 Netherlands 80s 0.0203 0.0412 0.0478 0.2324 0.0397 2.4606 0.888 490s 0.0231 0.0324 0.0531 0.2679 -0.0757 2.4517 0.922 3

17 New Zealand 80s 0.0067 0.0148 0.0427 0.2378 0.1869 10.8799 0.866 390s 0.0194 0.0774 0.0749 0.0099 0.0405 1.7520 0.902 4

18 Norway 80s 0.0244 0.0056 0.0268 0.2068 0.0727 7.6645 0.888 390s 0.0302 0.0569 0.0555 0.2343 0.0547 2.3404 0.925 3

19 Panama 80s -0.0215 -0.0989 -0.0230 0.5903 -0.0159 1.8440 0.745 390s 0.0186 0.0963 0.0401 0.2442 0.0707 1.1682 0.770 3

20 Seychelles 80s 0.0410 0.0980 0.1480 0.1144 -0.0141 3.0784 490s 0.0085 0.0719 0.1239 0.1780 0.0108 2.2870 3

21 Singapore 80s 0.0471 0.0237 0.1437 0.1002 2.2843 0.782 590s 0.0445 0.0237 0.0824 0.0981 1.7296 0.857 4

22 Spain 80s 0.0298 0.0674 0.0949 0.2457 0.1844 9.3628 0.855 690s 0.0251 0.0336 0.0894 0.0645 -0.0265 3.8929 0.895 3

23 Sweden 80s 0.0233 0.0589 0.0512 0.2809 0.1287 7.6141 0.883 590s 0.0195 0.0324 0.0678 0.2996 -0.0467 2.3303 0.925 3

24 Switzerland 80s 0.0162 0.0447 0.0535 0.2032 0.0456 3.4088 0.892 590s 0.0043 0.0154 0.0467 0.2734 0.0221 1.9597 0.914 3

25 United Kingdom 80s 0.0318 0.0678 0.0681 0.3807 0.1227 6.5854 0.858 790s 0.0241 0.0501 0.0705 0.2550 -0.0008 3.0520 0.916 3

26 United States 80s 0.0275 0.0399 0.0790 0.1786 0.0797 4.7401 0.898 590s 0.0243 0.0818 0.0974 0.3080 -0.0009 2.8014 0.925 5


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Table 7: Comparison of Performance of 24 Countries Not Listed among Top Performers during the Nineties(Rate of Growth)


1 Antigua and Barbuda 80s 0.0657 0.0925 0.0680 0.1332 6.4708 590s 0.0286 0.0207 0.0300 0.0704 2.5180 2

2 Belize 80s 0.0263 0.0988 0.0453 0.3583 0.2356 4.1761 0.718 690s 0.0139 0.0304 0.0270 0.0739 0.0810 1.7580 0.772 2

3 Botswana 80s 0.0637 0.1293 0.1100 0.0616 0.2925 10.5841 0.613 490s 0.0234 -0.0046 0.0147 -0.1791 0.0728 10.5134 0.620 0

4 Burkina Faso 80s 0.0092 0.0800 0.0280 -0.0983 0.1703 1.3416 0.282 390s 0.0230 0.0749 0.0182 -0.0250 -0.0012 4.5795 0.300 1

5 Chad 80s 0.0341 0.1087 -0.2529 0.2346 2.5345 0.298 490s -0.0089 -0.0368 0.1503 0.1104 7.0622 0.335 0

6 China 80s 0.0823 0.1072 0.0928 0.2599 0.0829 11.8369 0.591 590s 0.0856 0.1067 0.0530 0.1911 0.2411 7.4735 0.681 3

7 Costa Rica 80s 0.0070 0.0707 0.0928 0.1266 0.1180 27.1867 0.770 490s 0.0298 0.0468 0.0865 0.1261 0.0478 16.0461 0.805 3

8 Dominica 80s 0.0628 0.0554 0.5195 0.1911 4.6900 590s 0.0162 0.0166 -0.0540 0.0701 2.1072 1

9 Dominican Rep. 80s 0.0092 0.0564 0.1230 0.1580 -0.0892 24.2451 0.667 390s 0.0444 0.0639 0.0677 0.2316 0.0384 11.0107 0.698 2

10 France 80s 0.0205 0.0406 0.0497 0.2343 0.0242 6.3683 0.875 490s 0.0146 0.0191 0.0563 0.1064 0.0511 1.7242 0.914 2

11 Greece 80s 0.0064 0.0010 0.0504 0.0876 0.1378 19.0408 0.845 390s 0.0192 0.0373 0.0638 -0.0182 0.1350 9.3896 0.868 1

12 Grenada 80s 0.0571 0.0512 0.0289 0.2772 0.0072 5.2858 490s 0.0326 0.0533 0.0652 0.1113 0.1534 2.1959 2

13 Hong Kong, China 80s 0.0549 0.0423 0.1340 8.0906 0.823 490s 0.0159 0.0454 0.0709 0.1552 5.3448 0.877 1

14 Italy 80s 0.0257 0.0287 0.0645 0.0660 0.0950 9.7217 0.856 490s 0.0146 0.0181 0.0497 0.1239 -0.0188 3.7292 0.897 2

15 Macao, China 80s 0.0372 0.0722 0.0668 0.3159 9.6485 490s -0.0030 -0.0692 0.0094 0.1461 3.3975 1

16 Mali 80s -0.0132 0.0453 0.0668 0.1420 0.1907 0.292 490s 0.0147 -0.0045 0.0287 0.1758 0.0403 4.0512 0.346 0

17 Mauritius 80s 0.0535 0.0942 0.1310 0.4555 0.3921 8.3024 0.686 590s 0.0399 0.0392 0.0522 0.2164 -0.0089 6.6819 0.746 1

18 Portugal 80s 0.0337 0.0414 0.0800 0.3240 0.2584 17.3141 0.787 590s 0.0262 0.0549 0.0727 0.0649 -0.0663 4.9396 0.855 2

19 St. Kitts and Nevis 80s 0.0765 0.1377 0.0626 0.3604 0.1600 3.4399 690s 0.0467 0.0460 0.0457 0.1800 0.1038 3.5251 2

20 St. Lucia 80s 0.0596 0.0742 0.0972 0.0272 0.1885 4.2976 590s 0.0076 0.0246 0.0018 0.0519 0.0500 3.2908 1

21 St. Vincent and Gren. 80s 0.0523 0.0688 0.0490 0.3102 0.1445 4.5265 690s 0.0275 0.0511 0.0301 0.1640 0.0712 2.4217 2

22 Swaziland 80s 0.0385 0.0227 0.0469 0.3516 0.0693 14.5265 0.569 390s 0.0023 0.0209 0.0268 -0.2400 0.0616 9.4532 0.620 0

23 Thailand 80s 0.0594 0.0979 0.1222 0.2462 0.2044 4.4398 0.676 690s 0.0267 -0.0627 0.0309 0.1360 0.0636 4.5367 0.749 1

24 Turkey 80s 0.0300 0.0617 0.0984 0.2769 0.1467 46.2873 0.654 590s 0.0215 0.0426 0.1124 0.0230 0.1928 76.7014 0.717 2


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Table 8: Comparison of Performance of 24 Countries Emerging only in the Nineties as Top Performers(Rate of Growth)


1 Armenia 80s 090s 0.0018 0.0656 -0.1179 0.5094 0.6214 739.9026 0.715 3

2 Bahamas, The 80s 0.0244 0.0153 5.5348 0.817 290s 0.0055 0.6045 0.1086 2.5162 0.816 3

3 Bangladesh 80s 0.0145 0.0192 0.0646 -0.2326 0.1274 7.3649 0.386 290s 0.0304 0.0933 0.1034 0.6091 -0.0122 5.2992 0.445 4

4 Bosnia and Herzegovina 80s 090s 0.1840 0.3047 0.1960 3

5 Croatia 80s 453.8095 090s 0.0376 0.0805 0.0473 0.3964 0.3176 238.2516 0.789 5

6 Czech Republic 80s 090s 0.0164 0.0638 0.1331 0.2409 0.1479 7.5935 0.843 3

7 Equatorial Guinea 80s -0.0087 0.0580 -0.0421 0.533 190s 0.1948 0.3841 0.4202 0.1978 0.0727 0.582 3

8 Georgia 80s -0.0090 090s -0.0966 0.4818 0.1059 0.5642 -0.1046 39.3309 3

9 Hungary 80s 0.0158 -0.0059 0.0192 -0.0966 10.9270 0.805 190s 0.0284 0.1133 0.1167 0.0234 0.1141 20.2521 0.809 4

10 Israel 80s 0.0174 0.0223 0.0405 0.1225 0.0277 118.2897 0.836 190s 0.0219 0.0307 0.0795 0.2624 0.2007 9.6304 0.877 4

11 Lithuania 80s 0.0629 190s -0.0153 0.0946 0.0752 0.4751 0.3169 70.3021 0.781 5

12 Malaysia 80s 0.0229 0.0235 0.0679 0.0102 0.0738 3.2481 0.693 290s 0.0391 0.0321 0.0831 -0.1203 0.0793 3.5538 0.760 3

13 Maldives 80s 0.0706 0.0063 0.2372 0.629 290s 0.0568 0.0704 0.0895 0.0799 0.2296 7.4807 0.707 4

14 Nicaragua 80s -0.0515 -0.0745 -0.0270 2438.8706 0.584 090s 0.0106 0.1192 0.1053 0.3554 0.2097 339.1007 0.615 4

15 Poland 80s -0.0736 0.0600 0.2022 107.6725 190s 0.0506 0.1252 0.1450 0.3483 0.2749 28.4287 0.808 6

16 Romania 80s -0.0027 0.0712 -0.0052 0.0479 22.2534 0.794 290s 0.0034 -0.0388 0.0835 0.4008 0.1840 121.0157 0.772 4

17 Slovak Republic 80s 0.0154 0.0028 0.0360 0.813 190s 0.0317 0.0999 0.1113 0.2333 0.2231 9.2172 0.817 5

18 Slovenia 80s 090s 0.0363 0.1146 0.0734 0.0888 0.3141 13.6422 0.852 4

19 Sudan 80s -0.0245 -0.0727 40.2020 0.395 090s 0.0571 1.5106 0.3072 82.1034 0.462 3

20 Trinidad and Tobago 80s -0.0256 -0.1122 0.0217 0.4437 -0.3699 11.0800 0.774 290s 0.0264 0.1368 0.0952 0.1602 0.2096 5.4693 0.787 5

21 Uganda 80s 0.0037 0.0770 0.0430 -0.1121 103.4137 0.386 190s 0.0387 0.0958 0.1403 0.5299 0.2992 12.8222 0.404 5

22 Uruguay 80s 0.0054 -0.0495 0.0131 0.1175 0.0639 62.4875 0.781 190s 0.0238 0.0450 0.0820 0.4198 0.1914 38.0910 0.815 4

23 Vietnam 80s 0.0219 0.583 090s 0.0590 0.1737 0.2688 0.1679 0.2170 3.7115 0.649 5

24 Yemen, Rep. 80s -0.5380 090s 0.0287 0.0999 0.0783 0.2385 30.6111 0.439 4

and Vietnam have experienced relatively very highaverage inflation rate during the nineties. Thus, highinflation during a decade does not deter the solid realeconomic performance on the other dimensions duringthe same decade7, but may create problems of maintain-ing the consistency of relative performance over time,if not checked.

PREDICTING FUTURE PERFORMANCEFinally, we attempt to predict the economic performanceof countries in the next decade. As a first step, we findthe correlation for each indicator value during the eight-ies and the nineties. All correlation coefficients are verylow except for HDI where it turns out to be +0.9853.*

* This is not surprising since HDI is more of a stock variable.


49

For the rest, the r-squared are less than 0.09. Thus, exceptHDI, the future values of the other six indicators are nothighly correlated with their current values when per-formance over a decade is considered on a given dimen-sion. As a second step, then, we take the past perform-ance on all the seven dimensions to check whether thefuture performance on seven individual dimensions canbe explained. We, therefore, run regressions with eachindicator in the nineties as the dependent variable andall the seven indicators in the eighties as the independentvariables8. Here our intention is to examine the expla-natory power of the performance indicator we are usingrather than statistically mining explanatory variables.Four of our seven indicators are not explained satisfac-torily by the past performance measures. Only three outof the seven regressions turn out to be statistically sig-nificant at 3 per cent level of significance in terms of thegoodness of fit test. On these three regressions, we appliedthe step-wise regression procedures to arrive at the mostsignificant and acceptable fit. The results are shown inTable 9.

These findings are surprising for the followingreasons:

• Contrary to what Barro (1997) found, inflation inequation (1) has a positive and significant coeffi-cient implying a direct relationship with growth ofincome. Thus, our finding suggests the existence ofa trade-off between higher inflation and highergrowth.

• A negative and significant coefficient of Ggcf inequation (1) seems to contradict the finding of Blom-strom, Lipsey and Zyan (1996) that investment doesnot cause future growth. Higher investment is likely

to result in higher incremental capital-output ratioby depressing the rate of return ultimately leadingto a fall in the future growth of income. Thus, growthof investment may cause output growth, albeitnegatively. However, in the cross-country regres-sion framework, we can argue that the initial levelof the investment rate in a country would play animportant role in this relationship. Even when theincremental capital-output ratio remains constantin the face of rapid growth of investment, if theinitial investment rate is low, future growth will below; and with slow growth of investment, the growthof income will be high if the initial investment rateis high.* Under such conditions, our finding impliesthat investment rates across countries show a ten-dency of convergence.

• A negative and significant coefficient of Gfr inequation (2) contradicts the arguments of Kapur andPatel (2003) that the foreign investors may see highaccumulation of forex reserves by a country as re-ducing the risk of financial crises. On the contrary,the foreign investors may perceive very rapid growthof forex reserves in a country as a symptom and apotential threat of the government intervention tothe market forces. Once the forex reserves reach areasonably safe level of six to seven months ofimports, any excess accumulation can raise suchsuspicion. Even if direct costs of forex reserves arelow for a country, their indirect costs in terms ofreducing manoeuverability and flexibility of mone-tary policy instruments are very high.

• In view of the importance of inflation and HDI

Table 9: Results of Regression Equations

1. (Ggdppc)1990s= 0.0079 + 0.5157(Ggdppc)1980s -- 0.1231(Ggcf)1980s + 0.1321 (Gimpgs) 1980s + 1.87(10)-5(Inf)1980s

t-value (3.37) (4.58) (-2.45) (2.55) (2.35)P-Value (0.001) (0.000) - (0.017) (0.013) (0.021)

R2 = 0.386 F(4,75) = 11.80 P-value = 0.000

2. (Gfdi)1990s = --0.0505 -- 0.1733 (Gfdi)1980s -- 0.3177 (Gfr)1980s + 0.3851(HDI)1980

t-value (-0.57) (-1.49) (-1.78) (2.82)P-Value (0.569) - (0.140) (0.079) (0.006)

R2 = 0.117 F(3,75) = 3.31 P-value = 0.024

3. (HDI)1995 = 0.0337 + 0.5641(Ggdppc)1980s + 1.86(10)-5(Inf)1980s + 0.9961(HDI) 1985

t-value (3.19) (4.72) (1.56) (62.84)P-Value (0.002) (0.000) (0.124) (0.000)

R2 = 0.983 F(3,76) = 1503.96 P-value = 0.000

*We are grateful to Professor V N Kothari for pointing this out.


50

emerging from the discussion in the previous sec-tion, the finding in equation (3) suggests some dis-tant trade-off considering the magnitude and sig-nificance of its coefficient.The rest of the findings of our regressions are in line

with the existing literature. Thus, a positive and signif-icant coefficient of Ggdppc in equation (3) and absenceof HDI in equation (1) supports the hypothesis thatgrowth causes human capital and not vice-versa9 (Bilsand Klenow, 1996). Similarly, HDI is very important forgrowth of FDI (equation 2).

Based on these three regressions, it is possible togenerate the expected performance of different countrieson the three indicators. On the assumption that theextent of relationship given by the estimated parametersin these regressions remain stable over time, we mayplug in the values of the independent variables for theeighties to generate the prediction of the trend rates ofgrowth of per capita real GDP and net inflow of FDI forthe decade of 2001-2010 and the level of HDI in 2005 indifferent countries. Since the availability of data is betterin the nineties, the number of countries covered in ourprediction is 156.

The results predict a more even growth of per capitareal GDP during the first decade of the 21st century. Theyalso predict strong growth in the developed countriesand considerable swings in the growth of the net inflowsof FDI. Based on our prediction of the three performanceindicators, 15 economies are likely to be among the topperformers of the next decade and would obviouslyinvite the attention of the business community. Thesecountries, in the alphabetical order, are: Argentina,Australia, Chile, Costa Rica, Cyprus, Czech Republic,Finland, Hungary, Ireland, Malaysia, Malta, Mexico,Norway, Portugal, and Spain. There may be genuinesurprises in store as far as the other 35 top performersof the future are concerned. This is because four of ourseven indicators of economic performance do not de-pend on the past performance. They are largely gov-erned by the policies and changes in economic environ-ment. Therefore, while we can identify some of the 50top performers of the future, we may not be able toidentify most of them.

CONCLUSIONS AND IMPLICATIONS

In the era of globalization and liberalization, importantinvestment and business decisions have to carefullyconsider long-term performance and prospects of differ-

ent national economies. The national governments wouldalso compete with one another on the strength of theireconomic performance and policies. Several organiza-tions make regular efforts to evaluate prospects and rankcountries for different purposes but research identifyingthe top performing economies considering differentdimensions of their long-term performance is conspic-uous by its absence. We have made a modest effort tobridge this gap by considering seven distinct criteria orindicators for measuring long-term performance andprospects of different economies to identify the top 50performers. Our selected indicators are very distinctfrom one another not only during the decade of theeighties but also during the nineties. It is found thateconomic performance of countries, which was alreadyspecialized on a few dimensions, is becoming morespecialized and focused during the nineties when com-pared to the eighties. It seems that development goals,targets, and strategies of countries are becoming sharperand narrowly focused over time. This makes all current-ly popular methods using uniform scale of weights torank different countries considering different dimen-sions of economic performance invalid and unaccepta-ble. As an effective alternative, a simple and robustmethod to identify the top 50 performers is proposedand used in the present study. Since the method doesnot require completeness of the entire set for each coun-try, it can cover larger number of countries then hithertoconsidered.

The study has generated some interesting findingsfor national policy making and for businesses to assessmacroeconomic prospects. There are 26 common coun-tries in the two sets of top 50 performers during theeighties and the nineties. High performance on theconsumer inflation and/or human development fronthas emerged practically as a pre-condition for consist-ently good overall performance. On this count, it ap-pears that a large number of the new entrants to theclub of 50 top performers during the nineties are notlikely to hold on to their position in the coming decade.Such emerging economies may prove to be risky. Theexperience of the eighties and the nineties suggests thathigh inflation during a decade does not deter solid realeconomic performance on other dimensions during thesame decade but may create problems of maintainingconsistency of relative performance over time, if notchecked.

For predicting the overall performance of countries,


51

past performance does not help in general. However, threeindicators, viz., growth of per capita income, growth ofFDI, and HDI can be predicted to some extent throughpast performance on various dimensions. Our findingssuggest a trade-off between high inflation and future highgrowth and between high inflation and future high HDI.Similarly, long-term growth of investment may negative-ly affect the future long-term growth of output and long-term growth of forex reserves may negatively affect futurelong-term growth of FDI in a country. Moreover, our

findings also lend support to the hypothesis that growthcauses human capital and not vice-versa.

Based on prediction of partial performance, the studyidentifies 15 economies likely to be among the top 50performers in the first decade of the 21st century. Sincefour of our seven performance indicators do not dependon past performance, the remaining 35 top performersmay spring genuine surprises. Economic environmentand policies during the decade would decide their rela-tive performance.

ENDNOTES

1. Solow (1957) and Abramovitz (1956) challenged theexisting belief that capital accumulation played a veryimportant role in the growth of a country. Severalempirical studies of the developed countries, e.g., Den-ison (1967) and Auer (1979) corroborated their findingthat technical progress plays an overwhelming role inaccounting for the growth of per capita income of acountry. However, recent evidences from the study ofdeveloping countries, e.g., World Bank (1991) and Young(1995) show a significant share of capital accumulationin the growth of a country. The issue is far from settledempirically. Easterly and Levine (2001) consider it astylized fact that total factor productivity growth (TFPG)or the residual is more important than capital accumu-lation.

2. The imports, GCF, and GDPpc are measured in constant1995 US$ whereas the net inflow of FDI is in currentUS$. Time series data on these four variables along withthe consumer price annual inflation rate are availablefrom the World Development Indicators published by theWorld Bank (2002). Time series on forex reserves isavailable from IMF (2002) and the HDI is available fromthe UNDP (2002).

3. Out of 207 countries for which the World DevelopmentIndicators (2002) provide data, the non-availability ofdata does not permit us to construct even one indicatoreither for the eighties or the nineties in the case of 20countries. We have, therefore, dropped those 20 coun-tries from our analysis. For two countries (Afghanistanand Libya), none of the seven indicators could beconstructed for the nineties whereas there were ninesuch countries for the 1980s. Moreover, countries aredefined as distinct economies rather than political area.Thus, politically, Macao and Hong Kong fall underChina, but here we have considered them as two eco-nomies or countries. The calculated indicators can beobtained from the authors.

4. The number of observations for each correlation in thesetables differs because of the non-reporting of data ondifferent indicators in the basic sources.

5. Equal weights to indexes at this stage is justified be-cause all the countries in the group have appeared in

the top 50 performers in any three out of the sevenindicators. Our suggested method picks up only thoseindicators for a country where it has performed. Dif-ferent countries may have performed on different in-dicators. The index only measures the strength of theirrelative performance compared to the best and the worstperformers. Equal weights to add such relative per-formance in three different dimensions has nothingobjectionable.

6. Using similar measurement and concept of consumerinflation with the cross-country data for the sixties, theseventies, and the eighties, Barro (1997) finds a signif-icant negative relation between inflation and growth.He also finds the “causation from higher long-terminflation to reduced growth” (Chapter 3, p 117). Hisresults do provide support to our finding here. It shouldbe noted, however, that our finding considers goodrelative performance of a country on multiple dimen-sions and not on a single dimension of growth in in-come.

7. Our finding here appears to be in sharp contrast to Barro(1997) who finds “no sign in any range of a positiverelation that would signify that higher inflation had tobe tolerated to obtain more growth” (p 98). While growthof income is just one dimension of economic perform-ance, we are considering multiple dimensions and onlythe emerging performers during the nineties.

8. Here the problem of data non-availability becomes asevere constraint. Fitting a multiple regression requiresthat the data matrix be complete and uniform for allvariables. When we consider this constraint, the numberof countries falls sharply from 187 to only 80. Since 80is a large sample, our result may be considered reliablefor prediction if found statistically significant.

9 A recent study finds two-way causality between thelevels of economic and human development in India(Dholakia, 2003). It does not contradict our findingshere because we find that growth of per capita GDP inthe previous decade is a significant determinant of thelevel of HDI but the previous level of HDI does notsignificantly determine growth of per capita GDP in thecross-country regressions.


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REFERENCESAbramovitz, M (1956). “Resource and Output Trends in the

United States since 1870,” American Economic Review:Papers and Proceeding, 46(May), 115-23.

Arnold, D J and Quelch, J A (1998). “New Strategies inEmerging Economies,” Sloan Management Review, 40 (1),7-20.

Auer, L (1979). Regional Disparities of Productivity and Growthin Canada, Economic Council of Canada.

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Denison, E (1967). Why Growth Rates Differ: Post-War Ex-perience in Nine Western Countries, Washington, DC:Brookings Institute.

DeSilva, Gamini, Thattil, R O and Gamini, S Samita (2000).“Construction of a Composite Index of Human Devel-opment for Developing Nations,” IAOS Conference onStatistics Development and Human Rights held atMontreaux (Switzerland), 4-8 September.

Dholakia, Ravindra H (2003). “Regional Disparity in Eco-nomic and Human Development in India,” Economic andPolitical Weekly, 38(39), 4166-72.

Easterly, William and Levine, Ross (2001). “It’s Not FactorAccumulation: Stylized Facts and Growth Models,”World Bank Economic Review, 15(3), 177-219.

Global Edge (2002). http://ciber.msu.edu/Research/MPI/default.asp.

Goyal, Arun and Mohd, Noor (eds.) (2001). WTO in the NewMillennium: Commentary, Case Law and Legal Texts, FifthEdition, Bombay: MUIRDC World Trade Centre, Sep-tember.

Güveli, Serdar K (2000). “A Ranking of Islamic Countriesin Terms of Their Levels of Socio-Economic Develop-ment,” Journal of Economic Cooperation, 21(1), 97-114.

Hoskisson, R E; Eden, L, Lan, C M and Wright, M (2000).“Strategy in Emerging Economies,” Academy of Manage-ment Journal, 43(3), 249-67.

International Finance Corporation (1999). Database fromhttp://www.ifc.org/EMBD/SLIDES/img009.gif.

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Jalan, Bimal (2002). “Financial Architecture: To Each HisOwn,” Address delivered at the symposium of CentralBank Governors hosted by the Bank of England atLondon, July 5.

Kapur, Devesh and Patel, Urjit R (2003). “Large ForeignCurrency Reserves: Insurance for Domestic Weaknessand External Uncertainties,” Economic and PoliticalWeekly, 38(11), 1047-53.

Morris, David Morris (1979). Measuring the Conditions of theWorld’s Poor: The Physical Quality of Life Index, Wash-ington, DC: Overseas Development Council.

Nelson R (1964). “Aggregate Production Functions andMedium Range Growth Projections,” American Econo-mic Review, 54(5), 575-606.

Solow, R (1957). “Technical Change and the AggregateProduction Function,” Review of Economics and Statistics,39(August), 312-20.

Teramishi, Juro (1992). Import Substitution Policy in Japan’sEconomic Development, Tokyo: Institute of EconomicResearch, Hototsubashi University.

The Economist (1999). 2nd January.UNDP (2002). Human Development Report 2002, New York.World Bank (1991). World Development Report 1991, Wash-

ington, DC.World Bank (2002). World Development Indicators 2002 (on

CD-ROM), Washington, DC.World Bank (2003). Global Economic Prospects and the De-

veloping Countries, Washington DC: WBDP.World Economic Forum (1999). The Global Competitiveness

Report 1998-99, New York: Oxford University Press.World Economic Forum (2002). The Global Competitiveness

Report 2001-02, New York: Oxford University Press.World Economic Forum (2003). The Global Competitiveness

Report 2002-03, New York: Oxford University Press.Young A (1995). “The Tyranny of Numbers: Confronting

the Statistical Realities of the East Asian Growth Expe-rience,” Quarterly Journal of Economics, 110 (3), August,641-80.

Acknowledgements • The authors are grateful to Professor M MMonippally for going through the first draft of the paper carefullyand making very useful suggestions and editorial changes and toProfessor V N Kothari and Professor J C Sandesara for their valuablecomments and observations. The authors are also grateful to theanonymous referee of Vikalpa for his/her valuable comments inthe organization of the paper.

Ravindra H Dholakia, Professor in the Economics Area of IndianInstitute of Management, Ahmedabad, currently holds the RBIChair. A doctorate in Regional Development Economics from

MSU, Baroda, his areas of interest include regional development,macroeconomic policy and environment, demand analysis, andinternational trade. He has published 12 books and severalinternational cases, monographs, and research papers in reputedjournals.e-mail: [email protected]

Akhilesh S Kumar is a Research of Associate in the EconomicsArea of Indian Institute of Management, Ahmedabad. His areas ofinterest are macroeconomics and international trade.e-mail: [email protected]


53

Rekindling the Heart and theSoul of Management

J Singh

A concerted set of initiatives over the last 50 years has transformed management into aprofession and a popular discipline for formal study. However, there has been a steadydeterioration in the quality of working life in modern organizations. Contrary to the oft-repeated cliché about people being valuable assets, they are increasingly being treatedas liabilities that can no longer be afforded. This is best reflected in the frenzy of‘rightsizing’— a weak euphemism for turning employees out. Those who are luckyenough to survive are then subjected to a mechanistic culture devoid of humansensitivity. The focus is on squeezing the maximum out of them but not doing enoughto make them feel wanted or to enhance their sense of self-worth and self-respect.Compounding these problems is the more dramatic fall in leadership standards. As thespate of recent scandals suggest, many organizations have fallen into the hands of greedyimpostors masquerading as leaders.

Simultaneously, the public image of business corporations has been severelytarnished. Because of frauds and other misdemeanours that have been uncovered andpublicized, they are perceived less as creators of social wealth and progressively moreas exploitative organizations seeking to prosper at the expense of the common good.Business ethics, good governance, and corporate social responsibility may be fashion-able themes for conferences but they are not much in evidence in practice.

Any insightful observer is, therefore, likely to infer that modern corporations have losttheir hearts (and hence the people-are-liabilities mindset) and their souls (hence theirlack of sensitivity to social well-being). This paper underscores the urgent need forrekindling the corporate heart and soul — reorienting the prevailing approaches todealing with employees and changing the mindset about corporate purpose. Whatpeople require is a genuinely supportive environment and a persevering, diligent leaderto show the way. For creating the right kind of environment, the author suggests thefollowing measures:

appoint the right persontreat people like assets — not liabilitiesinvest generously in culture-buildingcultivate the right attitudes.

For rekindling the corporate soul, the following initiatives are suggested:follow ethical conductappoint ethical peopleget oriented towards social responsibility.

Only when all these are achieved will business organizations provide enriching workexperiences to their employees and ultimately succeed in transcending profit-making inits narrow sense to attain their more altruistic, nobler purposes. Among the variousprescriptive measures, the most crucial is the selection of individuals for leadership roles.The importance of character is vital. Yet, it is perhaps the one requirement that is mostoften compromised.

KEY WORDS

Downsizing

Leadership

Social Responsibility

Ethical Conduct

Culture Building

Pygmalion Effect

Executive Summary

presents articles focusing on managerialapplications of management practices,theories, and concepts

I N T E R F A C E S


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Sustained attempts have been made over the last50 years to ‘professionalize’ the field of manage-ment. A dramatic increase in the number of busi-

ness schools, the growing fraternity of MBAs, the boom-ing business in continuing executive education, the rapidmultiplication of professional associations and industryconfederations, the mushrooming of management con-sultancies, and the burgeoning sale of books on topicssuch as quality, leadership, and excellence are some ofthe indicators of the intensity of this campaign.

Notwithstanding all these attempts at enhancingprofessionalism, there are growing signs of disillusion-ment with life in today’s seemingly professional organ-izations. Employees complain of meaningless work, ex-cessive stress, and increasing insecurity—all leading toa variety of stress-induced diseases. Hypertension andcardiac problems have become almost as normal as thecommon cold. Though pay and working conditions haveundoubtedly improved over the years, the psychologicalquality of life in organizations has not; in fact, it hasclearly deteriorated. Employees have little time left forthemselves, their families, and for meeting their socialobligations. As a result, they view their work merely asa necessary chore and not as an enriching, fulfillingexperience. The rising turnover rate among employeesand the mounting difficulty in attracting talented pro-fessionals as replacement are a manifestation of thisdisillusionment. So are the numerous stories about thedreaded ‘Monday blues’ and about how employees begineach week eagerly looking forward to the coming week-end.

No wonder then that Terkel (1972) prefaced hisseminal book titled Working with the acerbic observationthat “work is, by its very nature, about violence—to thespirit as well as the body… It is about…daily humili-ations.” This type of work leads to a parching of thehuman spirit rather than its fulfilment.

Added to the disillusionment of employees is thedisenchantment of the general public. Because of thecumulative effect of corporate misdemeanours in thepast and a spate of scandals recently, the image of man-agement, especially of ‘big business,’ has been severelytarnished. To the common man on the street, it hasvirtually become a synonym for unrestrained greed andexploitation. It stands severely indicted for its unethicalpractices, environmental degradation, and social irre-sponsibility. One measure of the low esteem in whichit is now held is the finding of a survey reported recently

in The Economist (2003) that corporate leaders rank onlya shade higher than second-hand car salesmen in thepublic’s mind.

It is ironic that corporations that provide so muchemployment and produce so much wealth for societyhave come to such a pass. One possible explanation isthat they have become professional only superficially.In their dealings with their employees, they still lack adeep understanding of what makes people tick. There-fore, they are unable to touch their hearts and to bringthe best out of them. Similarly, they have shown greatinsensitivity in their dealings with the general public.They have been so obsessed with short-term results thatthey have forgotten the true purpose and the ultimatesource of their performance. In brief, they seem to havelost their corporate heart and soul.

THE MISSING HEART

Good human resource management is first and foremosta matter of the heart. It hinges on genuine respect forother people, deep concern for their well-being, andabiding confidence in their capabilities. With such anattitude as the starting point, one can — in repeatedenactments of the ‘Pygmalion Effect’— enable those oneleads to develop to the very limits of their potential.

However, the passion and commitment of Pygmal-ion is rare. The typical manager we encounter in our day-to-day work is so preoccupied with himself that heappears to have little time, respect or concern for others.His approach towards them is basically utilitarian; heuses — and often abuses — them for his own interests.He somehow drives people to do their assigned workand uses restrictive control systems to ensure that theydo not deviate in any way from what they are told todo. When the work is done, he collects his rewards andmoves on. Such exploitative managers only succeed increating conditions under which human potential isstifled and work is reduced to being merely a necessarybut demeaning and painful chore. Employees in mostcompanies are left wearing shackles — not on theirhands, but on their minds and spirits, unable to exercisetheir innovativeness and creativity.

In a bygone era, describing a person as being ‘hardat work’ implied that he was engaged in his craft withall his heart and passion. However, in the contemporarycontext, it is more likely to imply labour under duress.He exerts himself only physically but his heart andpassion have been squeezed out.

56 REKINDLING THE HEART AND THE SOUL OF MANAGEMENT

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Mindless repetition can reduce even a profoundstatement to being merely an empty, worn-out cliché.‘People are our most valuable assets’ is a fine exampleof this phenomenon. Executives wanting to appearenlightened repeat it routinely. However, they do somechanically and without much conviction — as is amplyevident to any observer from their actual day-to-daybehaviour. They appear far more preoccupied withmeeting their narrow performance metrics and some-how clambering up the ladder of personal success thanlooking after the ordinary folks in their organizations.Instead of treating them as valuable assets to be cher-ished, handled with tender care, and protected zealous-ly, they regard them either as mere tools to be used oras burdensome costs to be minimized and, therefore,often deal with them in ways that are clearly an affrontto human dignity and self-respect.

Symptoms of the Malady

The inference that management today lacks the heartnecessary for understanding and dealing effectively withpeople at work may be drawn from a series of obser-vations:‘People-are-liabilities’ mindset: Contrary to the popu-lar belief about people being valuable assets, the top-ranking executives of today seem to be concerned onlywith the ‘bottom line’ and behave as if their employeesare costly, unaffordable liabilities. They only calculatewhat they pay in terms of salaries and wages and feelthat they would be better off saving on such payments.They do not see what wealth employees have producedalready and what more they are capable of producingprovided they are treated well. They lack the capacityto appreciate the innate creativity within their employ-ees and the virtually limitless potential they have toovercome challenges or solve seemingly insurmounta-ble problems. Therefore, they appear singularly obsessedwith ways of getting rid of people — their biggest ‘lia-bilities.’Downsizing spiral: The knee-jerk reaction of almostevery company faced with intensified competition is toshed manpower — the same manpower eulogized sooften in public as ‘our most valuable assets.’ In a com-plete reversal of thinking, it is suddenly described as‘unaffordable costs.’ To make it appear less cruel thanit actually is, it is referred to euphemistically as ‘right-sizing.’ But, call it by any name, the effect is the same:

extremely painful for those who have their source oflivelihood snatched away from them suddenly for rea-sons totally beyond their control.

The compulsions behind downsizing are easy tograsp. In a competitive market, companies have to acquirean edge over their rivals in one way or another. Amongthe options available is to gain a cost advantage. Thisrequires a careful review of existing costs and identifi-cation of areas where reductions can be made. Whilesearching for areas where greater economy can beachieved, attention invariably focuses on manpowercosts. Salaries and wages paid to employees form amajor component of costs. Therefore, when all othermeasures to reduce costs have proved insufficient,manpower is reduced to minimize the outflow on ac-count of salaries and wages.

There is no denying that as organizations prosperand grow, they accumulate ‘excess baggage’ — or slackresources — everywhere. These may take the form ofexcess production capacity, inventory or even manpow-er. As long as the going is good, there is no pressureto reduce the slack. However, during an economicdownturn or when competitive pressures mount, franticattempts are made to minimize the slack resources.Therefore, it is quite understandable that the cost ofmaintaining the surplus manpower accumulated overthe years also receives due attention.

There is no problem with downsizing as an extreme,one-time corrective measure. It can be regarded as surgery— painful but necessary. Unfortunately, however, ex-perience shows that it has become a repetitive or addic-tive habit. Every time a company hits a road bump, ittends to resort to another round of manpower reduction.Thus, there is an unending spiral of intermittent or serialdownsizing. Those who survive one round enjoy onlya temporary reprieve; they are left guessing about whentheir turn to be axed will come next.

For those who are suddenly deprived of their sourceof livelihood, it is a traumatic, humiliating experience.Apart from the financial insecurity arising from losingtheir jobs, they lose their respectability in the eyes oftheir family members, professional peers, and society ingeneral. And for those who are safe for now but waitingin the queue for their turn, the anxiety is debilitating.Seeing the heartlessness of their employer and the fateof their colleagues, they lose their commitment to workand their loyalty to the organization.


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Repeated downsizing also raises some ethical ques-tions:• If ordinary workers are axed in the interest of

economy, why is it that at the other end of thehierarchy, there are phenomenal increases in exe-cutive compensation? There was a time when or-ganization designers were of the view that the highestsalary should not be more than four times that ofthe lowest. On the contrary, we now have caseswhere the chief executive’s compensation is 400times that of the lowest paid employee! Thus, onthe one hand, we hear about containing employeecost and, on the other, there are unjustifiable in-creases in executive compensation.

• Those who typically get axed are not the ones whohad anything to do with accumulating excessmanpower in the first place. The responsibility oughtto lie with senior executives who saw the need forand authorized recruitment of additional employ-ees. The decision-makers who were instrumental inthe build-up rarely, if ever, pay the price for theirmistakes. It would be safe to assume that they goup to bigger things in their company. But, those whowere persuaded to accept employment are the oneswho unwittingly bear the burden of separation.

• Except in rare cases (e.g., Tata Steel), the separationis managed without any consideration for humandignity. Nothing except a paltry compensation isoffered for years of service. In effect, people areturned out ignominiously. Should committed, loyalemployees be dispensed with so cheaply and cal-lously?In the final analysis, we must not ignore fundamen-

tal truths. It is possible to temporarily boost productivityby restructuring and downsizing but it is not possibleto sustain high productivity and innovation withoutwinning the hearts of employees. In many ways, down-sizing is like anorexia; it can make one leaner and thinnerbut not necessarily healthier.Mechanistic culture: All natural species flourish bestwhen surrounded by an environment conducive to theirgrowth — possessing the requisite level of warmth,nourishment, security, and support. On the other hand,when the environment turns hostile, they all suffer andslide towards extinction. This is the law of nature. Asin nature, so too in organizations. People who work inan organization also require an environment — organ-izational culture — conducive to their growth. When it

has the appropriate character, it energizes everyonecoming under its influence to be highly productive andcreative. But, if the culture is a contrasting one, thenhuman potential is stifled and growth is stunted.

Unfortunately, we are not so adept at cultivatingsuch nurturing environments. One reason for this short-coming is our inability to think organically as we shouldabout living beings. Instead, in our attempt to appearscientific, we have become mechanistic in our approachto people at work. There is little trace of feeling, respector empathy. Our attitude is even reflected in the namesgiven to tools of man management: leveraging humanassets; human capital management; human resourceaccounting; reengineering and restructuring; outplace-ment; outsourcing; talent management; flattening; de-layering; downsizing or rightsizing; competency map-ping; PMS, 360 degree, and consequence management.It would not be surprising if an uninitiated person wereto mistake them as references to mechanical objectsrather than to ordinary people. How motivated are theylikely to be after they have been flattened, de-layered,restructured, reengineered, rightsized, and leveraged?

In their eagerness to appear scientific, companiesoften hastily adopt fashionable techniques. In their un-warranted haste, however, they almost invariably failto fully internalize the values underlying such tech-niques. Their superficial understanding and mechanicalapplication inevitably results in poor implementation.Even intrinsically good techniques, therefore, degene-rate into empty rituals and fail to yield the desiredresults.

All popular aphorisms have a flip side and can bedebated. But one that we have started to accept blindlysays: ‘What gets measured, gets done.’ Because there isa good amount of truth in it, we have now taken mea-surement to an extreme — without being aware of itsshortcomings. HR professionals today want to measurebehaviour minutely: aptitudes, attitudes, values, com-mitment, loyalty, integrity, competencies, satisfaction,performance, and potential.

This fetish for measurement or ‘numerical myopia’is being pursued at the expense of the developmentalresponsibility of human resource management. Muchcould be gained by paying greater attention to the crea-tion of an environment or culture conducive to enthu-siasm and excitement than to measuring them. We needto pursue this course more out of conviction and passionthan something driven by artificial measures. It needs


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to be understood that trying to measure with moreprecision what is essentially abstract and ‘unmeasura-ble’ is futile and can only lead to erroneous inferences.

We have discarded time-tested notions such as ‘or-ganizational loyalty’ and ‘belongingness’ as old-fash-ioned. Instead, we are cultivating a culture more suitedto mercenaries. Motivation is no longer through an emo-tional bond between employees and their organizationbut through money and other extrinsic rewards. ‘Per-form and get rich’ appears to be the new motto. Thosewho are not adequately motivated by such incentiveshave no value or place. As a result, there is no commit-ment or loyalty left either way; organizations are notcommitted to their employees and vice versa.

We need to get back to fundamentals. The elemen-tary, but still relevant, teachings of Maslow and Herz-berg implore us to appeal to the noble, self-actualizingneeds of professionals through a set of real ‘motivators’— job content and work environment — rather thanshort-term, but expensive, ‘hygiene’ improvements.Leadership or lack of it: There is a myth that people riseto leadership positions by virtue of their merit. Thereality, however, is that people reach there more oftenbecause of their proficiency in organizational politics orby accident. One measure of this is the number of CEOsand other high-ranking executives who have eventuallybeen dismissed because they did not measure up to therequirements of their role. The evidence is even strongerin the case of political leaders.

What if one is really wanting in merit? As the Chinesephilosopher, Guanzi, said: “If a person rises to a levelof authority that exceeds his virtue, all will suffer.” IfGuanzi is correct, then we can imagine the amount ofdamage caused to the morale, culture, and team-workin organizations where persons have risen undeservedlyto key positions of leadership.

Leadership behaviours that are common and thatsap the energy and enthusiasm of people include:• Preoccupation with self-promotion and self-aggran-

disement rather than focusing on organizationalhealth and the well-being of all members.

• Using people as ‘stepping stones’ and discardingthem subsequently without the rewards due to them.

• Divide and rule tactics to secure one’s own position.

• Stealing credit from those who actually deserve itfor their work or ideas.

• Excessive control over professionals who have thecapability and the desire to work independently;

not empowering them to perform their roles effec-tively.

• Whimsical, ad-hoc decision-making; inconsistencyin thinking; lack of clarity about long-term direc-tion.

• Management by fear.• Unrestrained ambition and greed; lack of financial

integrity and intellectual dishonesty.• Keeping people in the dark — not communicating

regularly and clearly with them.• Insufficient attention to the development of the

people one works with.The need of the hour is for a new breed of leaders

who are also good social architects. They should beskilled in crafting environments in which eager indivi-duals feel wanted, work together successfully, and deploytheir creative potential to the maximum extent possible.

THE MISSING SOUL

What marks a successful life? In this increasingly ma-terialistic world, we may be tempted to judge a personsimply by the amount of wealth he has accumulated.However, relying fully on a single measure would bea gross mistake for two significant reasons. First, itignores the means employed to accumulate one’s wealthand the uses to which it has finally been put. Respectablewealth must be acquired legitimately and used unself-ishly. Second, it overlooks the multidimensional natureof life. One does not exist solely for accumulating wealth;one must also be concerned about the social, cultural,and spiritual aspects of one’s life. Therefore, there aremultiple requirements for success. In the end, one oughtto be judged by a composite measure of how one haslived life taken in its totality. It must be distinguishedby an upliftment of the human spirit and soul.

It is important to remember that the noble person-alities of history, the ones we regard as role-models,were not necessarily the wealthiest; they are reveredbecause they left behind a rich legacy of achievementsin multiple areas and lived according to values whichare universally treasured.

The same reasoning should apply to corporationsalso. Like individuals, they too have multiple facets.Therefore, it is difficult to capture their success in onemeasure alone. Single-minded success appears emptyafter a while. Though management texts proclaim profitmaximization as the central purpose, it is the equivalentof saying that an individual’s life ought to be judged


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mainly by his personal wealth. In essence, profits arelike oxygen — essential for survival — but not the purposeof it.

Profits are important and should be used as one ofthe several measures of success. However, we must alsobe concerned about how profits are earned and whatuses they are put to. If they are earned by questionablemeans and are appropriated by a small group of ownersor high-ranking executives mostly for their own benefit,they would not be regarded by the society as being ofmuch value. Like successful individuals, good corpora-tions too are expected to conform to social norms andcontribute to the well-being of people and communitiesaround them. Through their products, services, and alltheir related business activities, they are expected toenhance the quality of life of everyone who comes incontact with them. There is a higher purpose, and stand-ard of success, than mere profit-making.

This does not mean that profits are not important.In fact, it is very essential for business enterprises to beprofitable; otherwise, they will not be able to continueoperations. However, being profitable — though neces-sary — is not a sufficient reason for their existence. Aftermaking their profits, they must focus on serving all theirstakeholders and constituencies. In the end, they mustbe seen as adding value to the society in general. If, aftermaking profits, they also succeed in enriching the so-ciety, they would have met both the necessary andsufficient conditions of effectiveness.

Enhancing shareholder value has become the driv-ing ‘mantra’ of modern management. The assumptionis that the shareholder is a person who has taken riskin putting his hard-earned money into a new venture.To justify his risk, the organization must give him a rateof return higher than he would have got elsewhere. Theproblem with this assumption is that the shareholdercommunity is a very diversified one; it now includesboth the initial shareholders who bore the risk whilefounding a company and short-term speculators whosubsequently ‘parked’ their money in it as a speculativeinvestment. The first group of investors — or entrepre-neurs — has a strong commitment to make their venturesucceed. For them, their company is like a dream project.They put their heart and soul into making it succeed.They support it through all its ups and downs. Thesecond group of speculative financial investors is moremercenary in its outlook. They are only riding piggyback

on the entrepreneurs in the hope that their share valuewill appreciate fast at which stage they will ‘book theirprofits’ and take their money away to speculate on anotherpromising enterprise. They take little pride in buildingit through sustained effort or interest. In essence, theyare fair-weather investors. They have no abiding com-mitment to make the enterprise succeed. Should bothtypes of shareholders be treated the same way? Shouldmaximizing the gains of speculators be the driving motiveof management?

Also, why is financial equity of the shareholderconsidered to be the only equity? What about the ‘in-tellectual capital’ of employees who, in addition toproviding their ‘sweat capital’ — their hard physicallabour — are constantly thinking of technological im-provements to raise efficiency and productivity or newproducts and services to win customers? In this know-ledge-based era, it is this intellectual capital that givesa company its greatest competitive advantage. Whatabout the ‘goodwill equity’ of the community in whichan organization exists? Apart from providing it withmuch-needed support services, the people of that com-munity also put up with many inconveniences resultingdirectly from its operations; for example, air, noise, andwater pollution.

What is a company? We need to reflect on thiscrucial question. It must be understood first as the creationof entrepreneurs who establish it to serve a societal, nota selfish, need. Second, it is a place where a group ofpeople — employees — come together to create fulfillinglives for themselves. They both succeed in reaching theirrespective ends only by contributing to society in gen-eral. Third, in order to succeed, the company needs tobe efficient and profitable.

As companies grow and legal ownership passes intothe hands of financial investors, the interests of share-holders squeeze out other interests. Eventually, firmsthat were created to serve society get transformed toones serving only their shareholders. This is the tragedyof modern organizations.

Much of the evidence around us suggests that man-agements today are engaged in almost a single-mindedpursuit of profits and shareholder value. They are underintense pressure from the speculative financial commu-nity to promise and deliver virtually unreasonable re-turns; they have become victims of the ‘quarter-by-quarter mentality’ promoted by them.


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Symptoms of the Malady

Thanks to a series of scandals and a litany of othermisdemeanours registered over the years, the image ofbig business, along with the reputation of high-levelexecutives, is on a steady decline. As a result, any keenobserver is prompted to infer that modern corporationsare tending to lose their ‘souls.’ Among the chief reasonsfor such an inference are:Misrepresentation: Many corporations that were held inhigh esteem only a short while ago have been exposedfor breaking laws, tampering with their accounts, anddeceiving their stakeholders. For example, one studyshowed that the proforma earnings announced by thetop 100 NASDAQ companies in the first nine months of2001 exceeded audited profits by $100 billion. Even theaudited figures overstated actual profits by a big margin.Also, there is ‘breaking news’ about the chief executiveof Shell coming under intense fire for having misled thepublic about his company’s proven oil reserves. It ap-pears that they were exaggerated by at least 25 per centin order to artificially boost the company’s valuation.

These are not isolated cases. Numerous examplesof such gross misrepresentation have come to light inrecent times. They even include many venerable namesfrom the ‘Fortune 500’ list.Mistrust: A recent survey by Gallup indicates that 82per cent of the public no longer trusts management fortaking proper care of the shareholders; 90 per cent donot trust them for taking care of the employees; and upto 95 per cent in some countries believe that their man-agement only looks after itself. It is frightening that thesociety’s wealth and well-being are in the hands of peoplewith so little credibility.Unethical conduct: Many corporate icons have beenknocked off their high pedestals by startling revelationsof their misconduct in office. The range of their misde-meanour includes insider trading, misappropriation ofcorporate funds for personal use, concealing informa-tion about the hazardous side-effects of their productsand production processes, throwing prudence aside topursue megalomaniac schemes solely to pander to theirinflated egos, fabricating performance data to lull stake-holders into believing that all is well with their company— when the truth is otherwise — with the intention ofmanipulating their bonus earnings and dishonest tradepractices. It ought to disturb us that an increasing numberof business leaders are being caught on the wrong sideof the law.

Misgovernance: The Enron debacle and a series of sim-ilar scams in high-profile companies have underscoredthe need for tightening governance standards. It is quiteclear that the boards of directors have failed in their dutyto ensure probity, transparency, accountability, andfairness in the conduct of important business. Withvirtually no checks and balances they exercised absolutepower and ended up abusing them. As a result, im-proved governance has risen to the top of the corporate,and even political, agenda in many countries.

Social irresponsibility: Corporate activity is double-edged: it results in both gains and losses for the so-ciety. The gains are in the form of needed goods andservices, employment, and economic development.These outcomes are the ones that have traditionallybeen highlighted. But, there are concurrent, counter-vailing losses that are often most conveniently over-looked. Industrial activity is notable for consuminglarge quantities of natural resources and, in the end,generating a variety of harmful effluents. The cumu-lative effect of the wanton exploitation of natural re-sources and the unrestrained discharge of waste ma-terial has caused incalculable, and perhaps irrepara-ble, damage to our planet’s environment. The list ofindictments is long: air and water pollution; deforest-ation; greenhouse effect; ozone depletion; climatechange; and chemical poisoning. Nevertheless, mostcompanies have disowned responsibility for the envi-ronmental devastation wreaked by them.

Corporations are embedded in society. Therefore,they cannot disassociate themselves from its generalhealth. But, that is precisely what many of them appearto be doing. They are preoccupied with their own narrowinterests and are watching the worsening scene aroundthem like idle spectators. They continue with their sin-gle-minded pursuit of financial profit ignoring the threat-ening social problems around them: unemployment,illiteracy, urban decay, health, corruption, etc. At best,to clear their conscience, they indulge in PR-orientedphilanthropy. But, what is needed is their active involve-ment in mitigating these problems.

Anti-business sentiment: The mistrust described abovehas led some towards activism. They are mounting anincreasingly strident campaign against big business andinstitutions associated with them. Notice, for instance,the popular outrage against the WTO and WEF — bothof which are seen as symbols of the rich and of bigbusiness. Their critics claim that they are doing a great


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deal of harm to poor economies: plundering naturalresources with scant respect for the environment; usingobsolete, even hazardous, technologies that endangerthe lives of employees and the neighbouring commu-nities; expropriating the profits; and not reinvestingenough in the economies from which the profits wereearned.

Unfortunately, most companies still regard socialresponsibility and sustainable development as noble butimpractical ideas. At best, they are willing to complywith laws but not take any initiatives on their own. Itmust, however, go beyond simple compliance withexisting laws because laws are always several stepsbehind what is required. It enjoins them to do evenbetter.

Also, sustainability should go beyond concern forthe environment alone. It must also consider humanfactors, e.g., balance between work and other parts oflife. This imbalance is a major cause of stress in worklife.

THE REMEDY

For a significant breakthrough in organizational per-formance and overall effectiveness, there is an urgentneed for reorienting the prevailing approaches to deal-ing with employees and our mindset about corporatepurpose.

Rekindling the Heart

Dealings with people must be founded on respect anda deep Pygmalion-like conviction in their innate crea-tivity and potential. It must be presumed at the start thatthey naturally yearn for challenges to overcome, oppor-tunities to innovate, and excel in whatever they do. Allthey require is a genuinely supportive environment anda persevering, diligent coach to show the way.

But, neither such respect nor such conviction comesnaturally to us. Victims of over-sized egos, we tend tobe far too preoccupied with ourselves to show sufficientrespect for others. We also lack the keen eye to see thehidden potential in people; nor do we have the diligenceto develop them. Because of lack of respect for othersand our inability to recognize their true potential, muchof management as it is practised today is about control-ling behaviour based on a suspicion that people cannotbe relied upon to act responsibly on their own. They needtough-minded superiors to direct them properly andmonitor all that they do.

The primary task of management then is to nurturethe kind of environment in which the wonderful mindsof people can go to work and their latent potential canbe fully realized. Some of the measures that can be usedfor this purpose are as follows:Appoint the right person: The behavioural style of aleader at any level directly impacts all those who workunder him. If he possesses Pygmalion-like qualities, heis certain to inspire and extract the best out of his team.However, if he lacks those qualities, he is likely to treatthem in ways that raise their psychological defences. Adefensive attitude is not conducive to giving off one’sbest. Therefore, appointing the right leader makes all thedifference.

To use a metaphor made famous by Collins (2001),the transformation of organizations requires that thewrong leaders occupying various positions be first ‘ta-ken off the bus’ and their seats be given to more deserv-ing candidates. Unless this change is made, there is littlehope of any strategy working effectively.

It is not enough to suggest people-orientation as oneamong several criteria for selecting a leader. We mustgo beyond and insist on it as one that cannot be com-promised. No matter what other credentials a personhas, if he does not have the requisite level of people-orientation, he is not a fit candidate to head a team. Anotherwise competent person could do a great deal ofdamage if he turns out to be obsessed with his personalinterest, has an exaggerated ego, behaves arrogantly, ispower-hungry, competes unfairly or is vindictive innature. The damage he is likely to cause in the first placecannot easily be undone; no amount of HR sophistry issufficient for this purpose.

Therefore, the first step towards putting the heartback into organizations is to ensure that only individualswho value and respect others are appointed to leader-ship positions. Their subsequent growth should dependon how successful they have been in marshalling theirhuman resources. The acid test of their leadership is thespirit and morale of their people.

They must be masters of the art of fostering a senseof belonging and ownership, commitment and organi-zational loyalty, and igniting the passions of people toaim for ever-increasing standards of performance.

Treat people like assets, not liabilities: Unless an or-ganization is in the habit of collecting misfits, it mustlook upon its people as priceless assets. Therefore, allits efforts must be directed towards making them feel


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wanted and enhancing their value.

In a crisis, there is a temptation to live by disposingoff one’s assets. This may be justified as a temporarymeasure; but it cannot be sustained — it is the surestroute to eventual bankruptcy.

In the final analysis, prosperity derives from accu-mulating and strengthening one’s asset-base. This prin-ciple must translate into measures to keep an organi-zation’s workforce intact and taken care of properly. Wemust find ways of escaping the vicious cycle of down-sizing as this is the way to eventual growth.Democratize: All organizations are essentially hierar-chical. What distinguishes one from another is the natureof its hierarchy: how power is distributed and wielded.At one extreme are highly regimented, centralized or-ganizations where all power is concentrated in the handsof a few key functionaries at the very top. Most membersof such organizations are merely expected to do whatthey are told. At the other end are organizations wherepower is shared equitably. There is inner democracy;people at all levels are involved and have an effectivevoice in day-to-day decision-making.

The degree of inner democracy is an important de-terminant of the attitudes of the professionals. In gene-ral, the greater the democracy, the more involved andempowered they feel; they develop a sense of belongingand ownership. Under such conditions, they are able togive off their best.

Therefore, the route to the heart of employees is notthrough extrinsic inducements — but through genuinedemocratization of management processes. Every effortmust be made to prevent power-hungry individualsfrom usurping power. Inner democracy must be promot-ed and protected until it matures and becomes indeliblyingrained in the corporate DNA.Invest generously in culture-building: With the rightperson in place, the task of fostering the desired culturebecomes a lot easier. The essential ingredients of thisculture are:• Respect for people; enhancement of their sense of

self-esteem.• Getting each individual to identify with the organ-

ization by cultivating a sense of ownership andbelonging and encouraging involvement. These maysound old-fashioned but are still very potent vir-tues.

• Liberal empowerment at all levels; professionals aregiven ample ‘space’ to work independently and

according to their own judgment. Controls areexercised only by exception.

• Engaging people fully in their work and, thereby,motivating them to excel themselves. There is suf-ficient understanding of the futility and expense oftrying to motivate through external inducementsonly.

• Open, timely communication in all directions witha view to uniting hearts and minds.

• Emphasis on teamwork and trust; developing a senseof ‘community.’

• Appreciation of the good work of team members;fairness in rewarding them.

• Attention to personal growth and development.• Absence of fear (of superiors or of committing

mistakes).• Encouragement for continuous organizational learn-

ing and sharing of knowledge.As culture cannot be imported, simply imitating

practices from other companies is of little consequence.For culture to take deep roots, it is essential that allmembers share common values and live strictly by them.Our ‘talk’ and our ‘walk’ must reinforce one anotherconsistently.Cultivate right attitudes: It is worth remembering thatsuccess in building the kind of culture described abovedoes not depend on fancy, pseudo-scientific HR tools;it is more linked to having the right attitudes towardspeople in the first place. Tools are merely artefacts; bythemselves, they are incapable of achieving anything.What matters is who wields the tools and how. A personwith the right attitudes can do wonders with them (oreven without them). But, a person who does not havethe essential attitudes will use the same tools to do moredamage than good.

Rekindling the Soul

Mundane profit-making or shareholder value cannot bethe only driving force behind organizational activity.There has to be a more fundamental, grander, larger-than-life reason why so many people struggle so hardto set organizations up and then strive even harder tomake them perform well.

Organizations can be regarded as truly successfulwhen they enrich or contribute to the well-being of allwho come in contact with them. Therefore, the measuresof performance must go beyond the conventional finan-cial indicators. They are far too restrictive; they address


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only the needs of financial investors but ignore the lessvisible, but no less important, investments made byother stakeholders. We must begin to measure organ-izational success in terms of contributions to all of them.

The time has come for us to invent new measuressuch as Total Returns to Community (TRTC) and Re-turns on Total Capital (ROTC) to supplement the tra-ditional financial indicators we have been relying uponso long. These should focus on the gains or outcomesfrom the viewpoint of all parties that have invested theirresources, financial or otherwise, in an organization.

The key initiatives required to reawaken the corpo-rate soul are as follows:Follow ethical conduct: Gaining competitive advantageis important. But, so are the means employed in theprocess. Any competitive edge that is acquired by takingundue advantage of others is worth little and cannot besustained for the simple reason that it invites retaliation.Therefore, organizations must insist on following ethicalstandards in all their actions. Each stakeholder must bedealt with fairly; there must be no attempt to gain bydeceiving them. Once such a mistake is committed,corporate reputation suffers irreparable damage. Re-member: reputation is fragile. Like china is never thesame once it is cracked, reputation is difficult to restoreonce it is sullied.Appoint ethical people: Like people-orientation, per-sonal integrity must be regarded as a non-negotiablecriterion for appointments to a responsible position.Regardless of one’s numerous credentials, one ought notto be put in a leadership role unless one first passes thebasic tests of integrity. If anyone with questionableintegrity somehow acquires such a role, he is very likelyto abuse his powers for personal gains. This will weakenand ultimately kill the very organization he was chosento lead.

The power of one’s leadership is multiplied man-ifold when, in addition to integrity, it is guided by aholistic outlook towards the purpose of any corporateactivity — or of life itself. High emotional and spiritual— not necessarily religious — quotients are the hall-marks of leaders with such holistic minds. They aim atdelivering the maximum benefit to the maximum numberof people rather than serving either their own or thenarrow interests of a privileged few. They are cast inthe mould of Jamsetji Tata (Harris, 1958).Improve governance: Boards must come alive and assertthemselves. Their intended role is to give an overall

sense of direction to management — and to ensure thatall corporate affairs are conducted with full proprietyin accordance with accepted norms. To play this roleeffectively, they need to act independently. Unfortunate-ly, many boards have surrendered their independence.They have become pliable tools in the hands of over-powering managements; they merely attach their sealof approval to whatever their ‘masters’ want done. Thisabject failure is the common cause of almost all thecorporate scandals recorded in recent times.

Many of the initiatives taken to improve governanceare, regrettably, quite misguided. They aim merely attightening the statutory requirements. As a result, thereare a host of new regulations about the number of ‘in-dependent’ directors and the composition of variouscommittees. But, simply enacting new statutes does notguarantee compliance; there has to be an underlyingculture based on respect for the law. What is overlookedis that a director does not become independent simplyby designating him so nor does a committee. The needis really for true independence of mind and character.

When boards are made up of such fiercely inde-pendent personalities, they will be able to direct andoversee the corporate functioning effectively and ensurethe fulfilment of societal, rather than merely narrow,sectoral objectives. They will begin to function like thecorporate conscience.Get socially-oriented: Social responsibility has for longremained a fashionable subject of conversation at sem-inars but there is little evidence of it in practice. The timehas now come for us to pay more serious attention to it.

Each organization has countless dealings, directlyor indirectly, with members of the community in whichit is embedded. Therefore, it affects their lives in nume-rous ways. Based on their collective experiences, theyarticulate their expectations from it in exchange for thematerial and moral support they provide. All indicationsare that they are becoming increasingly vocal and in-sistent in their demands that management commit re-sources to fulfil their expectations. Social responsibilityis all about understanding these expectations and tryingto meet them to the extent possible.

Every community has its quota of problems. Thesehave traditionally been assumed to be the responsibilityof governmental or social organizations rather than thatof business corporations. However, given the symbioticrelationship between business and society, managementcan no longer disown responsibility for addressing such


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social issues. With the impressive resources at theircommand and their track record of efficiency in day-to-day operations, they must step in to take a more activerole.

In view of their limited resources, however, organ-izations must guard against assuming responsibility forall social malaise. It would be more prudent to focus onselected areas where they can make a visible impact. Therest should be left for other agencies more qualified forthe purpose.

The management’s focus must first be concentratedon the negative consequences of organizational activity.To begin with, there is environmental degradation con-nected with extraction of raw materials and exploitationof other natural resources. Second, there are numerousproblems arising from the combustion of large quanti-ties of fossil fuels to power machines. Third, there arealso problems relating to disposal of polluted, toxiceffluents and other solid waste matter. Finally, there arethe unanticipated side-effects of consuming their prod-ucts. All these combine to cause incalculable damage tosociety. Since they arise directly from organizationalactivity, management is under a deep moral, and evenlegal, obligation to mitigate the consequences of itsactions. Unfortunately, this responsibility has been large-ly evaded in the past leaving hapless individuals tosuffer the painful consequences.

Social responsibility, however, is not limited onlyto ameliorating damage caused to society directly, albeitinadvertently, by a company. It goes a big step furtherto address some social malaise not directly of its making.Each community may be plagued by a unique set ofsocial problems. It is incumbent upon the managementsof firms operating there to identify some of these andcommit resources to redressing them.

Therefore, a socially responsible company is expect-ed to evaluate its community’s varied needs and expec-tations and select a few areas where it feels it can makea meaningful contribution — either alone or in associ-ation with other like-minded partners. These could rangefrom basic literacy to higher education, health care,vocational training, afforestation, water harvesting,sports, arts, and culture.

Such initiatives are consistent with a principleenshrined in the German constitution: “Property impos-es duties. Its use should also serve the public well”(Article 14, section 2). Extending this principle to themanagements of private business implies very clearly

that they too have an obligation to use their corporatewealth for the common good.

Dave Packard, the legendary co-founder of HP,instilled in it a value system that is largely responsiblefor its enviable public image:

I think many people assume, wrongly, that a com-pany exists simply to make money. While this isan important result of a company’s existence, wehave to go deeper and find the real reasons forour being. As we investigate this, we inevitablycome to the conclusion that a group of people gettogether and exist as an institution that we calla company so that they are able to accomplishsomething collectively that they could not accom-plish separately — they make a contribution tosociety, a phrase which sounds trite but is fun-damental.

Tata Steel is undoubtedly the best example of socialresponsibility in India. It spends enormous amounts ofmoney on a wide array of activities to ameliorate thepressing social problems in its hinterland. The excel-lence of its work has made it a truly benchmark com-pany. JRD Tata, one of the most distinguished chairmenin its history, articulated its driving philosophy veryeloquently: “No success or achievement in material termsis worthwhile unless it serves the needs or interests ofthe country and its people and is achieved by fair andhonest means.”

CONCLUSION

Merely to survive and prosper is not enough. Organi-zations must also leave behind indelible footprints in thesands of time. To be able to do so, they need to first makethe best possible use of their employee community ortheir human resources. More than a battery of quasi-scientific HR tools, this requires that management hasits ‘heart in the right place.’ It must understand the inneraspirations and motivations of the people and deal withthem in ways that, apart from getting the best perform-ance out of them, also make them feel wanted and enhancetheir self-esteem. In addition, corporations must notspend all their time and effort only in the pursuit ofprofits and market capitalization; they must also strivefor a nobler cause. Instead of being mere economicmachines, they ought to take on the character of de Geus’(1997) ‘living company’ — flowing like a perennial,timeless river nourishing everything along its course.Imbued with a sensitive conscience and an enlightened


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‘soul,’ they must aim at improving the quality of life ofall those who come in contact with them to the maximumextent possible. They should regard this not as a periphe-

ral but a primary objective. Such causes give meaningand purpose to their existence.

REFERENCESCollins, Jim (2001). Good to Great, New York: Harper

Business.

De Geus, Arie (1997). The Living Company, Boston: HBSPress.

Harris, Frank (1958). J N Tata: A Chronicle of His Life, London:Blackie and Sons.

Terkel, Studs (1972). Working, New York: Pantheon Books.

The Economist (2003). October 25.

J Singh, a Ph.D. from Wharton School, University of Pennsyl-vania, has just returned to XLRI, Jamshedpur as the Tata SteelChair Professor of Organizational Development. Prior to this, hespearheaded the organizational learning and human resourceinitiatives of Tata Steel for 20 years. He began his professional

career in 1970 on the faculty of XLRI and eventually rose to serveas its Dean for four years before moving on to Tata Steel. He hasbeen closely associated with several professional associationssuch as CII, AIMA, ISTD, IISI, and Cedep (at Insead).e-mail: [email protected]

History proves that dictatorships do not grow out of strongand successful governments, but out of weak and helplessones. If by democratic methods people get a governmentstrong enough to protect them from fear and starvation,their democracy succeeds; but if they do not, they growimpatient. Therefore, the only sure bulwark of continuingliberty is a government strong enough to protect theinterests of the people, and a people strong enough andwell enough informed to maintain its sovereign controlover its government.

Franklin Delano Roosevelt


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Does Higher Price SignalBetter Quality?

D P S Verma and Soma Sen Gupta

With differentiated products, consumers may not be aware of the quality and features ofthe products they buy. They are often unable to make a quality comparison amongvarious brands. Moreover, they often gather little information even when the financialcommitment involved is substantial. A popular belief is: ‘You get what you pay for.’Therefore, consumers tend to believe that high price is an indicator of better quality.Although many studies conducted on price-quality relationship have supported thisbelief, there are other studies that have found the relationship to be product-specific andweak in general.

This study seeks to examine the relationship between the price of the product and thebuyers’ perception of quality in respect of durable, semi-durable, and non-durableproducts in the Indian context. Three products were selected for the purpose of the study:colour television as a durable product; T-shirt as a semi-durable product; and toothpasteas a non-durable product. Data were collected from the primary sources with the helpof a non-disguised, pre-structured questionnaire.

In particular, the authors sought to explore answer to two questions: (1) Does highprice have a positive influence on the buyers’ perception of product quality? (2) Is therea significant difference in the buyers’ perception of the quality of products falling indifferent price ranges?

The major findings of the study are as follows:For a durable product, like colour television, setting the price too low willnegatively affect the quality image of the product and the consumer would bereluctant to buy a low-priced brand as it might lower his image in the society.Pricing it reasonably high will give the product a high-quality image. However,the marketer should take care of the competitors’ pricing policies and the buyers’purchasing power.The target market for T-shirt in India consists mainly of the young, especially thecollege students, having limited purchasing power. They prefer local, or littleknown, but trendy brands of T-shirts rather than expensive ones. Also, they wouldopt for a T-shirt of a reputed brand if it is within their purchasing power. However,reducing the price of the T-shirt may dilute its brand image. Hence, the marketerof the T-shirt should think of market segmentation strategies and select theappropriate target segment(s) and price the product accordingly.For toothpaste, brand reputation is a critical factor and the marketer should pricethe product according to the reputation enjoyed by the brand. However, theprice-quality relationship for this product has been found to be weak incomparison to colour television and T-shirt. The marketer, therefore, should bewary of charging a very low price as it would create an inferior quality image inthe mind of the buyer.

The findings have important marketing implications for pricing, market segmenta-tion, target marketing, and product positioning.

KEY WORDS

Product Quality

Perceived Quality

Purchase Decision

Price-quality Relationship

Executive Summary


I N T E R F A C E S


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Pricing is an important decision area of market-ing. It is the only element of the marketing mixthat generates revenue; all the other elements

involve cost. In spite of its importance, however, pricinghas been an area of little theoretical understanding andeven less operating precision (Shapiro, 1968).

Price is also one of the most important marketplacecues. The all-pervasive influence of price is due, in part,to the fact that the price cue is present in all purchasesituations and, at a minimum, represents to all consum-ers, the amount of economic outlay that must be sacri-ficed in order to engage in a given purchase transaction(Lichtenstein, Ridgway and Netemeyer, 1993). Althoughit is believed that price serves as an indicator of quality,there exists no general price-perceived quality relation-ship. In fact, price becomes a less important indicatorof quality in the presence of other product quality cuessuch as brand name or store image (Erickson and Johans-son, 1985). The use of price as an indicator of qualitydepends on the following (Zeithaml, 1988):• the availability of other cues to quality• the price variation within a product class• the product quality variation within a product

category• the level of consumer awareness about price• the consumers’ ability to distinguish quality vari-

ation in a product group.It is in this context that this study seeks to examine

the influence of price of the product on the buyers’perception of quality in respect of durable, semi-dura-ble, and non-durable products. It also seeks to ascertainwhether this cue has a different effect on the three typesof products.

IS PRICE AN INDEX OF QUALITY?

Price, the extrinsic cue, has received the most researchattention out of all the intrinsic and extrinsic cues. Priceis identified as an important index of quality (Scitovsky,1945). In his view, the word ‘cheap’ usually means inferiorquality. In the United States, the word ‘expensive’ is inthe process of losing its original meaning and becominga synonym for superior quality.

In one of the pioneering studies on price-perceivedquality relationship, Leavitt (1954) observed that thebuyers tended to have doubts when they chose the lower-priced brands than in the case of higher-priced brands.He concluded that a higher price might sometimesincrease the buyers’ readiness to buy. Price would be

an indicator of quality for commodities such as textileproducts where quality cannot be ascertained by sightand where, owing to changes in technology and fashion,past experience was of little use (Gabor and Granger,1966).

Price played an important role in indicating qualityof many products for four reasons (Shapiro, 1968):

• The ease of measurement since price is a concrete,measurable variable.

• The effort and satisfaction, i.e., consumer satisfac-tion with a product depends on the amount of effortspent by the consumer in acquiring the product andan expenditure of money may be viewed by theconsumer as similar to an expenditure of effort.

• The snob appeal.• The reduction of the perceived risk of buying a

product of poorer quality.

However, Shapiro warned marketers that the con-cept of price as an indicator of quality should not beapplied indiscriminately in making pricing decisions.

McConnell (1968) examined the relationship betweenprice and the quality of beer which is a frequently-purchased consumer product. He found that the buyersused price as an indicator of product quality. With ahomogeneous product and various unknown brandnames, buyers perceived the highest-priced brand to beof better quality than the other two brands. He conclud-ed that price, without any other cue, was an effectivemeasure for brand evaluation.

In an experimental study, Gardener (1971) exploredthe degree of price-quality relationship for three pro-ducts: toothpaste, a man’s shirt, and a suit. He concludedthat while price did not affect the perception of productquality in case of all the three products, whether brandedor not, it did affect the willingness to buy a shirt.Consumer choices regarding price might be influencedby the following product-specific factors (Lambert, 1970):

• buyer’s confidence in the predictive value of price

• perceived consequences of making a poor brandchoice

• amount of brand-to-brand variation in productquality

• social importance of the product

• difficulty encountered in making quality judgments

• ability to assess product quality.In another study, Lambert (1972) found that in all

the sample product categories, the buyers of the high-

68 DOES HIGHER PRICE SIGNAL BETTER QUALITY?

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priced product had significantly more low-priced alter-natives.

Shapiro (1973) sought to determine whether pricewould act as a communicator of quality and ascertainthe reasons for consumers judging the product qualityby price by determining the correlates of price reliance.It was found that, for most of the dimensions such asquality, durability, looks or fragrance, the number ofbuyers ranking the high-priced product better than thelow-priced product was greater than the number of buyersranking the low-priced product better than the high-priced product. But, a substantial number of buyersrated the products as equal. The study revealed thatprice was a communicator of quality and the associatedattributes in the marketplace when the product wasactually present and the setting relatively realistic. Onthe other hand, the data showed that price was not astrong communicator of quality.

Furthermore, price reliance appears to be a genera-lized mental construct — an attitude or trait, i.e., somepeople seem to be price-reliant regardless of the productunder consideration. Interestingly, the study of the re-lationship between demographics and generalized pricereliance shows price reliance to be correlated with olderage and lower education but not with income. Pricereliance depends upon the consumer’s trust in the com-petence and honesty of the price-maker, perceived riskin a purchase situation, self-confidence of the customers,snobbery among them, importance of shopping speed,and the perceived quality difference among the brands.Price and quality were linked together in the mind ofthe consumer (Shivdasani, 1972).

Price plays different roles in the purchase-decisionprocess. In traditional economic theory, since higherprice has a negative impact on the consumer’s budget,price has a negative influence on his buying decision.However, from a behavioural perspective, price may beperceived as a product quality cue (Monroe and Krishnan,1988). Therefore, price may be viewed either as an in-dicator of sacrifice, or as a quality cue, or both. Rao andMonroe (1988) found that price increase might play apositive or a negative role in the purchase-decisionprocess.

People are more likely to use price as an indicatorof quality for expensive products. As price increases, therisk of an incorrect decision increases and the buyer isoften less familiar with the product because of the in-frequency of purchase. In such situations, simple learned

heuristics, based on folk wisdom, such as ‘you get whatyou pay for,’ are likely to be used (Rao and Monroe,1989). Gerstner (1985) found that the relationship bet-ween quality and price was product-specific and weakin general.

In the Indian scene, Mehta, Parasuraman andAmbarish Kumar (1972) conducted an experimental studyto find out the relationship between quality and priceand to examine the consumers’ brand choice with res-pect to ready-made shirts. The study indicated that amajority of the buyers perceived some quality differencebetween the two shirts which were identical in all res-pects except for the brand names. The study revealedthat the name of a well-known brand induced the con-sumers to be favourably disposed towards that brandin terms of quality and price perception and they werewilling to pay a higher price for the well-known brand.

Tellis and Gaeth (1990) identified three choice stra-tegies that the consumer might use under uncertaintywhen the price of the product was better known thanits quality: ‘best-value,’ ‘price-seeking,’ and ‘price-aver-sion.’ While the best value strategy involves choosingthe brand with the least cost in terms of price and theexpected quality, price-seeking is selecting the highest-priced brand to maximize the expected quality, andprice-aversion refers to buying the lowest-priced brandto minimize the immediate cost. The strategy that aconsumer would use depends upon the information onquality, importance of quality, and the price-qualitycorrelation.

Erickson and Johansson (1985) investigated themulti-faceted role of price in product evaluation withan empirical analysis of beliefs, attitudes, and intentionof buyers regarding various automobile brands. Threeinteresting conclusions were drawn from the empiricalresults:• The price-quality relationship operates in a reci-

procal manner. A high-priced car is perceived topossess (unwarranted) high quality. A high-qualitycar is, likewise, perceived to be high-priced than itactually is.

• As a consequence of the price-quality relationship,perceived price is a good proxy variable for per-ceived quality. However, price was found to havea positive but indirect effect on intention, i.e., priceaffects intention positively through its positive effecton quality perception, through the positive effectof quality perception on attitude, and through the


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positive effect of attitude on intention.• Price perception has an independent and negative

effect on the probability of purchasing a car — abudget constraint.Lichtenstein and Burton (1989) found that consu-

mers perceived objective price-quality relationship withonly a modest degree of accuracy and that the price-quality perception was more accurate for non-durableproducts than for durable products. Consumers useprice as a surrogate indicator of quality if they lackproduct information or confidence in their own abilityto make the choice on other grounds (Schiffman andKanuk, 1996). Moreover, when the consumer is familiarwith a brand or has experience with a product, price hasless influence on product selection.

Rao and Monroe (1989) integrated the previousresearch on the influence of price, brand name, and/orstore name on buyers’ evaluation of product quality.They found that, for consumer products, the relationshipbetween price and perceived quality and between brandname and perceived quality was positive and statisti-cally significant, and the effect of store name on per-ceived quality was small and not statistically significant.Moreover, though statistically significant, multi-cuestudies generated slightly larger effect than single-cuestudies.

Monroe and Krishnan’s (1988) meta-analysis re-vealed a more positive effect for price when brand in-formation was present than when it was not and thatbrand name enhanced the influence of price on qualityperception. Andrews and Valenzi (1991) examined theindividual and the combined effect of price, brand name,and store name on the quality perception for two prod-ucts: sweaters and shoes. Render and O’Conner (1976)conducted a similar study on shirts, desk radio, andafter-shave lotion. Both the studies revealed that priceproduced a stronger effect on the quality perception thaneither brand or store information. Another study con-ducted by Gardener (1971) on men’s socks, electrictoothbrush, tape recorder, and men’s suit, revealed amoderate price-quality relationship when price was theonly available information cue. However, when otherinformation cues (product, brand, and limited productinformation) were introduced, this relationship wasreplaced by a brand-quality relationship.

Dawar and Parker (1994) found that brand namewas universally used more than price and physical ap-pearance, which were, in turn, used more than the

retailer’s reputation as signals of product quality. Thestudy also revealed that the more one uses the brandname as a signal, the more one uses price, physicalappearance, and retailer reputation as signals of productquality. Dodds, Monroe and Grewal (1991) studied therelationship between the individual and the combinedeffects of price, brand, and store information on thebuyers’ perception of product quality and value as wellas on their willingness to buy. They found that whenprice was the only extrinsic cue available, consumersperceived quality to be positively related to price.

PRICING AND INDIAN BUYERS’PERCEPTION OF QUALITY

In this paper, we use Indian data to answer the followingtwo questions:• Does high price have a positive influence on the

buyers’ perception of product quality?• Is there a significant difference in the buyers’ per-

ception of the quality of products that fall in dif-ferent price ranges?We analysed three products—colour television,

representing the durable category; T-shirt, the semi-durable category; and toothpaste, the non-durable cate-gory (see Box for Research Design and Methodology).We elicited information from consumers on these threeproducts through a questionnaire.

The questionnaire contained statements relating tothe factors that the respondents might have consideredwhile buying the product and their general opinionregarding the quality of that product. The statementswere classified into factors on the basis of opinions of

Box: Research Design and Methodology

For the purpose of the study, three products were selected torepresent the three product categories — durable, semi-durable,and non-durable. Colour television represented the durableproduct category; T-shirt the semi-durable category; and toothpastethe non-durable product category. A ‘household’ was consideredas a sampling unit and the non-probability, convenience samplingmethod was adopted to select the sample items.

The sample chosen consisted of 525 respondents for thethree products taken together (179 respondents for colourtelevision, 175 for T-shirt, and 171 for toothpaste). The respondentsrepresented different age-groups, educational levels, and income-groups. They were selected from the metropolitan city of Delhiand its satellite towns — Faridabad, Ghaziabad, Noida, andGurgaon. The data were collected through field survey with thehelp of three non-disguised, pre-structured questionnaires duringDecember 2000 to May 2001.

The data were analysed with the help of the SPSS package.The statistical tools used for data analysis included tabulationand frequency distribution, mean, standard deviation, correlation,paired t-test, and the multiple regression analysis.


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five judges who were appointed for this purpose. Theseven factors identified were — brand reputation, price,features, promotion, brand loyalty, store reputation, andstore loyalty. The second set of factors consisted of thebuyers’ perception of the quality-revealing ability of fiveout of the seven factors, i.e., brand reputation, price,features, promotion, and store reputation.

Factors Considered while Buying the Product

In order to determine the importance of the seven factorsfor the respondents while buying the three products —colour television, T-shirt, and toothpaste — the mean,percentage mean, and standard deviation were compu-ted. On the basis of their mean values, the factors wereranked. The results are presented in Table 1.

Consumers considered price as an important factorfor purchasing the product. This was particularly truein the case of consumer durables like colour televisionas well as for semi-durable products like a T-shirt. While,for colour television, price bagged the first rank, in thecase of T-shirt, it was ranked second. The buyers paidless attention to price while purchasing toothpaste and,hence, it managed to secure the fifth rank among theseven factors. The possible reason for this phenomenonis that people habitually buy a particular brand of tooth-paste and do not pay much attention to the price.

Quality Perception of the Influencing Factors

In an attempt to compare the quality perception of thefactors with regard to the three products, the meanscores and the corresponding ranks were computed. Theresults are presented in Table 2.

It is noticed from Table 2 that buyers, to a consid-erable extent, judged the quality of the product on thebasis of brand reputation. This was true for all the threeproducts. Therefore, this factor secured the second rankin the case of both colour television and T-shirt. How-ever, in the case of toothpaste, this factor bagged the first

rank. Buyers gave maximum weight to product featuresbut price was ranked third among the five factors, forall the three products. This suggests that buyers gene-rally believe that the higher the price of the product, thesuperior will be its quality.

Price-Quality Relationship: Durable Product

The findings reported in Tables 1 and 2 reveal that priceis considered to be an important factor by the respon-dents in product evaluation. As reported in Table 1, priceis considered to be the most important factor whilebuying a colour television and people go for high-pricedbrands with the belief that it would ensure value for theirmoney. It is also clear from Table 2 that people perceivethat higher the price of colour television, the superiorwould be its quality and, hence, price managed to securethe third rank in terms of its association with quality.

Perceived Quality of Colour Television Falling inDifferent Price Ranges

In order to ascertain whether the buyers’ perception ofquality was affected by price of the colour television, therespondents were asked to judge the quality of a regular21-inch colour television on the basis of five price ranges.Their responses are summarized in Table 3. Only 7 outof 179 respondents (3.9%) believed that a low-pricedcolour television set would be of high quality, i.e., if itis priced ‘up to Rs 10,000.’

On the other hand, for the television falling in thehighest price range of ‘Rs 25,001 and above,’ 142 re-spondents (79.3%) opined that it would be of very highquality and 21 respondents (11.7%) believed that it wouldbe of high quality. Thus, it appears that the higher theprice of colour television, the higher will be the consum-ers’ perception of its quality.

The mean, percentage mean, and standard devia-tion for each of the price ranges are presented in Table4. It indicates that the higher the price range, higher isthe perception of quality of the colour television. Thefirst rank was secured by the colour televisions falling

Table 1: Factors Considered while Buying the Product

Factors Colour Television T-shirt ToothpasteN=179 N=175 N=171

Mean Rank Mean Rank Mean Rank

Brand reputation 3.28 III 3.04 IV 3.07 VIPrice 3.75 I 3.32 II 3.15 VProduct features 3.74 II 3.73 I 3.52 IIPromotion 2.77 VII 2.54 VII 3.19 IVBrand loyalty 3.27 IV 3.06 III 3.55 IStore reputation 3.10 V 2.84 VI 2.79 VIIStore loyalty 3.00 VI 2.88 V 3.51 III

Table 2: Ranking Factors in Terms of Quality Perception

Factors Colour Television T-shirt ToothpasteN=179 N=175 N=171

Mean Rank Mean Rank Mean Rank

Brand reputation 3.50 II 3.37 II 3.36 IPrice 3.32 III 3.32 III 3.08 IIIProduct features 3.74 I 3.82 I 3.14 IIPromotion 2.74 V 2.80 V 2.68 IVStore reputation 3.16 IV 3.31 IV 2.66 V


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in the price range of ‘Rs 25,001 and above’ while thelowest price range of ‘up to Rs 10,000’ secured the fifthand the last rank.

The information contained in Table 4 was furtherstatistically analysed to ascertain if there was any sig-nificant difference in the perceived quality of colourtelevisions falling in different price ranges. In order totest this, all the price ranges were classified into threegroups on the basis of their mean scores:

Price-group A: ‘Rs 25,001 and above.’Price-group B: ‘Rs 20,001 to Rs 25,000’ and ‘Rs

‘15,001 to Rs 20,000.’Price-group C: ‘Rs 10,001 to Rs 15,000’ and ‘up to

‘Rs 10,000.’The three price-groups were put to paired t-test, the

results of which are presented in Table 5. The t-valueswere found to be significant at 0.01 level of significancein all the three cases. Hence, we may conclude that theperceived quality of the colour televisions falling indifferent price ranges differs significantly.

A multiple regression was conducted to determinewhy the respondents considered price while purchasing

a colour television. The results of this test are presentedin Table 6. It reveals that while the quality perceptionattached with price and store prompted the buyer toconsider the price while buying a television, his incomealso played a significant role.

The correlations between three factors and pricewere also found to be statistically significant. The effectof the respondents’ perception about the price — ‘thehigher the price of the television, the superior will beits quality’ — played the most important role in theconsideration of the factor ‘price’ while buying televi-sion contributing up to 29 per cent of its total possibleimpact.

Thus, the consumers considered price as an impor-tant criteria in judging the quality of colour television.They perceived higher-priced televisions to be of highquality. Significant differences relating to the perceptionof the quality of colour televisions falling in differentprice ranges were also found. Thus, we may accept thefact that high price has a positive influence on buyers’perception of product quality.

Price-Quality Relationship: Semi-durable Product

The T-shirt market is flooded with a host of brands —local, national, and multinational, besides the unbrand-ed ones. Even among the branded T-shirts, the buyer isfaced with the problem of making a distinction betweena genuine and a fake brand. Most of the reputed brandsare sold through the company outlets or exclusive show-rooms. Hence, it becomes difficult to distinguish bet-

Table 3: Price Range and Quality Ratings of Colour Television

Quality Number(%) of RespondentsPrice Range Very Low Low Average High Very High Total

Up to Rs 10,000 57(31.8) 54(30.2) 61(34.1) 07(03.9) 00(00.0) 179(100)Rs 10,001-Rs 15,000 04(02.2) 41(22.9) 93(52.0) 40(22.3) 01(00.6) 179(100)Rs 15,001-Rs 20,000 02(01.1) 03(01.7) 73(40.8) 88(49.2) 13(07.3) 179(100)Rs 20,001-Rs 25,000 00(00.0) 02(01.1) 15(08.4) 88(49.2) 74(41.3) 179(100)Rs 25,001 and above 01(00.6) 00(00.0) 15(08.4) 21(11.7) 142(79.3) 179(100)

Table 4: Ranking Price Ranges in Terms of PerceivedQuality of Colour Television

Price Range Mean Percentage Standard RankMean Deviation

Rs 25,001 and above 4.69 93.8 0.67 IRs 20,001-Rs 25,000 4.31 86.2 0.67 IIRs 15,001-Rs 20,000 3.60 72.0 0.70 IIIRs 10,001-Rs 15,000 2.96 59.2 0.75 IVup to Rs 10,000 2.10 42.0 0.90 V

Table 5: Comparison of Price Groups of Colour Television

Price Group Mean Standard Deviation t-value

A 2.53 0.75 25.71**B 3.95 0.62

A 2.53 0.75 28.31**C 4.69 0.67

B 3.95 0.62 16.62**C 4.69 0.67

**Significant at 0.01 level.

Table 6: Variables Determining Price of Colour Televi-sion (Multiple Regression)

Independent Variable Dependent Variable: PriceBeta Simple r t-value

Quality perception of price 0.29** 0.37** 3.93Quality perception of store 0.23** 0.34** 3.05Income 0.19** 0.16* 2.76

Multiple R = 0.47; R2 = 0.22.* Significant at 0.05 level.** Significant at 0.01 level.


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ween brand reputation and store reputation. Moreover,T-shirts are found in a very wide price range of, say,Rs 50 to Rs 2,500, and predicting the quality of a par-ticular T-shirt available at a particular price becomes allthe more difficult for the buyer.

From the data given in Tables 1 and 2, we canexamine the influence of price on the buyers’ perceptionof quality of a T-shirt. It is evident from the tables thatprice was an important factor for the respondents whilepurchasing a T-shirt and in judging its quality. Price gotthe second rank among the factors considered by therespondents while purchasing a T-shirt and the thirdrank in terms of its quality-revealing ability.

Perceived Quality of T-shirt Falling in DifferentPrice Ranges

In order to ascertain whether the buyers’ perception ofproduct quality is affected by the price of the T-shirt,nine price-classes were selected, starting from ‘below Rs50’ to ‘Rs 1,201 and above,’ and the respondents wereasked to rate the quality of a T-shirt falling in these nineprice ranges. The responses are presented in Table 7.

Table 7 reveals that the lower the price, the loweris the quality rating given by the respondents. A totalof 133 respondents (76%) were of the opinion that a T-shirt falling in the price range of ‘below Rs 50’ wouldbe of ‘very low’ quality and another 34 (19.4%) said thatit would be of ‘low’ quality. On the other hand, for thelast four price ranges, i.e., the T-shirts priced above Rs451, not a single respondent gave a ‘low’ or a ‘very low’quality-rating. Thus, the respondents believed that thehigher the price of the T-shirt, the superior would beits quality.

Furthermore, the mean, percentage mean, and stan-dard deviation for each of the price ranges were com-puted and then these price ranges were ranked on thebasis of their mean scores. The results are presented inTable 8.

Table 8 shows that while the T-shirt falling in thehighest range of ‘Rs 1,201 and above’ secured the firstrank with the highest mean score, the lowest price rangeof ‘below Rs 50’ got the last rank with the lowest meanscore.

For a further analysis, price ranges in Table 8 wereclassified into three groups:

Price-group A: ‘Rs 1,201 and above,’ ‘Rs 901 to‘Rs 1,200’ and ‘Rs 601 to Rs 900.’

Price-group B: ‘Rs 451 to Rs 600’, ‘Rs 301 to Rs 450’‘and ‘Rs 201 to Rs 300.’

Price-group C: ‘Rs 101 to Rs 200’, ‘Rs 51 to‘Rs 100’and ‘below Rs 50.’

In order to test whether there is a significant dif-ference in the perceived quality of a T-shirt falling indifferent price ranges, the three price groups were putto paired t-test. The results are presented in Table 9.

The t-values in all the three cases were found to behigh and significant at 0.01 level of significance, imply-ing that the buyers perceived a significant difference inthe quality of T-shirts falling in different price ranges.Similar results were obtained from the multiple regres-sion analysis.

High price has a positive influence on the buyers’perception of the quality of T-shirts and people see asignificant difference in the quality of T-shirts availableat different price ranges. However, ultimately, buyersjudge the price of the product on the basis of its featuressuch as the strength and texture of the fabric, colour,design, and shape of the T-shirt, and not merely on thebasis of their perception about the price or the ‘highprice-superior quality’ image.

Price-Quality Relationship: Non-durable Product

The respondents paid less attention to the price of thetoothpaste, as shown in Table 1, and hence ‘price’ wasranked fifth among the seven factors. However, in terms

Table 7: Price Ranges and Quality Ratings of T-shirt

Quality Number and Percentage of RespondentsPrice Range Very Low Low Average High Very High Total

Below Rs 50 133(76.0) 34(19.4) 08(04.6) 00(00.0) 00(00.0) 175(100)Rs 51 to Rs 100 85(48.6) 67(38.3) 23(13.1) 00(00.0) 00(00.0) 175(100)Rs 101 to Rs 200 16(09.1) 86(49.1) 68(38.9) 05(02.9) 00(00.0) 175(100)Rs 201 to Rs 300 04(02.3) 22(12.6) 125(71.4) 24(13.7) 00(00.0) 175(100)Rs 301 to Rs 450 01(00.6) 03(01.7) 85(48.6) 81(46.3) 05(02.9) 175(100)Rs 451 to Rs 600 00(00.0) 00(00.0) 31(71.7) 111(63.4) 33(18.9) 175(100)Rs 601 to Rs 900 00(00.0) 00(00.0) 09(05.1) 88(50.3) 78(44.6) 175(100)Rs 901 to Rs 1,200 00(00.0) 00(00.0) 08(04.6) 34(19.4) 133(76.0) 175(100)Rs 1,201 and above 00(00.0) 00(00.0) 09(05.1) 19(10.9) 147(84.0) 175(100)


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of the quality-revealing ability of this factor, it managedto get the third rank after ‘brand reputation’ and ‘fea-tures’ as can be noticed in Table 2. These results indicatethat although people do not pay attention to the priceof the toothpaste while making the purchase, they doassociate high price with superior quality.

Perceived Quality of Toothpaste in Different PriceRanges

The respondents were asked to judge the quality of a150gm toothpaste tube on the basis of six price ranges.The purpose was to ascertain whether the buyers’ per-ception of quality was affected by the price of the tooth-paste. The responses are summarized in Table 10. Asshown in the table, people perceived that the higher theprice of the toothpaste, the superior will be its quality.While 86 respondents (50.3%) believed that a 150gmtoothpaste tube priced below Rs 10 would be of very lowquality, for the highest price range, viz., ‘Rs 51 andabove,’ 88 respondents (51.5%) gave a very high qualityrating.

On the basis of the results shown in Table 10, themean, percentage mean, standard deviation, and theranks corresponding to the mean values for each of thesix price ranges were computed. The results are present-ed in Table 11.

From Table 11, it is evident that the higher the pricerange, the higher is the mean value or the quality rating

and, therefore, higher is the corresponding rank. Thehighest price range of ‘Rs 51 and above’ scored thehighest mean value of 4.39 and secured the first rank.Thus, the respondents perceived a difference in the qualityof toothpaste available at different prices and gave ahigh quality rating to the high-priced toothpaste andvice-versa. A further grouping of the price ranges, anda paired analysis as well as the multiple regressionanalysis substantiated these results.

Thus, the buyers believe that the higher the priceof toothpaste, the superior will be its quality. However,they would like to pay a high price for a toothpaste whichhas the maximum number of features as they believe thatsuch a toothpaste will give the maximum value for theirmoney. Moreover, most of the respondents were eitherbrand-loyal or went for reputed brands and, therefore,paid little attention to the price of the toothpaste.

Principal Components of Price

The importance of price while buying any of the threeproducts has already been discussed in the previousparagraphs. The principal components of this factorwere further analysed on the basis of their mean scoresand standard deviation. The results are presented inTable 12.

The analysis of the variables revealed that, for allthe three products, the buyers attached much impor-tance to the fact that they would get value for theirmoney by buying that brand. This was especially truefor colour television and T-shirt. The variable ‘value for

Table 9: Comparison of Price Groupsof T-shirt

Price Group Mean Standard Deviation t-value

A 4.63 0.49B 3.49 0.51

26.73**

A 4.63 0.49C 1.76 0.57

47.91**

B 3.49 0.51C 1.76 0.57

42.44**

**Significant at 0.01 level.

Table 10: Price Ranges and Quality Ratings of Toothpaste

Quality Number of Respondents(%)Price Range Very Low Low Average High Very High Total

Below Rs 10 86(50.3) 57(33.3) 26(15.2) 02(01.2) 00(00.0) 171(100)Rs 11 to Rs 20 26(15.2) 72(42.1) 66(38.6) 07(04.1) 00(00.0) 171(100)Rs 21 to Rs 30 02(01.2) 28(16.4) 103(60.2) 36(21.1) 02(01.2) 171(100)Rs 31 to Rs 40 01(00.6) 03(01.8) 56(32.8) 94(55.0) 17(09.9) 171(100)Rs 41 to Rs 50 01(00.6) 01(00.6) 24(14.0) 90(52.5) 56(32.7) 171(100)Rs 51 and above 01(00.6) 01(00.6) 19(11.1) 62(36.3) 88(51.5) 171(100)

Table 8: Ranking Price Ranges: Perceived Quality ofT-shirt


Rs 1,201 and above 4.79 95.8 0.52 IRs 901 to Rs 1,200 4.71 94.2 0.55 IIRs 601 to Rs 900 4.39 87.8 0.59 IIIRs 451 to Rs 600 4.01 80.2 0.61 IVRs 301 to Rs 450 3.49 69.8 0.61 VRs 201 to Rs 300 2.97 59.4 0.60 VIRs 101 to Rs 200 2.35 47.0 0.69 VIIRs 51 to Rs 100 1.65 33.0 0.70 VIIIBelow Rs 50 1.29 25.8 0.55 IX


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money’ scored a very high mean of 4.58 and 4.39, res-pectively, for the two products, while it was only 3.53for the toothpaste.

For all the three products, a majority of the respond-ents believed that the price of the brand they hadpurchased was reasonable. This variable scored anaverage rating for the three products. The mean scoresof this variable were 2.94, 2.96, and 2.77 for colour tel-evision, T-shirt, and toothpaste, respectively.

The buyers’ perception of the product quality on thebasis of price was further examined. For this purpose,the mean and the standard deviation for each of therelevant statements were computed. The results areshown in Table 13.

The buyers believed that it would be risky to buya low-priced brand and, therefore, the mean computedfor this variable was reasonably high in case of all thethree products: 3.59 for colour television, 3.58 for T-shirt,and 3.42 for toothpaste.

Another interesting finding is that, despite the res-pondents agreeing to the common proposition ‘the lowerthe price of the product, the inferior will be its quality,’they did not strongly believe that ‘the higher the priceof the product, the better will be its quality.’ Therefore,while the mean scores for the former statement were3.23, 3.27, and 3.06, respectively for colour television,T-shirt, and toothpaste, the mean scores for the latterstatement were 3.14, 3.11, and 2.79, respectively.

It can be inferred from Table 13 that buyers per-ceived a lesser association between price and quality fortoothpaste in comparison to colour television and T-shirt.

PRICE-QUALITY RELATIONSHIP:MANAGERIAL IMPLICATIONS

An analysis of the price-quality relationship for the threeproducts reveals the following:

Colour television: Among the seven factors consideredby the buyers while purchasing a colour television, priceis the most important factor. The buyers perceive aconsiderable difference among the quality of colourtelevision falling under different price ranges. Theybelieve that price can reveal its quality and the higherthe price of the television, the superior will be its quality.Moreover, while purchasing a durable product like acolour television, buyers prefer to go for a high-or areasonably-priced brand, rather than a low-priced one.Moreover, they want value for their money and find itrisky to buy a low-priced product.

T-shirt: For purchasing T-shirts too, price is an impor-tant consideration while selecting a brand. However, thebuyers would like to pay more for reputed brands andfor features present in the T-shirt like the strength andtexture of the fabric and fast colour. They believe thatthe lower the price of the T-shirt, the inferior will be itsquality. However, they are a bit sceptical about the‘high-price-superior quality’ relationship. Nevertheless,they perceive a considerable difference in the quality ofthe T-shirt falling in different price ranges. The expec-tation of getting value for their money has more impor-tance to them than the high-price consideration.

Toothpaste: The buyers generally pay less attention tothe price of the toothpaste while making the actualpurchase. Brand loyalty, features of the toothpaste, andbrand reputation takes precedence over price. However,they see a significant difference in the quality of thetoothpaste available at different price ranges. They dobelieve that the lower the price of the toothpaste, theinferior will be its quality and vice-versa. But, this beliefis somewhat weaker for toothpaste in comparison to theother two products. Again, in comparison to colourtelevision and T-shirt, while buying a toothpaste, thebuyers are less concerned about whether they will get

Table 11: Ranking Price Ranges: Perceived Quality ofToothpaste


Rs 51 and above 4.39 87.8 0.70 IRs 41 to Rs 50 4.18 83.6 0.68 IIRs 31 to Rs 40 3.72 74.4 0.69 IIIRs 21 to Rs 30 3.05 61.0 0.68 IVRs 11 to Rs 20 2.32 46.4 0.78 VBelow Rs 10 1.67 33.4 0.77 VI

Table 12: Factors Influencing Price Consideration

Factor Colour Television (N=179) T-shirt (N=175) Toothpaste (N=171)Mean Standard Mean Standard Mean Standard

Deviation Deviation Deviation

High price of the product 2.94 1.12 2.96 1.12 2.77 0.98Value for money 4.58 0.56 4.39 0.65 3.53 0.71


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value for their money from that purchase.The findings of the study have the following impli-

cations for the marketer for pricing of the three typesof products:

Colour television: In the case of colour television, settingthe price too low will negatively affect the quality imageof the product and the consumer would be reluctant tobuy a low-priced brand which may lower his or herimage in the society. Pricing it reasonably high will givethe product a high quality image. But, the marketershould also take care of the competitors’ pricing policiesand the purchasing power of the target market.

T-shirt: Pricing of the T-shirt is all the more difficult.The problem faced by the marketers of T-shirt in theIndian market is that their target market segment mainlyconsists of the young, especially the college-going ones,having limited purchasing power. They would prefer alocal or not-so-reputed brands of trendy T-shirts rather

than spending on expensive branded T-shirts. But, theywill definitely prefer a T-shirt of reputed brand if it iswithin their purchasing power. However, reducing theprice of the the T-shirt may dilute its image. Hence, themarketer of the T-shirt should adopt appropriate marketsegmentation strategies, select the appropriate targetsegment, and price the T-shirt accordingly.

Toothpaste: For toothpaste, brand image is a decisivefactor and the marketer should price the product accord-ing to the reputation enjoyed or likely to be enjoyed bythe brand. However, the price-quality relationship forthis product is rather weak in comparison to colourtelevision and T-shirt. However, the marketer shouldkeep in mind that charging a very low price would createan inferior quality image in the minds of the buyer.Moreover, the buyer, generally, judges the price of thisproduct in terms of his/her internal reference price.Hence, an understanding of the buyers’ internal refer-ence price is necessary for the marketer.

Table 13: Price and Quality Perception

Statement Colour Television T-shirt ToothpasteN=179 N=175 N=171

Mean Standard Mean Standard Mean StandardDeviation Deviation Deviation

The higher the price of the product,the better will be its quality 3.14 1.12 3.11 1.11 2.79 1.08The lower the price of the product,the inferior will be its quality 3.23 1.11 3.27 1.16 3.06 1.12It is risky to buy alow-priced product 3.59 1.03 3.58 1.04 3.42 1.06

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McConnell, J Douglas (1968). “The Price-Quality Relation-ship in an Experimental Setting,” Journal of MarketingResearch, 5(3), 300-34.


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Mehta, Subhash C, Parasuraman, A and Ambarish Kumar,K (1972). “Impact of Price and Brand on Consumer’sChoice: An Experimental Study,” in Mehta, Subhash C,Indian Consumers: Studies and Cases for Marketing Deci-sions, New Delhi: Tata McGraw-Hill, 53-62.

Monroe, Kent B and Krishnan, R (1988). “The Effect of Priceon Subjective Product Evaluations,” quoted in Rao,Akshay R and Monroe, Kent B, “The Moderating Effectof Prior Knowledge on Cue Utilization in Product Eva-luations,” Journal of Consumer Research, 15(3), 253-64.

Rao, Akshay R and Monroe, Kent B (1988). “The Moder-ating Effect of Prior Knowledge on Cue Utilization inProduct Evaluations,” Journal of Consumer Research,15(3), 253-64.

Rao, Akshay R and Monroe, Kent B (1989). “The Effect ofPrice, Brand Name, and Store Name on Buyers’ Percep-tions of Product Quality: An Integrative Review,” Jour-nal of Marketing Research, 26(3), 351-57.

Render, Berry and O’Connor, Thomas S (1976). “The In-fluence of Price, Store Name and Brand Name onPerceptions of Product Quality,” Journal of Academy of

Marketing Science, 4(4), 722-30.Schiffman, Leon G and Kanuk, Leslie Lazar (1996). Con-

sumer Behaviour, 5th edition, New Delhi: Prentice-Hallof India, 193.

Scitovsky, Tibor (1945). “Some Consequences of the Habitof Judging Quality by Price,” Review of Economic Studies,12(2), 100-102.

Shapiro, Benson P (1968). “The Psychology of Pricing,”Harvard Business Review, 46(4), 14-25.

Shapiro, Benson P (1973). “Price Reliance: Existence andSources,” Journal of Marketing Research, 10(3), 286-87.

Shivdasani, H K (1972). “Psychology of Pricing: Price-Perceived Quality Relationship,” Indian Management,11(1), 29-33.

Tellis, Gerard J, and Gaeth, Gary J (1990). “Best Value,Price-Seeking and Price Aversion: The Impact of Infor-mation and Learning on Consumer Choices,” Journal ofMarketing, 54(2), 34-45.

Zeithaml, Valarie A (1988). “Consumer Perceptions of Price,Quality and Value: A Means-End Model and Synthesisof Evidence,” Journal of Marketing, 52(3), 2-22.

We tend not to choose the unknown, which might bea shock or a disappointment or simply a little difficultto cope with. And yet it is the unknown with all itsdisappointments and surprises that is the most enriching.

Anne Morrow Lindbergh

D P S Verma was a Professor in the Department of Commerce,Delhi School of Economics, University of Delhi, Delhi. He hasalso held senior administrative and managerial positions in thecentral government and in the industry. His teaching and researchinterests include marketing, competition law and policy, consumerprotection law, and operations research. He has authored fourbooks and published over 100 articles in leading national andinternational journals. He has delivered lectures at reputeduniversities and business schools of Manchester, Birmingham,Paris, London, and Budapest.e-mail: [email protected]

Soma Sen Gupta is a Senior Lecturer in Commerce, Kamla NehruCollege, University of Delhi, Delhi. She is also a visiting facultyin the Department of Commerce, South Campus, University ofDelhi, Delhi. A Ph.D. from the University of Delhi, she haspublished several articles in reputed journals and presented papersin national seminars.e-mail: [email protected]


77

Governance of Higher EducationInstitutions

I M Pandey

Governance includes the issues of autonomy and accountability. In most countries,including developing countries, autonomy is being extended to higher educationinstitutions (HEIs) in order to increase the flexibility which these institutions require tomeet the needs of the society and the economy. Autonomy is the prerogative and theability of an institution to act by its own choices in pursuit of its mission and goals. Thisensures optimum allocation of resources for achieving the stated goals and missions ofHEIs which are knowledge creation and dissemination. These institutions are mission-oriented and although they have a significant impact on the economy and the society,their action and results are not directly measurable in financial terms. Autonomyencompasses three areas — academic, institutional, and financial. Academic autonomyis the freedom for faculty members to operate freely which would lead to intellectualwealth of great quality. Institutional autonomy includes operational freedom andfreedom of decision-making by the institute's constituents. Financial autonomy meansthe freedom to raise and use funds according to its priorities and internal rules. Aninstitution cannot have full institutional autonomy without financial autonomy. Allow-ing financial autonomy with accountability would assess the effectiveness of theinstitution in disseminating knowledge to its students.

Autonomy of publicly funded institutions also implies societal accountability.Institutions operate in a given environment. Therefore, their actions and outcomes mustbe consistent with the demands of the external environment. Societal concern assumesgreat significance as governance in HEIs cannot be devoid of environment and socialresponsibility. Every organization's actions influence the members of the society, directlyor indirectly. Therefore, HEIs should strive to strike a balance between needs of theirstakeholders, demands of the society, and autonomy. A socially responsible HEI shouldperform the following duties:

Be a resource and supporter for public policies and issues.Ensure admission to all qualified students from all sections of the society.Facilitate quality education and research.Assist in professionalizing management practice of socially desirable but under-managed sectors.Help business and industry through training, research, and consultancy.Research on the issues that are significant for the government, the industry, andother sectors and disseminate the research findings.Collaborate with other academic institutions to help them improve their aca-demic standards.

Organizations take a lot from the society and hence should also give back to thesociety. This attitude will sustain them over a long period of time.

KEY WORDS

Governance

Autonomy

Societal Accountability

Bureaucratization

Higher Education Institutions

Executive Summary


I N T E R F A C E S


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The issues of autonomy and accountability, in fact,relate to the governance of higher educationinstitutions (HEIs). Historically, there has never

been a doubt about the academic freedom of HEIs in thecivilized world though it might have differed in scopeand content. It is a norm now to extend autonomy toHEIs in most countries including developing countriesand even those operating under closed political systems.HEIs in various countries evolved in response to theneeds of business, economy, and society. The raisond'être for the extension of autonomy is the fundamentalbelief that it will increase the flexibility and speed thatthe institutions require to address the needs of the societyand the economy. Autonomy ensures optimum alloca-tion of resources for achieving HEIs' stated goals andmissions. The decision cannot be optimum if they cannotbe made by the people who are directly responsible forsupplying services. To respond to the stakeholders andthe society's changing needs quickly, HEIs must beinnovative, creative, and enterprising. It is doubtful thata state-controlled and financially dependent institution,devoid of autonomy, is likely to be enterprising, inno-vative, and creative; it will be over-bureaucratic andwasteful in utilizing the scarce resources (human capitaland money).

WHAT IS AUTONOMY?

Autonomy is the privilege and the capacity of an insti-tution to act by its own choices in pursuit of its missionand goals. The degree of autonomy depends on theextent an institution can decide its own actions and theextent it is directed to follow directions and actions notof its choice. Hence, autonomy means unconstrainedfreedom of action and capacity of action within theestablished norms, goals, mission, structure, systems,and processes of the institution. As I argue later, uncon-strained autonomy bags more accountability.

Autonomy in the case of HEIs encompasses opera-tional or institutional autonomy, academic freedom, andfinancial autonomy. I will explain each of them. Withoutfinancial autonomy, no institution can have effectiveinstitutional and academic autonomy unless the fundingagencies grant financial autonomy by a contract that iseither legally or socially enforceable. The past traditions,based on mutual trust and respect between the institu-tions and fund providers (may be read as government),may also ensure financial autonomy, if not absolutely,but to a great extent, functionally useful and viable.

Academic Autonomy

From ancient times, the civilized world has developedand practised models of academic freedom; a studentis free to learn what he or she chooses to learn; a teacheris free to teach and research what he or she chooses toteach and research. This freedom is recognized every-where, legally or by tradition and practice, irrespectiveof financial dependence or independence of an academicinstitution. This has resulted in intellectual wealth ofgreat quality. Whenever this privilege is violated, itcreates uproar, anger, and anguish. In democraticallyfunctioning societies, everyone including the state takesacademic freedom for granted. An operational defini-tion of academic freedom is: "It is the unfettered choiceof an individual teacher to teach and write and pursueresearch, irrespective of what it leads to, without anyfear from anywhere."

Institutional Autonomy

Institutional autonomy goes beyond academic freedomand includes operational freedom and the freedom ofdeciding the framework and structure of the decision-making process. Institutional autonomy guarantees thatthe institution is entitled to determine its structure,systems, mission, goals, and priorities consistent withthe societal needs and take decisions independently.Generally, in case of the state-funded HEIs, the state,through policy deliberations with various segments ofthe society, provides for an organizational structure thatwill ensure the autonomous decision-making and func-tioning of HEIs. In a fair and transparent manner, it willalso put a governing board in place that will compriseeminent people from different sectors — education, busi-ness, government, social organizations, etc. The insti-tutional autonomy will be diluted if the governing boardis constituted on political considerations rather thanbased on the demands of competent governance. Therole of the governing board will be to provide broadpolicy guidelines, strategic directions, and help the head(say, the director) of the institution to raise funds. Theboard will also ensure academic autonomy and freedomof decision-making to the faculty and protect it. It isperhaps desirable that the governing board and thefaculty, rather than the government, should have a greatersay in appointing the director to ensure autonomy. Thereal autonomy will lie with the authority and freedomof academic staff ensuring the efficient and effective

80 GOVERNANCE OF HIGHER EDUCATION INSTITUTIONS

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functioning of the institution. Knowledge is the core ofan academic institution. It is the faculty members whocreate and disseminate knowledge. Hence, they shouldbe at the centre stage of decision-making. The mostcritical ingredients of institutional autonomy include thefreedom of the faculty members to:• select students• develop processes to recruit academic and non-

academic staff• set standards of teaching, research, and faculty and

student performance• decide to whom to award degrees• design its curriculum and offer new courses as

demanded by changing needs of the economy andthe society

• innovate in teaching methodology• allocate funds received from any source.

Financial Autonomy

Financial autonomy means the freedom to raise and usefunds. Any institution that raises its own funds candecide to use it according to its internal rules, systems,processes etc.; it should not be constrained by the ex-ternal influences and control to use funds. Hence, it willenjoy financial autonomy. An institution, dependent onthe government funds, may enjoy financial autonomyin different degrees. It will have financial autonomy ifit has independent decision-making power to use itsown and the government funds. The state may behavedifferently. It may interfere with certain areas of deci-sion-making and spending; or it may play the role ofa facilitator and counsellor and actively or passivelyguide the utilization of funds; or it may ask the finan-cially supported institution to be subservient to its diktat;or it may provide financial support without any inter-vention. The resource dependence of HEIs on the gov-ernment funding (and other funding sources) necessi-tates them to depend on their environment. At times,they may find it difficult to maintain autonomy and willbe confronted with outside interference and control —quite a dysfunctional situation for discharging their statedgaols and missions. Notwithstanding the financial de-pendence and diluted autonomy, there are HEIs like JNUor Delhi School of Economics that have maintained highacademic standards since these institutions do enjoyacademic freedom.

A multiple-source and self-generated funding iscentral to an institution's financial autonomy. Through

a conscious decision, most governments worldwide arereducing their share in funding HEIs. They are demand-ing HEIs to raise their own funds (by deciding on feesand other sources of income) and do a lot with lessergovernment financial support. For example, apart fromthe developed countries, in developing countries likeIndonesia, Malaysia, Thailand, and Bangladesh, govern-ments have passed legislations in favour of the priva-tization of higher education. Some governments areprepared to make strategic investments in highly achieve-ment-oriented and internationally acclaimed HEIs andaccord them full autonomy. South Korea is an example.The Expenditure Reform Commission, India, recom-mended a liberal funding without much of administra-tive and financial strings and with full autonomy to'outstanding and internationally' autonomous institu-tions (ERC Report, p 207). It is paradoxical to note thatin some quarters in India, people argue that the highereducation professional institutions like IIMs and IITsshould have financial dependence on the state in spiteof their capabilities to raise their own funds. It is notgood economics.

Link between Institutional and Financial Autonomy

Given the fact that certain HEIs will remain financiallydependent on the government, willingly or forcefully orotherwise, could they retain both financial autonomy andinstitutional autonomy? Autonomy means accountabil-ity. Assuming that we are able to specify accountabilityfor these institutions, the government must allow theseinstitutions to function as autonomous institutions so thatthey could achieve excellence in meeting their goals,mission, etc. It is incongruous to think that an institutionwill have full institutional autonomy without financialautonomy; they are interlinked and inseparable. Byfinancial autonomy, I mean the ability and capability ofan institution to spend money according to its strategicand operating priorities to achieve its stated goals. Ofcourse, there are institutions that have functional andfinancial autonomy but have not performed well. Tosatisfy all ingredients of institutional autonomy as speltearlier in this paper, having financial autonomy is anecessary condition. Usually, governments, including inIndia, give funding on the basis of the number of stu-dents enrolled in degree/diploma programmes. Thus,a simple mechanism of allowing financial autonomy withaccountability is assessing an institution's effectivenessin imparting knowledge to the admitted students. It


81

should be understood that an institution impartingquality education should decide on the number of stu-dents and the fees. The government can then decide whatpercentage of fees it will like to reimburse to the insti-tution. This process will ensure the autonomy of HEIs.

ACCOUNTABILITY

Autonomy or no autonomy, all organizations, includinginstitutions of higher education, are accountable to itsstakeholders in particular and to the society in general.Autonomy of publicly funded institutions also impliessocietal accountability. Greater autonomy to these insti-tutions means greater accountability to the society.Normally, accountability means measuring the efficien-cy and effectiveness of what an institution does. If aninstitution does well (in terms of quality) what it isintended to do, it is efficient. If it utilizes resourceseconomically and judiciously, it is effective. Accounta-bility pre-supposes clearly defined mission, goals, ini-tiatives, etc. and performance measurement indicators.Excellent institutions clearly state where and how theyseek to excel and accomplish objectives. For highlyacclaimed HEIs, it is sufficient to submit the auditedfinancial statement to the government and other provid-ers of funds. Their performance and achievements shouldbe so visible that they should not be subjected to bu-reaucratic controls and reporting and auditing. How-ever, I would suggest that such institutions should alsoprepare periodically a 'social report' listing their contri-butions to the society. For example, IITs and IIMs areknown for the quality of their students and research, butthey have also made tremendous impact and contribu-tion in many socially desirable sectors purely due to theself-motivated initiatives of individuals and groups offaculty members.

Accountability will be wanting from HEIs if thesociety loses trust in them. If that is the case, the chal-lenge is to regain the society's trust. The institutionsshould strive to strike a balance between stakeholders'needs, societal demands, and institutional autonomy. Asocially responsible HEI will do the following to dis-charge its societal accountability:• Serve as a resource and champion for public policy

and issues.• Ensure admission to all qualified students from all

sections of the society.• Ensure quality education and research.• Help in professionalizing management practice of

socially desirable, but under-managed sectors.• Assist business and industry through training,

research, and consultancy.• Research on the issues that are significant for the

government, the industry, and other sectors anddisseminate the research findings.

• Collaborate with other academic institutions to helpthem improve their academic standards.

• Sensitize the participants in various educationprogrammes to the concerns and needs of the so-ciety.We must understand that accountability can re-

strain the institutional and academic autonomy. Theidea that those who fund higher education should havethe right to determine how funds are spent might erodeautonomy and would be dysfunctional to the efficientand effective functioning of HEIs. It is not only thegovernment but also the industry and other agenciesthat fund higher education which demand accountabil-ity. Corporate or non-corporate organizations fundingthe research of faculty members may demand specificresults. This will erode their intellectual freedom andcapacity. In the name of accountability and efficiency,corporate sector practices and bureaucracy may beimposed on the HEIs. Both 'managerism' and 'bureau-cratization' will prove fatal to the very survival of in-stitutional autonomy — an essential condition for achiev-ing excellence. HEIs are mission-oriented organizations.Their accountability lies in achieving their missions.

GOVERNANCE

Governance assumes a decision-making structure andperformance evaluation. The issues of governance be-come more complex in the case of HEIs as there are nodirectly identifiable owners and they have multiplesources of funds in the form of grants and donations.They are also coalitions of different groups and theiractions are not measurable in financial terms, thoughthey have tremendous impact on the society. What is thegovernance model that can be applied to such organ-izations?

I shall take the example of Indian Institute of Mana-gement, Ahmedabad (IIMA) to illustrate the practice ofgovernance at HEIs. IIMA was the result of the grandvision of Dr Vikaram Sarabhai. It is a fine example ofthe trustworthy partnership and cooperation betweenthe state and the central governments and private in-dustry. In the beginning, it received substantial funds


82

from the government. Over the years, with governmentsupport and its own initiatives of raising funds, itsdependence on the government funds has reduced. Inthe past, persons of great stature and eminence like ShriKeshub Mahindra, Dr I G Patel, and Shri P L Tandonhave served as the Chairman/President of the IIMAgoverning board. Reputed people with great distinctionfrom all walks of life are serving as members on the IIMAboard. IIMA was created with a clear mission of pro-fessionalizing management education and practice. Fromthe very beginning, the founding fathers created a valuesystem that led faculty members to excel in teaching,research, training, and consulting. It is worth noting thatIIMA was created as a management institute rather thana business school. As a management institute, its scopewas much broader than being merely confined to thebusiness sector. It was designed to cater to all sectorsand particularly those that were socially desirable. IIMA,from its inception, committed itself to professionalizemanagement practices of the business sector as well asagriculture and public systems (education, energy, trans-port, infrastructure,etc.). Over the years, many morenew sectors have been added. IIMA is functioning as aautonomous institution while diligently serving thesocietal needs.

The achievements of IIMs in general and IIMA inparticular are well known. What has motivated IIMAto achieve what it has achieved? It is the autonomy ofthe faculty members that has motivated them to achieveexcellence. Their salaries and other monetary benefitsare not very high by world standards or industry stand-ards. Consulting adds a little more to their monetarybenefits. It, however, has a much broader objective; itis a mechanism of learning about the management practiceand using this knowledge to enrich students and otherparticipants in the education programmes. It also pro-vides good ideas and rich material for research. IIMsshould have appropriate processes to link consultingwith teaching and research.

The faculty is the core of an institution's perform-ance and excellence. As the mission of HEIs like IIMsis to professionalize management practice and educa-tion in India, the faculty members assume the centre-stage in achieving this mission. The faculty members arenot managers; they are knowledge creators and intellec-tuals. Any system of governance that interferes withtheir autonomous functioning will be dysfunctional. IIMAis a faculty driven and managed institute. The faculty

has all the responsibilities to discharge its duties withoutany authority. IIMA faculty, to my knowledge andexperience, is amongst the most committed and compe-tent faculty in India. The faculty members have doctor-ates from some of the best universities in the world suchas Harvard, MIT, Chicago, Berkeley, Stanford, LondonSchool of Economics, Delhi School of Economics, andIIMA itself. It is only the academic freedom and auto-nomy and hence the opportunity to innovate and excelthat has kept these faculty members at IIMA. If thegovernment starts governing IIMA by rules and bureau-cratic controls, it would mar their creativity and inno-vativeness and they would not be able to achieve ex-cellence in attaining the institute's mission.

In my experience and as per my knowledge, boththe state and the central governments have always sup-ported IIMA in varieties of ways in its endeavour toachieve excellence. IIMA is fortunate to have its wellwishers in government and everywhere. No doubt, thegovernment does subject IIMs and IIMA to some admin-istrative and bureaucratic rules and control which attimes impede the speed and flexibility of IIMA in theday-to-day operations. But, there was never any sub-stantial interference; the autonomy — financial, academ-ic, and institutional — was respected, by and large. Notthat IIMA did not face serious problems; it did but eachtime the problem was amicably settled. We had matureand responsible people having understanding of mutualconstraints on both the sides. Once IIMs and IIMA faceda grave situation where the government wanted it tobecome a 'national institute' through an act of Parlia-ment. IIMA argued with the minister and the bureau-crats concerned that this will be a disastrous step for theautonomous functioning of IIMs; they understood andagreed with the Institute's point of view.

CONCLUSION

The governance model for HEIs will have to be a nor-mative model — consciously created with specific mis-sion and well-defined goals. In this model, the realdecision-making should be with the faculty memberswho will develop a culture of excellence. The govern-ment's role should be to put an eminent board in placewhich will act as a sounding board for the decisions ofthe institutes. If the HEIs achieve excellence as deter-mined by the users of teaching, research, consulting, etc.,they would have made a tremendous contribution to thesociety and served their purpose.


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Note • The author's reflections in this article are based on hisexperience of over two decades at Indian Institute of Manage-ment, Ahmedabad.

I M Pandey, a Ph.D. in Finance from Delhi School of Economics,University of Delhi, is a Professor at Indian Institute of Manage-ment, Ahmedabad. He has taught at graduate business schools inUSA, France, UK, Malaysia, Thailand, Vietnam, Sri Lanka andBangladesh. His publications include ten books, six researchmonographs, and about 100 articles and management cases. His

articles are published in international refereed journals in USA,UK, Singapore, Malaysia, and France. He is a member on the IFCIand Cochin Shipyard Company boards and has served on theboards of IDBI-Principal, Ahmedabad Stock Exchange, GujaratChemicals, and IDBI's Western Region Advisory Board. He wasa member of the Controller of Capital Issues Advisory Committee.He is Editor of Vikalpa: The Journal for Decision Makers and is onthe editorial advisory boards of eight journals including GlobalBusiness and Finance Review (USA) and International Journal ofAccounting, Auditing and Performance Evaluation (UK).e-mail: [email protected]


When the creation was new and all the stars shone intheir first splendour, the gods held their assembly in thesky and sang “Oh, the picture of perfection! The joyunalloyed!”But one cried of a sudden – “It seems that somewherethere is a break in the chain of light and one of the starshas been lost.”The golden string of their harp snapped, their songstopped, and they cried in dismay – “Yes, that lost starwas the best, she was the glory of all heavens!”From that day the search is unceasing for her, and thecry goes on from one to the other that in her the worldhas lost its one joy!Only in the deepest silence of night the stars smile andwhisper among themselves – “Vain is this seeking!Unbroken perfection is over all!”

Rabindranath TagoreGitanjali

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C O L L O Q U I U Mincludes debate by practitioners andacademicians on a contemporary topic

Social Context of ManagementEducation: Institution BuildingExperiences at IIMs

I G Patel, Samuel Paul, Pradip N Khandwalla,Amitava Bose, K R S Murthy, N Vittal,Rishikesha T Krishnan, and Arun Kumar JainAnil K Gupta (Coordinator)

IIMs have played a significant role in realizing the societal aspirations of India becominga creative, compassionate, and developed nation. This needs attention of all stakeholders.Very few people know that IIMs contribute as much, if not more, to public action andmanagement as to the private sector management. The purpose of this Colloquium is toproactively ask questions which will help IIMs to explicitly state their contributions to thesociety and be ready for challenges ahead. Some of the key issues discussed in thisColloquium are:

The processes through which IIMs have defined their goals and directions overthe years.Adequacy of initiatives taken by IIMs to generate greater social, ethical, andprofessional accountability among students and executives trained at IIMs.IIMs’ institution building role and its impact on the quality of managementeducation and practice in India.Factors contributing to the elitist character of IIMs and its social context andsignificance.The potential for IIMs playing a catalytic role in facilitating, empowering orserving the small-scale, unorganized/under-managed sectors and other civilsociety organizations.The role that IIMs see for themselves in building India into a developed nation.

The following points emerged from the discussion:IIMs have made a tremendous contribution to the Indian economy by providingcorporate leadership. The skills developed and honed in IIMs should be extendedto other sectors and institutions.IIMs form the backbone of our country’s economic success by helpingprofessionalize management for all sectors of the economy and providing theentrepreneurial, technical, and skilled personnel for superior wealth generation.IIMs offer a model for management education with open and merit-basedadmissions, good and relevant curriculum, campus placement, and a generalmotivation to be relevant to the social needs.The participative, decentralized, and transparent governance system can makeIIMs the role model for excellence-seeking institutions.If global reputation for distinctive contribution and institutional excellence hasto be sustained, IIMs would need to coordinate their approaches to addressingopportunities in globalization.To gain social legitimacy and respect of various stakeholders, IIMs need to takeproactive steps to bring students from less privileged social backgrounds.Higher management education institutions such as IIMs should develop acoherent and compelling vision of how they would want to contribute to the new,liberalized India. Visioning must be participative and must involve all thestakeholders.

KEY WORDS

Management Education

Institutional Building

Elitism

Governance

Corporate Social Responsibility

Academic Excellence

Globalization

Executive Summary


85

There is a great deal of legitimate concern and uneaseas well as ill-informed criticism about the state of highereducation in India. Many feel that the present systemof higher education is elitist and should not be pamperedfurther. On the other hand, most educationists are wor-ried about the poor quality of teaching and research inmost of our educational institutions. They emphasize theneed for much greater resources if higher education isto be worthy of the name and if at least some institutionsof higher learning in India are to be world-class and caterto the vastly complex needs of a knowledge society. Inthe new world of globalization, it is the quality ofknowledge and research and skills which will givecompetitive advantage to a country and not cheapunskilled labour or even natural resources. Are we notliving on the capital created in the early years of Inde-pendence by the vision of a Nehru or a Bhabha or aMahalanobis?

First of all, if we are to meet the needs of a globalizedsociety, let us not decry, denigrate ordebilitate such centres of excellenceas we already have. IIMs, IITs, Indi-an Institute of Science, Tata Instituteof Fundamental Research, NationalDrug Research Laboratory, NationalPhysics or Chemical Laboratoriesand many others are among the bestin the world. We have to strive tomake them better — not worse.

I would agree that elitism isinherent in our present system ofhigher education. By and large, the middle and upperclasses benefit by it and the poor have little access toit. I am afraid this is true to some extent of every country— be it India, the UK or the US. The relatively better-off with higher education in the family for generationshave an advantage which gets compounded by theirability to send their children to better schools. To pretendthat we can avoid this altogether and everywhere ishypocritical. At the same time, it cannot be denied thatthese so-called elite institutions do have some socialresponsibilities. To gain social legitimacy and respect ofvarious stakeholders, it becomes unavoidable for such

institutions to take certain proactive steps to alleviatethe situation. Let me just mention a few things whichare crying for attention.

• Basic talent is distributed fairly widely and uni-formly in the society. What one needs to outperformand make it to the top is capacity building. Whatsteps have technical or professional institutions suchas IITs and IIMs taken to achieve such a goal?

• Given the tough standards of entry in the institu-tions of higher education, only the most meritoriousare able to reach such institutions. This is to beexpected. But, the truth is that, to gain social legi-timacy and respect of various stakeholders, suchinstitutions have to take proactive steps to bringstudents from less privileged social backgrounds.Indian administrative service tried and succeededin this mission.

• When economically weak students do enter suchelite institutions, there is a need toprovide them financial and otherassistance to lessen the stress on theirfamilies. A fund of Rs 2.5 million wascreated for such a purpose severalyears ago at IIMA. We need to gaugethe effective utilization of the fundtill recently and the proactive stepstaken to reach out to such students.

• There are several reasons whystudents from institutions like IIMsgo to well-paying corporate jobs.

Much of the public sector does not have the organ-izational environment to absorb the skills and pers-pectives that such students are equipped with. But,one could try to provide incentives to students toencourage them to go to social and under-managedsectors. For instance, one could write-off the loansor pay the loans of such students who go to suchsectors even for one or two years. Every develop-mental institution has to cross-subsidize. Why can’tthe better-off students pay more so that the lessprivileged students can pay less and some go towork for NGOs or such other institutions?

In the new world ofglobalization, it is the

quality of knowledge andresearch and skills which

will give competitiveadvantage to a countryand not cheap unskilledlabour or even natural

resources.

86 SOCIAL CONTEXT OF MANAGEMENT EDUCATION

I G PatelFormer Director, IIM, Ahmedabad andLondon School of Economics; Former Governor, RBI

86

• Tremendous social capital has been invested in thebuilding up of IIMs and IITs and there is no doubtthat the society has a right to demand returns onthis investment. There is a need for greater socialengagement. Special programmes for women andother socially disadvantagedsections must be organized anda fund be created to pay theirfees, of course, on merit grounds.Equality of opportunity has tobe ensured even in Manage-ment Development Programmes(MDPs) as managers from lessprivileged classes have no lesstalent than those whose employ-ers or who themselves can payto get high quality executivetraining that IIMs offer.

• Yet another way to create new elite with may behigher social conscience could be to track toppersof school exams in different states and encouragethem to apply to such elite institutions. By support-ing some of the students from disadvantaged social

background who otherwise cannot afford elitist edu-cation, they may be brought into the mainstreamthrough such proactive steps.

My question is: Are institutions of higher educationlistening enough to the voices at thegrassroots in society? The pyramidfor social climbing is becoming steep-er and steeper with passage of time.The base from which elites are drawnand the constituency which theyserve is becoming thinner. Can thepyramid become flatter? Will IIMstake more proactive steps to bringyoung students and professionalmanagers from various socialstreams into their elite club so thatthe elite themselves become more

socially aligned and responsive? After all, the autonomythese institutions have enjoyed and quite well deserv-edly also cast on them greater social responsibility. Thereis no way by which the demand for such an account-ability can be dismissed as an unnecessary call on theirdoors.

Tremendous social capitalhas been invested in thebuilding up of IIMs and

IITs and there is no doubtthat the society has a

right to demand returnson this investment. There

is a need for greatersocial engagement.

IIMs stand out because ofhigh barriers to entry,

placement of theirgraduates in the corporate

sector, and the globalopportunities that come

their way.


Samuel PaulFormer Director, IIM, Ahmedabad;Chairman, Public Affairs Centre, Bangalore

IIMs were established by the Government of India asa part of its industrialization and modernization stra-tegy. IITs had already arrived and management educa-tion was seen as a complementary input along withtechnology for the modernization of the Indian econo-my. It explains why these two sets of institutions werebrought within the purview of thetechnical education wing of theMinistry of Education.

The public perception aboutmost institutions of higher learningis that they are elitist. There is noth-ing surprising about it as they caterlargely to rather small and selectgroups of young people whose par-ents were able to give them a goodeducation. Among such institutions, IIMs stand outbecause of the high barriers to entry into these institu-tions, placement of their graduates in the corporate sector,and the global opportunities that come their way. How-

ever, the only news about them in the media usuallypertain to the high salaries offered to the new graduatesalmost as if salary is a proxy for excellence! Little elsewas written about them in the press until the infamous‘fee’ issue came along. It merely reinforced the elitistimage of IIMs.

But those who founded theseinstitutions were inspired by theirpotential for professionalizing man-agement. They may have been awareof the elitist trap along the way butthat would not have stopped themfrom taking the route they did.

The first three IIMs to be set upwere keenly aware of the larger rolethey had to play in the nation’s de-

velopment. Even though IIMA and IIMC had well knownUS business schools as their collaborators, they did notconfine their attention to the private corporate sector

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alone. At IIMA, the early establishment of the Centrefor Management in Agriculture (CMA) and the latercreation of the Public Systems Group (PSG) testify to itslarger vision. IIMA has collaborated with the NationalAcademy of Administration at Mussoorie for severalyears in IAS training programmes. Much field work wasdone at this time and new cases were developed for useat the Academy. IIMA also incubated the Indian Instituteof Forestry Management and contributed to faculty de-velopment at many universities.

At IIMC, many programmes were conducted forpublic enterprises and advisory services were providedto various governments. At IIMB, there was an ambi-tious effort to work on the management issues of avariety of sectors beyond industry. A good deal ofresearch, training, and consulting was thus done for thegovernment, social sectors, and other non-corporatesectors. The fact remains, however,that these initiatives did not result ina significant diversification of the IIMprogrammes. The corporate sectorfocus continued to be the dominantand the most visible image of all IIMs.It is important to see why this haspersisted.

Some might argue that IIMs didnot adequately highlight their workbeyond the private corporate sector.Though there is some truth in it, Idoubt very much that more aggres-sive publicity would have helped.There were more important andsubtle factors at work. First of all,management knowledge and curri-cula have evolved around the corporate sector and it isthis pool of knowledge, concepts, and tools that the IIMsborrowed from abroad. It made it easier for IIMs toorganize programmes and undertake consultancy forthe corporate sector. Even if IIMs invested in researchto generate knowledge on other sectors, it would havetaken time. Thus, there was a head start factor in favourof serving the private corporate sector.

Second, there was greater response to IIMs from thecorporate sector than from other sectors and publicagencies. The post-graduate and executive programmesare the best examples. The corporate sector absorbed

almost all the new graduates. IIMB’s graduates whospecialized in other sectors did not find suitable place-ment. These specializations were later on discontinued.Consulting work was also dominated by the corporates.Government agencies that badly need management skillshave many constraints in recruiting IIM graduates andattending executive programmes. Their procedures andcompensation policies are such that they cannot effec-tively compete with the private corporate sector. Under-served sectors such as cooperatives or health may benefiteven more from modern management but they are unableor not motivated enough to respond. And this is madeeven worse by the much higher salaries and careerprospects corporates are able to offer to the new grad-uates.

Third, there is a special problem that is peculiar tothe government. The government personnel may attend

IIM programmes but are often un-able to apply their new knowledgein their settings. Either the systemmay not permit it or sustaining newideas becomes difficult in a bureauc-racy that does not reward them. Thiswas the problem with IIMA-Nation-al Academy collaboration. The pro-gramme got off to a good start whenthe IIMA faculty was directly in-volved. But, when this period of jointwork was over, the Academy wasunable to sustain the programmewith the same vigour. Factors suchas changes in leadership and facultymay well have been responsible forthis decline. Many consulting assign-ments for the government may also

have had a similar fate.

Given this scenario, it is not surprising that IIMshave been dominated by their corporate sector focus. Itwill not be easy to reverse or weaken this trend. But,surely, IIMs can take steps to address the needs of othersectors that are important for the country and the gov-ernment. Even the private business schools in the Westhave diversified their work along these lines. Leadingbusiness schools in the US, for example, have createdspecial programmes for small entrepreneurs, the farmsector, and non-governmental organizations. Some ofthem have funded research on the problems of these

There is a specialproblem that is peculiarto the government. Thegovernment personnel

may attend IIMprogrammes but are oftenunable to apply their new

knowledge in theirsettings. Either the system

may not permit it orsustaining new ideas

becomes difficult in abureaucracy that does not

reward them.


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organizations. There are dedicated faculty groups whopublish on these subjects. There is no reason why thiscannot be done in India by the publicly funded IIMs.No one should be under the illusion that this shift willerase the elitist stamp on IIMs. The endeavour shouldbe to do what is right for the country.

As noted above, several IIMs have already launchedinitiatives that go beyond the private corporate sector.A recent example is the creation of the Centre for PublicPolicy at IIMB that has a long-term programme for centraland state level officials. Perhaps, they are not publicizedenough and hence may not be fully known to the circlesthat matter. Of course, much moreneeds to be done beyond publicity.What steps should IIMs take to movein this direction?

• The faculty of IIMs should besensitized to the need to have abroader view of the managementneeds in the country. The newfaculty who come from diversefields may not be fully aware ofthe new role they are expectedto play. In earlier years, someof the IIMs had a practice of ori-enting the new faculty to the vision and scope oftheir institutes. The collaborating US schools alsohelped with this process. It is important that the keyprofessionals in IIMs share a common vision of theirrole and contribution to society.

• There are many ways to encourage faculty and boardsto think along these lines. One that has been triedout at IIMA is a faculty Committee on Future Di-rections that deliberates and recommends an agen-

da for action. Another option is to systematicallyconsult with different stakeholders (not only thecorporates) who may have useful ideas to offer. Thisimplies, of course, that the institutes and their lead-ership including the faculty are willing to introspectand look for new ideas. It is the only way to avoidothers pushing their agenda on IIMs. The initiativefor change should come from within.

• International experience clearly shows that newinitiatives invariably call for fresh investments anddedicated groups. It is easy to produce one paperon a subject or to offer a course on a one-time basis.

But, to generate systematic knowl-edge on a sector or to develop newconcepts and tools, longer-term in-vestments and team efforts will berequired. The kind of home work tobe done to make this happen will notoccur in the absence of a fair measureof internal consensus and institution-al support.

• Institutional autonomy andflexibility are pre-requisites for do-ing the different things mentionedabove. It is unlikely that those who

look to the government to be told what they shoulddo will make use of the autonomy they possess.Many educational institutions are run in a bureau-cratic style. Autonomy seems to be wasted on them.The traditions of IIMs in their early years were verydifferent from this style. It was not uncommon forthem to influence the government’s ideas and ideasfor IIMs. I hope that the newer IIMs will learn fromthis experience and tradition and guard and usetheir autonomy to the best of their ability.

Several IIMs have alreadylaunched initiatives thatgo beyond the private

corporate sector. A recentexample is the creation of

the Centre for PublicPolicy at IIMB that has along-term programme for

central and state levelofficials.


Pradip N KhandwallaFormer Director, IIM, Ahmedabad

Professor Anil Gupta has posed a tough set of questionsabout the dilemmas of IIMs in the context of the face-off between IIMs and its major funder, the government.The crisis seems to have passed due to political reasons.But, it could recur, in the same or other forms, so longas the dependency on the government is not addressed.

I am nowhere near as familiar with the other IIMsas I am with IIMA, where I spent nearly 27 years of

my professional life. So, my remarks pertain primarilyto IIMA, though I hope they are not wholly irrelevantto the other IIMs. The tension between a principalfunder and an institution of academic excellence is acontinuing one but if IIMA retains its major strengthsand responds creatively and effectively to these ten-sions, it will emerge stronger. Let me first list thestrengths that IIMA, and generally all institutions of

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excellence, must retain or develop.

First of all, IIMA stands out asone of the few institutions in Indiathat has a genuinely participative,decentralized, and transparent gov-ernance system. In theory, almost allthe powers are vested in the Boardof Governors and the Director. Inreality, much of the decision-makingis with the committees and individ-uals. The faculty, for instance,through various committees, hasconsiderable say in the selection ofthe students and faculty members, in faculty promo-tions, in the content of the academic and training pro-grammes that are offered, in the research that is funded,and even such financial decisions as the fixing of the fees.Individual faculty members have freedom to design newcourses and training programmes, decide on the coursecontent and pedagogy, and what research to undertake.Not that the decision-making process is a smooth one.It is frequently turbulent and occasionally exasperating-ly slow. But, the process nearly mirrors the kind ofdemocratic and participative civil society that we aspireto. In this sense, IIMA is a role model for all the excel-lence-seeking institutions of this country. They all havea stake in the excellence-through-autonomy of IIMA.Their support is worth cultivating in the present crisis.

Secondly, no one so far has credibly pointed to anyhanky-panky in IIMA’s selection of students and faculty.Here again, IIMA is a role model for many institutionsin terms of institutional integrity. The latter is a scarcecommodity. No government in its right mind wouldwant to put it in jeopardy through its actions.

The third strength of IIMA is itsinstitutional creativity. It has not onlyspawned several academic and train-ing programmes of widely recog-nized excellence, these programmesthemselves are continuously beingre-invented. In many academic insti-tutions of India, the syllabi hardlychange in a decade and courses aremore or less frozen in time while therelevant fields of knowledge gogalloping. At IIMA, practically

every course undergoes some changeor the other every year — in termsof readings, tests, projects or evenpedagogy. In any given year, a doz-en or more new courses and trainingprogrammes may be on offer. Thereis a huge backup for what is taughtin the classroom in the form ofhundreds of Indian case studies,research findings, and teaching notesthat highlight the Indian, and increas-ingly, the global context. I do nothave the latest figures. But, my es-

timate is that, over the years, IIMA faculty, researchstaff, and students have produced a thousand books andresearch monographs, and several thousand papers, casestudies, and teaching notes. This is a contribution to theIndian management knowledge pool of monumentalproportions in a country in which the style is to replicatein the classroom mostly American and British manage-ment wisdom — of a decade or two back. This contri-bution is not well known. It should be publicized a lotmore. No one in his or her right mind would want toerode IIMA’s capacity for generating new and relevantmanagement-related knowledge.

Fourthly, almost from its inception, IIMA has re-garded itself as not just a business school, but as aninstitute of management. This is where it sharply differsfrom the leading overseas business schools. Over thedecades, it formed centres and groups to contribute tothe effective management of agriculture and rural de-velopment, developmental administration, populationcontrol, energy, health, and education. These groupshave extended the impact of IIMA well beyond thecorporate sector. This contribution of IIMA also is not

known enough. Again, no majorstakeholder in IIMA would want toerode this capacity of IIMA to con-tribute, through research, training,and consulting, and rejuvenate whatare known as the priority sectors ofour society.

There are many more contribu-tions of IIMA. But I will mentiononly one more. If professional man-agement has become an honouredphrase in India, a country in which

IIMA stands out as one ofthe few institutions in

India that has a genuinelyparticipative,

decentralized, andtransparent governance

system. It is a rolemodel for all the

excellence-seekinginstitutions of this

country.

If professionalmanagement has become

an honoured phrase inIndia, a country in which

business, not too longago, was considered anunscrupulous activity,significant credit must

surely go to IIMs, notablyto IIMA.


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business, not too long ago, was considered an unscru-pulous activity, significant credit must surely go to IIMs,notably to IIMA. Thanks to IITs and IIMs, the countryis ranked high among the emerging economies on thequality of its technical and managerial manpower. Thistalent pool is a potent factor in attracting increasingforeign investments to India and in the globalization ofIndian industry. It would cost the country dear to un-dermine this contribution.

Of course IIMA has its warts. It has been slow ingrasping the opportunities opened up by globalization.Most of the graduates of its Post-Graduate Programme(PGP) tend to opt for cushy jobs in cushy companies forcushy pay and perks rather than prove their mettle asentrepreneurs or as intrapreneurs in dynamic compa-nies short on professional management. IIMA could doa lot more to foster in its students astronger sense of business ethics andcorporate social responsibility, twoareas in which IIMA may be laggingbehind its peers in the West. It is yetto develop a coherent and compel-ling vision of what it wants to con-tribute to the new, liberalized, butstill very poor India. It could havecontributed more aggressively andeffectively to such priority sectors asthe creaky Indian governance sys-tem that have been such a drag onour quality of life. There is a fear thatthe IIMA is stuck on a plateau. Itneeds to re-charge its batteries. Ef-fective visioning is a process that canhelp institutions like IIMA to leap from one level offunctioning to significantly higher levels of excellence.I suggest four elements of collective visioning by IIMA:

• The first element is one of institutional scope. Whatkind of a profile, through expansion and diversi-fication, acquisitions and divestments, joint ven-tures, internationalization of activities, etc., doesIIMA want to have, say, by 2010?

• The second element involves the visioning of insti-tutional performance by 2010 in terms of interna-tional rankings, educational and research quality,and earnings to secure financial self-reliance.

• The third element involves the visioning of the

quality of functioning by 2010, say, in terms of theprofessionalization of administrative staff and farbetter administration, speedier and more expertise-based participative decision-making, and greaterentrepreneurship in identifying and grasping theopportunities afforded by economic growth andglobalization.

• The fourth element is what IIMA should contributeto the management scene and to the quality of lifein India.

In the past, IIMA has, of course, engaged in vision-ing exercises, primarily through the device of the Com-mittee on Future Directions set up every five years orso. Its deliberations have involved most stakeholdersand its report is widely discussed internally. Some of

its recommendations are implement-ed. But, in my experience, the imple-mentation has been generally quitetardy and so the impact and thebenefits have been limited.

Visioning must be participativeand must involve all the stakehold-ers. In the context of IIMs, it mustinvolve not just the faculty and theBoard, but also the alumni, the stu-dents, the various sectors served bythe institution, and also the govern-ment. Since the process of visioningis as important as the vision itself,the help of one or more process con-sultants may be helpful in ensuring

that the process is participative, there is enough brain-storming for creative perspectives and options, and equal-ly, there is a robust way of reaching a consensus on theinstitutional vision. Retreats help and so could Devil’sadvocacy to ensure that the vision has anticipated mostof the likely impediments.

Visioning is an exercise in wishful thinking if thereis no effective implementation strategy. Visioning mustbe accompanied by an implementation strategy thatbreaks the task of agreed upon change into missions,specific tasks, structures of implementation with specificaccountabilities and timelines, monitoring and reviewmechanisms and schedules, incentives for excellence inimplementation, and so forth. Times have changed. Thereis a lot more competition now; opportunities are now

Times have changed.There is a lot morecompetition now;

opportunities are nowcoming thick and fast,

but vanish quickly, too, ifnot grasped in time.

Vision, creativity,enterprise, and effectiveimplementation are theoars with which IIMAmust row into vaster

waters.


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coming thick and fast, but vanish quickly, too, if notgrasped in time. Vision, creativity, enterprise, and ef-

fective implementation are the oars with which IIMAmust row into vaster waters.

There is a sense in whichthe PGP is unabashedly

‘elitist.’ It is a veryexclusive programme. Itcannot but be exclusivesince it is merit driven.

Those who do notpossess the cut-off merit

just cannot get in.


Amitava BoseFormer Director and Presently Professor, IIM, Calcutta

The vision with which IIMs were set up was a visionwith a difference. Indeed, it was never the intention thatIIMs would be carbon copies of run-of-the-mill businessschools that cater to the needs of the private corporatesector only. They were visualized as management insti-tutions that would be capable of answering to a muchwider societal mandate. The idea was to produce man-agers who would perform with equal ease no matterwhere they might be located. However, at the end of theday, the question remains: how much impact has all thiscreated?

The most visible of all IIM activities is the PGP. Mostcritics of IIMs argue that the prod-ucts of the PGP have only benefitedthe private corporate sector and for-eign multinationals. That could nothave been the objective with whichthe Government of India set up theseinstitutions and funded them. Crit-ics would like to see more of ourstudents addressing the needs ofpublic institutions including publicutilities. They would be happier ifour students had improved the wayour railways are run, the way trafficin our cities is controlled, and the way in which ourhospitals are managed. They assert that our studentshave not addressed the needs of the so-called ‘under-managed’ sectors of our economy.

There is a sense in which the PGP is unabashedly‘elitist.’ It is a very exclusive programme. It cannot butbe exclusive since it is merit driven. Those who do notpossess the cut-off merit just cannot get in. There is onemore point that is relevant here. Management educationis market-driven in a way that university education ingeneral is not. Because of the high credibility enjoyedby the meritocratic PGP, excellent placements are as-sured for its products. This has induced more and moreof the brightest students of the land to try for admissionshere. As a result, IIM students are among the best in thecountry.

The best students are going to want the best jobs.This is the reality. Whether we like it or not, the bestjobs are nowadays defined in terms of money and au-thority. As parents, we push our children relentlesslyin the direction of careers promising assured money andauthority. It may be sad but it cannot be denied that thebest jobs are not in the ‘under-managed’ sectors but inthe private corporate sector and with multinationals.Because of the operation of the profit motive, these jobsare also most demanding. At the same time, rewards fornotable performance are quick in striking contrast to‘promotion-by-seniority-when-a-vacancy arises’ in gov-ernment and the public sector. If the ‘under-managed’

sectors want to hire from IIMs, theymust improve their absorptive ca-pacity.

A case in point is the IIMs them-selves. Can IIMs hire their own stu-dents as managers? Do IIMs promiseattractive managerial careers? Theolder IIMs in particular are strad-dled with administrative rigiditieswhich are quite out of line with thechallenges of the contemporaryworld.

IIMs are not all-powerful. They may try but areunlikely to influence politically sensitive HR policies inthe government sector. Again, they may try but areunlikely to alter preferences of the modern parent oraspirations of today’s youth. There is, therefore, only oneway by which IIMs can get their products to go to the‘under-managed’ sectors: they have to reposition them-selves so as to exclude the academically brightest stu-dents. One way to do that would be to announce thatIIMs are not going to offer placement services and tochange the curriculum to exclude ‘Westernized’ topicssuch as modern financial management, strategic man-agement, etc., and introduce larger doses of public service-oriented courses. What is quite certain, however, is thatmany faculty members would not agree to such a change.Also, which alumnus would want to see the IIM brand

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equity getting dissipated? So, that is where the problemlies. Of course, once the best students stop coming in,the best faculty would also pack up and go. There aremany very good private institutions which will cash inon the exodus.

In other words, given the nature of the world, IIMsare ‘elitist’ in the sense of academic exclusiveness. Elitejobs and academic merit go hand in hand. This mayappear to be an unfortunate trap fordevelopment. But is it really a trap?There are many who would arguethat most development problems arenon-academic in nature and do notrequire academic brilliance for theirsolution. Why not leave academicbrilliance for universities to tackle?Publicly funded management insti-tutions ought to give priority to de-velopment and if that means gettingrid of obsessive preoccupation withacademic credentials then so be it.

The response to the above is the following: Whilestriving after academic excellence does not automatical-ly address the pressing issues of development, lack ofacademic excellence does not automatically foster com-mitment to national development either. There are manyschools already in existence which do not cater to thebrightest students. Why are the products of these schoolsnot helping to solve the pressing problems of develop-ment management? Is the government doing anythingto absorb them in the ‘under-managed’ sectors?

It would not be appropriate to judge the PGP of IIMssolely in terms of direct placements. The PGP has setstandards for hundreds of other schools to emulate. ThePGP syllabus has been used as a benchmark for other

schools. As a consequence, IIMs have had a catalyticeffect on management education in the country. Yet,there is room for improvement and I would like to makea concrete suggestion.

There is a certain amount of contribution that IIMfaculty teams have been making to policy making interms of research, consultancy, and training. My sug-gestion has to do with how to enhance a typical PGP

student’s involvement with devel-opmental problems of the country.The suggestion is that the institutesshould take up large on-going re-search projects studying differentsectors of the country and ‘execute’these through the PGP. The word‘sectors’ is being used in an ellipticalfashion and a little loosely. Thesecould be defined in different ways.They could be defined in terms ofproducts (e.g., agro-based industriessuch as tea, sugar, etc.), services

(transport, power, etc.), organization (informal, facto-ries, peasant farming, etc.), geography (rural Bengal,etc.) and so on. The projects should be so designed asto require considerable field work and the students shouldbe assigned to spend time on the field as part of the corecurriculum. The hard work is not how to design suchprojects but to organize their execution. We would needthe government’s help.

The idea seems to be promising. In this manner, notonly would IIM students and teachers contribute to thedevelopment literature (and thereby to policy making),the very process of participating in the field surveyswould enrich their understanding of the ground reali-ties. The effect of this on fresh minds can be expectedto be far reaching and permanent.

While striving afteracademic excellence doesnot automatically address

the pressing issues ofdevelopment, lack of

academic excellence doesnot automatically fostercommitment to national

development either.


K R S Murthy

Former Director, IIM, Bangalore

The social context of elitism in management educationhas changed significantly since the first two IIMs wereset up in the 1960s. When India embarked on plannedeconomic development, the need was felt for engineersand managers. Industry was unfamiliar with the modernmanagement concepts, methods and techniques. IIMswere to introduce modern management education inIndia. Its graduates were to complement the supply of

engineers from IITs. Planning was done to balance thesupply of engineers and managers with the expectedneeds of the industry. However, this balancing did nottake place at the micro level because the large and heavyindustries were primarily driven by the government,while the graduates of both IITs and IIMs preferred otheravenues.

The challenge for IIMs was to learn and absorb the

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American management educationand practices, adapt them to theIndian context through research,familiarize Indian industry withmodern management methods andtechniques, and find placement op-portunities for the graduates.

In the early years, the IIMABoard worked informally like a self-governing society. There was strongsupport from the state and centralgovernments. The fluid initial conditions, the tall lead-ership, and the quality of government decision makersin the government enabled the management of strategicdiscontinuities in location, in the choice of collaborator,in negotiations with the state government, the collab-orator and Ford Foundation, as also in enlisting thecooperation and support of industry. The Board ofGovernors mediated and facilitated institutional lead-ership to enlist the required support from industry andto overcome the many constraints arising out of govern-mental rules and procedures.

IIMA and IIMC invested heavily on faculty andadaptation, either through case development or otherresearch and innovation in curriculum. The faculty learntand adapted the American management practices andeducational methods and delivered excellent educationin a contextually relevant manner. Awareness was crea-ted among target groups about the usefulness of theinstitute’s products and services. Consultancy was un-dertaken as a way of learning about the challenges facedby Indian managers.

Simultaneously, IIMA also set up faculty groups towork on agriculture, banking, and other sectors. In ordernot to impose any additional burdenon the government budget, other thanthat required for the PGP, the secto-ral faculty groups were required tobe self-financing, which also enabledthem to be responsive and relevantto practitioners.

Private industry recognized theuseful contribution that the execu-tive programmes and the graduateprogrammes could make to manage-rial practice. The Institute’s reputa-

tion and confidence increased. Thesector groups were able to providesignificant help to policy makers.

Thus, although unable to attractgraduates into its operations, theGovernment of India had successful-ly launched some important anduseful elitist higher educational ins-titutions. For a variety of reasons,the turnover of graduates in indus-try was high. Although their merit,

education, and potential were acknowledged, there werecriticisms that the graduates were arrogant, ambitious,and selfish. I do not think that they were any more sothan any other group of successful young professionals.The careers that they finally settled on were as diverseas that of any other professional group. Not infrequentlydoes one come across IIM graduates who have becomeentrepreneurs, senior managers in non-government or-ganizations, public enterprises, and even joined civilservices after competitive examinations. Thus, IIM grad-uates have contributed significantly in a number of sec-tors and areas.

In the 1960s, the social context provided few alter-natives to bright and merited youngsters other than theIAS. In that context, the transparent and merit-basedsystem of IIMs provided a respectable alternative careerchoice. More and more youngsters competed for a chance,which was available irrespective of caste, region, reli-gion, or subject of study at the graduate level. The elitismcame from merit and success in competition. That is theway the students got tuned to before, during, and aftertheir educational period in IIMs, quite a different char-acteristic vis-à-vis the elitism of the IAS cadres. For, the

IIM graduates do not enjoy mono-poly or governmental power that theIAS cadres get accustomed to. Thenetwork of IIM alumni is quite dif-ferent from the network of the IAS.A get-together of the IIM alumni ismostly a personal and emotionalaffair, without any of the dynamicsof power of network of an IAS batch.The opportunities that IIM gradu-ates get are open to non-elitists —non-IIM graduates and even non-graduates — unlike the IAS. Their

In the 1960s, the socialcontext provided few

alternatives to bright andmerited youngsters other

than the IAS. Thetransparent and merit-based system of IIMs

provided a respectablealternative career choice.


The elitism came frommerit and success in

competition. That is theway the students got

tuned to before, during,and after their

educational period inIIMs, quite a different

characteristic vis-à-vis theelitism of the IAS cadres.

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organizations too have to compete, unlike the govern-ment.

The elitism of IIMs was also due to the sector facultygroups, which earned the goodwill of policy makers andprofessional bodies, sponsoring their research studies.The watchwords were social relevance and excellence.In the 1970s, a visiting professor of strategy and organ-izational theory from Case Western Reserve Universityto IIMA compared the research output of IIMA facultywith those of his University. His finding was that whilethe topics chosen by the faculty of his University weretheoretical and focused narrowly on organizational is-sues, the topics that the IIMA faculty chose appearedto be much wider in scope and addressing practicalproblems. Even at the cost of not finding a place ininternational journals, the facultypreferred focusing on work that wasrelevant.

Although, many private institu-tions and university departmentsfollowed the example of IIMs andstarted management education pro-grammes, their number was less thana hundred. The IIMs stood apart interms of their faculty, campus, andother resources.

The elitist status of the institu-tions and their graduates, naturally,gave rise to the question: why should the governmentsubsidize the education of elitist managers who serveprivate industry, especially the multinationals? TheGovernment of India could have made the IIMs self-financing, with greater autonomy in fixing the fee, andraising other funds. But, it did not. IIMs continued tobalance their budgets and the various demands on themthrough a combination of project funding and govern-ment grants.

The social context changed in the 1970s, with thegovernment moving further towards tighter governmentcontrol of the economy. With nationalization of banking,coal, and other sectors, and the focus on poverty removaland rural development, it was felt that there was a needfor young graduates in the public sector. It was in sucha social context, and as a departure from the earlier IIMs,that IIMB was set up in the 1970s. Building on theexperience of IIMA and IIMC, IIMB started on the as-

sumption that a model of management, relevant to thelarge and growing Indian public sector, could be indi-genously built and delivered. It did not collaborate withany foreign institution. It expected that the governmentand the public sector would support and absorb theoutput. Again, that did not happen, although somepublic enterprises, with good leadership, were able toattract some of the IIM and non-IIM management grad-uates to their organizations.

The IIM model for management education — itsopen and merit-based admissions on an all-India basis,good and relevant curriculum, and campus placementefforts, and a general motivation to be relevant to thesocial needs — was emulated to different degrees bymany private colleges and even university management

departments. The functioning ofIIMs with many sentient groups, flatand participative decision-makingstructures was a great departure fromthe functioning of a typical univer-sity, with its hierarchic, non-respon-sive, and highly politicized systems.While some universities tried to givegreater autonomy to their manage-ment departments, the IIM modelcould not in general be replicated inthe Universities and the colleges asthey could not mobilize the requisitefaculty and other resources.

There has been a rapid expansion in managementeducation, beginning with the late 1980s and early 1990s.There are now nearly 1,000 institutions, which are of-fering masters level education in management, with acapacity to graduate over 60,000 a year. The number ofinstitutions offering management education in variousapplication areas such as health has also increased. Elitistgroups are increasing in a number of areas — R&D,Information Technology, Biotechnology, Drugs and Phar-maceuticals, and the Capital Markets, with or withoutformal management qualifications.

The growth impetus has come from the economicreforms of the 1990s which has released private energyand initiative. Just as the Indian subsidiaries of themultinationals were the first to recognize the value ofthe IIM graduates in the 1960s, the new multinationalsentering India have been quick not only to recognize the

The elitism of IIMs wasalso due to the sectorfaculty groups, which

earned the goodwill ofpolicy makers and

professional bodies,sponsoring their researchstudies. The watchwords

were social relevance andexcellence.


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value of the graduates of IIMs, butalso in recognizing the potential forresearch collaboration with Indianresearch institutions. Indian indus-try, under intense international com-petition, is becoming active not onlyon Indian campuses but also oncampuses abroad. Globalization hastaken off. The media is tuned to theglobal systems. It terms the IIMs asB-schools, ignoring the deliberatechoice of management, instead ofbusiness, in their very names and the many programmesand activities that IIMs are involved in.

In this social context, there is a need to redefine thestandards for excellence and relevance of India’s elitisteducational institutions. IIMs need more focus andintensity for their teaching, research, and consultancyactivities. If achieving such intensity in all the currentactivities is difficult, they need to select and synergize.Internal structures and policies, especially the govern-ment constraints in personnel management, have to bechanged.

One major lesson from the institution building ex-perience of IIMs is that while the state and central gov-ernments can be expected to be supportive, especiallyin funding in good times, they cannot provide the in-itiative and timely coordination across different depart-ments or ministries. In the planned era, the governmentwas indifferent enough not to impose drastic changeson IIMs. That has not been the case in the more volatilesocial context since the 1990s.

In the early 1990s, when the Government of Indiafaced a financial crunch, it wanted IIMs and IITs tobecome self-financing. IIMs were able to respond better

to this situation than IITs as theywere autonomous. IITs, governed bythe IIT Act, were more dependent ongovernment approval for fee increas-es. Some of the IITs had to defer evenmuch-needed maintenance expendi-tures for several years until the gov-ernment was able to approve fee re-vision.

More recently, the governmenttried to impose a cut in the fee

charged by IIMs. Such coercive power of the governmentcan hurt institution building. In the structure of IIMs,the government has a dominating role. It appoints theChairman, the Board members, and the Director. In therecent crisis over the fee cut, Shri Narayana Murthy triedto mediate between the institutes and the government.The failure of the government to take a more objectiveand comprehensive view of the system is disturbing.

In the emerging global social context, the governanceand leadership of elite institutions have to be comprehen-sive, flexible, understanding. The Board should be inde-pendent and autonomous. In my view, the Board shouldappoint the Chairman of the Board and the Director as inthe case of Indian Institute of Science, Bangalore. TheBoard can then take full responsibility for governance. TheBoard can institute a system of accountability to all itsstakeholders. In institutions that can be financially inde-pendent, the Government’s control role can be restrictedto participation in Board discussions and supporting in-stitutional activities wherever possible. The government’spower to intervene or set rules should be restricted to shortperiods of gross malfunctioning. The government and thenation will not be a loser with such a transformation. IIMswill scale greater heights and bring more benefits to all itsstakeholders.

In the early 1990s, whenthe Government of Indiafaced a financial crunch,it wanted IIMs and IITs to

become self-financing.IIMs were able to respond

better to this situationthan IITs as they were

autonomous.


N VittalFormer Chairman, Central Vigilance Commission

IIMs were, to begin with, visualized as institutions toprovide management education for an independent Indiain an environment conducive to provide managers andleaders for business enterprises. IIMs, particularly, thosein Ahmedabad and Calcutta which came up early, werevery much influenced by the institutions with whichthey were closely connected, namely, Harvard Business

School and Massachusetts Institute of Technology.

The issue whether IIMs are elitists or social organ-izations has been provoked by a controversy initiatedin the recent past. Perhaps, out of this controversy, anopportunity has arisen to reflect on the role of IIMs andtheir relevance to India today. A little reflection about

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the human development and pro-gress achieved in any society willshow that progress does not comefrom the common man. It is the un-common man who brings progressin any field. Progress invariablycomes from the people who are tal-ented, who are able to see beyondtheir time, who are innovative, andwho provide leadership. These peo-ple by their very nature are classifiedas elite. Human society can be lookedat from two angles. The first is whatmay be called as purely material orphysical or to use the electronic jargon, the hardwareaspect. At the physical level, all human beings are equal.But, there is a second dimension of the human society.This is what could be called the non-material, spiritualor the software dimension. In this dimension, all humanbeings are definitely not equal. Though it may soundcynical, some are more equal than others.

The concepts of liberty, equality, and fraternityevolved very strongly after the French Revolution in1789. These concepts were essentially based on theprinciple of equality of human beings. In fact, muchbefore the French Revolution, spiritual and religiousleaders in different parts of the world have pointed outthat all of us are equal because we are the children ofGod. Nevertheless, when it comes to material progressof the society, in whatever field we consider, be it art,industry or economics, it is the elite, the leaders inthinking, who have made a contribution.

After India became indepen-dent in 1947, the principle of equalitywas very much in the minds of theleaders. Article 14 of the Constitu-tion enshrines this principle. In re-cent times, we have seen the legacyof affirmative actions and reserva-tions. However, this continuousemphasis on social justice which ispopulist is also contributing to themediocratization of the society. Asociety which has only mediocrepeople will not be able to makeprogress. The net result of the con-tinuous emphasis on social justice

over a wide spectrum is the creationof social tensions and a general de-terioration in efficiency and qualityof governance.

In this context, where do IIMsstand? Even in the US, institutionssuch as Harvard Business School andMassachusetts Institute of Techno-logy with whom the earlier IIMs hadcollaborated are recognized as out-standing institutions and will qual-ify as elitist institutions. So, IIMsare, in my perception, elitist institu-

tions and should remain so. This is because it is the elitewho provide leadership and are able to make a contri-bution. If we make IIMs into populist institutions, wewill only be destroying what has been systematicallybuilt over the years. There is a Kikuyu proverb whichsays, “don’t destroy anything unless you can replace itwith something of value.” If we look at IIMs today, wecan be proud that we have created institutions of excel-lence which are recognized all over the world. This isparticularly significant in the context of globalizationwhere the world has become borderless.

In this new globalized context, another importantfactor should be considered. While in a country likeIndia, we may think in terms of social justice, affirmativeaction, quota, etc., in the global market, the only cur-rency is merit. It is this merit that IIMs try to nurture.Perhaps, one can question whether IIMs are really makinga contribution to the development of real talent. But,the very process of selection ensures that the brightest

and the best among the youth com-pete for the entrance examination.In the selection process itself, IIMsstart with an advantage because theyhave the best human resources avail-able. In addition, the method of teach-ing and education that has beenevolved is such that the products ofIIMs automatically carry a brandequity. They are picked up readilyby the Indian private sector and themultinationals. Over the years, thebrand equity of IIMs has grown andthere is no reason why it should becompromised.

If we make IIMs intopopulist institutions, wewill only be destroying

what has beensystematically built overthe years. If we look atIIMs today, we can be

proud that we havecreated institutions ofexcellence which are

recognized all over theworld.


Progress does not comefrom the common man. It

is the uncommon manwho brings progress in

any field. Progressinvariably comes from thepeople who are talented,

who are able to seebeyond their time, whoare innovative, and who

provide leadership.

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Perhaps, from a purely econom-ic point of view, if the human re-sources can be classified, we canadopt the policy of freely convertiblecurrency or non-convertible curren-cy for human resources. If we fallinto the trap of quotas and populism,we will be creating managers whowill be like non-convertible curren-cies. They may not have any valuein the global market place. On theother hand, with the focus on merit,the products from IIMs today arelike freely convertible currencieswhich are acceptable in every coun-try of the world. I would, therefore,suggest that IIMs should realize thatthey are elitist institutions and continue their traditionso that they can produce products which are universallyaccepted in the global market and are capable of pro-viding leadership wherever they are.

We examine some other relevant issues in this con-text. The first issue is: What are the processes throughwhich IIMs have defined their goals and directions overthe years? In fact, IIMs, particularly IIMA, was startedwith the collaboration of Harvard Business School. Ithas set up very healthy traditions and I remember theCommittee on Future Directions headed by Professor VL Mote. Perhaps, there have been similar committeesthat were constituted from time to time. Hence, even ifIIMA is considered to be an ivory tower institution, itis not an isolated ivory tower. In fact, IIMs have madea tremendous contribution to the Indian economy byproviding managerial leadership. Some of the top man-agers today in different large organizations includingsome multinationals are IIM products. In that sense, theprocesses by which IIMs have defined their goals anddirections are right.

Regarding the issue of IIMscatering primarily to the privatecorporate sector, I personally feel,there is no need for IIMs to be apol-ogetic about it. In fact, when IIMBcame up, Professor N S Ramaswamy,the then Director, tried to focus onthe public sector as against the pri-vate sector which was supposed to

be the focus of IIMA. Over the years,I think, both IIMs have contributedto excellent managerial leadershipboth within the private sector andthe public sector.

Next, I come to the issue offunding of IIMs. Some of the olderIIMs are supposed to have a largecorpus. It is believed that the gov-ernment helped them to build thecorpus. To what extent is this true?What is IIMs’ thinking on utilizingthe resources for the benefit of thesociety through various alternativesincluding different pricing of prod-ucts such as PGP, Fellow Programme

in Management (FPM), MDP etc., and services for dif-ferent sectors in the society? The decision apparentlytaken at the meetings of the directors of IIMs to comeup with a revised scholarship scheme for the econom-ically weak students, I think, is the best solution underthe circumstances. Otherwise, there is no need to med-dle with the financial resources of IIMs.

We now turn to the question: “Do IIMs have anyrole to play in serving the under-managed sectors andother civil society organizations which cannot afford topay high prices? How should IIMs play this role?Definitely, the principles of management should beextended to other sectors also. However, there is adisconnection between policy and implementation whichprobably the management experts have not been ableto resolve. But, perhaps, there is a learning processwhich may soon enable the extension of managementprinciples to the government. There is no reason whythe skills developed and honed in institutions like IIMscannot be extended to other sectors and institutions.

IIMs must consider expanding theiractivities in this direction. As regardsthe pricing of these programmes, itshould be left to the market forcesor the principle of enlightened self-interest.

Finally, I look at the question ofwhat role IIMs see for themselves inmaking India a developed nation.The role IIMs play is to select the best

IIMs have made atremendous contribution

to the Indian economy byproviding managerial

leadership. Some of thetop managers today in

different largeorganizations includingsome multinationals are

IIM products. In thatsense, the processes by

which IIMs have definedtheir goals and directions

are right.

There is no reason whythe skills developed andhoned in institutions likeIIMs cannot be extended

to other sectors andinstitutions. IIMs must

consider expanding theiractivities in this direction.


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among the youth and give them excellent managementeducation so that they are automatically picked up bysuccessful enterprises both within the country andabroad. Some of them take initiatives and are selectedby the non-governmental organizations. A few join the

government and consultancies also provide opportuni-ty. The products of IIMs are practically present in allsignificant sectors of the country and it is through thesealumni that IIMs can play a role in shaping the destinyof the nation.

The problem is that wewant to be known as top-

tier world-classeducational institutionsbut are unwilling to be

measured by thiscriterion. In the absence

of any major discontinuityin the market for

knowledge, if we want tomake an impact globally,

we have to start byplaying the game by theglobal rules before we

seek to change the rules.


Rishikesha T KrishnanFaculty, Corporate Strategy and Policy IIM, Bangalore

The first three IIMs were conceived during a period ofmulti-dimensional challenges in nation-building andthese IIMs had multiple objectives within an overallmission of improving the quality of management inIndia. In keeping with this mission, IIMs defined man-agement broadly and undertook several activities innon-business sectors such as the CMA and the PSG ofIIMA and the Centre for Public Policy of IIMB. Manyfaculty members have been involvedin these activities and continue to doso. These activities are highlightedin our annual reports and statementsby the Directors and any additionalvisibility for them would be welcome.However, in the public eye, IIMs haveremained better known for theirPGPs. I see no reason why we shouldbe apologetic about producing goodmanagers and managerial knowl-edge that contribute to the industrialand services sectors.

Since 1991, India has adopted apredominantly capitalist economicsystem and the country needs goodmanagers to work in the corporatesector as well as qualified ‘profes-sional’ entrepreneurs. In spite of liberalization in thehigher education sector and the mushrooming of busi-ness schools, there are very few new business schoolsthat are providing a contemporary and high qualitymanagement education. In his book, The CompetitiveAdvantage of Nations, Michael Porter has emphasized theimportance of specialized assets and specialized knowl-edge for country competitiveness. Across the world,among developing countries, India is one country thatrealized early the importance of higher education andthe development of specialized people resources.

Given our current strengths, IIMs can make the

biggest contribution to the industrial/corporate sector.Given the size of IIMs, it is unreasonable to expect themto be able to provide specialized knowledge or educationfor the whole economy.

Are IIMs elitist? It is a fact that we are highlyselective of both faculty and students and our graduatesgo into jobs that pay, at least by Indian standards, veryhandsome salaries. In this sense, we are elitist. However,

there is nothing wrong in IIMs beingconsidered elitist as long as it is forthe right reasons. Many countrieshave an implicit hierarchy of aca-demic institutions — even in the USand the UK which are well endowedwith institutions of higher learning,universities like Harvard and Cam-bridge occupy a unique position. Thisdistinctive positioning is due to thequality of scholarship demonstratedby their faculty over an extendedperiod of time. Further, they ensurethat the best students can enter theirportals independent of their abilityto pay (though they may also admitsome students from families of theiralumni or donors for reasons of

continuity and tradition!). So far, we have done well onthe second count, i.e., we have ensured a rigorous andfair selection process that selects only the best studentswithout discrimination except for government-mandat-ed affirmative action and we have provided financialsupport to those who needed it (though we have perhapsnot given enough visibility to the availability of thissupport). However, we are not as strong on the firstdimension, i.e., on the quality of scholarship we havedemonstrated.

The world’s leading academic institutions are eva-luated by the quality of their research output, i.e., by

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the thought leadership that theirfaculty demonstrate. The problem isthat we want to be known as top-tierworld-class educational institutionsbut are unwilling to be measured bythis criterion. In the absence of anymajor discontinuity in the market forknowledge, if we want to make animpact globally, we have to start byplaying the game by the global rules before we seek tochange the rules. Universities in China and Hong Konghave learnt these lessons well and focus on research intop-tier journals, even if this means they have to attracttop scholars from the US and other countries to join themat internationally competitive salaries. They work with-in the existing paradigm of research before trying toestablish new paradigms.

What is somewhat disquieting is that we have notmade the best use of opportunities right in our backyard.By any account, the growth of the Indian software in-dustry has been a momentous event in the history ofeconomic development. But, barring a few exceptionssuch as my colleague, S Krishna’s co-authored book(Sahay, S, Nicholson, B and Krishna, S, 2003, Global ITOutsourcing: Software Development Across Borders, Cam-bridge: Cambridge University Press) on the manage-ment of globally dispersed software projects and themultiple IIM contributions to an international project oninnovation in the Indian IT industry (D’Costa, A P andSridharan, E [eds.], 2004, India in the Global SoftwareIndustry: Innovation Firm Strategies and Development, Lon-don: Palgrave Macmillan), we have allowed others todefine the research agenda related to the study of thesoftware industry. The first paper in a top journal thatdocumented its evolution was writ-ten by academics (albeit of Indianorigin) sitting thousands of milesaway at Carnegie Mellon University(Arora, A; Arunachalam, V S, Asun-di, J and Fernandes R, 2001, “TheIndian Software Services Industry,”Research Policy, 30, 1267-1287). Thegrowth story of the industry has beenappropriated by McKinsey & Com-pany with the assistance of NASS-COM. The most widely used caseson Indian software companies havebeen written by professors at Har-

vard Business School and Stanford.Going a step further, Harvard Busi-ness School, Wharton School, andUniversity of Michigan have an-nounced the founding of researchcentres located in India!

An eye-opener for IIMs is thatall are not able to see and appreciate

our contribution. While our alumni have (naturally)been supportive, many people are suspicious of us andsome even downright resentful. It is clear that manypeople wonder whether we are making the best use ofthe resources the society has provided us. People aresuspicious of what we do and there is a perception thatwe are so busy consulting (making money!) that we donot have time to teach students. While data at IIMB showthat only about 5 per cent of the faculty use anywherenear the full 52 days of consulting allowed by the rules,it is clear that the society expects us to provide highquality management education to larger numbers ofstudents than we are doing at present. People are un-impressed by our claims of fulfilling other functionssuch as executive education and training. While we maybe able to support ourselves ‘independently’ in a finan-cial sense, we need to reflect on whether we can survivein a resource-scarce and often politicized environmentunless we enjoy greater support and legitimacy from thesociety at large.

We have not educated the public and importantstakeholders about what should be the role of leadingmanagement academic institutions such as ours. Wehave not talked enough about what should be the criteriato measure our performance and provided enough data

to stakeholders to enable them tomake an assessment of our perform-ance. We have found fault with thesurveys conducted by businessmagazines but not suggested alter-nate ways of doing a more rigorousassessment of our quality. We havemade a start in benchmarking ourperformance and this needs to becarried forward. We should writemore books and articles so that peo-ple recognize our output and thoughtleadership. We should, in our owninterest, play a bigger role in enhanc-

Our future will bedecided by ourcontributions to

knowledge creation ratherthan merely knowledge

dissemination.


If we create an academicenvironment of

questioning, probing, andintellectual debate, it isbut natural that some ofour graduates will moveaway from the corporate

world to play a largersocial role. Our job is to

provide such anenvironment.

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ing the quality of management education in other man-agement institutions. In a nation where scams are almostroutine occurrences, we have made an outstanding con-tribution to the economy with modest investments bythe government. The three older IIMs are today in aposition to sustain and grow their contributions withoutfurther investment by the government. Isn’t this an out-standing achievement? We need to publicize this fact.

Going forward, IIMs need to focus on two activities:research and long duration academic programmes.Executive education and consulting are important tohelp faculty keep in touch with industry problems andto supplement faculty income but these will have to playsecond fiddle. (The ideal would surely be to raise facultysalaries so as to make executive education teaching anoptional extra for those with the talent and the interest.We may be able to make this case more strongly oncewe have greater societal legitimacy.)

Fortunately, at IIMB, our recent thinking has beenin this direction. In the last few years, the IIMB facultyhas published their research in top-tier journals such asthe Academy of Management Review, Journal of FinancialEconomics, California ManagementReview, IEEE Transactions on SoftwareEngineering, Research Policy, andWorld Development. There is a con-sensus that our future will be decid-ed by our contributions to knowl-edge creation rather than merelyknowledge dissemination. We havealso been responsive to the educa-tional demands of critical sectors bylaunching two important new long-duration programmes. The Post-Graduate Programmein Software Enterprise Management (a programme forworking software professionals designed in consulta-tion with leading software companies and supported byan endowment from five leading software companies todrive research relevant to the industry) was started in1998 and the Post-Graduate Programme in Public Policyand Management was started in 2002 to help hone thecapabilities of the bureaucracy in a deregulated econ-omy. A committee to develop a new vision for IIMB (ofwhich I am a member) has recommended an increasein the enrolment to the PGP in two stages, in 2005 and2007. Further, we have recommended that the two non-negotiable expectations from faculty be a minimum

amount of teaching in long duration academic pro-grammes and papers published in refereed journals.

As research is conducted by individuals, the ab-sence of formal ‘inter-IIM’ research collaborations in thepast is not surprising. Further, we have very few forawhere faculty from IIMs can share their research andideas. But, fortunately, there are signs of change. BothVikalpa and IIMB Management Review have been activelysoliciting contributions and refereeing contributions fromother IIMs. Two professional bodies — the Society forOperations Management (SOM) and the Strategic Man-agement Forum (SMF) have been holding annual con-ferences for the last six to seven years and these providethe opportunity for exchange of research ideas and sowthe seeds of collaboration. As a collective, IIMs and theirfaculty need to create similar professional bodies in theareas of management where they do not exist and toactively support the existing ones such as the SOM andthe SMF.

Across IIMs, another good sign is that we are be-coming more open to learning from the best global

schools. Recent efforts by PankajChandra (‘’Elements of a World ClassManagement School,” IIM, Ahmeda-bad, Working Paper No 2003-09-03)at IIMA to capture the best practicesof world-class management institutesand by Ravi Anshuman and S Chan-drashekar (“How Contemporary areIIMs? MBA Curricula in a GlobalizedWorld,” Economic and Political Week-ly, February 21, 2004, 827-837) at IIMBto provide a framework for bench-

marking PGP curricula show that we are moving awayfrom the argument that ‘we are different.’ I believe thatwe need to take the next step and have periodic peerreview of our areas and curricula by internationally-respected peers from both within and outside India.

I believe that our primary social responsibility is touse our resources to create new management knowledgeand to teach as many participants as possible in longduration programmes consistent with this knowledgecreation objective. Within a talented and motivated high-performing faculty body, there will always be indivi-duals who will make major contributions to wider in-tellectual and social causes (as Anil Gupta has done in


We must explicitly raiseethical issues during allstages of the students’

stay at our institutes. Ourfailure to do so suggests

ambivalence or, evenworse, a message that the

means do not matter.

101

the area of grassroot innovations and Trilochan Sastryin the area of election reform). These activities need notbe part of the objectives of the institutions themselves.Similarly, from within a talented pool of students, somewill always gravitate towards the social sector as VijayMahajan and Bhushan Punani have done. Again, I donot think we need structured programmes to create suchpeople — if we create an academic environment of ques-tioning, probing, and intellectual debate, it is but naturalthat some of our graduates will move away from thecorporate world to play a larger social role. Our job isto provide such an environment.

A secondary objective should be to reduce the gapbetween the top management schools and those below.For this, we need to create a large pool of talentedmanagement teachers and researchers. Unlike in abusiness context, where the ‘rule of three’ might apply(according to this perspective, only the top three com-panies in an industry are profitable), we will, ironically,have ‘more space’ if the gap between the other institutesand IIMs narrows. Otherwise, the social forces of greedand mediocrity will tend to pull down good institutionssuch as ours. As a corollary, the current offerings of IIMsin terms of the FPM and the Faculty Development Pro-gramme need to be increased in scope and size. This isconsistent with an effort to raise research output and afocus on core academic activities.

To conclude, I would like to comment on our rolein cultivating a higher standard of ethics and valuesamong our students. To some extent, the values of ourstudents are already formed when they enter an IIM.However, being young adults, their values are stillopen to reinforcement or questioning. We must explic-itly raise ethical issues during all stages of their stayat our institutes. Our failure to do so suggests am-bivalence or, even worse, a message that the meansdo not matter. However, what is more important isthat students learn from us in many other ways —from the way we interact with them, from the waywe structure our evaluation systems, from the levelof professionalism we maintain. They are sub-con-sciously watching us and observing our behaviour. Ifwe set exams that test their memory instead of theiranalytical or integrative skills because such exams canbe easily corrected by teaching assistants; or if we takemonths to give feedback on examinations; or if we setunreasonable deadlines that make collaboration highlyattractive, we are giving (perhaps unwittingly) thewrong signals about professional values and ethics.Luckily, such instances are rare. To look at this moreconstructively, by interacting more closely with stu-dents and setting a good example of professional workethics, I believe we can have a positive influence onstudents’ values.


Arun Kumar JainFaculty, Strategic and International Management, IIM, Lucknow

The issue of institution building is important not onlyin the limited context of IIMs but also for all the overallwell-being of the country. Researchon corporate governance and globali-zation consistently suggests that na-tions prosper only when their insti-tutions are nurtured and all stake-holders demonstrate a healthy re-spect for their maintenance and sus-tenance. This includes devising suit-able structures and systems of reg-ulation, governance, and manage-ment and allowing these to function.Institution building in this sense isa many-faceted activity and a contin-uous one since the alignment isheavily context-dependent. In this

debate, I shall delve upon IIMs as institutions and someareas where they need to carry out strategic and/or

structural realignments in order tofunction within the ambit of societalexpectations. The lessons could beuseful for institution builders in thebroader context of developing anaction plan.

First, let me comment on theconceptual issue of IIMs as ‘institu-tions.’ By definition, an organizationis deemed an institution if it is self-perpetuating and draws its mainenergies by delivering products andservices that are perceived to be ofhigh value to the proper and civi-

Higher educationinstitutions such as IIMsshould ideally form the

backbone of our country’seconomic success by

helping professionalizemanagement for all

sectors of the economyand providing the

entrepreneurial, technical,and skilled personnel for

superior wealthgeneration.

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lized functioning of the society (e.g. those relating tojudiciary, legislative, and executive arms of the govern-ment). Often, institutions may be engaged in improvingthe living standards of the people through capacity build-ing and skills formation (such as IIMs). Conceptually,an organization remains an institution as long as thesocietal responsibility angle and self-sustenance remainthe focal point of the operational vision. Such organi-zations have a strong strategic management in placealong with a strong external orientation. In a paradigmof knowledge economy, the quality of governance ininstitutions and continuous capacity building throughinnovative processes is of prime importance. Highereducation institutions such as IIMsshould ideally form the backbone ofour country’s economic success byhelping professionalize managementfor all sectors of the economy andproviding the entrepreneurial, tech-nical, and skilled personnel for su-perior wealth generation.

There is a strong feeling in manysegments that IIMs have forsakentheir institutional character and be-come more of a nursery for produc-ing managers for powerful corpora-tions and MNCs. The implicit sug-gestion is that they have generallylost their initial moorings with res-pect to their ‘social responsibilities’!This is an issue that I would like toaddress from the perspectives of afirst generation entrepreneur, a man-agement scholar, and a common man.Broadly, the purpose of IIMs must be to enhance thequality of life of the people of India through professionalManagement (with a capital M) and relevant knowledgecreation and dissemination. The faculty members areexpected to participate and intervene in this nation-building endeavour through their research, teaching,consultancy, and writing. This means an expectation ofa combination of leadership and entrepreneurial rolesfor the faculty members. Prestige and respect comesnaturally, especially in a poor society, for such exaltedpositions. The faculty and IIMs would surely be per-ceived as ‘elitist’ if they fail in meeting these socialexpectations and remain insensitive to the nature of trust

imposed by the society in general.

A far greater institutional effort and commitmentis necessary (and yet again the faculty has to providethe lead) to create conditions where the education portalsof IIMs are accessible to all sections of the society. Eco-nomically-and socially-deprived sections of the countryshould neither feel (nor be made to feel) that IIMs areonly for the rich, and from the rich. There is an urgentneed for remodelling the access mechanisms to makemanagement education at IIMs more universal in char-acter and composition. This mindset probably has beena reason that although most IIMs had resources ear-

marked for needy students for at leasta decade or more, yet none hadactually disbursed these resourcesto any significant extent.

For any institution, accountabil-ity parameters and robust perform-ance measures are surrogates formaking periodic reality checks. Thereis strong global research evidencethat institutions of higher learningneed substantial operational auton-omy in a hierarchy-less environmentfor the knowledge-owning individ-uals to operate at the highest moti-vational levels for sustained periodsof time. Structures at such organiza-tions are generally multi-discipli-nary, temporary, and ad hoc existingonly for a given project and thendisbanding. To outsiders, this ‘struc-tureless’ informality may appear

‘elitist’ but it is a necessary condition for excellence.However, these structural arrangements can also be-come self-serving instruments for self-preservation ra-ther than mechanisms for continuous learning and ex-ecuting pedagogical innovations. This to my mind is animportant reason why there is little collaborative re-search, sharing of resources, and learning amongst IIMsthemselves. Given the importance of this dimension ofinstitution-building from the national perspective, per-formance measures need to be designed that encourageteamed efforts at least between IIMs (to start with).

To quote Rhenman’s terminologies (Rhenman, E,1973, Organization Theory in Long-Range Planning, New

There is strong globalresearch evidence thatinstitutions of higher

learning need substantialoperational autonomy in

a hierarchy-lessenvironment for theknowledge-owning

individuals to operate atthe highest motivational

levels for sustainedperiods of time. Structuresat such organizations are

generally multi-disciplinary, temporary,

and ad hoc existing onlyfor a given project and

then disbanding.


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York: John Wiley), an organizationmay be classified as a ‘Corporation,’‘Marginal,’ ‘Appendix’ or ‘Institu-tion’ depending upon the strength ofits strategic (internal) and ideolog-ical (external) goals. Marginal andAppendix organizations can easilybecome ‘expendable tools’ (Selznick,P, 1957, Leadership in Administration,Evanston, Illinois: R Peterson) sincethey lack a personal identity. Manyprivate-run educational set-ups remain ‘corporations’with money-making as their core character and absenceof an ideological value-system (larger societal good asan objective). In this framework, for IIMs to remainfunctioning ‘institutions’ in the Indian context and withinthe framework just discussed, we need to re-examinesome of the thrust areas which are as follows:

• Considering that there is a crying need for qualitymanagement teachers all across the country, weneed to improve the intake of doctoral students.Along with FDPs, the doctoral programme too hasto be an important societal commitment of an IIM.We need to seriously debate amongst ourselves howto make the programme attractive to the best stu-dents so that the country may have a pool of ex-cellent management teachers! I agree this questionhas direct linkages to faculty compensation andgeneral quality of life (not just in IIMs).

• IIMs should consider alternative modes of knowl-edge-service delivery (including the new commu-nication technologies) to cover a large number ofstudents, say 150, in a class. Perhaps, the case methodis the best for teaching management concepts, but,different contexts may require application of differ-ent pedagogies. To me, the lim-itation of smaller class-size (say60 students) is more a case ofrigidities in the pedagogy struc-tures driving the strategy ratherthan the other way round, sti-fling the innovation possibilities.It is not uncommon for class-sizes at MIT and Wharton to bein hundreds. At one of the top-rated business schools that I

visited in the UK, the class size couldvary between as high as 150 and assmall as 35. While the case methodwas the most suitable for the small-est size class, the teacher had toreorient the teaching pedagogy forthe 100-plus class though the sessiontopic was common for all the classes.

• Considering that the infrastruc-tural resources and facilities (includ-

ing library, research assistance, computers andInternet connectivity, sabbatical leave, etc.) arealmost world-class, the IIM faculty should publishfar more in international journals. In top-rated busi-ness schools in developed countries, the only cur-rency for securing tenured faculty positions is thelist of research publications in high impact makingjournals.

• Similarly, IIMs need to carry out some introspectionon how to remain wedded to the institutional com-mitments for creating and disseminating relevantknowledge suitable for ‘local’ and ‘domestic’ con-ditions. There is a huge felt need for greater numberof quality books and insightful case studies thanbeing presently published by the faculty. Collabo-rative research across IIMs is likely to reduce costsespecially for field-based writing projects, providenewer perceptions, and speed up delivery of thefinal product.

• There is a general perception that IIMs cater mainlyto the needs of the private sector and that too onlythe ‘privileged few.’ Performance yardsticks meas-ured by the starting salaries of students, number ofinternational positions, and number of MNCs com-

ing for campus placement reinforcethis strong perception. In reality,IIMs have made some significant con-tributions towards raising the pro-ductivity standards and profession-alization of management of severalnationally strategic sectors such asthe PSUs, cooperatives, rural and ag-riculture, defence production, nucle-ar energy, oil and electricity energy,railway and road transportation,university education, etc. However,

IIMs should consideralternative modes ofknowledge-service

delivery (including thenew communication

technologies) to cover alarge number of students,

say 150, in a class.


IIMs need to carry outsome introspection on

how to remain wedded tothe institutional

commitments for creatingand disseminating

relevant knowledgesuitable for ‘local’ and‘domestic’ conditions.

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these outcomes are generallydue to the enterprising efforts ofa few individual faculty mem-bers than due to deliberate in-stitutional initiatives and strate-gic thinking in policy. In thiscontext, IIML has identified cor-porate governance as a keythrust area towards fulfilling itssocial commitment for superiorwealth creation, institutionaland corporate processes, andsafeguarding the interests of thecommon investor. IIMs need to highlight and ‘mar-ket’ some of these facts and attributes of their func-tioning.

• Perhaps it would be difficult for IIMs to justify thefact that only a few hundred students pass out eachyear, i.e., the output numbers are wholly insuffi-cient and inadequate for a large country like India.This situation is aggravated when many PGPs takeup assignments outside India. IIMs need to addressthis issue at the earliest since it also involves chang-ing the existing mindsets regarding classroom peda-gogies discussed earlier.

To me, the future course of action for IIMs in theshort-to-medium term is clear: Globalize in the truestsense of the word by becoming one of the top attractioncentres of management education to students and fac-ulty from all parts of the world. We are in an economicparadigm where ‘the winner takes all’ and a break-through can be achieved only through the networkingeffect. Once we have the virtuous cycle of top-classstudents, world-class faculty, best organizations forconsultancy and research, best recruiters, and documen-

tation of learning and knowledge inthe best research journals, the so-called networking effect would comenaturally. IIMs need to provide anurturing and enabling environmentfor creating the best brains. We canlearn from the Japanese Nobel Lau-reate Susumu Tonegawa who saidhe was glad to have moved to MITfrom Japan. To quote, “I might neverhave got the Nobel Prize for medi-cine (which he won single-handedlyin 1987 for his revolutionary work on

the genetic origins of antibody diversity), since it wasthe environment at MIT that enabled me to make mybreakthrough in my thirties and win the Prize within10 years.” It is useful to remember that Mr Tonegawaretains his country-of-origin citizenship (just like ourown Nobel Laureate Amartya Sen), but has been scath-ing in his criticism of the scientific research system inJapan where he says, ‘individual potential is stifled, notcultivated’ (Economic Times, February 18, 2004).

IIMs have traditionally had the requisite functionaland academic autonomy and access to sufficient resourc-es the country could provide. As institutions of excel-lence, IIMs should individually and collectively sit to-gether to evaluate the quality and quantity of their broadcontributions and embark upon developing strategies tomake their knowledge more relevant and accessible toless privileged sections of the society and yet be ableto attract knowledge seekers and creators internation-ally. One positive legacy of the fee controversy is thatthe Directors of the six IIMs are talking much more toeach other than ever before. The need is to extend thiscollaboration at many more and different levels.

The future course ofaction for IIMs in the

short-to-medium term isclear: Globalize in the

truest sense of the wordby becoming one of thetop attraction centres of

management education tostudents and faculty from

all parts of the world.


Anil K GuptaKL Chair Professor of Entrepreneurship, IIM, Ahmedabad

IIMs, particularly the older ones, have tried to build self-renewing capacity through engagement with variousstakeholders over the years. They must learn and lev-erage from the past lessons and experiences. They mustcontinuously remain in dialogue with all the stakehold-ers to achieve far greater social legitimacy. Probablylistening more carefully, learning more courageously,and leveraging the lessons from the past engagements

more self critically would have given these institutionseven greater social legitimacy than achieved so far. Allpanelists in this Colloquium agree that IIMs are elitistinstitutions in terms of high academic standards anddistinction. Where the differences between IIMs do existare in the way they have used their elitist character, andtremendous social capital invested in them, as Prof I GPatel puts it, to further enhance their social impact and

105

appeal. IIMs, particularly, IIMA havemade tremendous contribution ininstitution building as recounted byProfessor Samuel Paul. However, itis realized that they could have to-gether contributed much more to theinstitution building tasks not only inthe country but, in fact, even global-ly, and that potential remains to beproperly harnessed.

I remember, many years ago, theKhadi Village Industries Board of astate government wanted help in de-veloping indicators to be used as apart of the management information system to evaluateits performance from time to time. The concerned facultyteam proposed that the small amount that this boardcould pay be contributed to the staff welfare fund andthat IIMA may not charge its overhead expenses just asthe faculty would not charge anything for its time.Similarly, studies have been undertaken at differentIIMs offering development plans for some of the mosteconomically backward regions, artisanal clusters, pri-mary health centres, and educational policy alternativesbased on innovations of the primary school teachers.Similarly, our colleagues have also developed long-andshort-term programmes for building capacity of publicsystems, disadvantaged sectors, and also occasionallythe NGO sector.

Colleagues in IIMs have syste-matically pursued capacity buildingin agriculture, infrastructure, trans-port, micro finance, energy, environ-ment, cooperative sector, electoral re-forms, management of grassrootsgreen innovations, incubation ofinnovation-based enterprises, etc.But, what has made the most pow-erful impact on the popular mind isthe high salaries that IIM studentsget. This is acceptable so long as itconveys validation by market placeof the talent these young boys andgirls show. It is seldom realized thatabout 30 per cent of the students (atIIMA) come from families havingdeclared income less than Rs three

lakh per annum and 80 per cent fromincome less than Rs five lakh perannum. Basically, it is the youngchildren from the middle class thatmake it to IIMs through a tough,rigorous admission process and takeup lucrative, but highly competitiveand challenging jobs in companies inIndia and abroad. The transition froma middle class background to the topsalaried class in one generation isundoubtedly a matter of achievementand gratification. This would surelyattract societal attention. Panelistshave explained why these students,

despite applicability of their education to public andcivil society sectors, are not joining these sectors, pri-marily due to the limited capacity of the latter to absorbtheir talent.

The need for change has been felt by most panelists.Prof Paul rightly stresses the need for IIM leadershipincluding the faculty, “to introspect and look for newideas. It is the only way to avoid others pushing theiragenda on IIMs. The initiative for change should comefrom within.” Mr Vittal makes a strong case for elitismof the kind IIMs possess to continue. But he also stresses,“there is no reason why the skills developed and honedin the institutions like IIMs cannot be extended to other

sectors and institutions. IIMs mustconsider expanding their activitiesin this direction.” Continuing in thisvein, Prof Khandwalla adds, “Overthe decades, it formed centres andgroups to contribute to the effectivemanagement of agriculture and ru-ral development, developmental ad-ministration, population control, en-ergy, health, and education. Thesegroups have extended the impact ofIIMA well beyond the corporatesector.” Other IIMs also pursued sim-ilar diversification though withmixed results and response. ProfKhandwalla draws attention to are-as which need much more attentionin future. He advises, “IIMA coulddo a lot more to foster in its studentsa stronger sense of business ethics

Studies have beenundertaken at different

IIMs offering developmentplans for some of the

most economicallybackward regions,

artisanal clusters, primaryhealth centres, andeducational policy

alternatives based oninnovations of the

primary school teachers.


It is seldom realized thatabout 30 per cent of thestudents (at IIMA) come

from families havingdeclared income less thanRs three lakh per annum

and 80 per cent fromincome less than Rs five

lakh per annum. Thetransition from a middleclass background to thetop salaried class in one

generation is undoubtedlya matter of achievement

and gratification. Thiswould surely attractsocietal attention.

106

and corporate social responsibility, two areas in whichIIMA may be lagging behind its peers in the West. Itis yet to develop a coherent and compelling vision ofwhat it wants to contribute to the new, liberalized, butstill very poor India. It could have contributed moreaggressively and effectively to such priority sectors asthe creaky Indian governance system that have beensuch a drag on our quality of life.” The import of thisadvice does not need to be stressed any further. ProfMurthy suggests the need to redefine the standards forexcellence and relevance of India’s higher educationalinstitutions through focused teaching, research, and con-sultancy. According to him, ‘’if achieving such intensityin all the current activities is difficult, they need to selectand synergize.” Prof Bose suggestsa very practical but challenging op-tion of aligning IIMs with largersociety through its most reputed andeffective instrument — the PGP. Headds that IIMs should take up largeresearch projects aimed at studyingdifferent sectors of the country and‘execute’ them through the PGP.These projects, he suggests, “shouldbe so designed as to require consid-erable field work and the studentsshould be assigned to spend time inthe field as part of the core curric-ulum. The hard work is not how todesign such projects but to organizetheir execution. We would need thegovernment’s help…The effect of thison fresh minds can be expected to befar reaching and permanent.” Willthe government be willing to absorbsuch inputs from the brightest youngminds of the country?

Prof Krishnan feels that IIMs need to benchmarkthemselves globally not only for the PGP where theirrecord is impeccable but also for research outputs wherea great deal more can be done. He observes poignantly,“The world’s leading academic institutions are evalu-ated by the quality of their research output, i.e., by thethought leadership that their faculty demonstrate. Theproblem is that we want to be known as top-tier worldclass educational institutions but are unwilling to bemeasured by this criterion. In the absence of any majordiscontinuity in the market for knowledge, if we want

to make an impact globally, we have to start by playingthe game by the global rules before we seek to changethe rules….. There is a consensus that our future willbe decided by our contributions to knowledge creationrather than merely knowledge dissemination.” Prof Jainfeels that, “IIMs need to carry out some introspectionon how to remain wedded to the institutional commit-ments for creating and disseminating relevant knowl-edge suitable for ‘local’ and ‘domestic’ conditions.” Toachieve this goal, he suggests that, “ as institutions ofexcellence, IIMs should individually and collectively sittogether to evaluate the quality and quantity of theirbroad contributions and embark upon developing strat-egies to make their knowledge more relevant and acces-

sible to less privileged sections of thesociety, and yet be able to attractknowledge seekers and creators in-ternationally.”

Panelists have discussed themultifarious institution building ef-forts being made or needed at IIMs.They have drawn attention towardsother contributions and processes ofIIMs which may help harness theirelitist character for nation building.I would like to reflect on some of thestrategies that IIMs could use, de-pending on their strengths and wellarticulated priorities, to harness theirpotential through (i) even more widersocial engagement, (ii) greater invest-ment in building capacity of thosemeritorious students who still can-not make it to IIMs but deserve todo so, and (iii) engaging with such

social sectors which deserve their inputs but cannot payfor them at prevailing market prices.

One of the most encouraging features of IIMs is thatlike in any other social sphere, there are faculty memberswho wish to contribute towards the development ofsectors which cannot pay for these services. If suchcontribution has not been forthcoming as much as itshould in all IIMs, the reason could be the lack of in-stitutional mechanisms which periodically take stock ofrespective contribution in this regard. If we analyse theminutes of the meetings of the faculty councils in mostIIMs, there might be a lack of evidence suggesting that


One of the mostencouraging features ofIIMs is that like in any

other social sphere, thereare faculty members who

wish to contributetowards the developmentof sectors which cannotpay for these services. Ifsuch contribution has not

been forthcoming asmuch as it should in all

IIMs, the reason could bethe lack of institutional

mechanisms whichperiodically take stock ofrespective contribution in

this regard.

107

views of other stakeholders (other than students andfaculty) within and outside IIMs are given adequateattention. Perhaps excessive preoccupation with one’sown views of the world and concerns may somewhatexplain why some quarters of the society charge theseinstitutions with insularity towards larger social con-cerns.

• Environmental, gender, and ethical concerns arecentral concerns today in the business as well associal realms — nationally and globally. I suspectthat there are not many MDPs offered for profes-sionalizing management in the corporate sector in-cluding such inputs. Benchmarking with interna-tional institutions in this regard would be useful.

• Producing managers equipped with professionalskills of world-class was a pioneering contributionof IIMs more than 30 years ago.No doubt, there is still a need forsuch managers in large numbers.But, will older IIMs remain onthe edge of disciplinary as wellas global margins by doing moreof the same? Should their focusevolve and realign with emerg-ing needs of the society? Shouldthey stress on the developmentof leadership and entrepreneur-ship more than just convention-al managerial education? In-stead of placement salaries mak-ing news, should not the busi-ness plans of students that at-tract millions of rupees or dollars from national andglobal venture firms make news? All IIMs wouldhave to give serious thoughts to these and decideon their own action plan. Creating jobs for massesis a need of the society and what better way ofcontributing to this cause than entrepreneurshipdevelopment. But, developing risk-taking abilityamong students would also require more risk takingattitude among the faculty. It is noteworthy thatIIMA and perhaps some other IIMs as well havealways taken some initiatives in the direction ofdeveloping entrepreneurship and leadership andoffering programmes for professionalizing manage-ment of small and medium size enterprises (SMEs).IIMA, for example, has been offering an MDP for

SMEs for over three decades and had identifiedentrepreneurship as a thrust area for research andtraining about a decade ago. The question is aboutthe quantum of efforts and resources devoted tothese activities in comparison with others and hav-ing a conscious strategy. The culture of IIMs willhave to become more entrepreneurial.

• Bringing students from the disadvantaged sectionsof the society through proactive steps as suggestedby Prof I G Patel makes a lot of sense and concreteinitiatives in this regard will certainly help in earn-ing higher social respect than what IIMs alreadyhave. Perhaps, IIMs can design special managementcourses for these sections of the society or allowthese students a graduated pace to complete themanagement programmes. Similarly, some incen-tives such as writing-off the debts of the students

who wish to serve such sections ofthe society may also warrant experi-mentation as a means of mouldingminds and preferences of youngergeneration.

• There should be enough incen-tives given to IIM students to spendsome time, as a part of the curricu-lum, as developmental intern withsmall sector, NGOs, service sectors,defence, and other strategic sectors.This will expose them to the chal-lenges faced by these sectors, andwho knows, they may also contri-bute creatively to solving some prob-

lems of these sectors. Social engagement of youngminds can only generate greater empathy and per-haps help in humanizing the corporate world alsoa bit more.

• Attractive research grants to faculty through chal-lenge award programme for addressing some of theserious social problems of unemployment and ruraland urban development could be another means ofattracting brilliant minds towards pressing societalproblems.

• The teaching material developed and used by IIMscould be placed in public domain with no restrictionon its use so that various management schools candraw upon it. Unless the average performance

There should be enoughincentives given to IIMstudents to spend sometime, as a part of the

curriculum, asdevelopmental intern with

small sector, NGOs,service sectors, defence,

and other strategicsectors. This will exposethem to the challengesfaced by these sectors.


108


improves, we would only havea few elite institutions and oth-ers would remain average andsuffer from mediocrity.

IIMs have played a significantrole in institution building and im-proving the management educationand practice in India. They are cer-tainly elite institutions and will re-main so. But, elite institutions fromdifferent social streams must networkto bring similar meritocratic culturethat IIMs have brought about in theirown self governance in other sectors.Nation-building is a challenging taskand it will not help to leave that taskentirely to politicians and bureauc-

racy. Civil society organizations aremaking tremendous efforts in awak-ening the social conscience of differ-ent sectors and segments of the so-ciety. Elite educational institutionslike IIMs have to join hands withthem and create new benchmarks oftheory building as well as triggerentrepreneurial experiments in var-ious fields of development manage-ment.

Elites have harvested tremen-dous social capital. If they do nothelp in renewing it and, in fact,augmenting it, their claim on thiscapital may not remain intact.

Nation-building is achallenging task and itwill not help to leave

that task entirely topoliticians and

bureaucracy... Eliteeducational institutionslike IIMs have to join

hands... and create newbenchmarks of theory

building as well as triggerentrepreneurial

experiments in variousfields of development

management.

Where the mind is without fear and head is held high;Where the knowledge is free;Where the world has not been broken up into fragmentsby narrow domestic walls;Where words come out of depths of truths;Where tireless striving stretches its arm towards perfection;Where the clear stream of reason has not lost its wayinto the dreary desert sand of dead habit;Where the mind is led forward by thee into ever-wideningthought and action...Into that heaven of freedom, my father, let my countryawake.

Rabindranath TagoreGitanjali

109

M A N A G E M E N TC A S E

describes a real-life situation faced, adecision or action taken by an individualmanager or by an organization at thestrategic, functional or operationallevels

Sarvodaya Samiti

Debasis Pradhan

Prior to an important meeting of the partner organizations of Khadiand Village Industries Commission (KVIC) scheduled the nextmorning, Pradip Mohanty, Coordinator of Sarvodaya Samiti, won-

dered what would be the best course of action for his organization as hewas concerned about the large number of honey bee-keepers associated withthe Samiti. He knew that his action will have implications for the local honeyindustry in general and the bee-keepers in specific. He had to decide onthe linkages of his organization with KVIC and its presence in different coreactivities like production, processing, and marketing and therefore suggestsuitable ways to allocate the efforts and resources of the organization amongthese activities depending on the varied strengths of his organization. Hewas in a dilemma whether the Samiti should be a part of the proposedconsortium. According to Mohanty, “Though, at present, we are in a com-fortable situation, we are looking at various options which can make thefuture more attractive.”

BACKGROUND

Sarvodaya Samiti, Koraput, is a state-level, non-governmental, non-politicalorganization. Registered in 1970-71 under the Societies Registration Act XXIof 1860, it is committed to the all-round and sustainable development oftribal and other under-privileged communities of the society. Started in 1959as Narayanapatna Kshetra Samiti, it was renamed as Sarvodaya Samiti afterits area of operation got extended to the other parts of the state.

Its present activities are sustainable agriculture, development of khadiand village industries, child and women welfare, building of an educationalcomplex for scheduled tribe girls, consumer welfare, watershed programmes,and rural marketing. As a founder member, Akshaya Mohanty said, “Weare one of the few organizations trying to promote rural marketing as oneof the viable activities and bring in a change in the living standards of thepoor.” According to him, “Though Sarvodaya Samiti is a not-for-profitorganization, it has started realizing the greater interest and benefits inkeeping the enterprise alive by making it a profitable entity.”

The Samiti had some good marketing experience which encouraged theorganization to do marketing of the rural produce. It was one of the fewinstitutions that had been certified by KVIC, Mumbai, and the Government

KEY WORDS

Marketing

Procurement

Processing

Tie-ups


111

of India under the broad category, ‘Development ofKhadi and Village Industries.’ It encompassed a rangeof activities like production of khadi, promotion of bee-keeping, and marketing of honey, turmeric powder, andarrowroot.

Staffing Pattern of the Organization

Akshaya Mohanty was leading the organization in thecapacity of its Secretary. Under him, Pradip Mohantyfunctioned as the sole organization Coordinator. Helooked after all the programmes of the Samiti in generaland marketing activities in specific. Out of a total of 22employees, six were in charge of the central office andeight were in marketing operations. Three out of theseeight members were engaged in the honey processingplant at Bhubaneswar. A technician, whose primary jobwas to take care of the processing of honey, was headingthe processing centre. In addition, he also did themarketing in bulk by negotiating and collecting moneyfrom the buyers in time.

Honey Production in Local Economy

The role of honey production in the local economy isnegligible with just around 5 per cent of the farmers ofthe district being engaged in bee-keeping. Pradip Mo-hanty estimated the income out of honey production andmarketing to be approximately two per cent of the totalincome of the district though there was no official es-timate. He was bullish about the exploration of market-ing potential for different products of the organization.He felt that “among all the activities of the Samiti, honeyproduction, procurement, and marketing were expand-ing and needed greater attention in terms of time andmanpower.” According to him, “Sarvodaya Samiti al-ways gives importance to the production of honey bythe farmers as it is an additional income for them withoutspending much time and energy. Also, rearing of beecolonies only requires some training in the local tech-nique.” A discussion with experts revealed that the localarea was suitable for honey production. Koraput is ahilly region with 65 per cent of the geographical areacovered by forest. There was plenty of forest honeyavailable which needed better processing and impres-sive packaging for its marketing. The Samiti had realizedthe importance of bee-keeping as a livelihood option.As there was not enough farmland, the local people hadexpressed an interest in taking up bee-keeping.

The Samiti used to give additional support to the

farmers by marketing their product with nominal charg-es for packing and processing. The income from themarketing and processing of honey was also used forthe development of bee-keeping and training to the bee-keepers.

Viability of the Samiti

Different products of the Samiti were marketed throughsix consumer stores, retail outlets, and a distributionnetwork spreading across different parts of the state andoutside. The consumer stores were selling khadi pro-ducts, honey, turmeric, and arrowroot. The Samiti wasgetting approximately 27 per cent of its revenues fromhoney and with the growing importance of honey pro-duction in the local economy, Pradip Mohanty expectedthe revenues to further increase in future (Table 1).Though khadi constituted the largest share (64%) of thetotal revenues of the Samiti, it had lesser margin, i.e.,three per cent compared to the eight per cent in honeyon the mark up. The popularity of khadi was also onthe decline. Therefore, the growing honey businessseemed to boost the financial position of the Samiti thusmaking it viable compensating for the lesser margin inkhadi.

Four different factors decided the importance ofhoney for the Samiti such as ease of procurement,availability of processing facilities, marketing experi-ence, and financial support. There was an abundance offorest honey which could be procured by the Samiti asit had the necessary processing and packaging facilities

Table 1: Sales of Turmeric, Arrowroot, Honey, andKhadi (in Thousand Rupees)

Year Turmeric Arrowroot Honey Khadi

1968-69 Production __ __ 0.90 40.90Sales __ __ 0.60 210.10

1969-70 Production __ __ 2.10 103.20Sales __ __ 3.10 281.50

1989-90 Production __ __ 26.50 __Sales __ __ 39.00 __

1991-92 Production 15.50 15.60 47.00 184.90Sales 15.70 18.60 53.80 724.50






112 SARVODAYA SAMITI

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to make it marketable. The honey marketed by the Samitiwas getting very good response from the consumers forits quality and certification from ‘Agmark.’ The decisionto open a special honey processing centre at Bhubaneswarhad perhaps been taken in view of its popularity. TheSamiti wanted to establish its product as a quality brandedhoney in the honey market. It had experience and ca-pability in marketing too. The fourth and one of the mostvital factors was the financial support provided by theKVIC and the UNDP. The Samiti had garnered a lot ofexperience in providing training on bee-keeping, tech-nical help, and supplying equipment from its involve-ment with organizations like KVIC and Integrated TribalDevelopment Agency (ITDA), Koraput, in the past.

Marketing and Processing

In 1982, four organizations were involved in differentareas of bee-keeping and honey marketing activities.These were Orissa Khadi Board, KVIC, District Indus-tries Centre (DIC), and ITDA, Koraput, providing finan-cial help and technical support while the Samiti was theimplementing agency. The Orissa Khadi Board was theonly body involved in marketing though it had not takenit up seriously. Due to inconsistencies in procurementand improper processing of honey, the whole processof marketing of honey had not picked up. At the requestof the then District Magistrate of Koraput, it entered intomarketing of honey apart from its procurement.

Initially, in the seventies, the Samiti used to manu-ally process and sell its honey locally. When it startedexpanding its markets outside local areas, it applied foran ‘Agmark’ certification and received the same in 1990.Ever since, it has taken lot of care to sustain the cre-dibility of the product through proper processing andbottling.

Koraput, the head office of the Samiti, was not wellconnected either to the other parts of the country or todifferent parts of the state and hence it was difficult tocarry out both processing as well as marketing opera-tions from here. The ‘Agmark’ officials found it incon-venient to visit Koraput for taking the honey samplesand giving approval. At times, the Samiti had to waitfor months before getting an approval for marketing it.Hence, it took a decision to shift the processing centrefrom Koraput to Bhubaneswar. Thus, a new processingcentre was opened at Bhubaneswar in 1995 which wasinvolved in a host of other activities like procurement,processing, and bottling of honey. Statistics showed a

quantum jump in the sales of honey in two phases: oneafter the ‘Agmark’ certification in 1990-92 and the otherafter the shifting of the office to Bhubaneswar in 1995-97(Table 1).

Procurement

The procurement of apiary honey from Koraput districtwas very low compared to that from the other parts ofIndia like West Bengal, Chhattisgarh, and parts of Bihar.Most of the forest honey available in Koraput and adjacentdistricts (Phulbani is the nearest) were being procuredby the traders from adjacent states like Andhra Pradesh(Box 1). They were paying higher procurement priceslike Rs 90-100 per kg vis-à-vis Rs 60 per kg paid by theSamiti. The Samiti did not rule out the possibility ofpaying competitive prices for procurement when theywould have a better processing facility at their disposal.It could also procure honey from West Bengal, Chhat-tisgarh, and parts of Bihar. “This is going to help thefarmers of those areas as they are getting lower priceslike Rs 40 per kg. But, the transportation cost is likelyto increase the cost of procurement,” said AkshayaMohanty.

Pradip Mohanty felt that there was a possibility ofprocurement of more amount of forest (rock bee) honeywhich was sufficiently available in different parts ofOrissa. He gave an estimate of his procurement plans;Similipal was approximately 500 km from Koraputwhereas the other two possible sources, namely Phul-bani and Malkangiri, were less than 200 km away fromKoraput. The Samiti hoped to do the marketing of itsown procurement which was expected to be around 15tonne per annum (Table 2).

The Samiti was procuring 3-5 tonne of honey perannum from one of its partner cooperative societiesnamed 24 Pargannas Bee-keeper Cooperative Society ofWest Bengal which was also certified by the KVIC. FromCalcutta to Koraput, the transportation cost was Rs 14,000per truck for 10 tonne of materials. From Koraput to

Box 1: Some Facts about Honey

Generally honey is of two types — apiary honey and forest honey.Apiary honey is produced by the Indian hive bee and is extractedfrom the bee-keeping boxes. Normally, all the branded honeyis apiary honey because it is clean and transparent. It is freefrom foreign materials like pollen, eggs, wax, etc., and, therefore,looks transparent. The forest honey, which is normally collectedby crude methods from the beehives of the rock bee, looks turbiddue to the presence of the above mentioned materials. Due toits turbidity, forest honey requires extra filtration to make ittransparent.


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Bhubaneswar, the transportation cost was Rs 8,000 pertruck for 10 tonne of materials. The Samiti also procured3-4 tonne of honey from the nearby coastal areas likePuri and Sakshigopal. The transportation cost for theseplaces was Rs 2,000-3,000. From Koraput, the manuallyprocessed honey was transported to Bhubaneswar in 50kg jerkins. The transportation charge for each jerkin wasRs 20-30. “To compensate the transportation cost of Rs10 to 12, we have to hike the retail price of our honeyfrom Rs 135 to Rs 150 (as compared to Dabur it is stillcheaper). It can be a viable proposition,” said PradipMohanty.

Packaging and Branding

The Samiti packaged its honey in glass bottles and didnot market it under any special brand name apart fromthe name ‘Sarvodaya Samiti’ written on the bottle. Thelabel wrapped over the bottles read ‘Apiary’ written ina big font followed by a prominent ‘Honey.’ At thebottom of the bottle, the name and address of the or-ganization was given in still smaller size which AkshayaMohanty as well as Pradip Mohanty virtually acceptedas the brand. The word ‘apiary’ differentiated this honeyfrom ‘forest’ honey.

HONEY MARKET: PRODUCT VARIANTS OFTHE SAMITI AND ITS COMPETITORS

The Samiti’s share in the honey market is given in Table 3.Its market is divided into two parts. First, the localmarket comprising Koraput and Jeypore, the only twotowns of the district, and the second comprising Bhu-baneswar and the market outside. The main competitorsof Samiti honey were Dabur honey and Himani SonaChandi honey. The Samiti’s honey was given the ‘Stand-ard’ grade by ‘Agmark’ whereas it was ‘A’ and ‘Special’

for Dabur honey and Himani Sona Chandi honey respec-tively.

The Samiti honey was available in variants of 1 kg,500 gm, 200 gm, and 100 gm bottles whereas Daburhoney was also available in 50 gm and 25 gm bottles.The 50 gm and 25 gm bottles of Dabur honey wereavailable at a price of Rs 15 and Rs 10. Though the Samitihad also made available its honey in 50 gm bottles, itdid not generate enough revenue and hence was with-drawn. The past sales record showed that the entireprocured amount had been sold out. According to theretailers of the local bakery and the grocery stores, “Thereason for lesser sale of 50 gm bottles is the popularityof the brand which resulted in more volume of sales forthe bigger sized bottles of Sarvodaya Samiti. People areconfident of the quality of the Sarvodaya Samiti honeyand hence they purchase in bigger volumes instead ofsizes like 50gm and 25 gm.” The retailers were convincedthat brands other than the Sarvodaya Samiti were beingmostly used for medicinal purpose whereas the Samitihoney was a regular and necessary item. According toa grocery shop owner, “Dabur’s and Himani’s honeybasically requires regular ‘push’ from the retailerswhereas Samiti honey does not require ‘push’ for itssales.” To quote the owner of a bakery, “The honey ofSarvodaya Samiti is the first choice of consumers andthe demand is more for bigger volumes which we oftenfail to meet due to insufficient supply.” Due to theunavailability of the Samiti honey, consumers werelooking for other brands like Dabur and Himani andespecially smaller sized bottles like 50 gm.

The Bhubaneswar office marketed the bottled honeymainly through the cooperative stores of Bhubaneswarand Cuttack. Initially, the Ayurvedic medicine storeswere also included as part of the retail outlets followedby allopathic medicine stores and grocery stores. Themargin given to all the retailers at present is the sameat 15 per cent on the selling price. The Samiti had a planto add more medicine stores to its list of retailers.Considering the big difference in the existing pricing ofdifferent brands (Table 4), the Samiti was planning toincrease its market penetration with a better price-valuerealization. It was looking at the possibilities of hikingits prices slightly though it was contingent upon manyfactors like its relationship with KVIC, etc.

Promotional Activities

The Samiti participated in some melas and fairs like theGramashree Mela in Berhampur organized by the Council

Table 2: Procurement Plans of Rock Bee Honey

Area Quantity to beProcured Per Annum

Similipal Eight tonneMalkangiri, Umerkote, and Nabarangpur Two tonnePhulbani Five tonne

Table 3: Market Share of Sarvodaya Samiti, Dabur, andOthers in Honey Markets of Orissa (Quantityin Tonne)

Markets Sarvodaya Dabur OthersSamiti

Koraput area 2 1 00.4Bhubaneswar and Cuttack 8 38 18.5


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for Advancement of People’s Action and Rural Techno-logy (CAPART). It also participated in the Bali Jatra heldat Cuttack, one of the biggest melas of India. It madesincere efforts to participate in all district level melas,fairs, and exhibitions. Pradip Mohanty admitted thatthere was a lot of potential in rural markets and that theSamiti was trying to benefit from this.

POLICY/GOVERNMENT REGULATIONS

The Orissa State Government was charging a sales taxof 12 per cent on the marketing of honey by the Samiti.The Samiti was not happy with this and the categori-zation of its honey as a consumer good as it meant anincrease in the retail price of honey. According to theSamiti’s accountant, Orissa was the only state where theproducts certified by KVIC and DIC were taxable. “Thissales tax is putting us in a disadvantageous position vis-à-vis other honey producers and marketers under theKVIC banner in other parts of India,” he said. The Samitiwas fighting against this imposition in the Orissa HighCourt for waiving it off or reducing it to approximately4 per cent.

STRATEGIC ISSUES

Pradip Mohanty was aware that the Samiti honey wasa good brand which was reflected in its quick sales. Ascompared to its competitors, the Samiti looked verysmall for the reason that it was unable to meet thedemand of the market because of its limited supply.Without an efficient processing facility, the Samiti hadnot tried to procure apiary honey in big volume, let aloneforest honey. Therefore, to gain a stronger foothold inthe market, it wanted to penetrate into the existing andnew markets and generate more sales volume for itsbrand of honey. With the imposition of sales tax, it wasfinding it difficult to continue with the current pricesas there was very less margin. However, as an organ-ization working under the KVIC banner, it could notchange the prices as pricing had to be decided by theKVIC. Therefore, the Samiti had to take a strategicdecision whether it would continue under the KVIC

banner. This decision would have wider implications aswithout the KVIC banner, the marketing of the entireproduct range of the Samiti will be deprived of thedistribution network of KVIC. As a matter of fact, KVICoperates all over India and has partner local organiza-tions in different parts of the country which are regis-tered with it.

It was at this juncture that the scene for honeymarketing by the Samiti had been recast with a proposedconsortium. The three parties likely to be part of thetripartite agreement were KVIC, ORMAS, and Sarvo-daya Samiti. Under this arrangement, ORMAS workingunder the DRDA, Koraput, would find ways to increasethe productivity of honey in the district with necessarysupport from KVIC and the Samiti and DRDA wouldprovide financial support to the producers (bee-keepers)through the Swarna Jayanti Swarojgar Yojna (SGSY) toencourage bee-keeping activity. As per the CEO, OR-MAS’ estimate, some financially supported Self HelpGroups (SHGs) of producers would do the targetedprocurement (Table 5).

According to Akshaya Mohanty, “Though all thefunding will be regulated by the KVIC, Sarvodaya Samitiwill benefit due to its long-standing relationship withKVIC.” KVIC was to channelize the original funding ofUNDP for plant installation. The honey procured byboth ORMAS and the Samiti would be processed at theplant installed in the premises of the Samiti and latermarketed by ORMAS. The new machine to be installedhad a capacity of one quintal per day. Pradip Mohantywas very optimistic about the popularization of a newhigher yielding species of honey bee called A Melliferaand his estimated forest honey procurement plan (Box2). As per his estimates, approximately 24 tonne of honeycould be procured to run the plant at 80 per cent of itscapacity.

The cost of installation of one such processing plantwith a capacity of one quintal per day had been estima-ted to be Rs 0.45 million. With an escalation in the pro-curement, there was a plan to set up a bigger plant witha capacity of three quintal per day at a cost of Rs 0.65

Table 4: Comparative Prices of Different Brands(in Rupees)

Size Sarvodaya Dabur Charak Jhandu Baidyanath Himani

1 kg 130.00 180.00 __ __ __ __500gm 72.00 94.00 __ __ __ __200gm 33.00 52.00 43.00 42.00 47.00 52100gm 17.00 27.00 __ 24.00 __ 27

Table 5: Proposed Estimate by ORMAS

Item Quantity

No of SHGs to be formed 30 (in number)No of members in each of the SHGs 10-15 (in number)Honey bee boxes per member 10 (in number)Yield per box per annum 10 (in kg)Total yield per annum 30 (in tonne)


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million. It had been agreed upon that the procurementprice would be Rs 60 per litre irrespective of the partiesinvolved in procurement. In the agreement, there wasa clause which would take care of the remuneration tothe Samiti for doing the processing. So, the Samiti hadto decide whether it should do only procurement andprocessing and let ORMAS do the marketing. However,Pradip Mohanty was reluctant to kill his brand by with-drawing from marketing after years of nurturing it.

Pradip Mohanty was in a dilemma whether theSamiti should be a part of the consortium. As per theproposal, though the Samiti could continue with theprocurement, its primary responsibility would be toprocess and bottle the honey for ORMAS. But, he fearedthat if he accepted the proposal, his growing marketingoperations might suffer as most of the Samiti’s resourceswould be devoted to procurement and processing. Atthe same time, he was aware that being a part of thisagreement, he could gain technological advantage withan advanced processing plant which would help hisrevenues grow.

The Samiti was willing to work with all the stake-holders for the development of bee-keeping in the dis-trict with a hope that this option would be sustainableand appreciable. Pradip Mohanty wondered if he shouldfollow the path of aggressive marketing using optionslike coming out of the KVIC network and formulate anew pricing strategy or be a part of the mission forincreasing the honey productivity of the district andearn a decent revenue by only processing it. After de-liberating over the issues, he identified several alterna-tives as the possible course of action for the organiza-tion.

Alternative 1: Sarvodaya Samiti beingPart of the Consortium

By signing the tripartite agreement, the Samiti wouldhave the responsibility of processing the honey procuredby ORMAS while ORMAS would market it. There weretwo options for the Samiti: i) take up the processingactivity and withdraw from marketing completely ii) do

processing for ORMAS while also processing and mar-keting its honey procured independently.

Under the first option, ORMAS would pay the Samitia processing fee of Rs 26 per litre. It was estimated thatthere would be a miscellaneous expenditure of Rs 20 perlitre incurred by the Samiti. ORMAS was planning tosell this bottled honey at 5 per cent margin to a foodcompany. Akshaya Mohanty was of the view that evenif ORMAS did all the procurement and marketing, theSamiti could boost its position by leveraging its provenstrength in processing and packaging honey, maintain-ing the quality, and getting the fixed processing charges.But, by doing only processing, the Samiti ran the riskof killing its own brand as it would not be involved indirect marketing.

Under the second option, the Samiti could be a partof the consortium and take up processing for ORMASand marketing of its own procured honey simultaneous-ly. This alternative would utilize the marketing as wellas the processing strengths of the Samiti which, as a partof the consortium, could process a limited quantity ofhoney procured by it and thereafter market the sameunder the brand name ‘Sarvodaya Samiti.’ Thus, theSamiti could use the remaining capacity of the plant afterthe use by ORMAS. The marketing of Sarvodaya Samitihoney, however, would be contingent on the capacityutilization of the processing plant by ORMAS. Thequestion here is: if the Samiti did not get any space forprocessing of its own honey, would it not be compelledto virtually kill its fast moving brand in the process?Though the possibility of installing a processing plantwith a higher capacity of three quintals per day couldgive the Samiti some space to harness the potential ofits brand, it needed further negotiation with both UNDPand KVIC and the total procurement had to be nearlythree times that of the present procurement to run theplant efficiently.

Alternative 2: Sarvodaya Samiti not beingPart of the Consortium

If the Samiti chooses not to be a part of the consortium,the plan of installation of the modern processing plantin its premise would stand cancelled and the Samitiwould have to set up its own processing plant by makingthe required investment. Due to delay in testing andcertification by ‘Agmark,’ the Samiti was planning to setup its own ‘Agmark’ unit in the premise of the organ-ization to speed up the process of testing, approving,

Box 2: Information on ‘A Melliferra’ Species

‘A Melliferra,’ a new variety of Italian bee, is a great hope ina situation where the demand for production is very high. It cangive a yield of 30-40 kg honey per box per annum against theaverage yield of approximately 10 kg from the Indian bee. But,one of the conditions for nurturing this variety is the availabilityof flowers in abundance. This may be one of the areas of concernfor the popularization of this breed.


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and marketing honey. Can the Samiti justify the invest-ment for its exclusive use? Though this propositionpromised an assured marketing growth for the Samiti,there was a perceived threat that in the absence ofORMAS, the greater interest of the local honey bee-keepers might get jeopardized.

Alternative 3: Severing Linkage with KVIC

Pradip Mohanty also evaluated the option of coming outof the KVIC network and establish the Samiti as anindependent marketing entity. As mentioned earlier, theimposition of 12 per cent sales tax by classifying theSamiti’s honey as a consumer good by the Governmentof Orissa had made marketing difficult for the Samiti.It was creating constraints in pricing. The Samiti had thechoice of selling through the food companies similar tothe plan of ORMAS. Can the severing of ties with KVICbenefit the bee-keepers in the long run? Can the Samitidevelop such a national network like that of KVIC tosustain as an independent marketing entity? Will thissevering of linkage have an impact on the marketing ofits other products which are being marketed through theexisting distribution channel of KVIC? These were theissues that need to be tackled before taking a decision.

Alternative 4: OMFED Proposal

There was a proposal from the Orissa State CooperativeMilk Producer’s Federation Limited (OMFED) to pur-chase the Samiti’s processed and bottled honey andmarket it under the OMFED brand name. It was beingconsidered by the Samiti as a good proposition. In thisproposal, the Samiti would process and pack honey forOMFED at Rs 26 per kg. OMFED was interested to enterinto a contract with the Samiti which would ensuresustainable supply of the bottled honey on a long-termbasis. Looking at the proposed plans of procurement,Pradip Mohanty was to decide if the Samiti would beinterested in such a contract and be able to cater to thedemand continually as this required a fully devotedprocessing plant. This proposal, however, ensured amarket for the bee-keepers. Otherwise, there was not

much prospect for the Samiti as a marketing entity.

Alternative 5: Tie-up with Both ORMAS and OMFED

In line with the vision and the purpose of existence ofthe organization, the Samiti can decide to be a part ofall such ventures described in the earlier proposals. AsORMAS and OMFED both aim at helping the farmersand providing them a platform for market linkage, itmight be worthwhile for the Samiti to accept both theoffers. The linkage might prove to be beneficial to allthe parties in the long run but may hamper the effortsof the Samiti to establish its brand in food and beveragesmarket. If the Samiti limits itself to processing of honey,it may find it difficult to start all the marketing activitiesfrom the scratch if both ORMAS and OMFED withdrewfrom the market. Pradip Mohanty was to take a decisionwhether to be a part of all the agreements and on thevolume of business with ORMAS and OMFED. Hewondered whether the Samiti had enough in-housecapacity to honour all the agreements.

According to Pradip Mohanty, “We are working asan NGO and our prime objective is to help the farmersas well as the consumers. We want to develop the bee-keeping industry in Orissa so that the production ofhoney increases with more number of farmers taking upbee-keeping along with other activities. At the sametime, we want to get good response from the market forour products.”

Debasis Pradhan is a doctoral student at Institute of RuralManagement, Anand and is the AKRSP Fellow in Rural Marketingarea. He has done his PGDRM from XIM, Bhubaneswar and hasworked for more than two years in the power sector. His areas ofinterest include rural marketing, relationship marketing, socialmarketing, and product management. Papers and managementcases authored by him have appeared in national and internationalconference proceedings.e-mail: [email protected]

Not everything that can be counted counts, and noteverything that counts can be counted.

Albert Einstein


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CASE ANALYSIS I

Mark Neal Richard TanseyAssociate Professor Associate ProfessorDepartment of Management College of Business AdministrationCollege of Commerce and Economics Texas A&M InternationalSultan Qaboos University UniversityOman Texas, USAe-mail: [email protected] e-mail: [email protected].

The case study by Agrawal and Rajasekar gives a detailed analysisof ABC Limited (its history, cultural values, strategic choices) as wellas a description of the current market conditions in the Indian electric

water pump industry (EWP) (competitors, pricing, and market segmenta-tion).

ABC LIMITED’S POSITIONING IN RURAL/URBANEWP SEGMENTS

The Indian market for pumps is considerable at around Rs 19.5 billion andthe Agricultural and Domestic Pumps (ADP) sector is estimated at Rs 11billion. Within the ADP sector, the domestic and agricultural segments eachcontribute 40-42 per cent to sales while the industry segment contributes12-14 per cent. One strategic issue for ABC Limited is whether to changeits marketing profile, i.e., shift its attention from the agricultural sector tothe growing domestic or industry sectors.

There are obvious reasons why ABC should consider this. The agri-cultural sector is stagnating: current figures show little or no growth withforecasts estimating future growth in pump sales at 2.7 per cent. On theface of it, things look less than inspiring. There is, however, a hiddenpotential for further growth in the sector. Increased EWP use can expandthe size of the agricultural sector as a whole by adding 30 per cent moreirrigated land under cultivation. There is, thus, a large potential rural marketthat can provide jobs for hundreds of thousands of unemployed ruralworkers.

The domestic sector is already expanding rapidly with current figuresshowing 5.5 per cent growth and forecasts estimating 10.5 per cent growth.

presents analyses of the management caseby academicians and practitioners

D I A G N O S E S

ABC Limited: Agriculture andDomestic Pumps Division

The October-December 2003 (Vol 28No 4) issue of Vikalpa had publisheda management case titled “ABC Limi-ted: Agriculture and Domestic PumpsDivision” by Girish Kumar Agrawaland J Rajasekar. This issue featuressix responses on the case by MarkNeal and Richard Tansey; NarendarV Rao; S M Mehta; Upinder Dhar;Salma Ahmed and Ashfaque Khan;and Abhijeet, Ankur, and Satyapra-kash.


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ABC Limited’s share in this sector is currently 8 per cent.The domestic pump sector is growing along with urban-ization and the resultant increase in high-rise livingwhich requires pumping water to high levels. There isa decreasing water table forcing the domestic as well asthe agricultural bore holes to be dug deeper year-on-year. Within this context, the sector for domestic pumpsis becoming more diverse and fragmented as the de-mand for basic pumping equipment is augmented by thedemands associated with high-earners who use powershowers, jacuzzis, etc.

There is also the industrial sector (sewage handlingpumps, alternators, vacuum pumps, etc.), where ABCLimited currently enjoys good market presence (14%)but which overall contributes relatively little to theproportion of sales (12-14%). Furthermore, the marketsize is currently only a fifth of the domestic or agriculturesectors and it thus offers limited scope for growth inabsolute terms.

Restricting the view to sector growth, then, it seemsthat there are greater opportunities for increased marketpresence in the faster-growing domestic sector. How-ever, considering the positive effects of EWP use on thesize of the agricultural sector, overall, we can see thepossibility that EWP use may actually increase thedemand for further EWPs.

GROWTH LIMITATIONS IN THEAGRICULTURAL SEGMENT

ABC Limited has been successful in the agriculturalsector despite government interference which has his-torically engendered conditions of monopoly (electricitysupply), indirect monopsony (indirect governmentpurchase of pumps), bureaucracy, and corruption. Thecompany’s success in this segment cannot be dismissedas mere first-mover advantage: there are few technolo-gical barriers to entry and rivals have been aggressivein their attempts to gain market share at all levels.

At the organized, ‘brand’ level, ABC had to respondto domestic competition within every segment of itsoperations, particularly those in which the state-spon-sored conditions made it difficult to compete on any-thing but price. Recently, things have become eventougher in this price-sensitive segment as Chinese importspriced at less than half their Indian counterparts havemade inroads into the market.

The company’s performance is also notable whenone considers that over 50 per cent of the Indian pump

sales are in the ‘disorganized’ (non-brand) sector. It isthus competing in a low-growth market where marginsare squeezed and the disorganized sector is allowed tothrive because of the government’s inability to collectexcise duties and sales taxes and by widespread non-compliance with labour laws. ABC Limited is the op-posite of a disorganized sector institution, the first inIndia to secure both ISO 9001 and ISO 14001. As such,it competes only in the squeezed organized sector whichconstitutes half of the existing market.

THE IMPORTANCE OF THEELECTRICITY SECTOR

Many of the contextual issues associated with operatingin the agriculture sector are clustered around the supplyof electricity. The privatization initiatives of the 1990sfailed in the electricity sector with the result that the statecurrently retains effective control of power generationand distribution. In 1998, the total production of elec-tricity equalled approximately 547.12 billion kilowatthours. According to Exhibit 1 of the case, for the 19Indian state electricity boards, agriculture users con-sumed 91.11 billion kilowatt hours in 1998. Through thecontrol of electricity supply and distribution, the stateshapes the EWP market. Because many farmers are poor,the existing market and its development depend heavilyon electricity subsidies. The future of such subsidies is,however, uncertain because the state electricity boardsare running out of money and the level of subsidy isbecoming problematic.

One would think that in such conditions, a companysuch as ABC Limited could increase customer benefit bycompeting on the power-efficiency of its product port-folio. Regulations, however, categorize pumps in termsof HP, thus encouraging firms to ‘under-rate’ theirproducts. As a result, there is little incentive for thefarmers to buy energy-efficient pump products and thisundermines the ability of firms to compete on efficiency.Thus, while government monopoly ensures that electri-city supply is inefficient, state regulations ensure thatmore — not less — is consumed per pump. Understand-ably, the state supply of electricity is finding it difficultto keep up with this inflated demand from 11 millionEWP owners. We can thus see an irony in the powershortages of November-December 2003 which were inpart attributed to the over-use of agricultural EWPs.

The effects of state intervention in the electricity andEWP sectors are thus mixed. While state electricity sub-

120 ABC LIMITED: AGRICULTURE AND DOMESTIC PUMPS DIVISION

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sidies undoubtedly support the market in EWPs andallow for its expansion, state intervention also causesproblems: it needlessly inflates the demand for electri-city in rural areas; it indirectly promotes the disorgan-ized sector; and it can skew the market away from theEWP sector. For instance, because of the shortage andunreliability of rural electricity in some areas, 6.5 millionrural farmers have purchased diesel pumps which aremore expensive to operate.

This situation requires companies such as ABCLimited to become the political champions for the needsof their rural buyers. They can do this by cooperatingwith others in the industry and lobbying for structuraland regulatory changes in the electricity and EWP sec-tors. In order to achieve this, the company needs re-search to demonstrate both the positive and negativeimpacts of the present system for rural farmers. On thenegative side, it can show how the current monopolisticsystem of electricity generation and distribution is gross-ly inefficient and how certain regulations are dysfunc-tional. On the positive side, crucially, it can provideevidence that electricity subsidies allow rural farmersto become more affluent.

As mentioned, ABC Limited needs to distinguishthe divergent effects of current state regulations andsubsidies on their rural EWP customers. While stateregulations clearly have a negative impact on ruralfarmers by restricting credit to potential buyers, stateelectric subsidies may have positive effects by increasingincome and reducing poverty among rural farmers.

FUTURE DIVERSIFICATION BEYOND THEAGRICULTURAL SECTOR

ABC Limited needs to redefine its business model byasking the old marketing myopia question: “what busi-ness are we in?” Currently, the company responds tothis issue by proclaiming that it is a manufacturer ofEWPs for three segments of the Indian economy:Agriculture sector: There are problems for ABC Limitedif it decides to remain in the agricultural sector: someare market-driven, such as increasing competition at theupper-end (e.g. Grundfos) and the lower-end of themarket (China); others are due to government failure —cumbersome credit regulations, high levels of bureau-cracy, and corruption. The combination of these factorsmeans that market conditions are tough; margins arelow; competitive strategy is based on price; brands are

subject to unfair competition from the disorganizedsector. On the positive side, it does enjoy advantagesover rivals in its strong distribution and service net-works. However, other companies, particularly foreignmultinationals, are also adept at service and supportnetwork strategy.Industrial sector: The industrial sector does not posesuch problems: the role of the government is restricted;companies are richer than farmers and do not usuallyneed credit facilities for pumps. Furthermore, becauseof the specialized nature of industrial pump technology,margins are more attractive. Overall, the industrial sectorseems to offer more scope for growth and increasedmargins.Domestic sector: The domestic sector is also free fromgovernment intervention. Domestic consumers of pumptechnology are usually richer than farmers and have noneed for government-approved credit. If they do requirecredit, they have the know-how, income, and choice toobtain credit quickly and cheaply. Electricity is not asbig an issue. Overall, the domestic sector looks attractiveparticularly when one considers its projected growthrate.

We would suggest that ABC Limited envision itsfuture according to the Dell model of providing lowtechnology to mass markets in India. The company shouldperceive itself primarily as a systems integrator forcombining pumps, electric engines, and pipes to custom-ers who value one-stop shopping instead of being forcedto acquire each of these components from separatesuppliers. Like Dell or Cisco, it needs to streamline thenumber of manufacturers of these components to a fewwho supply each of these parts. By focusing on a fewcomponent suppliers, it can establish high quality partsthat are made according to a dominant design that willfacilitate both the cost and effectiveness of creating astandardized technology trajectory for future EWP ex-pansion. Cisco has achieved enormous cost savings byestablishing a centralized purchasing centre at its head-quarters instead of continuing its old purchasing systemin which hundreds of its subsidiaries bought parts atmuch higher prices but received much lower quality. Byusing the Dell or Cisco model, the company shoulddevelop its Internet site for business-to-local-dealerpurchases. It needs to establish a dominant EWP designthat is customized for each of its three large segments:agriculture, industry, and domestic.


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FEASIBILITY OF DELL/CISCO MODEL FORABC LIMITED

Currently, ABC Limited has a strong national networkof dealers for distributing, promoting, and selling theirproducts. Few foreign companies will be able to createsuch a national network. At best, the company’s foreigncompetitors will establish networks in India’s large citiesand a few of the wealthiest states. Thus, if it aspires tobecome the Dell of EWPs in India, it will have minimalcompetition from strong foreign manufacturers. Thethreat from German competitors is mainly focused onmanufacturing high-quality EWP parts for urban areas,while the threat from Chinese competitors is focused onproviding cheap EWP parts for rural areas. The Dellmodel for ABC can be a tool for selling both its own partsand those of its foreign competitors in much the same

way that IBM sells its own PC chips as well as Intel’sand AMD’s chips. Thus, the Dell model encourages ABCLimited to cannibalize its own products thus reducingthe risk of falling behind aggressive and efficient foreigncompetitors.

Such is one level of strategy. The other level con-cerns state intervention and regulation: ABC Limited canbe involved in shaping the market indirectly throughcoherent and cooperative lobbying of state agencies. Aswe have seen, one overall concern for the company isthe retention of state electricity subsidies for rural farm-ers. It can combine its own interests with those of itsactual and potential customers by arguing that suchsubsidies do not just sustain the market in EWPs butenhance the wealth of rural farmers and the effectivedistribution of water throughout rural India.

A new spirit of economic freedom is now stirringin India bringing extensive changes in its wake.A series of ambitious economic reforms aimed

at unshackling the economy and stimulating foreigninvestment has moved India firmly into the front ranksof the rapidly growing Asia Pacific region and unleashedthe latent strengths of a complex and rapidly changingnation. Under these circumstances, any business wouldface critical decisions and business strategy changes inorder to maintain its growth rate and achieve its strategicgoals.

ABC Limited is a major player in the motor pumpindustry in India. It is a subsidiary of the Pariwala Groupof companies that was established in 1920 as a cast ironplough maker. It is organized into five strategic businessunits: industrial pumps, agricultural and domesticpumps, projects, valves and material handling, and paperand paints. The Agriculture and Domestic Pump (ADP)unit competes in three product-market segments, name-ly, agricultural pumps, domestic pumps, and industrialsegments. Its market share in these segments is 10 percent, 8 per cent, and 4 per cent respectively. The growthrate for the domestic sector is about 10-15 per cent while

it is estimated at a sluggish 2.7 per cent for the agricul-tural sector.

The agricultural sector is the most price-sensitiveof the three sectors. This is also the most competitiveof the three sectors due to the presence of a large numberof manufacturers from the organized as well as theunorganized sector. The competitive dynamics of thissector is also impacted by the presence of Chinesemanufacturers who enjoy a significant price advantageand have benefited from low import tariffs. The absenceof entry barriers as well as low technology requirementsof this sector have also had a major impact on thecompetitive landscape. Moreover, the agricultural sec-tor has suffered from market dislocation due to poorlyexecuted government involvement. Subsidies to farm-ers for seed, fertilizer, and power have become counter-productive as they have led to over-production (andreduced prices) and the draining of local governmentcapacity to pay the electricity companies. All this result-ed in supply failures. The company’s product design andengineering prowess does not give a competitive edgeto this sector as the farmers do not consider energyefficiency a plus (due to government power subsidy) and

CASE ANALYSIS II

Narendar V RaoAssociate Professor of FinanceCollege of Business and ManagementNortheastern Illinois UniversityChicago, USAe-mail: [email protected]


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require only basic, functional products.The domestic sector is the fastest growing segment

as there is a growing demand for higher lift capacitypumps and special purpose pumps due to increasedurbanization, growth of high rise buildings, and de-crease in the water table in all parts of India. Thecustomers in this segment are interested mainly inproduct range and functionality. Consequently, thissector is not as price-sensitive as the agricultural sector.The company is well positioned to address the needs ofthis sector due to its fast time-to-market pumps forspecific applications, proven design and product devel-opment capability, and marketing skills.

The customers in the industrial sector are discerningbuyers who require high quality, energy efficient pro-ducts. Product reliability and excellent after-sales serv-ice, not merely price, are important factors in the buyingdecision. The outlook for this sector looks promisinggiven India’s accelerating rate of economic growth. Thisbodes well for ABC Limited as its core competenciesmatch the requirements of the customers in this sector.

ADP is facing its first negative growth in ten yearsand its head, Mr Rana, needs to evaluate the company’scurrent position and formulate a long-term growth stra-tegy that would enable it to achieve sustainable com-petitive advantage.

ISSUES

From the data provided by the case, the issues thatrequire immediate attention are as follows:• The changes in the political and economic landscape

and its ramifications on the market growth anddemand in the pump industry.

• The prospect of negative growth faced by the com-pany for the first time in ten years.

• Substantial demand changes between sectors andbetween product type within the same sector.

• Shift in competition from the unorganized sectorand foreign manufacturers.

• The strong development barriers faced by the ag-ricultural sector due to restrictions on trade pricesof agricultural products and limited financing power.

• Electricity and water crisis and their implicationsfor the agricultural and domestic pumps segments.

ENVIRONMENTAL CHANGES

• Rationalization of subsidies for the agriculturalsector: This trend is likely to continue as the states

are facing a paucity of funds and the present levelof subsidies is unsustainable in the long-run.

• Shift in demand base from agriculture to urbandomestic markets: This trend is likely to acceleratedue to the fact that the unorganized sector is makingdeep inroads into the agricultural segment. Thissegment is also the most price-sensitive and theunorganized sector has some inherent advantagesin this regard.

• No entry barrier in the ADP segment of the business:This has resulted in the influx of many competitors(both foreign and domestic) into these segments.Hence, the company faces intense competition fromthe organized as well as the unorganized sector inthese segments.

• Private sector banks are shifting to indirect finan-cing.

• A comprehensive Act to foster private sector par-ticipation in electricity generation has been passed.

• The government still pursues an interventionistpolicy in agriculture. This results in a distortion ofoutput prices.

• The demand in the domestic pump segment isincreasing at a rapid pace due to the rapid growthin urbanization and the construction of high-risebuildings.

SWOT ANALYSIS

Strengths

• over 80 years of experience in manufacturing andmarketing pumps of various sizes and applications

• comprehensive range of products• excellent engineering company• commitment to technological renewal• strong social and ethical values• proven design and product development capability• winner of several awards and quality certifications• skilled in manufacturing energy efficient pumps• commitment to cost reduction across the entire

product spectrum

• well-established nation-wide dealer network

• strategically placed regional offices which are con-nected to an online information system and whichreport to one central office

• ongoing efforts to enhance the distribution networkand conduct market surveys on a regular basis

• part of a well-known business group.


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Weaknesses

• reliance on the domestic market that is subject tocyclical variations

• lack of exclusive service arrangements in rural areas• no schemes for the end user• higher costs as a result of excise duty and other tax

disadvantages and mandatory compliance requiredwith various labour and industrial laws.

Opportunities

• significant growth in demand in both agricultureand domestic sectors

• increasing importance of the industrial sector• increased demand for high quality motor pumps

caused by lifestyle changes and increasing urban-ization

• liberalization of the Indian economy and significantreforms in the electricity generation sector

• well positioned to market its products globally whichholds true for sourcing of raw materials.

Threats

• growing competition from the unorganized sector• increasing global competition due to the reduction

of customs duties on water pumps• influx of cheap Chinese products• no entry barriers• lack of an efficient financing system for the purchase

of water pumps• numerous restrictions on trade of agricultural pro-

ducts including administered prices of farm pro-ducts

• the ‘commoditization’ of many of the company’sproducts. This connotes that competition is nowbased almost exclusively on cost and only compa-nies that are able to lead in terms of cost advantagewill carve out the biggest share of the market.

RECOMMENDATIONS

The company should not only maintain but also furtherdevelop its technological and manufacturing excellenceto distinguish itself from competition. It should focuson innovation and leverage its core competencies. Itshould maintain its reputation as a manufacturer of highquality, energy efficient products and aggressivelypursue new technological solutions and develop newproducts in response to a change in market demand.

The company faces intense competition in the ag-

ricultural segment particularly from the unorganizedsector and Chinese imports. Consequently, it is the mostprice-sensitive segment. The firms in the unorganizedsector and the Chinese firms have a much lower coststructure than ABC. In addition, given the low techno-logy requirements of customers in this segment, thecompany’s engineering excellence and its ability toproduce energy efficient pumps do not give it a com-petitive advantage. This segment is also subject to thevagaries of changing governmental policies. Hence, itshould not dissipate its resources by fighting the com-petition in these sectors and should get out of this segmentaltogether. Outsourcing production of pumps for thissegment could result in quality problems and negativelyimpact on its brand image. Hence, it should not succumbto the temptation to outsource production to the unor-ganized sector.

ABC should focus on the growing domestic andindustrial sectors instead of the agricultural sector. Thecustomers in these sectors are discerning buyers whoappreciate the engineering excellence and energy effi-ciency of its products. In addition, with its reputation,dealer network, and resources, the company could addproduct service agreements and leasing to its productoffering. This could enable it to add significantly to itsrevenue and income stream from these high marginoptions.

The company should launch an advertising cam-paign to enhance its brand image and to differentiateitself from competition. The campaign should highlightthe company’s strengths. This is a strategic imperativethat must be undertaken immediately.

ABC should also aggressively export its productsto SAARC countries initially and later to countries inSouth East Asia. This could be a new growth opportunityfor the company. In the past, the company has woncritical orders from prestigious domestic projects and itsproducts were preferred for critical applications. Thisconstitutes great market recognition and the companyshould take advantage of it. ABC has also acquired highdesign and product development capability and is knownfor fastest time-to-market pump development and hasbagged several awards and quality certifications. Withsuch impressive credentials, the company should defin-itively consider changing its business strategy to a productdifferentiation strategy and leverage its core competen-cies to maintain its sustainable competitive position andgrowth in the long run.


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Another strategic alternative for the company ismerging with another pump manufacturer. GrundfosPumps India Limited (GPIL) seems to be a good can-didate for a merger. This company is not only one ofthe fastest growing water pump manufacturers in Indiabut also holds considerable market share. A merger withGPIL would enable ABC to increase its domestic marketshare as well its international presence. It would alsoyield sizeable synergies.

While diluting its high level of ethical standards

may yield some short-term financial benefits, it is likelyto hurt the company in the long run. Hence, Mr Ranashould reaffirm the company’s values and must ensurethat everyone in the organization is aware of the cor-porate credo.

If Mr Rana can reshape the ADP unit’s businessstrategy immediately, it should be possible for ABCLimited to maintain its market leadership position andits competitive advantage despite the changes in theeconomic, regulatory, and competitive environments.

ABC Limited has to keep in view the professionalethics of the business, enhance its business withregard to the macro environment, and continue

with its traditional stronghold on agriculture market inorder to sustain its operations and achieve progress ofthe company. A SWOT analysis of the company revealsthe following:

STRENGTHS

• well-established corporate house having diversi-fied activities

• eighty years’ experience in manufacturing andmarketing of pumps

• fluid handling business (including industrial, agri-cultural, and domestic pumps) worth Rs 5.25 bil-lion.

• wide range of products in all the sectors, i.e., ag-riculture, domestic, and industrial sector

• highly technical and excellent engineering skills• high social and ethical values having already won

awards and quality certification like ISO 9001• well spread network for distribution as well as

service support• established internet system with regional/area

offices.• well-planned strategies for advertising, sales, and

promotion.

WEAKNESSES

• dependence on ancillary units particularly in the

small hp range of pumps contributing about 30-35per cent of yearly units sold

• lack of introduction of new technologies in respectof design, development, and manufacturing capa-bilities

• liberalization of the economy and lowering of cus-tom duties resulting in reduced cost advantage

• entrance of multinational brands of pumps in themarket

• uninterrupted power supply for operating thepumpsets particularly in the agriculture sector

• exclusive service arrangements not available in ruralareas.

OPPORTUNITIES

• increased demand for agriculture pumpsets bothfor lifting groundwater and carrying surface water

• additional demand for pumpsets to operate the microirrigation system

• increased demand for processing of agricultureproduce

• increased demand for domestic pumpsets withincrease in high rise buildings in urban areas

• requirement of high pressure pumpsets and fittingsto suit the new bathrooms

• increased demand for pumpsets for potable watersupply as well as sewage handling.

THREATS

• competition from multinationals with price compe-

CASE ANALYSIS III

S M MehtaChief General Manager, (Development Policy Dept — Farm Sector)NABARDMumbaie-mail: [email protected]


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titiveness• availability of unbranded products• decline in dealers’ credit• purchase of pumpsets on the recommendation of

the agencies/dealers supplying other agriculturalinputs

• reluctance on the part of the bankers to providecredit on account of low recovery and governmentdecisions influencing repayments

• dealers indulging in promoting unbranded pumpsetsas also local mechanics influencing the purchasedecision

• reduction in the subsidy and other related issues.

EMERGING SCENARIO

ABC needs to evaluate its options in the context of thefollowing emerging factors.

The national policy on agriculture is to double theagriculture produce by the end of the 10th Five Year Planfrom the present level of approximately 210 milliontonne and go for diversification of crops and improvedagro-techniques. It also envisages effective and opti-mum use of available water resources using micro ir-rigation systems; improved facilities for storage ofagriculture produce by constructing of cold storages;value addition through processing of agriculture pro-duce; improvement in power generation and its avail-ability for agriculture purposes in the years to come;

banks’ compliance with the requirements for achievingtargets for priority sector and agriculture sector; andincreased demand for domestic and industrial segment.

RECOMMENDATIONS

The company, therefore, can build further from its presentposition by taking the following steps:• technology upgradation in its area of core compe-

tence• outsourcing some of the components/pump units

with strict quality control and branding undercompany’s name

• building brand image by advertising and salesstrategies

• training of the staff in its service centres• appointing authorized service agents in the rural

areas or giving exclusive franchise• effective use of Internet services for better manage-

ment information system as well as supply chainsystem.In order to sustain its corporate value of profession-

alism and fairness in dealing with the customers andsuppliers, ABC Limited should strengthen its areas ofcore competence — manufacturing and supply of qualityproducts. However, with increasing competition andbusiness volumes, the company has to suitably changethe product mix based on the market demand and alsoimprove the quality of its services.

CASE ANALYSIS IV

Upinder DharDirectorPrestige Institute of Management and ResearchIndoree-mail: [email protected]

The motor pump industry in India has been chang-ing at a rapid pace. Broadly, it was divided intoagricultural, domestic, and industrial sectors. The

agricultural and domestic sectors dominated with 89 percent market in terms of volume and 69 per cent in termsof value. The demand base was shifting from agricultureto the urban domestic markets. For the next few years,the growth rates for the agricultural and domestic sec-tors were estimated at 2.7 per cent and 5.5 per centrespectively. ABC Limited of the Pariwala Group ofCompanies believed that, to be competitive and success-ful, one required a comprehensive range of products and

solutions, a commitment to technological renewal, andglobal presence. Currently, the domestic segment isgrowing at an estimated rate of 10-15 per cent annuallywhile the agricultural segment has stagnated.

The earlier distribution efforts of ABC Limited weretargeted at the agricultural customers which requiredsome special capabilities of the dealers. In many areas,the dealer not only supplied other agricultural inputslike PVC pipes to carry irrigation water, sprinklers, andmotor starters but also supplied credit to the farmers.Their knowledge of local area was critical to demandgrowth and actual sales realizations. However, with the


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changing scenario after liberalization, the company wasmore keen on targeting the growing domestic and urbansector.

ADDRESSING THE AGRICULTURAL MARKET

In order to create an intermediate and vibrant marketin electricity generation and distribution, the uniongovernment had decided to allow private participationin distribution of electricity by enacting a comprehen-sive law to deal with various problem areas which hadhampered the development of the market. The enact-ment of the proposed act would spur the growth ofprivate sector participation in electricity generation anddistribution to reduce the demand and supply gap andhence may give momentum to the growth of agriculturalsegment. ABC Limited needs to make all possible effortsto educate the uninformed buyers who constitute theagricultural segment to prevent the malpractices pre-valent in the unorganized sector. The manufacturers inthis sector deliberately under-rated motor pumps as-sembly which made the product ‘large sized,’ as com-pared to properly rated ones, and desirable for extrapumping and, therefore, more attractive to illiteratefarmers. The latter , in any case, did not have to pay thefull costs of electricity and for the wastage so caused.Considering that the company’s core competence wasin serving the traditional agricultural segment, it shouldlaunch attractive schemes for the farmers as an incentiveto buy energy efficient products. It should not succumbto the practice of under-rating in order to capture marketshare and thereby compromise with the corporate codeof ethics as this could lead to spoiling its reputation andlosing its customers in the long run.

Despite extensive service network and many author-ized service centres, ABC Limited was not able to havean exclusive service arrangement in all the rural areas.Direct contact with sub-dealers in such areas was criti-cally important for the company. While continuing toproduce and market the highly energy efficient products,the company could think of supplying the pump in ‘kits’too. The ‘kits’ were likely to pierce the market whereexclusive service arrangement was difficult. Anotheralternative could be to outsource service arrangement insuch areas with effective monitoring by the company.Further, the company should continue its efforts in thedirection of cost reduction in all parts of the value chainbecause customers exhibited price sensitivity and a de-sire for faster payback on their pumping systems.

IMPORTANCE OF CORPORATE VALUES

The corporate values of professionalism and fairnesshave sustained the company for a long period of time.The credibility of the company would remain intact ifthese values are not tampered with. The outsourcing ofproduction to unorganized sector could be thought ofonly if ABC Limited could closely monitor the qualityof the product and reliable supply schedule. It mayinitiate efforts in this direction on its own terms. Afterensuring quality of production and reliable supplyschedule under this arrangement, it should take stepsfor cracking the market hold of the unorganized sector.

As India is emerging as one of the largest potentialmarkets for pumps and pumping equipment and sys-tems, many multinational brands have entered all thesegments of the market. Liberalization had resulted inthe lowering of customs duties on imported pumpswhich reduced the cost advantage available to domesticmanufacturers. It was fair to compete on price as it wasbelieved that only those companies that were pricecompetitive and had strong distribution and servicenetwork would survive in the long run. It was appre-ciable that ABC Limited had successfully refrained fromadopting any kind of unethical practices.

ADDRESSING THE FASTER GROWINGURBAN MARKETS

In view of the growing demand for pumps in urbanmarkets, it was appropriate to strengthen the distribu-tion network which was a key factor for developingvolumes. The company had rightly started giving im-portance to the process of dealer appraisal and evalua-tion. It had the capacity to respond to the needs of urbanmarket which demanded variety, technological compe-tence, distribution reach, strength, and rapid responsefrom pump manufacturers. This is the time to redefinethe business from an intermediate and almost a com-modity product ‘supplier’ to a ‘consumer durable’ aswell as a ‘services company.’ Though production andservice could be retained by the company, it may beadvisable to outsource, at least initially, the marketingin domestic and urban pumps segment. However, it maywiden its own network in the long run to overcome thefall-outs, if any. The product design should be givenattention for variety and innovation.

The SAP R/3 system may be effectively used tofurther improve management information system, faci-litate faster service delivery, and become the backbone


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of information and business processes. The company’sinternet site should enable customers to key in theirorders for being processed into order acceptance anddispatch. Since muncipalities regularly require pumpsfor water and sewage handling, these services are likelyto be privatized — a potential market for pumps. Thehuman relations skills of the area sales executives havean important role to play. The company should conducttraining programmes more frequently for the authorizedservice centre personnel to keep them abreast of newhappenings and should undertake six-monthly insteadof yearly performance review exercise to solve theproblems without any delay.

SUMMARY OF THE RECOMMENDATIONS

• Uninformed buyers should be made aware of themalpractices prevalent in the unorganized sector.

• Core competence of servicing traditional agricultur-al market should be retained.

• Besides having attractive schemes for dealers, in-centive schemes should be launched for end-userstoo. For instance, incentives should be given tofarmers for motivating them to buy energy efficientpumps.

• The company should not adopt unethical practicesunder any circumstances.

• The company should maintain direct contact withsub-dealers.

• The company may be able to attract customers evenfrom those areas where it does not have exclusiveservice arrangement either by supplying the pumpin ‘kits,’ or by outsourcing the service arrangement.

• The company should continue to put in efforts for

cost reduction in all parts of the value chain.• The company needs to maintain quality of the

product in all respects.• The market hold of the unorganized sector could

be cracked if the company could outsource the pro-duction to unorganized sector under its close su-pervision for quality assurance.

• Distribution network needs to be further strength-ened.

• The company should give importance to the processof dealer appraisal and evaluation.

• Business should be redefined from an intermediateand almost a commodity product ‘supplier’ to a‘consumer durable’ as well as a ‘service company.’

• Initially, the marketing function could be outsourcedin the case of domestic and urban pumps segment.However, the company may widen its network inthe long run.

• Product variety and innovation should be paid dueattention.

• E-initiative needs to be further encouraged to facili-tate faster service delivery.

• The company should make efforts to tap the poten-tial market of muncipalities as they regularly re-quire pumps for water and sewage handling.

• The company can conduct training programmesmore frequently for the authorized service centrepersonnel.

• In view of brisk changes taking place in the marketscenario, the company should undertake six-monthlyperformance review exercise to solve the problemproactively.

CASE ANALYSIS V

Salma Ahmed Ashfaque KhanFaculty Manager — Enterprise SalesDepartment of Business Administration Red Hat IndiaFaculty of Management Studies and Research New DelhiAligarh Muslim University e-mail: [email protected]: [email protected]

ABC Limited experienced a stagnant demand inthe agricultural division while there was anincrease in demand in the urban domestic

market (10-15%). Further, though the market size waslarge — 5.5 billion in the domestic market, 4.5 billion

in agriculture, and 1 billion in the industrial segment,the market share was small — a mere 8 per cent, 10 percent, and 14 per cent respectively.

An analysis of the environment reveals a changingtrend. On the one hand, there was a stagnant demand


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in the agriculture sector due to the fact that agriculturesector subsidy was on a decline and land under irrigationincreased only marginally (over the period 1981-1998).Hence, there was no major fillip to demand in this sector.On the other hand, demand in the urban domestic sectorwas on the rise. The major reasons for this were increasein urbanization and growth of high rise buildings,decrease in the level of water table thus increasing thewater pressure requirement, increase in the use of desertcoolers, and an increase in per capita consumption ofelectricity.

SWOT ANALYSIS

A SWOT analysis reveals the strengths, weaknesses, andopportunities.

The major strengths are:• high quality of products• efficient management• authorized service centres• highly trained employees at service centres• online order management• efficient information management.The weaknesses are:• fragile distribution network in the agricultural

sector• lack of financing options for farmers• high price• the threat of substitutes• low cost offerings of the unorganized sector• competition from MNCs• competition from other major players• no difference in the perception of energy effi-

cient and non-efficient products in the agricul-tural sector.

The major opportunity is created by:• increase in demand in the urban domestic market

segment.

RECOMMENDATIONS

There are many categories of buyers such as individualbuyers, institutional buyers, OEMs like domestic equip-ment manufacturers, and the industrial equipmentmanufacturers. The buyers’ needs are different and theircomposition is also different. For instance, individualbuyers in the urban sector are well educated as well asaware while the agricultural buyers are predominantlyignorant and dependent on nearby mechanics for advice.

The company need not divest the agriculture divi-

sion; this segment could be used as a cash cow. The urbandomestic and industrial division could provide highgrowth opportunities to be tapped intelligently. How-ever, since the problems of each segment are different,different strategies need to be adopted for each.

Strategy of Low Costs for Agriculture Sector

Cost is a critical issue for the needy farmers. Technologyand attributes have no significance. Even energy effi-ciency is not a barometer as electricity hooking is theorder of the day. Therefore, ABC Limited should adopta strategy of low costs for the agricultural segment.Further, this could serve as an entry barrier for the otherplayers and switching costs would also be very high.Low cost could be achieved through efficient manage-ment of the supply chain, a low inventory, and betterforecasts.

Finance is another issue of prominence in the ag-ricultural sector. ABC Limited should ensure that non-availability or shortage of funds does not create prob-lems for the purchase of pumps for the farmers. Thecompany should initiate zero finance scheme (throughthe dealers) or tie up with banks to promote micro fi-nance and make procurement of finance less cumbersomeand hassle-free.

The company’s major competitors have strong dis-tribution network and hence it should also strengthenits distribution particularly in the rural areas and alsoinitiate customer contact through dealers. The dealersshould play a very important role in convincing thefarmers. Moreover, it should also popularize the use ofseveral schemes to attract the farmers.

Further, efforts should also be undertaken to edu-cate agricultural users regarding energy efficiency andalso instil discipline in consumption of electricity andcontrolling wastages.

Strategy of Differentiation in the Urban Segment

For the urban domestic and industrial segment, techno-logy, energy efficiency, and product attributes are es-sential components. To keep the buyers of this segmentloyal, a broader range of products should be providedlike the other major players. Further, customized pro-ducts, quick response, and an efficient after-sales servicecould go a long way in retaining customer loyalty. Insteadof easy finance scheme, it is the dealer network, avail-ability, reach, and response which play a more criticalrole.


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Increasing the common components on each pro-duct and outsourcing some of these while retainingdesign and assembly could help in making it moreresponsive and also in controlling costs. Further, toface the onslaught of competition from the MNCs, it

should empower itself with globally respected certifi-cates to enhance its market creditability. Thus, byfollowing two different strategies, ABC Limited couldsustain itself in the market and also increase its marketsize.

ABC’s core competence lies in its technologicalknow-how, manufacturing capabilities to pro-duce large variety of pumps, and its long

experience in selling pumps in different markets. In thelong term, the company will have to be cost competitiveif it wants to survive in the market against MNCs, smalland unorganized players, and cheap Chinese pumpproviders. In the current scenario, pump-manufacturingtechnology has reached a stage where there is less scopefor innovations and product modification. Also, themarket is highly price-sensitive. Hence, the companyshould focus on technological improvements to save thecost of production rather than product improvement. Itshould concentrate on cost saving in different parts ofthe value chain so as to increase the overall profit withoutincreasing the selling price of the pumps. Consideringthat it has its own technological and manufacturingcapacities, it can sell pumps at better profits than itscompetitors by saving costs.

In an era when MNCs are setting up their manu-facturing facilities in India to take advantage of cheaplabour and better trained workforce, ABC Limited shouldnot change its focus from manufacturing. These produc-tion bases will churn out customized product solutionsand also act as a sourcing base for export markets in thelong run for the company.

AGRICULTURAL MARKET VSDOMESTIC MARKET

The growth of agricultural pump market is a functionof power supply, subsidiaries, dealers’ push, and cycliccrop output. This growth has over the years stagnateddespite the huge market because of inability of the farmersto pay the price for different reasons like poor crop

turnover, lack of availability of power, and poor infra-structure. Growth in agriculture pump market alsorequires a lot of ground work and long-term commit-ment to invest in the form of dealerships and servicecentre networks. Also, many other factors like availa-bility of credit and opinions of the local mechanic andthe dealer play an important role in the decision-makingprocess of the generally illiterate farmers. All these factorsmake this segment very complex as compared to theother segments.

Growth in the urban pump market is a function ofpower supply and degree of urbanization. The urbanmarket, which traditionally was small in size, has nowtransformed into a market which is rapidly growing witha huge number of domestic and global companies tryingto establish themselves in this market. This trend isbound to continue as the level of urbanization is increas-ing rapidly and so would the dependence of the popu-lation on electricity in the urban and semi-urban local-ities. The growing population of cities has given a thrustto the construction industry; the trend of high rise build-ings is increasing in the cities which, in turn, increasesthe demand for domestic pumps. Apart from this, reach-ing domestic customers is easier than the farmers.

Thus, we are looking at two markets where one ishuge but stagnated and the other is rapidly growing buthas customers demanding a large variety and an aesthe-tic appeal for the products they buy. Also, reach is veryimportant as the customer would like to see and touchthe pumps before buying thus leading to a larger numberof SKUs and hence the proportionate inventory cost.

As the company is already having a large dealernetwork (800 in three zones) and two manufacturingcapacities serving the agricultural market, it should focus

CASE ANALYSIS VI

Abhijeet, Ankur, and SatyaprakashPost-Graduate Programme on International BusinessK J Somaiya Institute of Management Studies and ResearchMumbaie-mail: [email protected]


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on the growing domestic market which requires lesseffort and resources than the agricultural sector but thisdoes not mean that it should lose its stronghold in theagricultural market which is stagnant as it has a longreputation and standing in this segment.

COMPETITIVE ANALYSIS

As far as the competitive scenario is concerned, if weanalyse the different competitors like KSB, Crompton &Greaves, GPIL, and others, most of them are catering toone or more than one segment of the market but no oneis catering to all the segments. On the contrary, ABC ishaving a wide market presence and range of pumpsproviding it a competitive edge.

To tackle the price war due to Chinese pumps, thecompany should approach common forums like theIndian Pump Manufacturing Association and also givea memorandum to government authorities to protecttheir domestic industries. However, in the long run, costreduction along the value chain is the only option tosurvive against fierce competition from MNCs as wellas the Chinese players.

CORPORATE VALUES

The unorganized market for ADP is very large (55%).These players not only have a cost advantage in theform of lesser overheads but also indulge in othermalpractices. The company has never indulged in suchpractices and has over the years built up a reputationof being trustworthy. It should not let go of this imageand should continue to hold on to its high corporatevalues. This would have the following advantages:• The honest image that it has built over the years

can now help it establish in the urban market wherethe brand name has more value.

• The unorganized market would suffer significantlydue to implementation of VAT and rising rawmaterial cost. Hence, its cost advantage would slowlyfade off making farmers go for more trusted andreputed brands which will not be too costly thanthe unorganized sector brands.

OUTSOURCING

The rising cost of non-value adding services and agrowing trend towards concentration on core compe-tences have made many players in the pump manu-

facturing industry to opt for outsourcing. However,improper sourcing policy may lead to poor productionquality, unreliable supply schedule, etc. The companyhas been in the pump making industry for many yearsand hence has good understanding of value adding andnon-value adding activities. It must, therefore, decidethe activities that it can outsource and have a selectioncriteria for manufacturers. It must also ensure that thesuppliers follow all environment guidelines.

RESTRUCTURING

In the year 2000, ABC Limited went for restructuring andformed five groups. In order to emerge as a major playerin the industry, it must concentrate on the faster growingurban markets and niche industrial and other evolvingmarkets like municipalities and shed its non-core activ-ities. Their core business is industrial, domestic, andagricultural pumps and industrial valves which genera-tes 95 per cent of the company’s sales by value.

Also, the company should capitalize on the un-tapped need for high quality valves and reallocate itsresources from the paper and paints unit to the domesticpump market and valves market by divesting thisbusiness.

The objective of the restructuring exercise shouldbe to increase its concentration on the urban market andemerge as a solution provider and not just a pumpprovider. This would mean that the company wouldhave to increase its presence in the urban market in theform of number of dealerships and service centres. Itmust emerge as a company which would understand theclients’ fluid material handling need. Essentially, it wouldhave to give prompt service and make efforts to reducethe downtime for its customers.

REPOSITIONING STRATEGY

ABC Limited needs to embark upon a repositioningexercise based on product or service differentiation.Considering that the current trend is to opt for completesolution providers, the company must focus on turnkeyprojects involving design, product selection, commis-sioning, and after sales service for their customers.Essentially, it should go beyond mere design anddelivery of pumps and valves and provide systematizedsolutions. Its experience in project pump business willhelp it to grow in this direction.


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B O O K R E V I E W Scovers reviews of current books onmanagement

AN ENCOUNTER WITH HIGHER EDUCATION:MY YEARS WITH LSE

I G PatelNew Delhi: Oxford University Press, 2004, pp 200, Rs 495

I G Patel’s An Encounter with Higher Education reminds me of two booksthat have remained a part of my memory ever since I read them quitesometime ago. One is The Making of the President, 1960, by Theodre White

and the other is The Harvard Century: Making of a University to a Nation byRichard Norton Smith. The focus of the first book is John F Kennedy’selection to the presidency of the United States, but in the process of ad-dressing his main purpose, White also provides a vivid understanding anddeep insights into how the American political system works in practice. Theother book, while discussing the evolution of Harvard University, describesin great detail, how the leadership style of each president impacted on theevolution of this great institution.

Like White, Patel too judiciously weaves into his treatment of theprincipal theme of his book, i.e., his experience as the Director of the LondonSchool of Economics and Political Science (LSE) from 1984 to 1990, variousaspects of the working of the School and of the relationship between theBritish government and university system. Of particular interest to theIndian institution builders is Patel’s description of how he was selected forthe post. The process started much before the term of his predecessor expiredand all formalities had been completed a full year ahead of Patel’s enteringupon his new responsibility. This provided ample opportunity for him toget acquainted with the system and prepare himself for his new job. Contrastthis with the situation prevailing in India, where, very often, even in thecase of elite institutions, the appointment of the chief executive gets delayeduntil much beyond the expiry of the incumbent’s term! And let us not forgetthat LSE’s Search Committee had to perform a much more arduous task,as it had the entire world to search from, unlike the leadership searchesfor Indian institutions that are limited at best to the country alone, though,in actual practice, not beyond the institutions concerned. If the quality ofleadership in most of our institutions often begins to slide down as theygrow in years, has it got something to do with the attention given to the

A book is the only place in whichyou can examine a fragile thought

without breaking it.

Edward P Morgan

THEMES

Higher Education

University Autonomy

Data Envelopment Analysis

Managerial Economics


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process of selection?A noteworthy feature of the working of the LSE

Search Committee was the flexibility demonstrated indealing with Patel’s sensitivities, i.e., his refusal toformally apply for the job or appear for a formal inter-view. Contrary to the popular image of the British beingsticklers for procedural formalities, they can be suffi-ciently flexible — a quality good institution builders canhardly dispense with.

Patel’s account of LSE’s dealings with the govern-ment-controlled University Grants Committee (UGC)may be of special interest to the Indian readers at a timewhen the government grants to certain categories ofspecialized institutions have been slashed. British insti-tutions of higher learning, such as LSE, were facing asimilar ordeal when Patel took over as its Director becauseof what he calls ‘the mounting meanness of MargaretThatcher’s government’ (p 26) with regard to financialsupport. Even during those dark days, however, therewas no threat to the autonomy of the British institutionsof higher learning as Patel’s account of the LSE inter-action with the UGC bears out. So entrenched is thenotion of university autonomy in that country. Contrastthis with what has happened to the autonomy of theIndian universities after the establishment of UGC soonafter Independence. Modelled after the British agencyand conceived purely as a funding body, as PrimeMinister Nehru took pains to emphasize in his inauguralspeech, our UGC has turned out to be some sort of asupra management whose fiat our universities can ill-afford to ignore. Somehow, it seems to me, we as a nationhave failed to internalize the value of university auto-nomy or else the kind of insidious attempts under waythese days to curb the independence of the IIMs, andother such institutions that do not come under the UGCpurview, would have been unthinkable. After all, therelative autonomy these institutions have enjoyed so farin their internal management has been a major factor intheir emergence as world class institutions.

Apart from a deeply entrenched tradition of univer-sity autonomy, the quality of leadership has been a majorfactor in the British institutions of higher educationbeing able to safeguard their freedom to manage theiraffairs without undue interference from any quarterincluding the government. They elect their leaders withgreat care, capable not only of standing up to pressuresbut also of meeting other contingencies. Selected out of‘hundreds of nominations’ (p 12) received from all over

the world, Patel had his own share of challenges duringhis six-year tenure. Financial stringency was one of thesearising out of sharp decrease in the government grant.How it had already affected the School can be describedin his own words:

There had been a reduction in academic staff mem-bers and a worsening of the staff-student ratio.Academic support staff had suffered a steeperdecline. Acquisitions to the library had to bereduced, computerization of School’s activitiesand the spread of information technology, ingeneral, had to be postponed, repairs and main-tenance were neglected and the deterioration hadbegun to show. The surroundings of the Schoolwere uninviting, student accommodation was waybehind needs, and the financial crunch on stu-dents was making increasing demands on thegenerosity of our friends and alumni (p 26).

Patel gives a comprehensive account of how headdressed these problems in which task he, with his non-confrontational style, usually had the cooperation andsupport from all stakeholders of the School — the gov-erning board, the faculty, students, alumni, etc. Consen-sus, however, can be only a strategy and not the goalof good governance and a true leader cannot escape theresponsibility of taking decisions that may displeasesome people or hurt their sensitivities. There were manyoccasions that tested Patel’s mettle in this regard. Per-haps the most noteworthy in this context was how hehandled the issue of instituting a special chair in thename of Karl Popper who had retired from the Schoolbefore Patel joined. The proposal to honour the famoussocial philosopher originated with the new directorhimself. Popper approved of the idea but Patel was quiteclear in his mind that the distinguished scholar wouldhave no say in the selection. Nobody would have thoughtthat this would pose any problem but it so happenedthat Popper raised serious objection to the appointmentof the person selected and went to the extent of threat-ening to dissociate his name from the proposed Chair.Patel decided to keep Karl Popper Chair in abeyance forthe time being and appointed the selected candidate toa simple professorship! He faced a more or less similarproblem in the case of filling up of the InternationalRelations Chair where he went along with the recom-mendations of the experts in favour of a candidate whosewritings had offended the sensitivities of a group ofpeople including some prospective fund-givers. Exam-

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ples of this kind can be multiplied, but a short reviewis hardly the place for detailing them.

While looking at Patel’s record at LSE, one shouldnot forget that before going to London, he did not havemuch experience of managing an institution of higherlearning. Most of his working years had been spent inthe Civil Service and his directorial tenure at the IndianInstitute of Management, Ahmedabad (IIMA) was muchtoo brief to be a real source of learning. Although he doesrefer to his IIMA involvement as a useful input, hisadministrative style, it seems to me, stemmed more fromhis personal values and beliefs than from any previousexperience. Whatever the case, Patel’s record at LSEplaces him in the category of educators who leave behindtheir imprint on the institutions they serve. And he didso in a country whose imperial condescension to itserstwhile colonies has not yet quite vanished to one ofwhich Patel belongs.

Apart from being an account of how he did so, AnEncounter also gives an idea of Patel’s views on someimportant issues relating to higher education. It also hasa chapter about his days as the IIMA Director. And someof the things it tells about him have so far been knownonly to a few people, e.g., his becoming the Principalof Baroda College when he had still not completed 25years of age. The style of presentation, a straightforwardnarrative in lucid English prose, is an added bonus tothe reader.

The book, thus, easily joins the list of works thathave made a lasting impression on me. Other readers,I am sure, will feel likewise.

Dwijendra TripathiRetired Professor

Indian Institute of ManagementAhmedabad

e-mail: [email protected]

AN INTRODUCTION TO DATA ENVELOPMENT ANALYSIS:A TOOL FOR PERFORMANCE MEASUREMENT

R RamanathanNew Delhi: Sage Publications, 2003, pp 201, Rs 250

Data Envelopment Analysis (DEA) is a mathe-matical technique, based on linear programming (LP), which is used to evaluate the per-

formance of organizations/departments through rela-tive efficiency measurements. In An Introduction to DataEnvelopment Analysis, R Ramanathan not only lays thefoundation of the technique of DEA effectively, but alsorichly illustrates it through full-fledged applicationsimplemented by the author himself. It covers the latestdevelopments in this field and lists out the resourcesavailable in print and web media for implementing DEA.A ‘not-too-rigorous’ mathematical treatment makes thisbook an easy, rapid-reading text and works as an entrypoint for those who want to step into this realm. It takesthe reader from terminology and concepts to the evo-lution and application of the technique. A chapter ded-icated to the do’s and don’ts from the implementationpoint of view and solutions to selected problems at theend of the book make it very useful for those who wantto try their hands at DEA. The emphasis of the book ison practice rather than abstract theory.

Ramanathan begins with a very lucid exposition ofthe terms, basic concepts, and graphical illustrationswithout the aid of LP, setting the stage for readers un-

comfortable with it. The author elucidates the applica-bility of DEA to not-for-profit organizations and elab-orates the underlying philosophy of DEA. The exerciseschosen at the end of the initial chapters, however, arenot in the right order of increasing complexity. Theseexercises may leave the reader confused.

In Chapter 2, the author introduces generalizedmathematical formulation from first principles leadingto the formulation of fractional DEA program througha simple example. This elicits interest among readersdespite careless typographical errors even in mathemat-ical constructs. An exercise right after introducing thegeneralized formulation firms up the concepts of frac-tional DEA before the author introduces dual formula-tion. The matrix formulation and non-Archimedeanconstant introduced here without any further active use,however, do little more than break the flow of the text.

The CCR model (named after its developers, Charnes,Cooper and Rhodes), laying the first stepping stone inthe formal theory of DEA, is immediately followed bydual DEA formulation, its relation with primal, andinterpretation. This sequence capitalizes on the interestaroused so far through the introductory chapters.

The relationship between multiplier DEA and en-


135

velopment DEA and their variants described in Chapter2 could have been better illustrated through a solvedexample. The two-stage optimization procedure is yetanother distraction which could have been avoided ifit were taken to the Appendix; it is not used further inthe text. In the section on interpretation of dual DEAformulation (Chapter 2, p 54), the example involvingfirms P, Q, R and T is inserted unnecessarily. It createsdiscontinuity and concludes in an ad hoc fashion.

In line with the chronology of the theory of DEA,the concept of ‘economies of scale’ is introduced inChapter 3 which includes basic concepts of constant andvariable returns to scale (CRS and VRS), technical andscale efficiencies, estimation of the most productive scalesize (MPSS), and their detailed investigation. This helpsthe reader understand the evolution of DEA to real lifeadaptation and its increasing acceptance. This chapterends with ample examples for the reader to have a goodgrasp of the theory. This chapter also introduces the BCC(Banker, Charnes, and Cooper) model quite succinctlybacked by good references but is marred by a numberof typographical errors. With this chapter, the basictheory and evolution of DEA during its foundation yearsis covered exhaustively and the text is fairly easy tounderstand. Beyond this chapter, the book shifts toapplication of theory.

The variants of basic models and the recent devel-opments have been covered in Chapter 4 of the bookwhich discusses Multiplicative DEA models, Additivemodels, Window Analysis and Malmquist ProductivityIndex Approach. Similarly, variants in these models,such as the use of non-discretionary input/output, treat-ment of categorical variables, and incorporation of judg-mental and subjective weights, are discussed. Thesemodels and variants are briefly introduced and a selectfew are illustrated. Examples for each type of variantwould, however, have made the chapter more effective.The chapter ends with three exercise problems and anote for advanced readers on other DEA models. Thenote establishes DEA’s linkage with multi criteria de-cision making (MCDM) models and evokes the readers’appreciation for DEA and its scope for further exten-sions.

The best part of the book lies in the chapter oncomputer support for DEA, wherein the computationalfeatures of DEA are taken into account along with theresources available in print and web media. DEA soft-ware, presented in Chapter 5, is aptly described with

finer implementation level details like compatibility withthe operating system (OS), the embedded solver, limitson the size of the problem, and interfacing with othercommon software. The format of data input, specifica-tion of variables, syntax of command, and snapshots ofthe various intermediate and final outputs along withtheir interpretation make very interesting reading. Thisis very helpful for readers who want to try out DEA.The software of varying degrees of robustness andcomplexity is demonstrated: Data Envelopment Anal-ysis Program (DEAP) by Tim Coelli of University of NewEngland, Australia; Efficiency Measurement System(EMS) software from University of Dortmund, Germany;General Algebraic Modeling System (GAMS) formula-tion; and simple spread sheet computation in MS Excel.

The chapter on DEA bibliography and applicationtakes the reader to the world of ‘DEA in practice,’ whichhelps one understand the issues involved in problemformulation, implementation, sensitivity analysis of themodel, post-DEA analysis, validation and reaffirmationof the results through techniques such as regression, etc.The problems attempt to demonstrate full-fledged im-plementation which ranges from comparative perform-ance of schools to productivity assessment of state trans-port undertakings in India; from comparative risk as-sessment of energy systems and energy efficiencies oftransport modes in India to carbon dioxide emission ofdifferent countries. This wide range of problems addsto the richness of the text especially when the studieshave been carried out by the author himself.

The book concludes with a chapter on do’s anddon’ts for undertaking DEA studies. It gives thumb-rules to those who want to use DEA as a black box. Ifthe author’s guidelines are followed, even an amateurcan confidently choose appropriate DEA models, em-ploy them, and also conduct post-DEA analysis.

The chapter ends with a graphical frontier analysiswherein two schools with different efficiencies have thesame relative efficiency scores. This clearly exposes thelimitations of DEA and brings forth the importance ofpost-DEA analysis and the caution to be exercised whileusing DEA results.

The book, though, disappoints and annoys readerswith a keen eye for detail: typographical errors abound;several variables are used without defining them; andproblems are sequenced inappropriately within exercis-es and across chapters. The insertion of unnecessarytechnical details at numerous places may also distract

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or annoy readers. The matrix representation of the for-mulations in Chapter 2, for instance, need not have beengiven in the main body of the text. Similarly, the dis-cussion on the non-Archimedean constant was unne-cessary along with matrix formulation. Both could havebeen moved to an Appendix.

Overall, the book is a good effort to introduce DEAespecially to students who may not have a backgroundin quantitative techniques, and would yet want to useDEA. A book covering so much is expectedly shallow,but it makes easy reading and opens the doors to thefield of DEA. Researchers, scholars, and advanced read-ers have little to derive from it except using as a quickhandbook for DEA usage checklist, definitions, andconcepts.

The most notable feature of the book is its use ofmany small case studies, comprehensive bibliography,and illustration of software usage, making it very usefulto practitioners. In fact, ‘DEA Made Simple’ or ‘DEA in24 Hours’ could have been more appropriate titles forthe book. The simple and comprehensive style of writingengages the readers. But, there are limitations men-tioned throughout the review; one hopes that the nextedition of the book will take care of them.

Bharat Bhushan VermaFellow Programme in Management, P&QM

Indian Institute of ManagementAhmedabad


MANAGERIAL ECONOMICS: THEORY AND APPLICATIONS

M L TrivediNew Delhi: Tata McGraw-Hill Publishing Company, 2003, pp 746

The biggest challenge in communicating conceptsof Economics is, perhaps, tying theory withpractice and being able to effectively explain what

one sees in the real world in the context of what ispredicted by theory. This, in fact, would be the key topractitioners and managers obtaining a better under-standing of the principles of Economics and applyingthem in their lives. Existing literature on the subjectconsists largely of text books like Peterson and Lewis(2001) and Koutsoyiannis (2000) that cater to specificaudiences such as students and teachers of economicsand management and expound theoretical principleswithout linking them to practice. Trivedi’s ManagerialEconomics differs from such works in its endeavour toestablish this link in its exposition of Economics.

This book is different in its treatment of the subjectalso because it focuses on the firm rather than themanager. In what could more aptly be titled ‘ManagerialMicro-Economics,’ the author has deftly strung togetheralmost all the facets of Economics relevant to the man-ager in particular and to the firm and business in general.

The book is in nine parts sub-divided into 38 chap-ters and explains the theory underlying the principlesof Economics. To make this practically relevant, theauthor uses mathematical constructs and real life exam-ples.

Part 1 (Economic Theory and Managerial Decisions)explains the relevance of Economics as a subject to

professionals, managers, and managerial decisions inparticular. It also outlines the scope of ‘managerial’Economics and its applications in the various functionsof management. It goes on to explain that there are sometechniques and principles to be used if one were to usethe concepts of Economics in day-to-day business.

The author then moves on to the theories of the firm.He begins by stating that there are several theoriesexplaining the raison d’être and the activities of a firm.He shows rather sketchily that neo-classical theoriesemploy an ‘optimalist’ approach — where mathematicaloptimization drives managerial decisions. The latertheories challenge this neo-classical approach and pro-vide more compact explanations. He then provides adetailed summary of the various theories that have beenproposed.

It is in Part 3 that the author finally begins explain-ing the cornerstone of Micro-Economic theory — themarket. He provides a beginner’s level analysis of theconcepts of demand, supply, and elasticity and goes onto explain demand forecasting in fair detail.

The author then leapfrogs in Part 4 from the theoryof the market to explaining production and cost theories.Along with the traditional concepts of cost, the authorinnovates by demonstrating the estimation of an empir-ical cost curve and introduces relevant additions like thelearning curve and its dynamics.


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The book also explains the concept of optimizationin great detail. Probably aimed at practising managers,the fifth part draws up various scenarios and the dif-ferent aspects and methods of optimization that one mayuse. In doing this, the book also touches upon the fun-damentals of Game Theory and how it would affectmanagerial choices. Surprisingly, the book does not dealwith this in detail, though it is one of the most researchedareas in Applied Economics.

In the next three parts, the book deals with somekey decisions that the firm may have to take. In Part 6,the book focuses on productivity and its improvementthrough efficiency and technological innovation. It lu-cidly brings out important concepts such as that ofeconomic efficiency. It also underlines the importanceof smoothening of performance. In the next part, thecrucial concept of pricing and its regulation is taken up.The book talks both about private as well as public firmsand the differences in their approach to the pricingdecision. It explains monopoly regulation and the ap-proach of the Indian government in fair detail. Part 8focuses on the growth and expansion decisions that afirm takes and presents a comprehensive analysis of thetheories of location, capital budgeting, internal growth,and expansion through acquisitions.

The ninth and final part provides an apt end to thedetailed exposition of Economics in the book. It high-lights the relevance of the environment to the firm andstresses that social responsibility and public accounta-bility are, in the final analysis, as important as theeconomic well-being of the firm.

In the preface, the author rues the state of Economicsliterature today and says that it suffers from movingwithin a narrow range caused by the prohibitive cost ofresearch. At the same time, he also notes that the ‘pub-lish-or-perish’ problem — which forces academicians toproduce research to retain their jobs — also reducesquality greatly. The author has very effectively helpedaddress both these concerns through his book.

The comprehensive exposition in the book makesit both a good primer and a reference book. It coversmost of the concepts of Micro-Economic theory relevantto managers. The book also critiques the work of manyauthors. It helps readers understand basic conceptswithout difficulty and judge whether they should readfurther.

Books on Economics are often accused of usingliterature and references that are too outdated. It is not

uncommon to see authors going back to the GreatDepression to illustrate concepts. But, Trivedi drawsextensively from recent research and weaves its insightsand results into his analysis. For instance, while explain-ing the concept of the learning curve, he uses the ex-perience of the Indian industry during the 1960s and1970s identified by Rameshan (2001).

The author painstakingly traces oft-quoted state-ments and tries to put a context to them. He providesa cogent analysis of the views of experts and often stepsaside to take his own views. The book, for example,begins with a strong critique of the assumptions under-lying the generally accepted theories of the firm, putsin perspective the views of the economists who pro-pounded them, and shows how they have becomeunrealistic.

The ‘application’ focus of the book is innovative inthe sense that it shows that the applicability of Micro-Economic theory is not restricted to the traditional firm.It also brings out the applications of Micro-Economicsin public policy and legislation. It dwells in detail, forexample, on the issue of monopoly regulatory legislationand the principles that govern it. It also critiques thetechnology policy of the Government of India andanalyses its impact on firms’ behaviour. This is a wel-come change from the restricted view of firm-focusedMicro-Economics literature.

There are, however, some areas where the book failsto deliver. Its presentation of the concepts of Economicsis sketchy in many places. It sometimes introducesadvanced concepts without first dealing with the basics.The first few chapters have, for instance, references toconcepts like Isoquants which the reader would not befamiliar with. Similarly, the book jumps to pricing andits dynamics without first acquainting the reader withthe different market structures and the impact they couldhave on the pricing decision of the firm.

Also, the book has not dealt with some of the mostcrucial concepts in Economics such as indifference curvesand the theory of utility which underlie a wide rangeof economic principles. Some concepts, such as optimi-zation, have been repeated unnecessarily. Given suchdeficiencies, it is hard for the author to deliver on hispromise of making the book useful to beginners andexperts alike. It has gaps which hinder absolute begin-ners. At the same time, it is too basic in many areas forpractitioners and experts to derive value from.

The organization of the book could also potentially

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lead to some confusion. The sections often appear dis-jointed. The theory of production, for example, suddenlyappears after the theory of the market with no percep-tible connection between the two.

In its quest for being comprehensive, the book oftenmoves out of Economics and launches into concepts inother fields. This creates two problems. First, it maydistract the reader and obfuscate the concept beingexamined. Secondly, it makes the book too voluminous.It would have been better to restrict the treatment ofmanagerial decision-making to the concepts of Econom-ics.

Another shortcoming of the book is that it is com-pletely India-focused. Almost all the examples and casescited are Indian which the international reader may notappreciate. In places where Indian cases have been used,the author could have provided a brief background tofamiliarize the reader with the situation. Similarly, theauthor often cites the current policies of the Indiangovernment to explain concepts. These may lose rele-vance quickly and, without a brief background, maybecome difficult to comprehend.

The book, despite its shortcomings, would surely

qualify as a good basic text book that has tried an in-novative approach to Economics. It would be of valueto teachers of Economics who could pick up many usefulhints on the approach they should employ to effectivelycommunicate principles of Economics. Students whohave a basic understanding of the concepts of Economicsalso will find it useful because it reinforces them andlends them a new perspective.

REFERENCES

Koutsoyiannis, Anna (2000). Modern Microeconomics, Lon-don: Macmillan.

Peterson, Craig and Lewis, Cris (2001). Managerial Eco-nomics, New Delhi: Prentice Hall.

Rameshan, P (2001). Organizational Efficiency and Produc-tivity Improvement, New Delhi: Vikas.

Nikhil Kashyab BalaramanMukundan Devarajan

Post-Graduate ProgrammeIndian Institute of Management

Ahmedabade-mail: [email protected]


To hope means to be ready at every moment for thatwhich is not yet born, and yet not become desperate ifthere is no birth in our lifetime.

Emily Dickinson


139

Finance, Accounting, and Banking1. IMF Conditionality and Country

Ownership of Adjustment Programs2. Structural Vulnerabilities and Cur-

rency Crises3. Launching a World-Class Joint Ven-

ture4. Understanding Venture Capital in

East Asia5. A Real-world Way to Manage Real

Options6. Business Groups: Financing Con-

straints and Investments

Marketing Management7. What Do Customers Consider Im-

portant in B2B Websites?8. Avoiding the Customer Satisfaction

Rut9. The Effects of Locational Conveni-

ence on Customer Repurchase Inten-tions Across Service Types

10. Influence of TV Advertisements onChildren’s Buying Response

11. The Importance of Customer Inputin the Development of Very NewProducts

12. The Management of Conflict in Buyer-Seller Relationships

Organizational Behaviour13. Worse than Enemies14. Managerial Involvement and Per-

ceptions of Strategy Process15. A Dual-Motor, Constructive Process

Model of Organizational Transition16. The Influence on Personal Mastery,

Organizational Learning and Per-formance of the Level of Innovation

17. Becoming an Effective Teaming Or-ganization

18. A New Model for Work Stress Pat-terns

A B S T R A C T Sfeatures summary of articles publishedin Indian and international journals withspecial emphasis on India and otheremerging markets

Indian Management Research

Mitali Sarkar

Abstracts is sponsored by the Indian Council of Social Science Research, New Delhiand intended to facilitate Indian management research.

Human Resource Management19. It’s Time to Retire Retirement

20. Conflict Escalation: Dispute Exacer-bating Elements of E-mail Commu-nication

21. Mutual Expectations: A Study of theThree-way Relationship betweenAgencies, their Client Organizationsand White-collar Agency Temps

22. International Compensation: Learn-ing from How Managers Respond toVariations in Local Host Contexts

23. Fairness of Human Resources Man-agement Practices, Leader-MemberExchange, and Organizational Com-mitment

24. Labour Turnover and ManagementRetention Strategies in New Manu-facturing Plants

Operations Management25. Knowledge Management Opportu-

nities for Cycle Time Reduction26. E-enabled Closed-Loop Supply Chain

27. How Do Suppliers Benefit from In-formation Technology Use in SupplyChain Relationships?

28. Modeling Customer Satisfaction inTelecommunications

29. How Co-operative is Co-operativePurchasing in Smaller Firms?

30. Exploring Decision Support and Stra-tegic Project Management in the Oiland Gas Sector

Information Systems Management31. Getting IT Right32. The Role of System Trust in Busi-

ness-to-Consumer Transactions

33. Centralization as a Design Conside-ration for the Management of CallCentres

34. Implications of the Internet for Know-ledge Creation and Dissemination inClusters of Hi-tech Firms

35. Regulation and the Internet36. Case for Re-examining IT Effective-

ness

Strategic Management37. Netchising: The Next Global Wave?38. Measuring the Strategic Readiness

of Intangible Asset39. Misery Loves Companies40. To Better Maps: A TOC Primer for

Strategic Planning41. Strategy as Ecology42. Expatriate Managers and MNC’s

Ability to Control International Sub-sidiaries: The Case of Japanese MNCs

Economics43. Globalization, Technology, and Asian

Development44. Is Globalization Reducing Poverty

and Inequality?45. Big Bang versus Gradualism in Eco-

nomic Reforms46. Water Subsidy Policies

Agriculture, Natural Resources,and Rural Development47. Buyer Collusion and Efficiency of

Government Intervention in WheatMarkets in Northern India

48. Structure and Operations of RuralCredit Markets: Some Results basedon Field Surveys in West Bengal

49. Child Farm Labour: The WealthParadox

50. Aggregate Private R&D Investmentin Agriculture: The Role of Incen-tives, Public Policies, and Institu-tions


141

Finance, Accounting, and Banking

1. Khan, Mohsin S and Sharma, Sunil (2004), IMF Conditiona-lity and Country Ownership of Adjustment Programs,” TheWorld Bank Research Observer, 18(2), 227-248.

Of late, questions have been raised on whether the conditionsimposed on the borrowing countries are too intrusive andwhether the design and implementation of IMF conditionalityhave undermined country ownership of adjustment pro-grammes aimed at correcting macroeconomic imbalances. Thispaper draws upon finance and agency theory to establish twobasic propositions about IMF conditionality and countryownership of adjustment programmes. First, it is argued thatsome form of conditionality exists in all borrower-lenderrelationships. Second, country ownership of programmes isessential as it aligns the incentives of the borrower and thelender. This paper examines the main features of IMF lending,assesses the implementation and effectiveness of IMFconditionality, and discusses some new initiatives for enhanc-ing country ownership of IMF-supported programmes. TheIMF’s mandate is to provide short-term lending to supportbalance of payments adjustments, and it believes that condi-tional lending has generally improved the external accountsof borrowing countries. On average, IMF-supported pro-grammes have been empirically shown to be reasonableeffective in achieving their main macroeconomic objectives. Awidespread perception, however, exists that programmeownership by borrowing countries is insufficient. The authorsconsider certain new initiatives for enhancing the countryownership of IMF-supported programmes. These includeencouraging countries to design their own programmes,streamlining structural conditionality, introducing flexibilityin the timing of structural policy measures, and applyingconditionality of outcomes rather than policies. The authorsfind merit in shifting the emphasis toward outcomes-basedconditionality and exploring the use of floating tranches,especially for structural reforms. Outcomes-based conditiona-lity, properly balanced with policy-based conditionality, it ishoped, would help in aligning IMF conditionality more closelywith country ownership.

2. Ghosh, Swati R and Ghosh, Atish R (2003), “StructuralVulnerabilities and Currency Crises,” IMF Staff Papers, 50(3),481-506.

This paper examines the role of corporate structuralvulnerabilities in currency crises using a panel dataset coveringaround 40 industrialized and emerging market countries, overthe period of 1987-1999. The focus is on “deep” currencycrises — that is, those in which there was an appreciabledecline in real GDP growth. In addition to the usual macroeco-nomic factors, four broad categories of structural indicatorsare considered: (a) overall “rule of law,” including ratings onpublic sector corruption, risk of government expropriation orcontract repudiation, and efficiency of the judicial system andlegal and accounting standards, (b) corporate sector govern-ance related to shareholders’ rights, (c) corporate governancerelated to creditors’ rights and (d) corporate debt-equity ratioand maturity structure of debt. This paper goes beyond thestandard probit analysis to use a decision-theoretic classifica-tion technique known as a binary recursive tree (BRT) — atechnique that can separate the different types of crises

represented in the dataset and examine the interaction of thedifferent variables in determining the currency crisis. Theresults confirm that macroeconomic imbalances, particularlya large current account deficit, are often the proximate triggerof a crisis. A weak “rule of law” has been found to makecountries particularly vulnerable to the effects of macroeco-nomic imbalances. Further, a risky corporate finance structure— high debt-equity ratio and short maturity of corporate debt— is an important determinant of currency crises. When thesedebt-equity ratios and maturity composition of corporate debtare included, the indicators of shareholder and creditor rightsfigure less prominently, suggesting that the effect of the latteron the probability of a crisis is manifested mostly through thefinancing structure of corporations. Finally, the authors arguethat the interaction between structural vulnerabilities andmacroeconomic imbalances in determining crises is oftenhighly complex, highlighting the difficulties of undertakingeffective surveillance and monitoring of countries’ potentialvulnerability to crises.

3. Bamford, James; Ernst, David and Fubini, David C (2004),“Launching a World-Class Joint Venture,” Harvard BusinessReview, February, 90-100.

Launching a world-class joint venture is complex and demand-ing. The fact is that JVs and alliances bring their own set ofchallenges and the companies do not clearly understand howto overcome them. This paper examines these challenges anddiscusses the keys to successful launch. It is argued thatalthough many companies are highly disciplined about inte-grating acquisitions, they do not normally commit sufficientresources to launching similarly sized JVs or alliances. Thelaunch phase — beginning with the signing of a memorandumof understanding and continuing through the first 100 daysof operation — is usually not managed closely enough. Thechallenges include building and maintaining strategic align-ment across the separate corporate entities, creating an appro-priate governance system, managing the economicinterdependencies between the corporate parents and the JV,and building the organization. For resolving the strategicconflicts, companies are suggested to develop a venture capital(VC) business plan and draw up supporting performancecontracts that make key JV managers accountable for thesuccess of the venture. An appropriate governance systemshould be such as to allow the JV management team to maketimely decisions while providing the parents with sufficientoversight to protect their assets. To find the right balancebetween autonomy and control, companies are suggested toapply rigorous risk management and performance trackingand streamline decision making. Most alliances are structuredso that the parents continually provide financial capital,human skills, raw material, and customers. Economicinterdependencies should be addressed as soon as an agree-ment looks likely in order to avoid launch delays. It is necessarythat the launch team challenges and limits interdependencieswherever possible and dedicate resources to resolve themupfront. Finally, for building the organization, the companiesare suggested to choose their organizational model carefully,create a compelling value proposition that would make goodpeople want to join the team, and obtain commitments fromparent company staff. Once a company gets the launch right,the rest almost takes care of itself, the paper concludes.

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4. Bruton, Garry; Ahlstrom, David and Yeh, Kuang S (2004),“Understanding Venture Capital in East Asia: The Impactof Institutions on the Industry Today and Tomorrow,” Journalof World Business, 39(1), 72-88.

Although there has been, in general, a wide recognition of therole of venture capital (VC) for the regional economic devel-opment, not much is known about the East Asian venturecapital. This paper examines the practice of venture capital inEast Asia, with a specific focus on the three key centres of VC—Hong Kong, Singapore, and Taiwan. The objective is to seehow the institutions, particularly those related to the regula-tory environment and culture in East Asia shape the VCindustry and create differences from that of the West. It hasbeen observed that ethnic Chinese dominate most elements ofthe economic life of these three geographic areas and havestrong cultural institutions that impact other business phenom-enon. The institutional aspects that shape organizationalactivity include regulatory, normative, and cognitive compo-nents. In the context of this study, since business is dominatedby Overseas Chinese in these three regions, the cognitiveaspects, transmitted primarily through the local culture, areexpected to hold the key to understanding the system’sstructure. The study suggests that a range of institutionalelements present in East Asia influence the actions of venturecapitalists located in the region. In spite of similar training andnorms as venture capitalist in the West, these institutions createseveral differences from venture capital practice in the West.In East Asia, the distinguishing characteristic includes the factthat most East Asian economies have a deeply entrenchedconcentrated ownership structure, with significant familycontrol of firms, and interlocking shareholding among firms,characteristic of Overseas Chinese business practice. Thesenormative and cognitive institutions combine with the weakregulatory system and poor corporate governance to createdifferent and unusual challenges for venture capitalists work-ing in East Asia. The authors, however, indicate the possibilityof East Asian venture capitalists increasingly behaving simi-larly as their counterparts in the West.

5. Copeland, Tom and Tufano, Peter (2004), “A Real-worldWay to Manage Real Options,” Harvard Business Review,March, 90-99.

Real options involve multistage investments, the company, ateach step, having the option open either to push ahead or pullout. Thus real option decisions are much more complex andambiguous than the financial options and therefore there hasbeen, in general, a consensus on rejecting the option-basedmethodologies for valuing a company’s growth. This paperpresents a binomial valuation model that captures the contin-gencies of real options and addresses nearly all the commonlyvoiced criticisms of using options theory to manage thosecontingencies. These models can be more easily customizedto reflect changing volatility, early decision points, and multipledecisions. Moreover, since they are transparent and can bespread-sheet based, managers find them easy to use. This paperdescribes how a binomial model works, discusses some of itsproblems, and offers suggestions for improving the manage-ment of real options. Valuing an investment project as acompound option by using binomial model is a two-stepprocess: (a) modeling the value of the underlying asset thatinvolves estimating the value of the asset if it existed today

and forecasting to see the full set of possible future values ofthe plant and (b) valuing the options working backward fromthe end of the last year of the decision tree and using replicatingportfolio technique to estimate the value of the project.However, if the mangers do not exercise their options rightsin a timely and rational manner, there is a possibility that thereal options would be less valuable than predicted. To solvethe suboptimal exercise problem, the authors suggest modi-fication of the planning and budgeting systems to reflect thedecision trees constructed by managers in using the binomialmodel to value their projects. In practice, this would meanidentifying decision trigger points that will tell managers whenthey need to decide on exercise and also specify rules gov-erning the exercise decisions. After all, good management isas much about making decisions at the right time as aboutmaking the right decisions, the authors add.

6. Lensink, Robert; Molen, Remco Van der and Gangopadhyay,Shubashis (2003), “Business Groups: Financing Constraintsand Investment: The Case of India,” The Journal of DevelopmentStudies, 40(2), 93-119.

Business groups form an integral part of the private sector withgroup affiliated firms accounting for more than 80 per centof the private sector’s assets, profits, and sales in 1993. Withrespect to corporate investment, business group affiliates areunderstood to have better access to external capital, either fromwithin the group or from outside. This study compares theinvestment behaviour of business group affiliates with that ofstand-alone companies and tests the hypothesis that groupaffiliated firms are less capital constrained than stand-alonecompanies. It tests for the presence of capital constraints byestimating the cash flow sensitivity of investment spending,taking the firm’s cash flow as a proxy for internal funds. Thedata set of the study contains 694 listed Indian companies forthe 1989-97 period. In order to estimate the cash flow sensitivityfor the sample firms, a standard accelerator cum cash flowinvestment equation is estimated. In the basic regressions,investment scaled by the beginning-of-period total assets isexplained by the change in sales scaled by the beginning-of-period total assets and cash flow scaled by the beginning-of-period total assets. Cash flow is measured as the sum of netprofits and depreciation. The importance of size, age, andexport orientation are examined as determinants of the sen-sitivity of investment spending to changes in cash flow. Asgroup firms are typically larger and older than stand-alonecompanies, and because being large or old tends to increasecash flow sensitivities, group affiliates were expected to havehigher cash-flow sensitivities. However, the results suggestthat all else equal, business group affiliation lowers thesensitivity of investment spending to cash flow. Overall, theresults find a significantly positive group affiliation effect:stand-alone companies have higher cash flow sensitivities thangroup affiliates. Interpreting the cash flow sensitivity as ameasure of financing constraints, this suggests that businessgroup affiliates have better access to external funds than stand-alone firms.

Marketing Management

7. Chakraborty, Goutam; Lala, Vishal and Warren, David(2004), “What Do Customers Consider Important in B2BWebsites?” Journal of Advertising Research, 43(1), 50-61.


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This study is meant to fill the gap in the research to demonstrateempirically what factors customers consider important in B2Bwebsites. The authors develop a reliable and valid scale usinga rigorous scale development procedure and a field study with606 business customers, for measuring and understanding thefactors. Based on earlier research, the study identifies sevenfactors that customers might consider important in a business-to-business website: organization, personalization, interactivity,informativeness, privacy and security, entertainment, andaccessibility. Organization turned out to be the most importantfactor in a website followed by non-transaction–relatedinteractivity and privacy/security. Then came informativenessfollowed by transaction-related interactivity and personaliza-tion, entertainment being the least important. However, com-mon managerial wisdom suggests that there should be mean-ingful differences in these importance ratings across groupsof customers who have different web usage objectives. Hence,the authors compared those who use the web primarily forpurchasing products with those who use websites primarilyfor non-purchase-related purposes such as identification,comparison, and specification of products, managing, andbidding for construction projects. While both groups considerorganization to be the most important factor in a B2B website,their self-rated importance differs on some of the other factors.The authors suggest that for buyers, managers should focuson improving perceptions of purchase-related features suchas privacy/security and transaction related interactivity. Fornon-buyers, the emphasis should be on improving the websiteexperience through non-transaction-related interactivity, per-sonalization, and enhancing product-related information. Thusa behavioural segmentation approach is believed to be usefulfor designing a website, conclude the authors.

8. Dahlsten, Fredrik (2004), “Avoiding the Customer Satis-faction Rut,” MIT Sloan Management Review, Summer, 73-77.

While customer satisfaction (CS) is considered as the guidingprinciple in most companies, it is feared that they couldsometimes get stuck in a customer satisfaction rut. There isa possibility that these companies may be measuring the wrongvariables and using the information in mainly reactive ways.For managers who intend to climb out of this rut, it is proposedthat they move beyond the mere measurement of quality andsatisfaction and refocus their CS practices on the actualcustomer experience. They are suggested to formulate acomprehensive strategy for using that knowledge throughoutthe organization. Based on a recent qualitative research atVolvo Cars, this article seeks to provide greater understandingof CS practices and their managerial implications by illustrat-ing how the practices at one company, though professionaland efficient, can be improved and complemented. It revealssome of the problems at Volvo and discusses some ways bywhich it is trying to become more customer-oriented—byhonestly and thoroughly scrutinizing its current CS practicesas well as pioneering new methods not used by competitors.Initiating and communicating customer satisfaction goalswithout offering a clear rationale for them can promotediffering interpretations within an organization and be the firstsign the company is in a customer satisfaction rut. Thechallenge for managers of such companies is to infuse a moreextrinsic focus into their CS practices which would require anorganic shift from a reactive and cost-conscious focus ontoday’s problems to a focus on long-term opportunities.

Although abandoning intrinsic focus might jeopardize qualitycost control, intrinsic focus alone is not sufficient to engendertrue customer orientation; it works best only with a strongextrinsic complement, the author adds.

9. Jones, Michael A; Mothersbaugh, David L and Beatty, SharonE (2003), “The Effects of Locational Convenience on Cus-tomer Repurchase Intentions Across Service Types,” Journalof Service Marketing, 17(7), 701-712.

It is widely believed that the choice of a location is the singlemost important decision facing retailers and service providers.However, since convenient locations could be costly, it be-comes important for the service providers to consider the cost-benefit trade-offs inherent in the location decision. This articleaddresses this issue in a service context in order to understandwhen investments in a convenient location will yield sufficientpayback and when such investments will yield little or novalue. The authors propose and demonstrate that the impor-tance of locational convenience for customer repurchase in-tentions depends both on satisfaction levels and on servicetype. The research, carried out among customers of banks andhairdressers in a city in southern USA, finds that a convenientlocation does not have a main effect on customers’ repurchaseintentions. However, having a convenient location is impor-tant in more standardized, less personalized services whensatisfaction falters. Having a convenient location is not impor-tant for less standardized, more personalized services, regard-less of satisfaction levels. For banks, therefore, having aconvenient location can make customers less likely to defectto another provider when satisfaction with the core serviceprovided by the bank drops. But contrary to conventionalwisdom, having a convenient location is less important as afactor affecting the repurchase intentions of hairdressers’clients. A hairdresser with conveniently located premises,therefore, cannot rely on this locational advantage, when theservice level slips, as a barrier to prevent customers fromswitching to another hairdresser. It is important that the servicefirms realize that investments in strategic attributes other thanlocation, such as employee training and technology, could bemore beneficial to customer retention in such cases.

10. Verma, DPS and Kapoor, Neeru (2004), “Influence of TVAdvertisements on Children’s Buying Response: Role ofParent-Child Interaction,” Global Business Review, 5(1), 51-71.

Television advertising has been heavily used by marketers toinfluence the buying response of children. It is assumed thatchildren develop effective and discerning skills to rememberand recall product-related information provided through TVadvertisements and help other members in the family in takinga buying decision. It is the parents who ultimately mediatethe influence of advertisements by filtering children’s requestfor a particular product. This study assesses the possible effectsof TV advertising on children’s consumer socialization fromearly childhood to early adolescence and examines the roleof parent-child interaction in this process. Data for the studywere collected through a survey of 500 children and a matchingsample of their parents in the National Capital Territory ofDelhi. The parent-child interaction was determined by fourvariables: (a) the amount of restrictions parent imposed onchildren’s TV viewing, (b) the choice of programme to bewatched by children, (c) their co-viewing, and (d) the expla-

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nation of the intents and contents of TV advertisements,teaching children what is real and what is created by the media.These variables were found significantly related to each other.Children’s exposure to TV advertisements was determined, toa large extent, by parental control of their TV viewing. Parentswho took interest in their children resorted more to co-viewing;this resulted in higher parent-child interaction that helped ina more mature, healthy, and positive consumer learning onthe part of the child. Parents of young children were foundto hold slightly more negative opinions, while those of theolder children considered the impact of TV advertisementsmore positively and appreciated the informative role playedby them. The sex of the child was also found to play a significantrole in framing parents’ perception, as a majority of the parentsof girls considered the impact to be positive, while the parentsof the boys reported more of a negative influence. It is hopedthat the findings of this study would be useful to the parents,marketers, and policy makers.

11. Callahan, John and Lasry, Eytan (2004), “The Importanceof Customer Input in the Development of Very New Prod-ucts,” R&D Management, 34(2), 107-120.

All technology driven firms have organizational processes andinfrastructures that facilitate the capture of customer require-ment information and its integration into the new product’sdesign. This paper provides empirical evidence on how theimportance of customer input in new product developmentchanges with product newness. Data were collected on 55product development projects from the computer telephonyintegration industry—a new industry experiencing rapidtechnological change. Three testable hypotheses were devel-oped concerning the relationships between product newness,the importance of customer input in the development process,and the use of customer intensive market research methods.Product newness was measured using five questions relatingto technological and market issues, results of which were usedto form an overall newness measure for the product. The resultssuggest that the importance of customer input increases withmarket newness of a product up to a point and then dropsoff for very new products, whereas the importance of customerinput increases with technological newness of a productwithout dropping off. It was also observed that the importanceof customer input significantly increases the use of customerintensive market research methods, whereas, neither marketnor technological product newness in themselves had muchdirect effect on research methods. Five major activities ofsoftware product development were identified: idea genera-tion and screening, requirements definition, technical devel-opment, trials and testing, and product launch. Both theimportance of customer input and the use of customer inten-sive research methods vary over the major activities of productdevelopment, the authors add.

12. Freeman, Susan (2004), “The Management of Conflict inBuyer-Seller Relationships: A Case Study of an AustralianExporter in Asian and US Markets,” Asian Academy of Man-agement Journal, 8(2), 109-132.

Despite the increasing research on inter-organizational buyer-seller relationship, the author observes a lack of focus on howthese relationships are terminated. This study therefore takesup the examination of the complexity of conflict and disso-

lution strategies of inter-organizational buyer-seller relation-ships, comparing Asian and Western markets and theircontextual boundaries. A model is developed linking differentdimensions of cross-cultural business relationships to differentdissolution and communication strategies for managing con-flict. Data were collected from a single firm to demonstrateexit strategies that a firm might use when dealing withimportant buyer-seller relationships in foreign markets, wherecultural practices in the business environment vary consider-ably. The case study focused on an Australian exporter in thecitrus fruit industry, and on the main buyer-seller relationshipsin two of their most important foreign markets, the US andSingapore. Five factors emerged out of the case study whichhave implications for conflict management and exit strategiesin buyer relationships in foreign markets: history of relation-ship with the foreign buyer, business culture of the foreignbuyer’s market, importance of the buyer relationship to theorganization, dynamics of the market environment operatingin the foreign buyers’ market, and the future options for thefirm. It is argued that these factors constituting the “contextualboundary” becomes even more complex when the firm hasto manage business relationships that are undergoing tensionand conflict and possibly exit, in psychically distant cultures.Even after a formal termination of the business relationshipbetween the focal firm and buyer, informal interactions canstill continue. Hence, for maximizing positive interactions ofthe firm, it is considered important to exit or revoke businessrelationships “beautifully” so that the firm’s continued good-will and reputation is ensured.

Organizational Behaviour

13. Sulkowicz, Kerry J (2004), “Worse than Enemies: TheCEO’s Destructive Confidant,” Harvard Business Review, Feb-ruary, 65-70.

Most CEOs develop a close relationship with a trustedcolleague-a confidant-with whom they can share their expe-riences. While most of the confidants complement the CEO’sstrengths and sharpen their effectiveness, there are somedangerous ones who cause enormous damage to the CEO andto the organization. They go to any extent to achieve their aimswithout any apparent constraints of conscience. This paperidentifies three distinct types of destructive confidants: reflec-tors, insulators, and usurper. The reflectors include people whomirror the CEO, constantly reassuring him that he is the “fairestof them all.” They intuitively know how to make a narcissisticCEO feel good. However, in extreme forms, the CEO-confidantpair ends up creating its own distorted version of reality, orshared madness. The insulators try to serve as a mediatorbetween an ill-suited CEO and his organization. They bufferthe CEO from the organization preventing critical informationfrom getting out or getting in. In the short run, insulatorsappear to be helpful but over time, they start undermining thevery authority of the leader they are seemingly trying toprotect. The usurpers are confidants who cunningly ingratiateshimself with the CEO in a desperate bid for power. Unlikethe reflectors and insulators, they are unethical and aredangerous not only to the CEO but also to the organizationas a whole. However, resolving a toxic CEO-confidant rela-tionship is difficult as CEOs have a personal stake in theirconfidants. Training confidants could help although it has only


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limited value. The only sure way to avoid destructive CEO-confidant relationships is for the CEO to step back anddispassionately analyse the relationship and his role in it, theauthor suggests.

14. Collier, Nardine; Fishwick, Francis and Floyd, Steven W(2004), “Managerial Involvement and Perceptions of StrategyProcess,” Long Range Planning, 37(1), 67-83.

Managerial involvement has been identified as a core elementin the strategy making process. Both positive and negativeeffects of involvement have been predicted in theory. On theone hand, it has been argued that involvement strengthensshared vision, increases rationality and improves adaptivenessin strategy making. On the other hand, involvement is saidto lead to intense political behaviour, increased cultural inertiaand more constraints in the strategy process. This study teststhe corresponding claims of the literature by examining therelationship between managers’ reported level of involvementand their perception of how strategy develops. It also inves-tigates whether such relationship differ according to a man-ager’s hierarchical level and functional background and whetherthey are robust within a large sample of managers from manyorganizations in a wide range of environmental contexts. Asurvey of over 6,000 managers reveal that their reported levelsof involvement are positively associated with perceptions ofstrategy development processes that are more rational, morefocused by a shared vision, and more adaptive. The managerswho report more involvement tend to see the process as lesstop-down and less influenced by political and cultural inter-ests. Those who are more involved also tend to view strategyas less constrained by external factors. It is argued that theseassociations between involvement and desirable features ofstrategy process are important because perceptions are thebasis of managerial behaviour. Involvement increases manag-ers’ tendency to see desirable attributes in strategy process anddecreases the tendency to see negative attributes.

15. Cule, Paul E and Robey, Daniel (2004), “A Dual-Motor,Constructive Process Model of Organizational Transition,”Organization Studies, 25(2), 229-260.

A process theory is considered to provide the best frameworkfor a theory of organizational transition. Drawing from anearlier research, this article proposes a process theory oftransition that incorporates two generative mechanisms, or‘motors’. At the individual level, a teleological motor isemployed to capture the managerial actions undertaken topromote transformation. At the organizational level, a dialecticmotor is employed to capture forces both promoting andopposing change. The theoretical model that emerges from theanalysis is grounded in an empirical study of a large companyundergoing a major transition in business model and organi-zation structure during the decade of the 1990s. The modelconsists of three sequential phases of transition—creation,destruction, and unification. The dialectic motor at the organi-zational level of analysis explains how the conflicting goalsof individuals face opposing change to produce a radically newand successful organization. The analysis comprised a formof hermeneutic circle in which both macro-and micro-analysiswas conducted. Personal stories of 15 people were collectedand divided into three chapters. ‘Confused Creation’ portraysthe birth of a new organization with new responsibilities. The

inflexion point leads to the second chapter, ‘Creative Destruc-tion,’ in which the initial creation was destroyed in order toachieve profit goals. However, destruction produced a formof entrepreneurial anarchy, threatening profitability. The finalchapter, ‘Phoenix Arises’ begins with the recognition of thenegative consequences of anarchy. The paper discusses thetransition of CASCO illustrating the operation of bothteleogolical and dialectic motors across the three phases oftransition.

16. Lorens-Montes, Francisco Javier; Garcia-Morales, Victor Jand Verdu-Jover, Antonio J (2004), “The Influence on Per-sonal Mastery, Organizational Learning and Performance ofthe Level of Innovation: Adaptive Organization versusInnovator Organization,” International Journal of Innovation andLearning, 1(2), 101-113.

This paper analyses the difference between innovator andadaptive organizations based on the capabilities of personalmastery, organizational learning, and capacity to innovate andon organizational performance and job satisfaction. From anorganizational perspective, adaptive or performance organi-zations try to do better at what they already do, improvingefficiency. On the other hand, the innovator or problem-solving organizations, besides working efficiently, also lookto create new values and models that enable them to do awaywith the existing guidelines and confront new challenges. Datafor the study were collected from 900 companies with greatestturnover in Spain and then by analyzing a series of items, 402usable ones were divided into adaptive and innovator organi-zations. On testing the hypotheses on these organizations, theauthors found that personal mastery, organizational learning,capacity to innovate and organizational performance arehighly inter-linked in both innovator and adaptive organiza-tions. It was also observed that innovator organizationsencourage more personal mastery, organizational learning,capacity to innovate and organizational performance thanadaptive organizations. Finally, personal mastery, organiza-tional learning and capacity to innovate was found to betterexplain the organizational performance and job satisfaction ininnovator organizations than in adaptive organizations. Suchorganizations encourage a greater perspective of openness andsincerity, a more creative style of response, a more participativeleadership, a shared vision and a greater development ofhuman resources, which all lead to increased job satisfaction.The authors, however, state that since this study was con-ducted in four sectors, including food-farming, manufactur-ing, construction and services, the results could be differentif analysed in different contexts.

17. Trent, Robert J (2004), “Becoming an Effective TeamingOrganization,” Business Horizons, 47(2), 33-40.

A group approach to work has become an integral part of theformal organizational design in most companies. However,what generally happens is that the teams themselves getoveremphasized rather than the concept of “teaming” whichactually is a broader process involving effective structuringand supporting the use of formal work teams. This articlepresents a four-phase teaming process that considers the majorhurdles, issues, and decisions that affect team effort andsuccess. It draws upon an extensive research with hundredsof teams in dozens of companies, learning gained through

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training and development, and a thorough review and inte-gration of team-based research. The first phase in the organi-zational teaming process is the planning phase involving theassessment of organizational readiness, selection of appropri-ate tasks, formation of teams, and evaluation of additionalpreparation issues. A recommended action during this phaseis to create a formal charter that conveys the team’s respon-sibilities, stipulates appropriate authority levels, and identifiescore and as-needed members. The second, performing phase,involves the team’s active participation, interaction, and work.The critical steps include establishing team-based performancegoals, promoting member effort and commitment, and facili-tating internal team interaction. The third phase of regularevaluation focuses primarily on performance assessment linkedto feedback and rewards. There is usually a tendency for theteams to reach a stage of maturity and decline, if left unat-tended. Therefore, to sustain commitment and performance,the author includes maintenance in the fourth and the finalphase. Performance maintenance demands that teams estab-lish goals, continuously keep assessing performance, androtate responsibilities, bringing in new members. By followinga path that integrates much of what is known about team-basedmanagement, firms would begin to realize consistent advan-tages from this promising but often difficult way to perform,the author concludes.

18. Barhem, Belal; Md Sidin, Samsinar; Abdullah, Iskandar andAlsagoff, Syed Kadir (2004), “A New Model for Work StressPatterns,” Asian Academy of Management Journal, 9(1), 53-77.

Work stress is believed to be one of the most important factorsaffecting productivity. Stress, in fact, is an extraordinary stateaffecting the individual human functions as an outcome ofinternal and external factors. This study examines a new,hitherto untested model of occupational stress that is designedto evaluate the stress patterns in terms of personal differences,sources of work stress and coping strategies. The study isconducted in two countries: Jordan and Malaysia for a generalunderstanding on how to cope with the stress, within thecustoms job environment. The customs workers of mostdeveloping countries are known to suffer various degrees ofstress because of the difficult nature and high responsibilityinvolved in their work. The model helps in measuring therelationships between a set of work stress sources that includerole ambiguity, role conflict, career development, role over-load, and responsibility for other people. The model alsoinvestigates a set of coping strategies — flexibility, acceptanceof others’ values, self-knowledge, wide interest and active andproductive. The third part of the model examines personaldifferences — sex, age, experience, educational level, andmarital status. Both Malaysian and Jordanian employeesidentified role ambiguity as the main source of work stressand self-knowledge as the main coping strategy to overcomework stress. Moreover, the relationship between sources ofwork stress and coping strategies was found to be strong whilethe relationship with personal differences was weak. Theauthors suggest improvement in the communication channelsand preparation of specific guidelines for the jobs in order tominimize role ambiguity. Additionally, skills training is rec-ommended both for avoiding role conflict and increase copingability against stress.

Human Resource Management

19. Dychtwald, Ken; Erickson, Tamara and Morison, Bob(2004), “It’s Time to Retire Retirement,” Harvard BusinessReview, March, 48-57.

Several countries, such as the United States and WesternEurope, suddenly face a severe skilled labour shortage, thelikely reasons being the changing demographics in thesecountries and the downsizing moves by most companies inthe recent years. Data suggest that the population of theyoungest workers is growing while that of the prime executivedevelopment years is declining. And, the fear is that, if thisshift in age distribution continues, it would lead to a chroniclabour shortage. In this backdrop, this paper looks at theimplications for businesses of an aging workforce and dis-cusses how companies can retain the skills of employees bymoving away from the old rigid model of retirement to aflexible approach where employees can become lifelong con-tributors. On the basis of a year-long research, the authorsdeveloped a series of management actions and pragmatictechniques for anticipating, coping with, and capitalizing onthe shifts in workforce demographics. Retirement, as is cur-rently understood, in fact, is a recent phenomenon. Histori-cally, people worked until they themselves dropped out.Flexible retirement is flexible work in the extreme — a logicalextension of the flexible work models where the work maycontinue indefinitely. Today, when most of the retirees arebored and restless sitting at home, and for whom workplaceis the primary social affiliation, retirement in the traditionalsense, does not make sense. The authors suggest the devel-opment of a programme aimed at older and mid-careerworkers with the skills, abilities, and experiences that theorganizations need the most. Such a high-retention pro-gramme might include fresh assignments or career switches,mentoring or knowledge-sharing roles, training and develop-ment, and sabbaticals — all of which have the potential torejuvenate careers while engendering fresh accomplishmentsand renewed loyalty.

20. Friedman, Raymond A and Currall, Steven C (2003),“Conflict Escalation: Dispute Exacerbating Elements ofE-mail Communication,” Human Relations, 56(11), 1325-1347.

E-mail communication has become a fundamental communi-cation tool for millions of people around the world. Commu-nication through e-mail is typically asynchronous, textual, andelectronic and is therefore very different from in-personcommunications. Motivated by the qualitative observations bymany suggesting an escalation of conflict interaction throughe-mail, this paper develops a theoretical framework of e-mailescalation — the dispute-exacerbating model of e-mail (DEME).The basic thesis is that some structural features of e-mail makeit more likely that disputes will escalate when people com-municate electronically than when they communicate face-to-face or via telephone. The paper first articulates the structuralproperties of e-mail communication and then examines theimpact of these properties on the conflict process effects, finallylooking at how the process effects in turn trigger conflictescalation. It also discusses how the extent of familiaritybetween individuals acts as a moderator of these relationships.


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The first question is whether escalation is inherent in e-mailconflict or is merely a product of how people use thattechnology. It is argued that the greater risk of escalation whenusing e-mail is a function of the technology. It reduces feedbackand social cues, allows for excess attention on statements,encourages argument bundling, creates deindividuation, andenhances biased perceptions. Yet, such risks can be reducedby greater self-awareness among those who use e-mail andthe use of different ways of communicating than would happennaturally. The participants need to recognize that certainactions or reactions are not intended and are an artifact of thetechnology. Recommendations for managing disputes throughe-mail include avoiding misintrepretations, allowing the angerto settle before responding, generating maximum possibleinteractions back and forth, etc. In no case is abandonment ofe-mail suggested. It is, in fact, an extremely useful tool thatcan help transform organizations into networked forms andtherefore, what is required is to learn to manage the problemsefficiently.

21. Druker, Janet and Stanworth, Celia (2004), “Mutual Ex-pectations: A Study of the Three-way Relationship betweenAgencies, their Client Organizations and White-collar AgencyTemps,” Industrial Relations Journal, 35(1), 58-75.

The traditional employment relationship is a two-way rela-tionship based on a notion of exchange. In the case of the‘agency temp,’ there are three parties — employment agencies,the temporary workers who are placed with them, and theclient or host companies with whom they are placed. Thispaper examines the mutual expectations of the parties to thethree-way relationship between (1) agencies and the hostorganization, (2) agencies and their temps, and (3) host andagency workers. It considers the ambiguities and complexitiesinherent in the psychological contracts between employmentagencies and client businesses in the UK and the implicationsfor the worker who is not defined as an ‘employee’. The studyis based in a mix of semi-structured interviews, non-participantobservation, and focus group research. The temps were fondto be remarkably positive about relations with the agency thatplaced them — and about other reputable agencies with whichthey had worked. They were, however, critical about the hostorganizations with which they were placed and had lowerexpectations from them. Secondly, there seemed to be amismatch in expectations between the host organization andthe worker. The host organizations were perceived to be ill-prepared for the arrival of agency temps and were often poorlyorganized to benefit from their presence. In the focus groupdiscussions, there was a strong sense of transience. For mostof the participants, temping was not a permanent option,largely because of the absence of continuity in pay andavailability of work benefits. Only for a minority, agencytemping was perceived as a long-term choice, especially forolder workers who had little confidence about the prospectsof permanent employment.

22. Bloom, Matt; Milkovich, George T and Mitra, Atul (2004),“International Compensation: Learning from How Manag-ers Respond to Variations in Local Host Contexts,” Interna-tional Journal of Human Resource Management, 14(8), 1350-1367.

As organizations expand their operations across nations andbecome MNEs, they face two distinct and opposing set of

pressures: one, inducing MNEs to harmonize approachesacross nations and locations and another, related to thoseconditions that compel MNEs to conform to conditions in thevarious local host contexts in which they operate. This paperdevelops a framework to explain how MNEs balance globalalignment and local conformance pressures in the design oftheir international compensation systems (ICS). The assump-tion is that the overall compensation strategy that the MNEsuse would influence how MNEs craft compensation packagesfor the various groups within the organization, such asheadquarters and local managers, expatriates, and executives.For developing the model, a grounded theory-building processwas used by integrating the information obtained from ICSof five MNEs. The insights obtained from this theory suggestthat it is the degree of variation in contextual factors, bothwithin and between local host contexts, rather than the typeof contextual factors (e.g. cultural norms, regulatory controls,economic conditions) per se, that matters most for understand-ing how MNEs manage the balance. The managers in the focalorganizations asserted that alignment with organizationalcontext is critical for organizational success. They acted aspragmatic experimentalists — conforming when necessary,resisting when feasible, and crafting strategic responseswhenever possible as they tried to adjust their internationalcompensation in such a way that they would support theirorganization’s global strategy, management structures, andculture.

23. Hung, Daisy Kee Mui; Ansari, Mahfooz A and Aafaqi,Rehana (2004), “Fairness of Human Resources ManagementPractices, Leader-Member Exchange and OrganizationalCommitment,” Asian Academy of Management Journal, 9(1), 99-120.

To stay competitive in a global economy, it has becomenecessary for the organizations to design effective HRMpractices that promote the level of commitment of highperforming employees in the organization. It is important toexplore how far the fairness perceptions of these practicesrelate to employees’ attitudes and behaviour. This paperintegrates the two broad research areas — HRM practices andleader-member exchange (LMX) — in predicting organiza-tional commitment. Contrary to the earlier research, theauthors conceptualize them as multi-dimensional constructsand test the interaction of fairness perceptions and LMX onorganizational commitment in the Malaysian context. A sam-ple of 224 managers was drawn from nine diverse multina-tional, manufacturing companies located in Northern Malay-sia. Data were collected through survey questionnaires con-sisting of a series of psychometrically sound scales to assessthe employed variables in the study. Fairness of HRM practiceswas assessed in terms of employee relations, performancemanagement and promotion, procedural fairness, and fairnessin training. Similarly, LMX scale included contribution, loy-alty, affect, and professional respect while organizationalcommitment was assessed in terms of three components —affective, continuance, and normative. Hierarchical multipleregression results provided support for the direct impact offairness perceptions and LMX on each component of commit-ment. But significant interactions were convincingly evidentonly in the case of affective commitment. These interactionssuggest that the impact of fairness perceptions of HRM

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practices on affective commitment is not unconditional. Theimpact is modified by the quality of exchange betweensupervisors and subordinates, the authors conclude.

24. Smith, Chris; Daskalaki, Maria; Elger, Tony and Brown,Donna (2004), “Labour Turnover and Management RetentionStrategies in New Manufacturing Plants,” International Jour-nal of Human Resource Management, 15(2), 371-396.

High labour turnover has become a regular element ofemployment relations in large multinational manufacturingcompanies. This paper examines policies towards high labourturnover at firm level, in particular human resource manage-ment policies, using two contrasting case examples fromJapanese transnational corporations (TNCs). It contextualizesmanagement decision making with regard to labour turnoverthrough a political economy and firm-level analysis. Theauthors question how high turnover fits within new produc-tion and product market conditions and suggest that it couldhave positive outcomes for the firm, despite management’sclaims to see high turnover as unremittingly problematic. Highmobility of labour is considered a rational response to the lackof alternative means of expressing grievances, that is voice,and was reflective of low wages, non-unionism, assembly androutine manufacturing typical in Britain. At the macro-level,a shift from using wages and strong internal labour marketstowards an inter-firm collusion on wages, non-poaching, andunion avoidance are highlighted as labour retention mecha-nisms. At the micro-level, these strategies are matched withfirm-level HRM policies of careful labour selection, companypaternalism, segmentation of labour force into temporary andpermanent group, and accommodation to higher levels oflabour turnover to balance product demand and labour supply.A focus on selection was the dominant strategy applied by boththe sample companies suggesting that management at firmlevel believes they can control the labour markets by system-atically controlling entrants to their firms. Creation of tempo-rary employment agencies (TEAs) is another common accom-modating strategies used by these companies to significantlydiminish the volume of labour turnover. The findings of thisstudy can be applicable to other areas in which TNC employ-ment has been dominant in manufacturing.

Operations Management

25. Yang, Jie (2004), “Knowledge Management Opportunitiesfor Cycle Time Reduction,” International Journal of Innovationand Learning, 1(2), 192-205.

Knowledge innovation plays a significant role in new productdevelopment (NPD). It is argued that developing new productat a lower cost and at a faster speed than the competitors isthe source of competitive advantage. This study examines thelink between knowledge management (KM) and NPD cycleand between the cycle time of NPD and new product financialperformance. It also investigates the moderating effect ofinnovation-technology fit on the link between KM and the cycletime of NPD. Two aspects of knowledge management arespecifically considered — knowledge acquisition and knowl-edge dissemination — as they interactively create the environ-ment for knowledge sharing and organizational learning. Thespeed of knowledge acquisition was estimated by measuringthe frequency of capturing environmental changes, the fre-quency of acquiring tacit knowledge, and the frequency of

acquiring explicit knowledge. The availability of knowledgedissemination facilities was measured by the explicit knowl-edge transfer system. The results of path analysis show thatNPD cycle time relates significantly to the speed of knowledgeacquisition and the availability of knowledge disseminationfacilities. Innovation-technology fit strengthens the negativerelationship between speed of knowledge acquisition andcycle time, but does not strengthen the negative relationshipbetween availability of knowledge dissemination facilities andcycle time. The author gives theoretical explanations for thesefindings and suggest that managers must address not only theongoing knowledge acquisition process for product develop-ment but also seriously consider current knowledge manage-ment in their companies if they intend to utilize the full valueof organizational NPD potential.

26. Nunen, Jo AEE van and Zuidwijk, Rob A (2004), “E-enabledClosed-Loop Supply Chains,” California Management Review,46(2), 40-52.

This paper presents a framework for systematic assessmentof information and communication technology (ICT) benefitsin closed-loop supply chains. It is believed that ICT can playa significant role in helping companies realize new innovativebusiness opportunities in the area of closed-loop supply chains.Processes, customers, and products and their interactions arevital sources of management information in closed-loop sup-ply chains. The process perspective concerns the differenttypes of recovery processes that occur in closed-loop supplychains. The recovery options include cleaning and repackaging,repair, remanufacturing, refurbishing, cannibalizing and re-cycling. However, recovery processes are difficult to managedue to a number of uncertainties in quantity, quality, andtiming of materials and components that are released from therecovery process. The customer perspective relates to infor-mation that is collected for customer relationship management(CRM). From a product perspective, the information of theproduct and its parts is captured directly or indirectly fromthe product itself that can be used to improve certain processeswithin closed-loop supply chains. ICT systems supportingmeasurement and control within the chain offer new businessopportunities to the organization involved. From a processperspective, it is important that the managers determine whichare the most relevant activities in the reverse flows, where costscan be reduced considerably, and where substantial improve-ments can be achieved. From a customer perspective, theservices that are relevant for the customer should be identifiedand improved. From a product perspective, managers aresuggested to discover where their biggest opportunities are.Future improvement will in part be driven by further technicaldevelopments.

27. Subramani, Mani (2004), “How Do Suppliers Benefit fromInformation Technology Use in Supply Chain Relation-ships?” MIS Quarterly, 28(1), 45-73.

This study focuses on the supplier perspective in IT-mediatedsupplier-retailer interactions and discusses the benefits tosuppliers from IT use. The question, the authors feel, is notwhether the suppliers should use supply chain managementsystems (SCMS) but how they can take advantage of thesesystems and benefit from their use. This paper draws fromorganizational theories of learning and action and transaction


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cost theory to propose a model relating suppliers’ use of SCMSto benefits. It proposes that two patterns of SCMS use bysuppliers — exploitation and exploration — create contextsfor suppliers to make relation-specific investments in businessprocesses and domain knowledge. These, in turn, enablesuppliers to both create value and retain a portion of the valuecreated by the use of these systems in interim relationships.The focus of this study is on supplier investments that createtwo types of intangible asset specificity: business-processspecificity and domain-knowledge specificity. The business-process specificity arises from the development of relation-ships-specific routines or standard operating procedures forefficient task execution while domain-knowledge specificityarises from the development of a context-sensitive understand-ing of cause-effect relationships that facilitate effective actionand resolution of ambiguities in task planning and execution.The data suggest that domain-knowledge specificity is morepotent than business-process specificity as a basis for derivingstrategic advantage. The results also provide empirical supportfor vendors-to-partners thesis whereby IT use in buyer-supplier exchanges leads to closer cooperative relationships.The results further refine this insight, indicating that the natureof intangible, relation-specific investments is influenced bypatterns of appropriations of SCMS by suppliers.

28. Athanassopoulos, Antreas D and Iliakopoulos, Anastasios(2004), “Modeling Customer Satisfaction in Telecommuni-cations: Assessing the Effects of Multiple Transaction Pointson the Perceived Overall Performance of the Provider,”Production and Operations Management, 12(2), 224-245.

Over the last two decades, the focus on customer satisfactionhas progressed from being a simple measurement issue to astrategic imperative that affects firm competitiveness. Thisstudy explores the antecedents of customer satisfaction in thetelecommunications industry with reference to fixed lineservices provided to residential customers. It proposes acustomized customer satisfaction framework in telecommu-nications to reflect the service delivery process as experiencedby customers. The authors draw upon the concept of customercontact according to which customer contacts are distin-guished based on three major dimensions including commu-nication time, intimacy, and information richness. It is arguedthat the interaction between customers and the delivery systemis affected via alternative contact points. Five distinct contactpoints between the customers and the telecommunicationsoperator have been proposed for formulating the overallperceived performance of the telecommunications provider.The empirical results evidenced the dominance of the “stableparts” of customer transactions over the “unexpected inci-dents,” such as fault repairs and new service provision. Thestatus enjoyed by the telecommunications operator withregard to image, product performance, directory enquiry, andbranch network was found to affect overall customer satisfac-tion perceptions. However, the corporate image of an organi-zation cannot be built and sustained without the assistanceof the incidence-driven performance. It is therefore suggestedthat the telecommunications organization should utilize thestrong association between the stable customer transactionpoints and the overall customer satisfaction such that they willgradually improve their performance in the incident-driventransactions and thus increase their role in the perceivedoverall customer satisfaction levels.

29. Mudambi, Ram; Schrunder, Claus Peter and Mongar,Andrew (2004), “How Co-operative is Co-operative Purchas-ing in Smaller Firms?” Long Range Planing, 37(1), 85-102.

Evidence suggests that small firms either do not engage in co-operative purchasing arrangements or continue to practiseadversarial engagement instead of co-operation. This studyexamines the mistakes of the SMEs and discusses the waysof putting them right. Through an in-depth multiple-interviewstudy of the firms reporting high levels of cooperation, theauthors identify three well-defined clusters: deliberate, emer-gent, and close-but-adversarial. In the firms with deliberatestrategies, co-operative purchasing is a consciously designedand long-term part of management policy. The emergent firmsare those that have very close co-operative relationships buthave not implemented them consciously; partnerships justhappen but are long-term. Then there are firms with close tieswith their suppliers but which still operate fundamentallyadversarial policies. Though they implement formal aspectsof cooperative relationships, they would not have developedinformal, trust-based aspects. Divisionalized firms, wherepurchasing departments are most concerned about vulnerabil-ity to suppliers, tend to fall into this category. It is argued thatsuccessful purchasing is possible in each of these categories;a firm’s optimal strategy is likely to depend crucially on itsresources and capabilities. By and large, firms with deliberatepurchasing strategies are found reaping the benefits of co-operative strategies. The close-but-adversarial firms are alsoleaner though they seem to have much more codified approachto minimize vulnerability. The emergent-type firms formed thelargest group, the ability to thrive without a formal purchasingstrategy seemingly appealing to the smaller firms. The firmsare suggested to choose the approach that is best suited to theircompetencies and culture; fit is as important as the strategicapproach, the authors conclude.

30. Asrilhant, Boris; Meadows, Maureen and Dyson, RobertGraham (2004), “Exploring Decision Support and StrategicProject Management in the Oil and Gas Sector,” EuropeanManagement Journal, 22(1), 63-73.

In the context of the changing and complex business environ-ment, strategic projects are essential, long-term investments,often involving high level of uncertainty. Strategic projectmanagement consists of evaluation and control and areconsidered successful if these projects are completed success-fully, both in financial and non-financial terms. This article isan attempt towards an increased understanding of bestpractice in decision making in strategic project management,as applied to the upstream oil and gas sector. It examines theconcept of strategic project management, the elements in-volved in the process, and the role of techniques in facilitatingstrategic project management. The elements are classified intothree categories: context and content elements that describethe strategic project management process, and outputs thatdescribe the results of the process. The elements are placedwithin the four perspectives proposed by the Balanced Score-card: financial, external environment, internal business, andlearning and innovation. The authors then examine the extentto which the techniques for managing strategic projectsaddress the proposed set of multi-dimensional elements. Forsimplification, the techniques were separated into evaluationand control techniques, and then mapped onto the set of

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elements involved in strategic project management. No one-to-one match between techniques and elements could be found.Thus the individual or a small number of techniques can onlylend partial support to the strategic project managementprocess, the authors tentatively conclude.

Information Systems Management

31. Feld, Charlie S and Stoddard, Donna B (2004), “GettingIT Right,” Harvard Business Review, February, 72-79.

In the 40-year history of information technology (IT), it hasmore or less been an expensive mess. Despite the bestintentions of the CIOs, IT has so far operated without theconstructive involvement of the senior management team. Infact, technology in itself cannot make IT work; it needs inspiredleadership, superb execution, motivated people, and thethoughtful attention and high expectations of senior manage-ment—just like the other parts of the business do to besuccessful. This paper proposes three interdependent, inter-related, and universally applicable principles for executing ITeffectively, adding that it is the responsibility of the topmanagement to comprehend and apply them. Of foremostimportance is a long-term IT renewal plan that would keepthe focus of the IT group on the company’s overarching goals,makes appropriate investments directed towards cost reduc-tion, and generates a detailed blueprint for long-term systemsrejuvenation and value creation. The second principle involvesa simplified, unifying corporate technology platform thatreplaces a wide variety of vertically oriented data silos thatserve individual corporate units with a clean, horizontallyoriented architecture designed to serve the company as awhole. However, what is most important for avoiding a messin the IT business is a high-performance IT culture, with a clearset of rules and a solid performance management and afeedback system. Like interlocking gears, these three principleswork together and must be consistently applied. If they meshwell, each reinforces the others and IT organizations andsystems tend to deliver results rapidly. However, in case oneis disengaged or turns in the wrong direction, the wholemachine starts working against itself or grinds to a halt.

32. Pennington, Robin; Wilcox, H Dixon and Grover, Varun(2004), “The Role of System Trust in Business-to-ConsumerTransactions,” Journal of Management Information Systems,20(3), 197-226.

One of the top concerns of Web consumers has been foundto relate to trust and privacy. It is argued that unknownvendors may enhance the concept of “system trust” by usingtrust mechanisms on their Web site. For instance, a vendorcould use a seal of approval based on an independent third-party evaluation, a rating system to indicate how their site rateson given criteria based on customer feedback, or even a self-reported statement on their site as a way of guaranteeingcompliance with established e-commerce standards. Thisstudy introduces the construct of “system trust” to a modelof e-commerce purchase intentions. It proposes and tests amodel that includes the construct of “system trust” througha survey of 200 consumers in an experimentally controlledsetting. Trust is assessed as a perceptual construct and trustin vendor is hypothesized to be influenced by system trust andperceived vendor reputation. System trust, in turn, could be

influenced by trust mechanisms. Brand name and price areused as the control variables. The overall model was testedusing a two-step structural equation modeling approach. Thestructural model included three antecedents to system trust:seals, guarantees, and ratings. All hypothesized relationshipsincluding the relationship between system trust and perceivedtrust in vendor, were found to be highly significant. The resultsindicate that system trust is important to consumers and withine-commerce situations, can be influenced directly by thevendor through provision of guarantees. This low-cost methodcould pay off through its indirect influence on trust in vendor,attitude, and intentions to purchase. Further, the study foundthat, regardless of reputation, firms should enhance systemtrust. Overall, the results demonstrate the importance ofinterventions such as self-reported vendor guarantees thataffect system trust in enabling successful e-commerce out-comes.

33. Adria, Marco and Chowdhury, Shamsud D (2004), “Cen-tralization as a Design Consideration for the Managementof Call Centres,” Information & Management, 41(4), 497-507.

A call centre provides telephone access to information servicesthat are delivered by a human operator (agent), who in turnhas access to an information resource (database). It thustypically replaces a more informal approach to service activi-ties in an organization. This article perceives call centres asa means of improving an organization’s customer service andspecifically examines the relationship between a call centre andthe two organizational outcomes of efficiency and customerservice, particularly in connection with the organizationaldesign variable of centralization in terms of distribution ofauthority. Call centres represent one part of an increasinglybureaucratized IT environment, and there is a shift to movedecision making upwards in the organizational hierarchy. Itis argued that centralization moderates and influences theorganization’s efforts to improve customer service through theimplementation of the call centre and its IT. If managers failto capitalize on the particular way that centralization moder-ates between IT and competitive strategy, the organization maynot enjoy an important benefit of the call centre, which iscompetitive advantage through increased efficiency and im-proved customer service. Based on survey responses from 68call centre managers, the authors find that both centralizationand decentralization are associated with call centre serviceoperations. While the call centre provides managers with theability to influence decision making (centralization), there arealso opportunities for agents in the call centre to exerciseauthority in managing the organization’s communicationswith customers (decentralization). Certain guidelines aresuggested for managers who are responsible for establishingor managing call centres.

34. Eng, Teck-Yong (2004), “Implications of the Internet forKnowledge Creation and Dissemination in Clusters of Hi-tech Firms,” European Management Journal, 22(1), 87-98.

Hi-tech industries, focusing on industrial concentration andlocal specialization of firms clustering in a particular locationor region have generally been commercially successful. Local-ized specialization is believed to help in the creation anddissemination of knowledge. The objective of this study is toexamine and determine the concepts pertaining to Internet-


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based drivers for facilitating the way clusters of firms createand disseminate knowledge. Specifically, the role of Internetis examined in relation to the dynamics that explain andcontribute to the creation of regional competence in clustersof high-tech firms. The analysis is based on detailed face-to-face interviews with 62 chief executive officers of high-techfirms from Cambridge. From the analysis emerge four Internetdrivers of regional clusters based on Internet technology: opensystems, virtual channels, multi-user engagement, and ex-tended customizability. These drivers are shown to have highsupport for spatial localization in terms of leveraging competi-tiveness. It is argued that since the Internet facilitates commu-nications, extends customization capabilities, and presentsnew virtual channels, firms in clusters gain efficiency throughtheir close and intensive interaction in the use and productionof resources between firms. Specifically, the open systems ofthe Internet promote stronger partnerships as well as firmsin clusters benefit from multiple linkages through virtualchannels and extended customizability. A localized context notonly creates new opportunities for firms to explore linkagesinvolving numerous firms, but also may serve to spreadbusiness risks and increase regional stability. While theInternet may attract national and foreign competition into theregion, it also builds on existing regional competence basedon local specialization. Thus, integrating the four Internetdrivers with regional economics literature would provide amore complete explanation of regional competence in theemerging context of the Internet, the author concludes.

35. Jarvenpaa, Sirkka L; Tiller, Emerson H and Simons, Robert(2003), “Regulation and the Internet: Public Choice Insightsfor Business Organizations,” California Management Review,46(1), 72-84.

Internet-related regulation encapsulates a broad range ofcontrol activities, including legally binding rules from gov-ernment institutions and technical standards for digital behav-iour from non-governmental and international organizations,or from business firms themselves. These economic, social, andtechnical regulations can affect fundamentally how a firmoperates on the Internet; how it stores, protects, shares, andcommercializes its digital data internally and externally.Critical to the enforcement of the regulatory bargain is theability of policymakers to design enduring regulatory struc-tures — specific institutional procedures and rules — thatbenefit the policy makers’ preferred group of firms and specialinterests. Public choice provides a supply-and-demand-basedexchange model of business and regulatory institutions whereregulators are seen as suppliers of regulations for incumbentbusinesses who buy those regulations with electoral resources.Underpinning public choice is the notion of the collectiveaction problem and, for solving it, the regulatory institutionsare required to have regulatory sovereignty. In this backdrop,the paper examines (a) whether the Internet affects the abilityof existing firms to act in a collective manner to hold up priceor to resist non-price competition, (b) whether governmentsretain sufficient sovereignty over Internet-enabled industryparticipants to follow through on regulatory bargains withexisting firms, and (c) whether enduring structures andprocesses of regulation can be designed to favour the incum-bents in the decentralized and fast-changing Internet environ-ment. It is argued that with some modifications, public choicecould continue to be an effective tool for understanding

regulatory developments in the emerging digital economy.The modifications could be in the form of redefinition of thescope and broadening of the roles of the regulatory body androle reversal for the government and business in regulatorysituations.

36. Kurien, Priya; Rahman, Was and Purushottam, VS (2004),“The Case for Re-examining IT Effectiveness,” Journal ofBusiness Strategy, 25(2), 29-36.

IT effectiveness is a measure of how well an IT organizationdevelops the right technology components of business solu-tions for its customers, so that the business supported canoperate and grow according to its own strategy and plans andwork within its own constraints. Over two decades, Infosyshas transformed itself into a global provider of world classtechnology services and solutions. In doing so, it had to learnhow to address the different elements of IT effectiveness ina manageable way and has developed systematic capabilitiesto do so. This paper describes the most important of theseelements, and discusses some of the lessons from both Infosysand that of its clients. Five key elements of IT effectivenessare identified: IT blueprint, IT measurement framework, coreIT, active business case, and rigorous change management.The experience of Infosys for transforming IT is a consolida-tion of three things: its own journey to CMM5 and beyond;its joint learning with clients as the outsourcing age hasmoved from infancy towards early adulthood; and the indi-vidual prior experience of people within the organization.From an analysis of this combined experience emerge severalthemes, the most important ones being balancing demandand supply and business and IT, measuring value, practicallessons from process improvement benchmarks, and activebusiness case management. Ultimately what is most impor-tant is the way the value delivered by IT is defined, measured,and improved.

Strategic Management

37. Morrison, Allen; Bouquet, Cyril and Beck, John (2004),“Netchising: The Next Global Wave?” Long Range Planning,37(1), 11-27.

For global success, businesses need to carefully consider thelocation where they should go and the process by which theyshould get there. In general, three trends have been found toimpact the globalization choices: (1) the movement towardsthe e-enablement of key activities, (2) the rising costs associ-ated with maintaining core competencies at world-class levels,and (3) the growing problem of managing attention in globalorganizations. Extensive field interviews with senior execu-tives of 35 companies in different continents reveal that a fewcompanies have been able to simultaneously address thesethree challenges by adopting a different global businessmodel—Netchising. This newly emerging model providescompanies with essentially all the benefits of globalizationwithout requiring the ownership of overseas assets. Netchisingis a structural approach to globalization that relies on theInternet for procurement, sales, and the management ofcustomer and partner relationships. Netchisers use the Internetfor transferring core activities through partnership arrange-ments; the netchisees in turn provide access to their geo-graphic competencies. Other advantages of netchising includeadded strategic flexibility, greater mass-customization, and

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improved value chain efficiencies. It is, however, found thatit worked best for companies with strong Internet capabilitiesand certain kinds of customer interfaces. The paper reviewsthe key factors governing whether a company is ‘Internet-ready’, and addresses the question of when netchising be-comes a viable alternative to other traditional approaches toglobalization, such as trade, franchising, and FDI. It is believedthat as costs of developing and maintaining world-class corecompetencies increases, the appeal of netchising will onlyincrease with time.

38. Kaplan, Robert S and Norton, David P (2004), “Measuringthe Strategic Readiness of Intangible Assets,” Harvard Busi-ness Review, February, 52-63.

Executives know that intangible assets are difficult to imitateand are thus a powerful source of sustainable competitiveadvantage. Therefore, by estimating the value of intangibleassets, it could be possible to measure and manage thecompany’s competitive position much more easily and accu-rately. This paper draws on the concepts and tools of the‘balanced scorecard’ to present a way to systematically meas-ure the alignment of the company’s intangible assets — whatthe authors refer to as the strategic readiness. Three categoriesof intangible assets were identified: human capital, informa-tion capital, and organization capital. A tool called strategymap was developed to link these assets to shareholder valuecreation through four interrelated perspectives — financial,customer, internal process, and learning and growth perspec-tives. This article focuses on the learning and growth perspec-tive — the foundation — of the map to show how intangibleassets actually determine the performance of the criticalinternal processes. It is argued that human capital becomesmore valuable when it is concentrated in the relatively fewstrategic job families implementing the internal processescritical to the organization’s strategy. Information capitalcreates the greatest value when it provides the requisiteinfrastructure and strategic applications that complement thehuman capital. On the other hand, organization capital intro-ducing a new strategy must create a culture of correspondingvalues, a cadre of exceptional leaders who can lead the changeagenda, and an informed workforce aligned to the strategy,working together, and sharing knowledge to help the strategysucceed. Since these intangible assets are more subjective thanthe conventional financial measures, some managers avoidmeasuring them. It is, however, argued that by using thesystematic approaches set out in this paper, companies cannow measure what they want, rather than wanting only whatthey can currently measure.

39. Margolis, Joshua D and Walsh, James P (2003), “MiseryLoves Companies: Rethinking Social Initiatives by Busi-ness,” Administrative Science Quarterly, 48(2), 268-305.

Human misery prevails in all possible forms across the globewhile a small fraction of the global population move towardsprosperity. In the face of deep-seated problems of humanmisery, business leaders face a vexing reality. On the one hand,they are themselves aware of their corporate social responsi-bility and are willing to respond to the calls for corporateinvolvement in ameliorating malnutrition, illiteracy, wealthinequality, and other social ills. On the other hand, they haveto sustain their legitimacy, securing vital resources, and

enhancing financial performance. To see how firms navigatethese competing objectives in their responses to social ills, thispaper first assesses the responses of organizational theory andempirical research to this tension over corporate involvementin wider social life and then proposes an alternative approachas a starting point for systematic organizational enquiry. Abrief appraisal of a 30-year corporate social performance (CSP)and corporate financial performance (CFP) empirical researchtradition and the standing of stakeholder theory is used fordeveloping the alternative agenda. A compilation of findingsfrom these studies suggests a positive association between CSPand CFP. Adapting a pragmatic stance, the authors introducea series of research questions whose answers would reveal thedescriptive and normative dimensions of organizational re-sponses to misery. For corporate social initiatives, three setsof features are believed to interact with normative considera-tions to shape the framework for action. How a companyshould respond would be a function, in part, of features ofthe problem, features of the company — in particular, thecompany’s relationship to the problem — and features of theimpact of the company’s response, the authors add.

40. Gupta, Mahesh; Boyd, Lynn and Sussma, Lyle (2004), “ToBetter Maps: A TOC Primer for Strategic Planning,” BusinessHorizons, 47(2), 15-26.

Several practitioners and scholars have recently challengedthe universal appeal of traditional strategic planning con-cepts, strongly advocating the need for a new model thatwould define strategy and its working in a new way. Strategicplanning so far has been an imperfect process resulting inimperfect maps. This paper presents an approach, based onthe theory of constraints (TOC) with the hope that it wouldhelp in improving the strategic maps. The TOC has two broadviewpoints: the business system perspective and the ongoingimprovement perspective. The TOC thinking process toolsaddress three questions: (a) What to change? (b) What tochange to? (c) How to cause the change? Strategy develop-ment is fundamentally a creative process and there is no oneright answer for these questions. However, the thinkingprocesses provide a structured way for the management totap into its collective intuition to determine a course of action.The authors use the case of People Express — a defunct airline— to introduce the use of TOC thinking process tools forstrategic management and show how they reach beyondtheory to apply to business decisions. The different steps inthe strategic planning process involve situational analysis,strategy formulation, and strategic implementation. Thesesteps are illustrated by using the concepts of the currentreality tree (CRT), the evaporating cloud (EC), future realitytree (FRT), prerequisite tree (PrT), and transition tree (TrT).CRT and EC are considered idea tools for allowing a manage-ment group to develop the common mental models or collec-tive intuition critical to success in strategy development andimplementation. The CRT allows all decision makers toexamine and challenge the cause-and-effect relationshipswhile the group creation of the tree allows all relationshipsto be discusses and generate by-in for the process. EC exposeshidden assumptions and helps in injecting a breakthroughidea into the current situation. FRT ensures that proposedsolutions will not cause more problems than they solve. Thepaper thus shows how the Toc tools provide a structured wayto use intuition to develop creative solutions.


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41. Iansiti, Marco and Levien, Roy (2004), “Strategy asEcology,” Harvard Business Review, March, 68-78.

Most companies today inhabit ecosystems that extend beyondthe boundaries of their own industries. It is believed that themoves that a company makes would, to varying degrees, affectthe health of its business network which, in turn, would affectthe company’s performance. This paper offers a frameworkto assess the health of a company’s ecosystem, determiningthe company’s place in it, and developing a strategy to matchits role. It is argued that for an ecosystem to function effectively,each of its domain that is critical to the delivery of a productor service should be healthy. Three critical measures of anecosystem’s health are identified: productivity, robustness,and niche creation. Although it is argued that a company thatis part of a robust ecosystem enjoys relative predictability,neither robustness nor predictability can completely capturethe character of a healthy biological ecosystem. In a businesscontext, the best measure of health is the ecosystem’s capacityto increase meaningful diversity through the creation ofvaluable new functions, or niches. For promoting the healthand stability of the company’s own ecosystem, it is importantto determine the company’s role within the network. Thecompany’s choice of ecosystem strategy — keystone, physicaldominator, or niche — is governed primarily by the kind ofcompany it is or aims to be. The choice, however, can getaffected also by the business context in which it operates: thegeneral level of turbulence, and the complexity of relationshipswith others in the ecosystem. For instance, a niche strategycould be most appropriate when the business faces rapid andconstant change while a keystone strategy is more effectiveif the business is at the center of a complex network of asset-sharing relationships and operates in a turbulent environment.On the other hand, if the business relies on a complex networkof external assets but operates in a mature, stable industry,a physical dominator strategy would be more suitable.

42. Paik, Yongsun and Sohn, Junghoon Derick (2004), “Expa-triate Managers and MNC’s Ability to Control InternationalSubsidiaries: The Case of Japanese MNCs,” Journal of WorldBusiness, 39(1), 61-71.

With the intensifying global competition, it becomes increas-ingly important for multinationals corporations (MNCs) tomaintain control over their international operations. An ap-propriate control would ensure that the MNCs’ strategic goalsare met and deviations from standards are corrected so thatsubsidiaries act in accordance with headquarters’ policies.Building upon the literature on behavioural means of control,this paper addresses the issue of expatriates as an effectivemeans of control over international subsidiaries. The primaryproposition of this paper is that expatriate personnel withadequate cultural knowledge of the host country will contrib-ute to the MNC’s control, but those without cultural knowledgewill not. It thus links the effectiveness of control to the levelof cultural knowledge that the expatriates possess about theassigned country. Traditionally, MNCs have relied on conven-tional standardized bureaucratic means of control, e.g., rulesand regulations, auditing, or formal performance evaluations.But, such output-based control mechanisms are often too rigidto cope effectively with the increasing number of its separateand yet interdependent international operations. An empiricalinvestigation was conducted with a sample of Japanese MNCs’

international operations in Korea, Taiwan, Singapore, and theUnited States. The findings indicate that while expatriatepersonnel with adequate cultural knowledge of the hostcountry contribute to the MNC’s control ability, those withoutcultural knowledge do not. It thus suggests that when man-agers with appropriate cultural knowledge are not available,the MNC would be better off refraining from relying onexpatriates as a means of control, and resorting instead toalternative control mechanisms, such as equity positions.

Economics

43. Stiglitz, Joseph E (2004), “Globalization, Technology, andAsian Development,” Asian Development Review, 20(2), 1-18.

One idea that has emerged in the last decade is that it is a gapin knowledge and technology that separates developed fromless developed countries. The author sees globalization as avery powerful force for developing countries, enabling thetechnology gap and the knowledge gap. It is believed that well-designed globalization can promote technology and develop-ment through trade links, FDI, joint ventures, etc. It is, in fact,because of globalization that opportunities and knowledge areeasily available today. The question that arises in this contextis whether the designs of international regime and interna-tional economic institutions and the policies pursued by themhelp developing countries seize these new opportunities toreduce the disparities in knowledge or make it all the moredifficult to overcome the gap. This paper focuses on theeconomic dimensions of globalization relating them positivelyto development. Appropriate technology policies are dis-cussed and it is believed that a role of government is necessaryfor making success more likely. The example of Korea is citedto show how a broad scale programme involving differentactivities of the government helped in closing the technologygap to not only promote economic growth but also reducepoverty. While emphasizing that globalization can promotedevelopment by promoting technology, it is also pointed outthat poorly-designed globalization can, in fact, inhibit devel-opment. For instance, capital market liberalization can lead toinstability in the real economy, making real investment in bothfiscal and human capital less attractive. For globalization towork successfully in the direction of reducing the disparitiesin knowledge and technology, the author suggests the needfor fundamental reforms in the institutions and in the policiesgoverning globalization in the world today.

44. Wade, Robert Hunter (2004), “Is Globalization ReducingPoverty and Inequality?” World Development, 32(4), 567-589.

The neoliberal argument suggests that there has been a fall bothin the number of people living in extreme poverty worldwideand in the world income inequality. On the other hand, the anti-neoliberal argument asserts that world poverty and inequalityhave been rising, not falling due to rising integration of poorercountries into the world economy. This paper questions theempirical basis of the neoliberal argument. It also explains whythere should be a concern about probably-rising world inequal-ity. For obtaining world extreme poverty head account, inter-national poverty line for a given base year is defined by theWorld Bank by using purchasing power parity conversionfactors (PPPs). The author is convinced of a large margin of

154 ABSTRACTS

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errors in the Bank’s poverty headcount and states that it couldbe significantly different from the one generated by PPP con-version factors based more closely on the real costs of living ofthe poor. The trend of world income distribution is stated todepend upon which combination of measures and countriesare considered. Evidence supports the liberal argument wheninequality is measured with population-wieghted countries’per capita PPP-adjusted incomes, plus a measure of averageinequality. On the other hand, studies measuring inequalityover the whole distribution and using either cross-sectionalhousehold survey data or measures of combined inequalitybetween countries and within countries show widening in-equality since 1980. The author counters the neoliberal argu-ment that inequality provides incentives for effort and risk-taking and states that it actually goes with higher poverty,higher unemployment higher crime and slower economicgrowth, particularly in larger countries like China. The pointis that if globalization within the current framework increasesinequality within and between countries, increases in worldinequality above moderate levels would cut world aggregatedemand and thereby world economic growth, making a vi-cious circle of rising world inequality and slower world growth.The author also discusses the other impacts of rising inequalitythus explaining why it should be a matter of concern.

45. Feltenstein, Andrew and Nsouli, Saleh M (2003), “Big Bangversus Gradualism in Economic Reforms: An IntertemporalAnalysis with an Application to China,” IMF Staff Papers,”50(3), 458-479.Economic reforms can follow one of the alternative paths:“gradualism” in which the country can move gradually byselectively introducing reforms and spacing them over timeor a “big bang” approach that introduces all the reformmeasures immediately and simultaneously. This paper analy-ses the implications of the alternative paths of economic reformin the context of China — an economy with a large public sectorthat is being transformed to become more market oriented. Adynamic general equilibrium model is used to analyse theeffects of speed of adjustment and sequencing of reforms inthis transition economy. Specifically, three types of policyreforms are considered in the model: privatization of capital,devaluation, and tariff reduction. Two initial simulationscarried out with privatization introduced at different speedsshow that on balance, an immediate privatization has a morepositive impact on consumers than a gradual one. Simulationsare then carried out combining an adjustment in the exchangerate with privatization. With a gradual devaluation withimmediate privatization, there is a relative increase in inflationbut a fall in real GDP in the initial period followed by a higherreal GDP and a dampened inflation once the private produc-tivity catches up. Both rural and urban customers are betteroff than under gradual privatization. However, in the case ofone-step devaluation with immediate privatization, there is nosignificant change in the real GDP and budget and price levelis generally higher which is reflected in lower welfare for bothcustomers. Similarly, the results suggest that tariff reform,taken alone, have little impact, whether done gradually or inone step. Looking at complete policy packages, the big-bangapproach is better from a welfare point of view: both customersare better off under a package where adjustment and reformpolicies reinforce each other. A piecemeal approach to reformcould not only fail to improve overall welfare significantly butmay even reduce it, the authors conclude.

46. Gomez-Lobo, Andres and Contreras, Dante (2003), “WaterSubsidy Policies: A Comparison of the Chilean and Colom-bian Schemes,” The World Bank Economic Review, 17(3), 391-407.

Informal subsidies benefiting primarily the middle customersare common in utility industries across the developing coun-tries. Although the convention is to tackle the social anddistributive effects of subsidies through general tax and benefitsystems, this may not always be a wise policy, particularly forthe developing economies. This paper analyses the distributiveeffects of two subsidy programmes for water utility servicesapplied in developing economies: a means-tested subsidyprogramme introduced in Chile in the early 1990s and ageographically-targeted scheme adopted in Colombia after1994. The Chilean system gives eligible households the rightto consume water at a lower price up to a certain limit, beyondwhich an additional consumption is charged at the full tariff.The subsidy is funded entirely from general tax revenues, andthe water regulator — responsible for setting tariffs — is notinvolved in determining subsidy levels thus completely sepa-rating the welfare policies in the water sector and the economicregulation of the industry. On the contrary, Colombia has ascheme based on cross-subsidies between different clients anduses a geographic targeting system to determine whether aclient pays a surcharge or receives a subsidy from the tariffstructure. The Chilean system is better able to identify poorhouseholds than the Colombian scheme, but the overallimpacts of the two schemes are quite similar, at least for thethree income deciles. However, there is scope for improvementin both the programmes. In Chile, the targeting mechanismshould be improved or the number of subsidies should beincreased if the policy objective is to benefit a significantproportion of households in the lowest income deciles. On theother hand, in Colombia, almost all households receive somekind of benefit, implying an unnecessarily high fiscal cost. Theauthors suggest an improvement in the targeting mechanismto lower this cost without affecting benefits to lower-incomehouseholds.

Agriculture, Natural Resources, andRural Development

47. Banerji, A and Meenakshi, JV (2004), “Buyer Collusion andEfficiency of Government Intervention in Wheat Markets inNorthern India: An Asymmetric Structural Auctions Analy-sis,” American Journal of Agricultural Economics, 86(1), 236-253.

The use of auctions to effect sales of foodgrains in wholesalemarkets has a long history in India. The process of oral auctionswhich started as early as the ‘30s, was institutionalized throughthe setting up of regulated markets. There are, however,unanswered questions regarding the behaviour of agents andthe form of collusion, etc. This paper uses the auction theoryto analyse these issues for the wholesale markets for wheatin Northern India. Most grain markets in developing countriesare characterized by buyer concentration, with relatively fewbuyers dominating the market. This could be a result ofsystematic differences in willingness to pay across buyers. Theobjective of this study is to analyse the asymmetries acrossbuyers and detect whether collusion exists and, if yes, thenin what form. It also examines the questions of efficiency ofgovernment’s procurement to see if it is paying too much for


155

the purchase of a given quality of grain. The study is basedon a primary survey of two regulated wheat markets in NorthIndia: one in Narela and the other in Panipat. While in Narela,all the wheat was bought by private millers and traders, theprices being inevitably higher than the minimum support price(MSP), in Panipat, the procuring arms of the state governmentbought virtually all the grain that arrived at the MSP. Bystimulating environments in the presence and absence ofcollusion, the impact on market prices were quantified. It isobserved that the presence of buyer asymmetry exacerbatesthe downward impact of collusion on market prices. This isprecisely because the two players with the highest valuationsfor the grain are part of a cartel which disallows their biddingsimultaneously at any lot, the authors explain. Further, for theseason during which the study was conducted, governmentoperations were not inefficient. Certain suggestions are offeredfor extension of this study in several directions.

48. Bhaumik, SK and Rahim, Abdur (2004), “Structure andOperations of Rural Credit Markets: Some Results based onField Surveys in West Bengal,” Journal of Rural Development,23(1), 1-30.

The rural credit markets are usually characterized by inad-equate availability, unequal distribution of formal credit, ex-ploitative nature of the informal credit, and high variability ofrate of interest. This paper seeks to build a broad idea about thestructure and the actual nature of operation of rural creditmarkets in West Bengal, a state that has recorded a tremendousgrowth in the agricultural production. It specifically examinesthe nature of participation of various categories of householdsin rural credit markets, distribution of formal and informalloans in rural areas, terms and conditions of the credit contractsin rural areas, determinants of rural households’ access toformal loans, actual cost of formal loans, and sees if there is anygap between the requirement for formal credit and its ultimateavailability in rural West Bengal. Data were collected throughan extensive survey of eight randomly selected villages in thestate. Ninety per cent of the households in these villagesparticipated in the credit markets, the share of informal sectorbeing nearly two-third of the total amount. Because of theunavailability of formal credit which is exclusively meant forproduction, the farmers, particularly the marginal and smallfarmers, are forced to borrow from the informal lenders forboth production and consumption purposes. While land formedthe main collateral security for the formal credit agencies, non-land and non-marketable collateral predominated the informalloan contracts. All this led to segmentation of agrarian creditmarkets into formal and informal sectors. Moreover, betweendifferent categories of farmers, the ‘credit gaps’ are found to berelatively higher for the marginal and small farmers as com-pared to the large farmers. Considering the marginal and smallfarming character of agriculture in West Bengal, the overallsuggestion is to provide them with sufficient institutionalcredit with minimum disbursement delay.

49. Bhalotra, Sonia and Heady, Christopher (2004), “ChildFarm Labour: The Wealth Paradox,” The World Bank EconomicReview, 17(2), 197-227.

Land is the most important store of wealth in agrarian societiesand is typically distributed very unequally. It has beenremarkably observed, particularly in the context of Ghana and

Pakistan that, on average, children in land-rich households aremore likely to work and less likely to attend school thanchildren in land-poor households. This phenomenon is re-ferred to as the wealth paradox. It challenges the commonpresumption that child labour emerges from the pooresthouseholds. This article explains the apparent wealth paradoxwith the help of a theoretical model that clarifies the role oflabour and land market failure as distinct from the role of creditmarket failure. The model of the peasant household is set inan economy with imperfect markets for labour, land, andcredit. By allowing two periods, it captures the impact of childwork in period 1 on productivity in period 2. This effect arisesthrough both the gain in work experience and the possiblelowering of educational attainment. The model specifies theeffects of farm size on child labour which, in addition to awealth effect, includes substitution effects arising from marketimperfections. These effects are tested using survey data fromrural Pakistan and Ghana. The results confirm the persistenceof wealth paradox for girls in both Ghana and Pakistanexplaining it in terms of imperfections in the land and labourmarkets. For boys, introduction of control variables mitigatesthe paradoxical patterns. This gender differential in work andschool participation and gender differences in the determi-nants of child labour would be useful in designing interven-tions to close the gender gap. Other implications of the findingsare also discussed.

50. Alfranca, Oscar and Huffman, Wallace E (2003), “Aggre-gate Private R&D Investment in Agriculture: The Role ofIncentives, Public Policies, and Institutions,” Economic Deve-lopment and Cultural Change, 52(1), 1-21.Research and development (R&D) is fundamental to anyagricultural innovation. Private research has grown tremen-dously in recent years offering the prospects of advances inthe quality of agricultural goods as well as reduction in theircosts. This paper examines the forces that determine theamount of privately funded research in this vital sector usinga sample of European countries. The objective is to presenteconometric evidence quantifying the effects of economicincentives, public policies, and institutions on national aggre-gate private agricultural R&D investments or expenditures.The primary hypothesis is that all the three are important andthat interactions exist among them. An econometric model ofnational aggregate annual private R&D investment is formu-lated and fitted to annual data for nine European Unioncountries for the period 1994-95. Overall, public and privateagricultural research in these countries has been found to becomplementary, holding trend factors constant. Evidencesuggests that public agricultural R&D crowds-out privateagricultural R&D investments at low levels of private R&D,but are complementary at high levels of private R&D. Thestudy also finds a small negative transnational externalityassociated with private agricultural R&D investment in otherEU countries. Private sector R&D investment is shown torespond positively to the size of a country’s agriculture butare negatively related to the relative importance of crop outputin total agricultural production. Moreover, stronger patentrights, better contract enforcement, efficient civil bureaucracy,and protectionism of local firms were found to increaseaggregate private agricultural R&D investment uncondition-ally. The authors suggest restructuring of public agriculturalresearch so that it is complementary with private agriculturalR&D investment.

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