Professional Documents
Culture Documents
Objective
Structure
1.1 Introduction
1.2 Nature and Scope of Corporate Management
1.3 Corporate Planning
1.4 Implementation of Corporate Plan
1.5 Review and Evaluation of Corporate Plan
1.6 Approaches to Corporate Management
1.7 Strategists and their role in Corporate Management
1.8 Need for Corporate Management
1.9 Corporate Management in Non Business Organisations
1.10 Summary
1.11 Key Words
1.12 SelfAssessment Questions
1.13 Further Readings
1.1 INTRODUCTION
Though corporate planning has been widely used in the United States and some other
European Countries for the last thirty five years or so, there seems to be scant use of the
term Corporate Management. Corporate management is a broad phenomenon and
covers a wide spectrum of activities. In the context of strategic management, the term has
three dimensions:
Corporate planning
Implementation of corporate plans
Evaluation and control of corporate plans.
1
On the academic side, research on corporate management has not taken off in India.
However, a few studies may be seen with respect to corporate planning.
For the sake of convenience, the concept of corporate management has moved through
five paradigm shifts as narrated below:
Adhocism- when the exigency used to force the mangers to take appropriate action to
deal with situation. This continued till 1930.
Planned Policy- the great depression forced the planners and thinkers to have a planned
policy. Unforeseen incidents and contingencies are to be anticipated.
Environment Strategy Interface- the strategy has to cope with environment. The forces
of internal and external environment have created uncertainties. In order to cope with
such situation, appropriate strategies are being formulated keeping in mind the
competitive advantage.
2
Scope of Corporate Management
The term corporate management is an extension of the term corporate planning and also
includes implementation and control aspects. More specifically, the scope of corporate
management is narrated as below: spread over different areas. They are as follows :
Activity I
3
The following are the essentials of corporate planning.
The object of corporate planning is to identify new areas of investment and marketing.
The following can be the reasons attributed to the failure of corporate planning in
Indian organizations:
4
(i) Failure to keep the corporate planning system simple.
(ii) Failure to develop awareness about corporate planning process in the organization.
(iii) Corporate planning tries to do all planning itself.
(iv) chief Executive gives planner a low status.
(v) Failure to modify the corporate planning system with the charging conditions in the
company.
(vi) Planner has only a part time interest in planning.
(vii) There is conflict between available soft database and managers need for hard
answers.
(viii) Top management becomes so engrossed in current problems that it spends
insufficient time on the corporate planning process.
(i) The chief executive must be totally committed and involved in the corporate
planning process.
(ii) Participation of those executives who would be responsible for implementation
must be ensured.
(iii) The process of corporate planning should be introduced on continuous basis to
cope with ever changing environmental factors.
(iv) The executives must understand that the real purpose of corporate planning is to
provide direction to the organization.
Activity 2
2)Name three to four big companies where corporate planning exercise was initiated
in recent years.
5
1.4 IMPLEMENTATION OF CORPORATE PLAN
Implementation refers to those objectives which are necessary for achieving the plans
already formulated. Quite often, companies having good corporate plans are not
successful at market place. The planning commission in India has formulated elaborate
plans for poverty alleviation through a number of programmes but it is a well known fact
that the achievements in terms of the original goals are far from the targets. It is to be
noted that the implementation of strategy is mainly an administrative task based on
strategic as well as operational decision making. This activity primarily refers to action
and doing. The task of strategy formulation is some what distinct. It is primarily an
entrepreneurial activity and this managerial task requires analysis and thinking.
Project Implementation
Procedural Implementation
Resource Allocation
Structural Implementation
Behaviorial Implementation
Functional Implementation
Strategic Budgeting
Zero Base Budgeting
PLC Based Budgeting
BCG Budgeting
6
(viii) Design and administration of the planning system.
The first four mechanisms will lead to the creation of the structure. The remaining
mechanisms are devised to hold and sustain the structure.
The aspects of strategy implementation that have an impact on the behaviour of strategies
in implementing the chosen strategies are related to behaviorial implementation. In this
regard, the following issues are important:
Leadership
Corporate Culture
Corporate politics and use of power
Personal values and business ethics
Social Responsibility
Rather than letting strategy implementation suffer due to politics and power games within
organizations, strategists have to learn to use them to implement strategies.
Functional implementation is carried out through functional plan and policies in five
different functional areas. Operational implementation is performed in four areas for
operational effectiveness. The areas are productivity, process, people and pace. The
productivity is the measure of the relative amount of input needed to secure a given
amount of output. Pace is the speed of operational implementation and is measured in
terms of time. Efficiency is the parameter often used to express the pace of operational
implementation.
Corporate planning cannot be said to be effective unless management monitor how well
the planned actions are matching actual achievements as implementation programmes. If
they find that the actual performance does not confirm to the planned performance,
corrective action is taken to enforce a strategy that is not being followed or modify
corporate plan that is not working. Strategic evaluation operates at two levels.
Strategic Level
Operational Level
The idea of strategic control is of a relatively recent origin and its techniques are still in
an embryonic stage. Four types of strategic controls are premise, implementation,
strategic surveillance and special alert control. Operational control consists of setting
standards, measuring performance, analysing variance and taking corrective actions.
MBO, network techniques, balanced scorecard, key factor rating, bench marking, value
chain analysis, systems modeling, responsibility control centers, etc. are the techniques of
strategic evaluation and control.
7
The following aspects differentiate strategic control with operational control:
Top down Approach- In this approach, the top management decides everything and the
implementation is being taken care of by the middle and lower level management as
instructed by top management.
Bottom up Approach- This approach takes into account the realities and complexities of
operations at the ground level. The top management adopts an open door approach.
Suggestions are invited from all levels.
Hybrid Approach- This is a combination of top down and bottom up approaches which
is generally used in decentralized companies. There is vertical communication between
top management and the Strategic-Business Units (SBUs) at different phases of the
corporate planning and implementation process.
Team Approach- Where lateral communication between the top managers is easier. The
chief executive may himself in collaboration with senior managers, prepare corporate
plans.
Activity 3
Strategists are individuals or groups who are primarily involved in the formulation,
implementation and evaluation of strategy. There are persons outside the organization
who are also involved in various aspects of corporate management. In this section, we
shall assess their role in corporate management:
Board of Directors
The role of the board of directors has come under intense scrutiny in recent times leading
to the emergence of the issue of corporate governance. It relates to the functioning of the
board of company and the conducting of the business internally and externally. The
composition of Board of Directors in some of the organizations is narrated below:
TISCO
2 Nominee Directors
2 Whole Time Directors
9 Part Time Directors
9
(i) One-third of directors will retire by rotation.
(ii) A public limited company must have at least three directors and a private limited.
company must have at least two directors.
(iii) Only individuals and not the institution, can be appointed as directors.
The role of the board is to guide the senior management in setting and accomplishing
objectives, reviewing and evaluating organizational performance and appointing senior
executives.
The CEO is designated as the managing director, executive director, president or general
manager in business organization. As the chief strategist, the CEO plays a major role in
strategic decision making with the increase in size. Many companies have adopted the
practice of sharing the responsibility of chief executive among two or more persons. In
India, Reliance Industries has chairman, vice- chairman and managing directors while
L&T has managing director and joint managing directors. ITC Ltd. has a multiple
executive system in the form of corporate management committee. Attributes like self
management and time management are very important for CEOs.
Entrepreneurs
The entrepreneurs always search for change , respond to it and explicit it as an
opportunity. The entrepreneur is a venture capitalist. They play a proactive role in
strategic management. As initiators, they provide a sense of direction to all concerned. S.
Kumar Sundram as the chairman of the Bank of Madurai Ltd., and after his death in
1986, the new chairman S.V. Shanmugavadivelu provide an excellent example of the role
of entrepreneurs as strategists.
Consultants
They assist the organizations in their corporate management process. Smaller
organizations may take the benefit of consultants for improving their corporate
governance. A.F. FerguSon, S.B. Billimoria, Mckinsey Company, Anderson Consulting
etc. are the notable consultants. Boston Consulting helps in building competitive
advantage while KPMG Peat Maruick assist in strategic financial management and
feasibility studies.
10
The following factors have forced the strategists to look into issues of corporate
management:
The basic objective of non-business organizations is to provide service to the people who
come in contact with these organizations. Unlike the business organizations which are
characterized by profit motive, risk bearing and creation of utilities, non business
organizations provide service to the clients. Measurement of the effectiveness of these
services is highly qualitative and therefore judgmental. The following are the specific
areas where corporate management issues are to be taken with greater care:
(i) Non business organizations are not interested in attracting large number of clients.
Such organizations do not go for rigorous environmental analysis.
(ii) Non- business organizations have larger number of interest groups. In this
environment, the corporate management process becomes more political. The
decision outcomes may not be as service oriented as is usually conceived.
(iii) Non business organizations seldom go through the rigour of strategic management
process. They get their resources from the public. They operate on the basis of non
focused strategic actions.
iv) The performance evaluation criteria in case of non-business organizations is highly
qualitative and therefore judgmental.
Activity 4
(ii) State three important factors forcing the immediate need of corporate management.
11
1.10 SUMMARY
In India, corporate planning could not bring desired results. Factors like poor
participation, complicated process, part time interest, domination of routine issues bring
bottlenecks to effectiveness in corporate planning process.
Implementation refers to those activities which are necessary for achieving the plans
already formulated. This administrative task is based on action and decision making. The
issues like project, procedure, structure, resource allocation, behavior and managerial
functions need special attention.
Review and evaluation of corporate plan operate at two levels i.e. strategic control and
operational control. Budgets, schedules and MBO are used in operational control. Four
types of strategic control are premise, implementation, strategic surveillance and special
alert control.
Variations in the corporate management systems may be top down approach, bottom up
approach, hybrid approach and team approach. Board of Directors, Chief Executive
officer, Entrepreneurs, SBU level executives and consultants play an important role in
corporate management process. Scarcity of resources, fast technological changes, LPG,
changing human values etc. are forcing the strategists to push the case of effective
12
corporate management. Non business organizations have to adopt a distinct corporate
management process to cope up with the changes in the emerging environment.
Implementation- refers to those activities which are necessary for achieving the plans
already formulated.
13
1.13 FURTHER READINGS
KAZMI, AZHAR, Business Policy and Strategic Management, Tata Mcgraw Hill
Publishing Co, Ltd., New Delhi-2002.
MILLER A. and G. G. Den Strategic Management Mcgraw hill, New York 1996
PRASAD, L.M., Business Policy: Strategic Management, Sultan Chand & Sons,
New Delhi. 2002
14
UNIT 2 INTRODUCTION TO CORPORATE
STRATEGY
Objectives
After reading this unit, you should be able to:
! explain the concept and nature of corporate management;
! acquaint yourself with the components and functions of corporate strategy;
! distinguish different levels of corporate strategy;
! identify various kinds of corporate strategies;
! discuss various schools of thought on corporate strategy formation; and
! underline significance and limitations of corporate strategy.
Structure
2.1 Introduction
2.2 Concept and Nature of Corporate Strategy
2.3 Components of Corporate Strategy
2.4 Functions of Corporate Strategy
2.5 Levels of Corporate Strategy
2.6 Kinds of Corporate Strategy
2.7 Schools of Thought on Corporate Strategy formation
2.8 Significance of Corporate Strategy
2.9 Limitations of Corporate Strategy
2.10 Summary
2.11 Key Words
2.12 Self Assessment Questions
2.13 Further Readings
2.1 INTRODUCTION
The twenty fifth National Business Conference sponsored by the Harvard Business
School Association in 1955 made one of the earliest attempts to discuss the concept of
strategy. In 1965, Ansoff published a book Corporate Strategy which was based on
his experiences at the Lock heed Aircraft corporation. Chandlers historical study of
the development of some of the American enterprises proposed strategy as one of the
most important variables in the study of organizations. From the literature on strategic
management, it is evident that strategic planning refers to the management processes
in organizations through which the future impact of change is determined and current
decisions are made to reach a designed future.
Dimensions Levels
Corporate Business Operating Functional
1. Time Horizon Long Medium Short
2. Type of Decision Philosphical Mixed Operational
3. Risk Involved High Medium Low
4. Impact Significant Major Insignificant
5. Profit Potential High Medium Low
6. Flexibility High Medium Low
7. Adaptability Poor Medium Significant
8. Innovations Innovative Mixed Routine
9. Levels of Decision Highest Middle Lowest
Making
The strategies at different levels are interrelated to each other. The interrelationship
between corporate strategy and functional strategies is shown in figure 2.1. Figure 2.2
shows the relationship between corporate, business and functional strategies. The
example of first category can be that of Reliance Industries Ltd. It is a highly
integrated company producing textile yarns and a variant of petro chemical products.
The second figure may be related to Ashok Leyland Ltd., which is engaged in
manufacturing and selling of heavy commercial vehicles. The SBU concept was
22 considered in this case.
Introduction to Corporate
Strategy
C O R P O R AT E S T R AT E G Y C O R P O R AT E M A N A G E M E N T
F U N C T IO N A L S T R AT E G IE S M ID D L E M A N A G E M E N T
O P E R AT IO N S M A R K E T IN G F IN A N C IA L PE RSO N N EL
S T R AT E G Y S T R AT E G IE S S T R AT E G IE S S T R AT E G IE S
C O R P O R AT E S T R AT E G Y CORPORATE MANAGEMENT
MIDDLE MANAGEMENT
F U N C T IO N A L S T R AT E G IE S
O P E R AT IO N S M A R K E T IN G F IN A N C IA L PERSONNEL
S T R AT E G Y S T R AT E G IE S S T R AT E G IE S S T R AT E G IE S
Figure 2.2: Corporate SBU and Functional Stratgies in Multiple SBU firms
2.10 SUMMARY
The word strategy is derived from the Greek word strategtia. Strategy is perceived
as the unified, comprehensive and integrated plan that relates the strategic advantage
of the firm to the challenges of the environment. Strategy is primarily related to
external environment. It is a long term overall framework for guiding enterprise
thinking and action. This integrated approach is developed by top management. The
components of corporate strategy are i) Objectives, ii)Vector, iii) Competitive
Advantage, and iv) Synergy.
Corporate strategy may exist at three levels in an organization. Corporate level
strategies are futuristic, innovative and pervasive in nature. Strategic business unit
managers are involved for business level strategies. These strategies are more specific
and action oriented. Operating level strategies are formulated at the functional level. It
relates mainly with routines.
There are four grand strategic alternatives. They are: stability, expansion,
retrenchment and combination of these three. Expansion strategies operate through
concentration, integration, diversification, corporation and internationalization.
Retrenchment strategy is carried out through turnaround, divestment and liquidation.
We also see upon the compendium of various perspectives to strategy formation that
have evolved over a period of time. The 10 schools of thought on strategy formation
have been grouped into the prescriptive school, the descriptive school and the 27
Issues in Corporate integrative school. Corporate strategy has an important role to play in coping with
Management
environment. It has great utility in planning, coordination, control and direction. We
should also not forget that corporate strategy formulation process is not only a
different exercise but also it is a costly proposition and has only long term utility.
29
UNIT 3 CORPORATE POLICY
Objectices
After reading this unit you should be able to
! understand the concept of corporate policy and its features;
! list out the determinants of corporate policy;
! develop an understanding about the scope and need of corporate policy;
! explain the steps in formulation of policy;
! discuss the various types of corporate policy; and
! understand the significance of corporate policy.
Structure
3.1 Introduction
3.2 Concept and Meaning of Corporate Policy
3.3 Features of Corporate Policy
3.4 Determinants of Corporate Policy
3.5 Scope of Corporate Policy
3.6 Policy Formulation Process
3.7 Classification of Corporate Policy
3.8 Importance of Corporate Policy
3.9 Summary
3.10 Key Words
3.11 Self-Assessment Questions
3.12 Further Readings
3.1 INTRODUCTION
The organization sets the objectives and works towards their achievement. Once these
objectives are defined and strategies determined, certain policies have to be made to
put them into action. Corporate policies act as a guide to action. They provide the
framework within which an organization has to meet its corporate objectives. The
policy points out the direction in which the company ought to go. Some of the policy
statements are-
We promote employees on the basis of experience
We sell televisions only for cash
In each of these statements, one could understand that there is a problem and the
policies help as a guide for finding the solution.
Some policies are just broad guidelines while some can be more specific. According
to Koontz and ODonnell, Policies are plans in that they are general statements of
principles which guide the thinking, decision making and action in an organization.
Policies aid in decision making and are the basis for procedures. They are
responsibilities of top management. Policies are applied in long range planning and
are directly related to goals. They are concerned with estimating availability of
resources, their procurement their augmentation and their efficient utilization.
In this unit, we shall discuss the concept, features, scope and essentials of a policy.
The classification of policies has also been discussed. In this era of competition and
30 dynamic environment, the need and importance of policies has also been explained
alongwith the formulation process.
Corporate Policy
3.2 CONCEPT AND MEANING OF CORPORATE
POLICY
Corporate policy is the guide post to decision making. It helps in the managerial
thinking process and thus leads to the efficient and effective attainment of the
objectives of any organization.
Corporate policy has been defined as Managements expressed or implied intent to
govern action in the pursuit of the companys objectives. Corporate policy clarifies
the intention of management in dealing with the various problems faced. It gives the
managers a transparent guideline to take their decisions by being on the safe side.
Corporate policy helps the manager in identification of the solutions to the problem. It
provides the framework in which he has to take the decisions. The distinct views
regarding policies can be categorized into the following three broad groups:
i) The first category holds the opinion that policy and strategy are synonymous.
Corporate policy has been defined by William Glueck as Management policy is
long range planning. For all practical purposes, management policy, long range
planning and strategic management mean the same thing. However, this view is
quite controversial as strategy and corporate policy do not mean the same thing.
Strategy includes awareness of the mission, purpose and objectives. It has been
defined as, the determination of basic long term goals and objectives of an
enterprise, and the allocation of resources necessary to carry out these goals,
while policies are statements or a commonly accepted understandings of decision
making and are thought oriented guidelines. Therefore, strategy and corporate
policy cannot be used interchangeably as there is a clear line of differentiation
between the two terms.
ii) The second group of experts view corporate policy as the process of
implementing strategy. In the words of Frank I. Paine and William Naumes,
Policies guide and channel the implementation of strategy and prescribe how
processes within the organization will function and be administered. Thus the
term policy refers to organization procedures, practices and structures, concerned
with implementing and executing strategy.
Supporting this view, Robert Mudric has defined corporate policy as A policy
establishes guidelines and limits for discretionary action by individuals
responsible for implementing the overall plan.
The view represents corporate policy to be
! Restrictive
! Laying stress only on the tactical side and ignoring the strategic dimension.
iii) The third view considers corporate policy to be decisions regarding the future of
an organization.
In this view, Robert J. Mockler defines corporate policy as, Strategic
guidelines for action. They spell out what can and what cannot be done in all
areas of a companys operation.
According to the policy manual of General Electric Company, Policy is
definition of common purpose for organization components of the company for
benefit of those responsible for implementation, exercise discretion and good
judgment in appraising and deciding among alternative courses of action.
The views of different management scholars differ because of following reasons:
! There is no clear differentiation of policy from other elements of planning.
! There are different policies made at different levels of management for 31
directing executives.
Issues in Corporate ! Corporate policy encompasses and relates to the entire process of planning.
Management
Thus, corporate policy focusses on the guidelines used for decision making and
putting them into actions. It consists of principles along with rules of action that
provides for successful achievement of corporate objectives.
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................
.................................................................................................................................
.................................................................................................................................
ENVIRONMENTAL INTERNAL
I ANALYSIS ENVIRONMENT
EXTERNAL ENVIRONMENT
IDENTIFICATION OF
II POLICY ALTERNATIVES
EVALUATION OF
III ALTERNATIVES
(CONSEQUENCES OF
POLICIES)
IV CHOICE OF POLICY
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................
Oral
Expressed
II) EXPRESSION Written
Implied
Originated Policies
Appealed Policies
Derivative Policies
Production Policies
Marketing Policies
V) FUNCTIONAL AREAS
Financial Policies
Personnel Policies
Planning Policies
Organizing Policies
VI) NATURE OF MANAGEMENT
FUNCTIONS
Actuating Policies
Controlling Policies
38
Figure 3.2: Classification of Policies
III) Classification on the Basis of Level Corporate Policy
! They help in solving the problems for optimum utilization of scarce resources.
! The sound policies help in building good public image of the business.
! Polices provide the firm with clear objectives with which the managers can
decide about the future course of action.
! They act as tool for coordination and control.
Thus, corporate policy is very important for an organization and helps in the overall
development and growth. A sound policy provides satisfaction to the employees in
terms of working conditions, culture, authority, responsibility and relationships.
Activity 3
1) Distinguish between expressed and implied policies.
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................
2) Explain functional policies in brief.
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................
3) State the importance of corporate policy.
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................
3.9 SUMMARY
Corporate policy is the guideline which helps the management to carry out its
activities in an efficient and effective manner so that the objectives of the organization
are met. However, there are different views with regard to definition of corporate
policy. The features of corporate policy include general statement of principles, long
term perspective, achievement of objectives, qualitative, conditional and general
statements, guide for repetitive operations, helps in decision making process, provides
a unified structure and helps to determine a positive declaration for its followers. The
determinants of corporate policy include internal and external determinants. The
scope of corporate policy is very broad and consists of variety of subjects that affect
various internal groups in the organization. The formulation of corporate policy is
very important and facilitate the managers to achieve goals. The process of corporate
policy formulation include four steps- environmental analysis, identification of
alternatives evaluation of alternatives and choice of corporate policy. Policies are 41
Issues in Corporate classified on the basis of various criteria - scope, expression, level of management,
Management
nature of origin, functional areas and nature of management functions. Policies have
an important role to play in organizations.
42
Corporate Policy
3.12 FURTHER READINGS
Shrivastava, R.M., Management Policy and Strategic Management, Himalaya
Publishing House, Bombay. 1999
Mamoria C.B., Mamoria Satish, Rao, P. Subba, Business Planning and Policy,
Himalaya Publishing House, Bombay.2001
Ghosh, P.K., Business Policy Strategic planning and Management , Sultan Chand
& Sons, New Delhi 1996
Kazmi, Azhar, Business Policy and Strategic Management, Tata Mcgraw Hill
Publishing Co, Ltd., New Delhi-2002.
Miller A. and G. G. Den Strategic Management Mcgraw hill, New York 1996
Prasad, L.M., Business Policy: Strategic Management, Sultan Chand & Sons, New
Delhi. 2002
Glueck WF and LR Iavch, Business Ploicy and Strategic Management Mc graw
Hill, New York 1984.
Thompson J.L. Strategic Management: Awareness and Change, International
Thompson Business Press, London 1997.
Shrivastava, R.M., Corporate Strategic Management, Pragati Prakashan, Meerut,
1995.
43
Issues in Corporate
Management CASE STUDY
Maharaja Textiles India Ltd.
Maharaja Textiles India Ltd. New Delhi was one of the leading companies with staff
strength of 2030 in the field of textiles. It started its manufacturing activities in Oct.,
1986 with an installed capacity of 1,52,000 spindles and 60 tonnes production per day.
About five years back, the company bought a smaller textile company at Cochin.
Primarily, this unit has to cater to the needs of southern region comprising Andhra Pradesh,
Tamilnadu, Karnataka and Kerala of the country. This taken over unit was set up long
back in 1940 by Rustom Ji, a private entrepreneur.
Reports from the Cochin Division were not encouraging. Hence, the top management of
Maharaja deputed a core group of experts from the headquarters to understand the nature
of problems confronted over. A few specific problems were identified by the company.
Their brief description is given below:
! Profits The Cochin units is incurring losses. Earlier, it was earning profits. During
the last few years, a few more textile companies were set up in southern area. This
has enhanced competitiveness. Las year, the company could achieve break even
ppoint after lot of special efforts.
! Absenteeism Employees have tendency to remain absent without giving proper
information to the management. During festivals and marriages, they prefer to meet
their social obligations instead of organizational duties. This disrupted the entire
production schedules. Statistics have revealed that this rate is around 20%.
! Sales The sales curive of the division has started flattening. Products having the
design from North are not aceptable in SOuth. Variety, Colour and Texture are the
other issues affecting the sales of the company. On the ohter hand, the sales of
corporate office has increased annually by 8%.
! Dealer Relations The erstwhile company at Cochin which was taken over by
Maharaja later on, had very good relations with dealers in the area. Once the company
was taken over by Maharaja, the dealers started moving towards the ompetitors.
Competitors have also started paying higher commission for promoting their local
products.
! Old & Obslete Textile Machines The company was following traditional process
of manufacture. It has old machines acquired in 50s. Most of the machines have
completed their life. They needed replacement immediate with newer models.
! Shortage of funds Maharaja has gone for a fresh issue of equity. The equity was
fully subscribed. But, it could not raise debt funds from the market later on. This
has led to reduced allocation of funds to Cochin unit.
! Starategic Intent The company has not formulated its mission. The objectives
of Cochin division are not in tune with the objectives of Maharaja at New Delhi.
The employees working at these two places place themselves differently.
! Autonomy The chief executive of Cochin unit contends If we people are allowed
to work independently, they would be doing fine. The company at New Delhities
their hands with policy manuals, directions, forms, reports
The core group has collected some important facts about Cochin unit:
! The unit was purchased for Rs. 20 crore five years back. Now, it requires an
44
additional investment of Rs. 160 crore.
! The unit has staff strength of 130. They include 45 unskilled and 30 offficers. Case Study
Newly recruited employees are only three.
! The unit does not have quality contron and R&D cells.
! The unit sends one six monthly report to Maharaja, New Delhi. No other
communications were formalised.
! The unit is located at around 10 kns. fromCochin city and at around 5 km. from
Cochin harbour.
! The unit is not making any exports. Further, it has to get the cotton from producers
residing near Kolkata.
The top executives are presently busy in identifying the mpost important problem of
Cochin unit.
Questions
1) Whic of the problems reported by the core group is most important?
2) How will you set corporate level and divisional level objectives for the company?
3) What policies and procedures be laid for better coordination between Maharaja
Head Office at New Delhi and Divisional Office at Cochin?
4) What strategic action may be taken to improve the performance of Cochin unit.
45
Unit 4: Historical Perspective
Objectives
Structure
4.1 Introduction
4.5 Summary
4.1. Introduction:
Change is the order of the day. Advancement in science and technology has changed the way we
live. Globalisation and liberalization has changed the way we do our business. There is change in
environment, change in culture and change in ethos. This change has brought some negative
impacts along with the positive ones. There is decline in ethics and values that ought to be
followed by everyone including states and corporates. This means that there is loose governance
by these entities. When this happens the objectives set for the entity cannot be achieved. In this
unit we shall focus on the meaning, objective and nuances of corporate governance.
1
Before we understand the term Corporate Governance (CG), let us first understand the
term governance. The concept of governance has been known in both political and academic
circles for a long time, referring generally to the task of running a government, or any other
appropriate entity for that matter. According to the World Bank, Good governance is
epitomized by predictable, open and enlightened policy making, a bureaucracy imbued with a
professional ethos acting in furtherance of the public good, the rule of law, transparent processes,
and a strong civil society participating in public affairs. On the other hand, Organisation for
Economic Cooperation and Development (OECD) defines governance as the use of political
authority and exercise of control in a society in relation to the management of its resources of
social and economic development. This broad definition encompasses the role of public
authorities in establishing the environment in which economic operators function and helps in
determining the distribution of benefits, as well as the nature of the relation between the ruler
and the ruled. Good governance encompasses all actions aimed at providing its citizens, a good
quality of life.
With the rapid change in the business environment and emergence of new regulations by world
bodies like EEC, WTO, OECD, World Bank etc. the concept of CG is gaining momentum.
management and control structure of a company. Also included in the concept are power
relations between owners, the board of directors, management and the stakeholder. Most
definitions relate to control of a company or managerial conduct. The Cadbury Report (U.K.)
states; Corporate governance is the system by which businesses are directed and controlled.
OECD definition says, Corporate governance provides the structure through which the
objectives of the company are set, and the means of attaining those objectives and monitoring
performances are determined. The following definition helps us in understanding the concept
even better: Corporate governance is not just corporate management, it is something much
broader to include a fair, efficient and transparent administration to meet some well defined
2
objectives. It is a system of structuring, operating and controlling a company with a view to
achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and
suppliers, and complying with the legal and regulatory requirements, apart from meeting
environmental and local community needs. When it is practiced under a well-laid out system, it
leads to the building of a legal, commercial and institutional framework and demarcates the
boundaries with in which these functions are performed. To state in simple terms, corporate
exercising its powers. Quality corporate governance not only serves the desired corporate
interest, but is also a key requirement in the best interests of the corporates themselves.
Sri Aurobindo
But that which determines his ethical being is his relations with God, the urge of the
Divine whether concealed in his nature or conscious in his higher self or inner genius.
He obeys an inner ideal, nor to a social claim or a collective necessity. The ethical
imperative comes not from around, but from within and above him.
Peter F. Drucker
The History The Ecological Vision (1993)
Above all, the ethics or aesthetics of self-development would seem to be tailor-made for
the specific dilemma of the executive in modern organization.
Theirthefunction
Though demands thegood
terms governance, self-discipline
governanceandand
thecorporate
self-respect of the superior
governance man. gly used
is increasin
humBusiness ethics is
an civilization. Theconcerned primarily with
eastern civilization hasthe relationship
enumerable of business
examples, goals
where inand
emphasis was
techniques to specifically human ends. It studies the impacts of acts (DECISIONS)on the
laid good of the
on good individual,The
governance. theactivity
firm, theofbusiness community
the state, and by
as envisaged society as a wholebusiness
the great eastern thinkers on
ethics studies the special obligations which a person and a citizen accepts when he or she
politbecomes a part
y relates to of the of
all aspect world of commerce.
human life, social, economic and religious. Peace, order, security
Robert C. Solomon
Ethics and Excellence (1992)
.integrity, in the face of conflict of the virtues, is the challenge rather than the answer.
It is moral courage moral courage is not self-sacrifice
Moral courage is not self-righteous obstinacy and it is not at all opposed to
compromiseMoral courage includes an understanding of the big picture, the purpose(s)
of the organization, and the way in which the organization or some part of it thwarts its
own best intentions. 3
Corporate Governance is a system by which companies are run. It relates to the set of
incentives, safeguards and the dispute resolution process that is used to control and coordinate
Activity 1
Enumerate five points to highlight the importance of Corporate Governance as a concept than an
instrument.
4.2 History
Though the terms governance, good governance and corporate governance is increasingly used
in development literature since recent times, the concept of governance is not new. It is as old as
human civilization. The eastern civilization has enumerable examples, where in emphasis was
laid on good governance. The activity of the government of the state, as envisaged by the great
eastern thinkers on polity relates to all aspects of human life, social, economic and religious.
Peace, order, security and justice were regarded as the fundamental aims of the states (the largest
form of corporate). State was considered a means to the realization of decent, good and
meaningful life and justice were regarded as the fundamental aims of the states (the largest form
of corporate). State was considered a means to the realization of decent, good and meaning full
life.
Manu, the son of Prajapathi was the first king who brought out a comprehensive code of conduct
or governance for men, society and the state as a whole in his treaty called Manu Dharma
Shastra. In Mahabharata while delivering his first formal discourse on polity Bhisma says in
equivocal terms that the kin should always put the interest of his subjects over that of his own.
The great political thinker of 3rd century BC namely Kautilya in his treaty Arthasastra has laid
In eastern literature a good society is one wherein a high, ethical standard of life is characterized
by the pursuit of wealth, enjoyment and liberation. It is the prevalence of dharma, which
characterizes an ideal society. Such a society is possible if the governance of the country is based
4
on clear, efficient and effective administration and all the rulers aim at this goal in the ancient
times.
However people in the west started feeling the need for good corporate governance in early 80s
as the corporate misdemeanours increased. In U.K., in 1980s, the corporate sector was beseeched
with a number of problems. Business failure, limited role of auditors, weak accounting standards
culminated in loss of control. The Cadbury committee was set up by the London Stock Exchange
to address the dreary financial aspect of corporate performance. A few years later, directors pay
became such a live political issue that a study group on directors remuneration was formed
under Sir Richard Greenbury. Then came two other committees the King Committee and the
Hampel Committee to diagnose the issue of corporate governance. The Asian financial crisis,
recent scandals in US, Italy, India have triggered fresh initiatives of thinking towards good
governance. Corporate governance has been much talked in India particularly after 1993.
Liberalisation brought in its wake a spate of corporate scandals, the first of which was a bank
scam involving securities. CRB scam and the UTI episode made it very clear that a serious
thinking is required on the front of corporate governance. SEBI in India has taken the initiative
in framing new rules and laws to strengthen corporate governance. Committees like Kumar
Mangalam Birla Committee (2000), Naresh Chandra Committee (2002) brought out reports on
corporate governance. SEBI has also constituted a committee on corporate governance under the
5
Presently corporate India is going through a great churning phase, as companies are doing
business with global ambition, placing a lot of emphasis on governance and transparency.
Recent corporate failures and scandals involving mis-governance and unethical behaviour on the
part of corporates rocked the corporate sector all over the world, shook the investor confidence in
stock markets, and caused regulators and others to question the assumption that most companies
do the right thing most of the time. These incidences diminished reputation and goodwill of even
those corporates who enjoy the trust and confidence of public at large. These factors highlight
the importance of good corporate governance. On the other hand, corporate governance is
important because corporate decisions impinge on its shareholders, customer, creditors, the state
shareholder value. With the assumption that capital and financial markets are working properly,
anything that maximizes shareholder value will necessarily maximize corporate prosperity.
For sound governance, managers need to act as trustee of shareholders, prevent asymmetry of
benefits between sections of shareholders, especially between owner-managers and the rest of
shareholders. They also need to be a part of societal concerns about labour and environment. In
fact stock market analysts see these days a greater correlation between governance and returns.
governance infrastructure. Confidence of investors, both domestic and foreign, is the need of the
hour. This is to attract patient long term capital that will reduce their cost of capital. Thus,
there is a need for intellectual honesty, integrity and transparency, which form the basis for good
corporate governance.
Activity 2
particularly after 1993. Liberalization brought mixed results for Indian economy. Noticeably, it
brought in its wake a spate of corporate scandals. Later on scores of companies made public
issues with large premium and then disappeared; prospectus misled the public. The management
of most of these companies diverted funds and investors had no option but to repent their lost
money. Primary market literally collapsed in the after math of these failures. Slowly, many a
family owned businesses moved to become widely held limited companies. The question, how to
function in a corporate setup overriding family interest and obligations called for a code of
governance. Similarly, corporate banks also came under strain due to scams; governance failure
was total. The story of UTI is also well known where millions of small investors lost their capital
Auditors were following questionable accounting practices on behest of the management and
often advising on how doubtful accounting choices might be made so as to remain on the right
side of law and at the same time, escape detection by users of financial information. All these
factors put strong pressure on many corporates to evolve a good governance practice.
Over the period of time in India companies like Tata Group, Infosys, Wipro have evolved sound
companies have become global and it is common to find global norms of accounting and
disclosure being followed in these corporate houses. Rights of employees, stock options,
independent directors, meeting quality norms, price warranty and guarantee- all these have made
room for quality governance. Managers have indeed become trustees of shareholders.
It began in 1998 with the Desirable Code of Governance- a voluntary code published by CII, and
the first formal regulatory framework for listed companies, established by the SEBI in February
2000, following the guidelines enunciated by the Kumar Mangalam Birla Committee Report. On
7
21st August, 2002, the Department of Company Affairs under the Ministry of Finance appointed
Naresh Chandra Committee to examine issues pertinent to governance. The committee looked
into financial and non-financial disclosure and independent auditing and board oversight of
management.
Apart from financial compliance or disclosure, the independent oversight of management is also
important. Many companies have disappeared, vanished either due to fraud or poor quality of
board resulting in lack of independent oversight. The Kumar Mangalam Birla Committee
focused on the role of independent and statutory auditors and also the role of the board of
directors.
Narayana Murthy. The committee included representatives from the stock exchange, chamber of
commerce and industry, investor associations and professional bodies, which debated on key
issues related to corporate governance. Findings and recommendations of these committees are
Thus we find that the corporate India is going through a great churning phase. New aggressive
companies are doing business with global ambitions, placing a lot of emphasis on governance
and transparency. FIIs are very serious about good governance and disclosures. Liberalization
brought great challenges, after initial jolts and pain of restructuring, companies are seeing profits
4.5 Summary
Good corporate governance is good business because it inspires investors confidence, which is
very essential to attract capital. A few unscrupulous businessmen can, largely undo all the
8
confidence built through the good work by the good companies over time. They need to be
However, corporate governance goes beyond the realm of law. It comes from the culture,
mindset of management and cannot be regulated by legislation. The watchwords are openness,
Companies need not be myopic with short-term goals, caring only about quarterly results or
immediate stock prices in the bourses, or that cherished P/E ratio. Good governance maximizes
long-term shareholder value, which in turn takes care of short-term goals too.
2. Why has it become necessary for business houses to have a good corporate Governance? Discuss.
Altekar. A.S. (1992). State and Government in Ancient India, Motilal Banarsidas, New Delhi.
www.sebi.gov.in
Report of Sir Adrian Cadbury Committee on Financial Aspect of Corporate Governance (1992).
www.business-ethics.com
Narayana Murthy, N.R., Corporate Governance: The Key Issues, Vikalpa, vol. 24, No.4.
9
Prasuna D.G. (June 2001). Governance Matters, Chartered Financial Analyst, June 2001.
10
Unit 5 Top Management and Corporate Governance
Objectives
Structure
5.1 Introduction
5.2 Role of Board of Directors
5.3 Responsibilities of Board of Directors
5.4 Strategic Management: Role of the Board
5.5 Board Committees
5.6 Role of Chairman
5.7 Role of CEO
5.8 Creating an Effective Board
5.9 Summary
5.10 Self-Assessment Questions
5.11 Further Readings
5.1 Introduction
The major players in the area of corporate governance, within the corporation are corporate
board, shareholders and employees. Externally, the pace for corporate governance is set by the
government as the regulator, customer, and lenders of finance and social ethos of our times. The
scope and extent of corporate governance are set by the legal, financial and business framework.
1
In essence, corporate governance is the system by which companies are directed and controlled.
Board of directors are responsible for the governance of their enterprises. -Corporate
As it is very clear from the above statement, people at the helm of affairs of an enterprise are
responsible for the good governance of the enterprise. The Board of Directors are responsible for
the governance of their enterprises, in a given economic, political and social environment. The
role of the board and the shareholder is interactive in nature and therefore the quality of
governance depends upon the level of interface established by them. The quality of the board
also depends upon a number of other factors, such as its size, its composition in terms of number
and proportion of whole-time and part time directors, the chairman of the board, power and
position of the CEO, the merit and qualification of the directors, etc. In this unit we will try to
find out the roles and responsibilities of the board and other executives for good governance.
The Indian Companies Act does not define the Board of Directors (BoDs). Even Director is
simply defined as it includes any person occupying the position of Director, by whatever name
called [sec.2 (13)]. With the help of this open definition of Director, we may infer that a Board
of Directors is a group of individuals each of whom is labeled as Director (or by any other title
Section 269 says that, the commencement of the Companies (Amendment) Act, 1988, certain
specified public companies or private companies which are subsidiaries of public companies,
2
shall have a Managing or Wholetime Director, a Manager, and each such appointment must be
What is a BoDs suppose to do? This again we can know inferentially by referring to a definition
of Manager and Managing Director in section 2 of the Act, and also Sections 291-93. Both
these incumbents have to exercise their powers of managements subject to the superintendence,
control and direction of the Board. Thus, the BoDs, in broad terms, is expected to perform the
On whose behalf does the BoDs perform this role of overseeing? It is expected to do this on
behalf of the shareholder. It is they who elect the directors on the board. And it is the BoDs,
The directors individually have no powers in the eyes of law. It is only the collective body of
directors, i.e., the board, which has a superior total power over the Chief Executive. The intent of
the Indian Companies Act appears to include only outside non-employee directors on the board.
Otherwise, if internal Wholetime Executive, say the MD were to be the directors on the board,
how could they exercise superintendence, control and direction over themselves?
Section 291 stipulates that the BoDs shall be entitled to exercise all such powers, and to do all
such acts and things as the company authorizes to exercise and do, except those things which can
be done in a general meeting of the company. The powers exclusive to the BoDs (sec. 292) are:
To issue debentures
3
To invest the funds of the company
To make loans
Correspondingly, section 293 restricts the powers of the BoDs, by making them subject to the
consent of general meeting of the company, in respect of selling, leasing or disposing of the
property of the company; remitting debt due by the director; borrowing money to an extent
The Board of Directors is expected to meet once in a quarter and the quorum for a valid meeting
of the board is one third of the total strength or two directors, which is higher. The power to
The dimension relating to the managerially derived expectations of the Board of Directors role
seems to be of relatively recent origin. In more than two decades or so, industrial development
competitive reorientation at the global level. As a result, many erstwhile great names in the
industry have been humbled. With such rapidly mounting changes and uncertainties, the role of
BoDs has begun to be viewed from much wider and long term perspective beyond the
minimum requirements of the law. Probably, upto 1970s, the duty of BoDs to superintend,
control and direct had gone by defaults. Stable environment had helped this key role to remain
4
dormant. What is then the renewed ramifications of this role at present? These are meant to
ensure that.
Long-term productivity and quality are never sacrificed at the alter of short term profitability
Judicious earnings retention policy is adopted for financing growth, modernization, etc.
Serious and sustained attention is adopted towards building a sound system of human values and
It is a common observation that BoDs function rather passively. Often the members are selected
not because of their knowledge and competence but because of their compatibility, prestige or
esteem in the community. Usually, the Chief Executive Officer or the group of promoters has
free reign in choosing the directors and in having them elected by the shareholder. The directors
thus selected often feels that they should go along with any proposal made by the CEO and his
group. Interestingly, the board members find themselves accountable to the very management
Over the recent past, however, lending institutions, financial media and corporate analysts have
seriously questioned the role of BoDs. The investors and government in general are better aware
of the role of the BoDs. Though the Companies Act throws some light on the powers of the
BoDs and the restrictions placed on those powers, it does not specify to whom they are
5
responsible and what for. However, there is a broad agreement that BoDs appointed or elected by
Hire and fire the principal executive and operating officers of the company
An important issue in this context is: should BoDs merely direct or may they manage also? Many
experts and practicing top managers say that BoDs should only oversee and direct, and never get
involved with the detailed management. There are others who feel that, for direction to be
realistic and sensible, some in-depth involvement with details is necessary. The majority view,
however, is in favour of directors directing the affairs of the company and not managing them.
The board is expected to act with due care. That is, they must act with that degree of
diligence, care, and skill which ordinarily prudent men would exercise under similar
circumstances in like positions. If a director or the Board as a whole fails to act with due care
and, as a result, the company in some way, is harmed, the careless director or directors may be
Further, they may be held personally responsible not only for their own actions but also for the
6
In addition, directors must make certain that the company is managed in accordance with the
laws and regulations of the land. They must also be aware of the needs and demands of the
constituent groups so that they can bring about a judicious balance between the interest of these
diverse groups, while ensuring at the same time that the company continues to function.
According to Bacon and Brown, BoDs, in terms of strategic management, have three basic tasks.
To initiate and determine: A board can delineate an organisations mission and specify
To evaluate and influence: A board can examine management proposals, decisions and actions;
agree or disagree with them; give advice and offer suggestions; develop alternatives.
To monitor: By acting through its committees, a board can keep abreast of developments, both
inside and outside the organization. It can thus bring new developments to the attention of the
While the BoDs are not expected to involve itself in day-to-day operating decisions, they are
nonetheless expected to consider and give their views on all such matters that have long-term
connotations. In fact, such matters by convention are referred to the board. These relate to issues
The directing function of the board has internal and external components. Internal components
relates to various actions taken by the executives and their implications for the organization,
including R&D, capital budgeting, new projects, new competitive thrust, relationship with
7
financial institutions and banks, foreign collaborators, major customers and suppliers. External
component relates to identifying broad emerging opportunities and threats in the environment
and feeding them to the management so that strategic mismatch do not occur. The board
should see that the organization always remains in alignment with the social, economic and
political milieu.
The provision of section 292 of the Companies Act provides for delegation of powers by the
BoD to the Committee of Directors of the powers regarding (a) borrowing money for the
company otherwise than for debentures, (b) investing the funds of the company, and (c) making
In practice, however, Boards do appoint specific committees for in-depth exploration of certain
matters e.g., diversification project, shutting down a plant. These committees work for a
specified period and submit their views to the full board. There are standing committees, which
meet in the interval between the board meetings, and are expected to devote greater attention to
details in important matters arising from those functions. It is the outside directors who officially
comprise such committees. Some important committees usually set up by the board, comprising
Audit committee: It consists of independent directors who report to the board. Usually the
committee acts as a link between the board and the external auditors. They look into the issues
raised by the external auditors in greater details. Some of the functions of the audit committee
are:
8
- To solve any problem they come across while completing the audit with due consultation
- To make recommendations regarding the audit fees, selection and replacement of the
auditors.
Remuneration committee: This committee reviews the remuneration packages of the executive
directors and other top-level managers. It consists of independent directors and drafts the
remuneration policy of the company, which checks the unreasonable increase in the executive
compensations.
The role of the Chairman is to manage the board and ensure that its policies are put into practice
by the management. He must have a good knowledge of companys financial position and
closely monitor its performance. The chairman has to work closely with the company secretary
With the knowledge of the way in which the company is managed and its financial standings, the
chairman has to play a proactive role. He should be in a position to identify the short comings
and see that the board discusses these. By being proactive the chairman can help the CEO take
corrective action before things get out of hand. Since the chairman leads the board, its for him to
maintain good relation between the board and the companys shareholders. In the process of
maintaining such relationship he ensures that the board makes decision in accordance with the
interest of the shareholder and all other stakeholders of the company. Primarily the chairman has
9
to cater to the internal needs of the board and its conduct. He also should maintain good relation
To upgrade the competence of director so as to meet the current and future needs of the
company.
The role of a CEO is to achieve the organizational objective, by efficiently running the
organization. He also needs to maintain close working relation with chairman and the directors.
His relation with the chairman requires a high degree of trust, respect and an ability to
communicate openly. On the other hand he should maintain cordial relationship with the
executive directors to ensure that they act in the interest of the whole organization. He needs to
10
Present the company to major investors, media and the government
Assist the executive directors in formulating strategies proposals that have to be endorsed by the
board.
Be a source of inspiration , leadership and direction to all the employees, customers and
suppliers
Non-Executive Directors
These are the directors, who do not hold an executive position in the organization. They are also
known as outside directors. These directors play a very important role in the governance of the
company. As these directors do not have any other (than remuneration) material pecuniary
relation or transaction with the company, its promoters, its management or its subsidiary, they
will have unbiased judgment on the workings of the board and the company.
The function of a board is very comprehensive. In practice, it could be said that the board is
responsible for laying down matters of principle and of accounting, statistical and management
procedures. It is also responsible for the decision of what product to make, which market to
penetrate, determination of manufacturing capacity, investment decision, cash flow, liquidity etc.
In summary, the directors are responsible for ensuring that the top management functions
effectively and that through the information system, proper reports are generated and information
11
Ideally, the board of directors should be the heart and soul of a company. Whether a company
grows or declines depends very much upon the sense of purpose and direction, the values, the
will to generate customer satisfaction, and the desire to achieve, develop and learn, that emanates
from the board and the extent to which it is visibly committed to them.
The efficient board should be the one which is willing to identify, discuss and tackle barriers to
its own contribution. The board can be constrained or enhanced by the limitations or strengths of
While effectiveness may be influenced by a number of factors, the following provide a model
checklist:
Do the board members share a common, clear and compelling vision? Are they committed to an
Have the necessary resources, processes, role, competencies, enabling technology and learning
Whether special responsibilities for projects that stretch beyond a financial year, such as
When the company expands into a international network, whether the governance needs of the
When the role of chairman and the CEO are separated, whether there is mutual trust and respect
Activity
12
List some more functions of the Chairman and CEO, to improve the Corporate Governance of an
organization.
5.9 Summary
competence and contribution depends upon the interaction of a particular combination of people
and personalities in the boardroom. This sense of direction and purpose of the board will lead to
good governance and that will determine the growth of the enterprise.
Allahabad.
January- March.
www.sebi.gov.in
www.dca.nic.in
13
Unit 6 Code and Laws for Corporate Governance
Objectives
corporate governance.
Structure
6.1 Introduction
6.2 Reports of Committees on Corporate governance
6.3 Government Initiatives
6.4 National Award Initiated by the Government of India
6.5 Recent Developments in Other Markets
6.6 Summary
6.7 Self-Assessment Questions
6.8 Further Readings
6.1 Introduction
For any concept or idea to form a part of our existence or business needs to be put in
papers in distinct terms, so that they are understood and followed by all in a similar
fashion. These are called rules or codes of conduct. These are principles and standards
that are intended to control, guide or manage behaviour or the conduct of individuals.
However, codes are self-imposed and regulations are imposed by the states.
1
Government also issues rules concerning corporate governance through capital market
As it was explained in the previous units the events in the corporate world (through out
the world) raised concern about standards of financial reporting and accountability of
management. Many believe that the failures could have been avoided had the companies
followed good governance. In recent years, governments and corporates have made
sincere efforts in designing and implementing codes for good corporate governance.
Some of the reports on corporate governance published abroad and in India are:
The Cadbury Committee was set up in May 1991 by the Financial Reporting Council of
the London Stock Exchange to address the financial aspects of corporate performance.
The sponsors of the committee were concerned at the perceived low levels of confidence,
both tin the financial reporting, and in the ability of auditors to provide safeguards which
the users of the company reports sought and expected. The move to set up the committee
2
was to improve the standards of financial reporting and to arrest any likely damage to
Londons reputation as a financial centre and the reputation of the British accounting
firms.
The Committee published its report and code of best practice in December 1992. From
July 1993; all companies registered in the UK and listed on the London Stock Exchange
have been obliged to state in their Annual Report how far they comply with the code, and
The Code of Best Practice has been divided into four sections- the first concerning the
role of the board of the directors and covering such matters as the duties of a board, its
composition; the second dealing with the role of the outside non-executive directors; the
third covering executive directors and their remunerations, and the final section
A single person should not be vested with the decision making power i.e. the roles
code of conduct.
The term of the director can be extended beyond three years only after the prior
3
A Remuneration Committee with majority of non-executive directors should
The Interim company report should give the balance sheet information and should
The information regarding the audit fee should be made public and there should
CII Report
Post liberalization years saw major upheavals in the Indian corporate world. Growing
international competition, growth in the economy as well as scams and frauds brought
The Confederation of Indian Industry (CII) took the initiative to draft some codes of
corporate governance. A national task force on corporate governance was set up in mid
1996 under the leadership of Mr. Rahul Bajaj, ex.-President, CII, and then CMD, Bajaj
Auto Ltd. The committee issued desirable corporate governance. The major
The board should meet minimum of six times a year, preferably at an interval of
two months, and each meeting should have agenda items that require at least half a days
discussion.
At least 30% of the board (where the chairman of the company is non-executive)
and 50% (where the position of the chairman and managing director is combined) of
4
listed companies with a turnover of Rs.100 crores and more should comprise of
draft of the code this number was to exclude directorship on the companys subsidiaries
(50% or more of equity holding) and affiliates (25% or more of equity holding).
While re-appointing members of the board, companies should give the attendance
record of the concerned directors. If a director has not been present (absent with or with
out leave) for 50% or more meetings, then this should be explicitly stated in the
resolution that is put to vote. As a general practice, one should not re-appoint any director
who has not had the time to attend even one half of the meetings.
passive advisors, have clearly defined responsibilities within the board, and should be
and stock options. The need for remuneration committee of the board has been brushed
code.
Listed companies with a turnover of at least Rs. 100 crores and a paid up capital
of at least Rs. 20 crores must appoint audit committees of the board within two years.
certificate, signed by the CEO and CFO which clearly sates that, the management is
5
responsible for the preparation, integrity and fair presentation of the financial statements
and other information in the annual reports, and which also suggest that the company
will continue in business in the course of the following year; the accounting policies and
principles confirm to standard practice, and where they do not, full disclosure has been
made of any material departures; the board has overseen the companys system of
internal accounting and administrative controls system either directly or through its audit
committee.
Over the years some Indian companies have voluntarily established high standards of
corporate governance, but there are many more, whose practices are a matter of concern.
accountability, especially after losses suffered by investors and lenders in the recent past,
which could have been avoided, with better and more transparent reporting practices.
have raised capital from the market at high valuations and have performed much worse
than the reported figures leave alone the financial projections at the time of raising
money. Another example of bad governance has been the allotment of promoters shares,
leading to further dilution of wealth of minority shareholders. This practice however was
later contained.
There are also many companies, which are not paying adequate attention to the basic
procedures for shareholders service; for example, many of these companies do not pay
6
adequate attention to redress investors grievances such as delay in transfer of shares,
delay in dispatch of share certificates and dividend warrants and non-receipt of dividend
warrants. SEBI has been daily receiving large number of investor complaints on these
matters. While enough laws exist to take care of many of these investor grievances, the
May 7,1999, by the Securities and Exchange Board of India (SEBI) under the
Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise
exchanges with the companies and any other measures to improve the standards of
material information, both financial and non-financial, manner and frequency of such
directors and at least 50% of the board should comprise of non-executive directors.
7
No director should be a member in more than 10 committees or act as chairman of
The board of the company should set up a qualified and independent Audit
Committee.
The corporate governance section of the Annual Report should make disclosures
on remuneration paid to directors in all forms including salary, benefits, bonuses, stock
The management should implement the policies and code of conduct of the board
financial matters and exceptions to the board, board committees and the shareholders.
report, Management Discussion and Analysis Report should form part of the Annual
The committees also took note of various steps taken by SEBI for strengthening
between projected and actual use of funds as per the requirements of the Companies Act,
8
Declaration of quarterly results
Timely disclosure of material and price sensitive information having a bearing on the
Dispatching one copy of complete balance sheet to every household and abridged
Issue of regulations providing for a fair and transparent framework for takeovers and
substantial acquisitions.
The recommendations made by Shri Kumar Mangalam Birla Committee were accepted
by SEBI in December 1999, and are now enshrined in Clause 49 of the Listing
In its zest to improve governance in the companies through the regulatory process SEBI
also instituted a committee under the chairmanship of Mr. N. R. Narayana Murthy which
The Narayana Murthy Committee has mentioned about correct approach for successful
Corporate Governance is beyond the realm of law. It stems from culture and
governance deals with conducting the affairs of a company such that there is fairness to
9
all stakeholders and that its actions benefit the greatest number of stakeholders. It is
about openness, integrity and accountability. What legislation can and should do, is to
lay down a common framework- the form to ensure standards. The substance will
ultimately determine the credibility and integrity of the process. Substance is inexorably
Thus we see that the whole thing has got an ethical orientation now, and emphasis is laid
on raising the ethical standards for good corporate governance. Some of the major
All audit committee members should be financially literate and at least one
procedures.
Board members should be trained in the business model of the company as well as
the risk profile of the business parameters, their responsibilities as directors and
10
Board of Directors, limiting the maximum number of stock options that can be
practices.
A peer group comprising the entire board of directors, excluding the director
members.
On 21 August 2002, the Department of Company Affairs (DCA) under the Ministry of
Finance and Company Affairs appointed a committee under chairmanship of Shri Naresh
Chandra to examine various corporate governance issues. The committee has been
entrusted with analyzing and recommending changes if necessary, in various areas, like,
of chartered accountants, company secretaries, and cost accountants, and other similar
statutory oversight functionaries, the role of independent directors, etc. The committee
committees, board composition and governance. The recommendations have also been
drawn from The Sarbanes-Oxley Act, 2002, of the U.S.A. These recommendations have
been widely debated in public domain. If implemented, they may bring sweeping changes
11
6.3 Government Initiatives
From the governments side, there have been swift moves through law and regulations
made by the Department of Company Affairs (DCA) and Securities and Exchange Board
functioning. The DCA has amended Companies Act at short intervals for this purpose.
have been inserted in the Act through Companies (Amendment) Act 2000. Important
Board to report in cases where buyback was not completed within the time
Providing for higher penalties (tenfold increase) for offences provided in various
The Amending Act of 2000 thus increased manifold, the duties and responsibilities of the
Realizing the significance of efficient financial markets in achieving higher growth rates
in economy, The Honorable Union Finance Minister Shri Yashwant Sinha initiated
several measures to promote corporate governance among Indian companies and for
12
orderly development of Indian financial markets. While presenting the Budget for 1999-
2000, he mentioned:
Lately, there has been considerable debate on the importance of good governance of
back to the capital market, companies have to put their houses in order by following
investor confidence. To help promote this trend, I propose to institute a National Award
investors confidence in the market, the Government of India awards the National Award
Panel consisting of eminent persons from financial markets and corporate world. The
constitutes the panel. Unit Trust of India has come forward to sponsor the award. UTI
In the year 1999 the panel constituted for the purpose initially short- listed the following nine
criteria for evaluation. Two criteria were subsequently added to the list later. The broad criteria
prescribed by the first panel for screening the companies for excellence in corporate governance
were as under:
2. Existence of institutions, like audit committee, which enable the Board to adequately guide the
management.
13
3. Adherence to prescribed accounting standards and quality of disclosures relating to financial
4. Frequency and content of communication of financial and operating data to the shareholders
In the later years, the following two criteria were added to the list:
2. Innovative practices to improve quality of life for other stakeholders of the company.
Based on these criteria the following Companies were nominated for the consideration
14
11 Cadbury India Ltd. 43 Motor Industries Company Ltd.
12 Castrol India Ltd. 44 MRF Ltd.
13 Cipla Pharma 45 Nicholas Piramal India Ltd.
14 Colgate India Ltd. 46 NIIT Ltd.
15 Container Corporation of India Ltd. 47 Novartis India Ltd.
16 Corporation Bank 48 ONGC
17 CRISIL 49 Pidilite Industries Ltd.
18 Dabur India Ltd. 50 Procter & Gamble India Ltd.
19 Digital Equipment India Ltd. 51 Punjab Tractors Ltd.
20 Dr. Reddys Laboratories Ltd. 52 Ranbaxy Laboratories Ltd.
21 E I H Ltd. 53 Reckitt & Coleman India Ltd.
22 Finolex Cables Ltd. 54 Reliance Industries Ltd.
23 Finolex Industries Ltd. 55 Satyam Computers Ltd.
24 GACL 56 SmithKline Beecham India Ltd.
25 Glaxo India Ltd. 57 State Bank of India
26 Global Telesystem Ltd. 58 Sun Pharmaceuticals Ltd.
27 HCL Infosystems Ltd. 59 Sundaram Fastners Ltd.
28 HCL Technologies Ltd. 60 TVS Suzuki Ltd.
29 HDFC Bank Ltd. 61 VSNL
30 HDFC Ltd. 62 Wipro Ltd.
31 Hero Honda Motors Ltd. 63 Wockhardt Ltd.
32 Hindalco
15
No. Criteria and selection Individual Total scores
scores
1. 1 Governance structure 30%
1.A. Composition of the board (15%)
1.B. Committees of the board (15%)
Total 100%
1. Governance structure
Budgets
16
Any Joint Venture or collaboration that the company proposes to enter into
director.
k. Does the nomination committee have a right to short- list candidates for the board?
directors?
m. Does the audit committee have all the powers and authority as envisaged?
n. Does the audit committee review the interim and annual financial statements
p. Is there a policy of limiting the number of terms a director can serve on the board?
17
2. Disclosure in the annual report
Does the annual report contain a statement of remuneration policy and details of the
remuneration of a director?
How long (within statutory limit) does company take to disclose material
information?
Time period between last day of financial year of the company and date of AGM.
Growth in assets
Growth in sales
Solvency ratio
Margins
Items for which detailed information were sought from company through personal interviews and
1. Employees
2. Stakeholders
18
Innovative practices with respect to the other stakeholders including the customers (for example,
FERA/FEMA violations
Show-cause notices from Income Tax Authorities and other regulatory authorities
4. Society
Based on these criteria companies are rated F, A, AA, AAA. Infosys and TISCO were awarded National
Award for Excellence in Corporate Governance in the year 1999 and 2000 respectively.
Activity
Discuss the feasibility of the National Award initiated by Government to promote good corporate
governance.
19
Implementation of Sabarnes-Oxley Act, 2002 in the U.S. A. In response to the public
outcry against the recent corporate scandals like, Enron, World Com, etc., a new
legislation viz., the Sarbanes-Oxley Act has been enacted on July30, 2003 in the U.S.A.
disclosures made pursuant to the securities laws. The legislation initiated major reforms
2. Auditors independence
3. Conflict of interest
4. Corporate responsibility
European Union
governance codes and proposed to merge all of them to create a single, consistent code.
20
Germany
strengthening the rules concerning auditor and supervisory board independence, gives
Ireland
Irish corporates with the Combined Code on governance implemented by LSE. 97% of
firms allow shareholders to vote on re-election of directors every three years. 85% and
79% of them have remuneration and audit committees respectively comprised fully of
non-executive directors. 79% of them have separate role for the chairman and the chief
executive officer.
S&P carried out a survey of 350 Asian and Latin American companies on 10 points based
information is closures; investors relation, and ownership structure; and board and
management structure and practices. 19 out of 43 Indian companies managed to get score
of 4; Infosys scores 7.
Kenya
Kenyas Capital Market Authority has introduced new guidelines to imp rove corporate
21
constitution of nomination committee, the role of CEO and Chairman to be separated;
limiting the term of director on the board subject to shareholders approval and frequent
Thailand
governance and make best corporate practice a national priority. Of the 580000
companies, nearly half do not report balances-sheet and a quarter of them do not pay even
taxes. Thailands SEC has drafted a framework for corporate governance ratings aimed at
protecting shareholders rights, the quality of directors and the efficiency of internal
controls. The Thai SEC will offer highly rated firms bunch of incentives, including a fast-
Russia
Russias Federal Commission for Securities Markets introduced new code of corporate
governance which includes a number of tax incentives and investor friendly regulations.
Hong Kong
Hong Kongs SFC proposed a rule that executives who intentionally or recklessly,
provide false or misleading information in public disclosures, shall face up to two years
Philippines
Philippines SEC has requested that all listed firms establish an evaluation system to track
performance of their boards and executive management. The recently approved code of
corporate governance recommends that all public entities and fund raising entities shall
22
adopt the same. Philippines SEC is likely to extend new corporate governance code to
require even non-listed firms to place at least one independent director on the board.
6.6 Summary
It would have been very clear by now as to the importance that has been laid in good
corporate governance. Government, corporates and the civic societies have been doing
their bit to improve upon the existing level of governance. Corporate governance goes
beyond the realms of law. It comes from the culture, ethos and the mindset of
management. However due emphasis must be given to the role of legislation also. Need
that makes the governing team enthusiastic and makes them aspire for excellence.
Procedural refinements and innovation are no substitute for good men, while good men
are never short of capacity to innovate. Thus, it is men more than measures that make
good corporate governance for that matter the governance give its true result.
23
Appendix I
Appendix II
Facts:
Four hundred and seventy four officers and men of the Indian Armed Forces laid
down their lives in Kargil to protect the integrity of the country
Many innocent civilians too lost their lives and property and found their livelihood
disrupted, as had tens of thousands earlier through years of proxy war.
The entire nation united in grief with widows and parents across the land to mourn
the blood, tears and treasure invested in Kargil.
Why?
2) Discuss the issues, which result in bad corporate governance. Suggest some measures to curb
them.
3) Develop a case of an organization where good corporate governance has resulted in the increase in
Allahabad.
Review.
.www.sebi.gov.in
www.dca.nic.in
25
Unit 7: Strategies for Dynamic and Stable Industry Environments.
Objectives
Structure
7.1 Introduction
7.2 Concept of Product Life Cycle
7.3 Dynamic Environment
7.4 Strategic Choices in a Dynamic Environment
7.5 Decision to Enter Dynamic Markets
7.6 Stable Environment
7.7 Strategies in a Stable Industry Environment
7.8 Summary
7.9 Self-Assessment questions
7.10 Keywords
7.11 Further Readings
7.1 Introduction
The dynamics of an industry plays a critical role in the formulation of a firms strategy. It can
increase or decrease opportunities or a threat for a firm and it often force the firm to make
strategic adjustments. A basic understanding of the process of evolution is essential since correct
response to the change in the competitive environment can mean the difference between success
and failure of a firm. The first part of the unit will present the concept of product life cycle to
explain the process of industry evolution and its significance for the formulation of strategy. In
the latter part of the unit, growth strategies in dynamic and stable environments will be dealt in
detail.
7.2 Concept of Product Life Cycle
In todays business environment, it is not clear what changes are taking place currently, much
less predict which changes will occur in the future. Given the importance of predicting the
business environment accurately, it is desirable to have a robust technique which will help in
anticipating the pattern of industry changes that one can expect to occur.
One of the most well-known and reliable tools for predicting the probable course of events in the
future is the product life cycle (PLC) concept. The basic hypothesis of this concept is that an
industry passes through a number of phases starting with introduction followed by growth,
maturity and decline phases. Product life cycle theory predicts that industry growth follows an S-
shaped curve because of the process of innovation and diffusion of a new product. The
1
introduction phase is often characterized by a flat curve reflecting the difficulty of overcoming
the buyers inertia and their initial reluctance to try unknown and untested product. However, the
product enters a rapid growth phase once the product proves successful. This rapid growth phase
reaches a plateau once the product reaches all the potential buyers. This phase is called the
maturity phase. In the final phase of the product life cycle the growth tapers off and the demand
for the products starts declining as new substitutes start appearing in the market. The predictions
of product life cycle theory about the strategies, competition and performance are explained in
the table below.
Table: 7.1 Strategy, Competition and Performance in Different Phases of Product life Cycle
Introduction Growth Maturity Decline
Product Poor quality, no Good quality, Superior quality, Very little product
standards, frequent product standardization, less differentiation
design changes, improvements, product changes,
basic product design technical and less product
performance differentiation
differentiation
Buyer behaviour Buyer inertia, buyer Buyers will accept Repeat buying, Buyers are
need to be persuaded uneven quality, saturation, mass sophisticated
to try the product widening buyer market
groups
Marketing High advertising Higher advertising Broaden product Low advertising and
expenditure and high costs but as line, market marketing costs
marketing costs, percentage of sales it segmentation,
skimming pricing will be lower than service is important
introduction and deals are quite
common
Strategy Increase market Change price and Competitive cost is Cost control key
share quickly, R&D quality image. key. Bad time to
and engineering Marketing is a key increase market
capabilities are key area share. Also bad time
factors to change price or
quality image
Competition Few competitors Many competitors Price competition, Exits and fewer
shakeout competitors
Risk High risk Growth covers risk Cyclical trend sets in
Margins and profits High margins and Highest profits and Lower profits, lower Falling prices, low
low profits fairly high prices margins, falling prices and margins.
prices. Increased Price may rise in
stability of market later stages of
shares decline phase
One major limitation of the PLC concept as predictor of industry evolution and dynamics is that
it attempts to describe one pattern of evolution which will invariably occur. And except for the
industry growth rate, there is little or no underlying explanation provided by this concept as to
why the competitive changes associated with life cycle will happen. Moreover, the industry
evolution can have so many different paths, the life cycle pattern may not always hold good.
Nevertheless, the PLC is a robust model of industry evolution and it predicts the strategy,
competition and the performance of a firm in different business environments. Generally,
industries which have products in the introduction and growth phases operate in a dynamic
environment, while those with products in the mature phase operate in a more stable
environment. The stable and dynamic industry segments differ from one another due to the
difference in speed and direction of the following industry dimensions:
2
Long-term changes in growth
Changes in buyers segments
Buyers learning
Diffusion of proprietary knowledge
Product innovation
Marketing innovation
Process innovation
Government policy change
Entry and exit of competitors
A good understanding of all the above dimensions that can shape the industry dynamics will
assist a firm to face and in some cases even influence the structural changes. A firms ability to
predict the future events will provide a valuable head start to direct environmental forces in ways
appropriate to the firms position. In fact, successful firms do not view environment change as
fait accompli, to adjust to, but as an opportunity.
Industry environments vary in their basic strategic implications along a number of important
dimensions, namely:
Industry concentration
State of industry maturity
Exposure to international competition
The following sections will discuss the industry environment and the strategies based on these
dimensions. In addition, in each of these environments, the structure of the industry, strategic
issues and strategic alternatives are also discussed. Two important business environments are
selected for discussion, namely dynamic environment characterized by very dynamic changes
and stable environment typified by steadier and stable variations.
7.3 Dynamic Environment
Generally dynamic environment is characterized by newly formed or re-formed industries
that has been created by technological innovations, emergence of new consumer needs/
segments, or other socio-economic changes that elevate a new product or a service to the level of
potentially viable business opportunity. Dynamic environment is also created when
old/traditional industries experience fundamental shifts in competitive rules coupled with growth
in scale by orders of magnitude, caused by some of the factors mentioned earlier. The essential
characteristic of a dynamic environment is the absence of any rules of the game which may
pose a risk or provide an opportunity. In either case it must be managed from the strategic
management point of view. The following section outlines the common characteristics of
dynamic industry environment.
Characteristics of Dynamic Industry Environment
Embryonic and Spin-off Firms: Dynamic environment has a greater proportion of newly formed
companies compared to more stable industry environment. Related to the presence of these
companies is that of many spin-off firms or firms created by personnel leaving firms in the
industry to create their own firms.
3
is great deal of uncertainty about the strategies of the competitors with different firms following
different approaches to product/market positioning, marketing, etc.
High initial costs coupled with steep cost reduction
Small production volumes coupled with newness of technological/production process produce
high costs in a dynamic environment relative to a more stable environment. But the steep
learning curve is followed rapidly by a succession of ideas related to improved production
procedures, plant layout, and employee productivity and so on. Additionally, increasing sales
make major additions to the scale and accumulated volume of output produced by firms. If the
gains due to learning are combined with increasing market opportunities, the initial high costs
are eclipsed by the rapid decline in costs.
First-Time Buyers
Most of the buyers of the new product/services produced by embryonic industries in a dynamic
market are first-time buyers. The task of a firm in a dynamic environment is thus of convincing
the buyers and persuading them to try the new products or services instead of the existing ones.
Short-Time Horizons
The pressure to develop customers or produce products to meet the demand is so great that
problems are dealt expeditiously rather than relying on comprehensive analysis of future
conditions.
The other features of a dynamic industry environment include inability of firms to obtain raw
material and components, absence of required infrastructure, absence of product or technological
standardization, erratic product quality, customers confusion, etc. In an environment described
above, firms will have to craft a strategy to survive and thrive which radically differs from
strategies adopted by firms in more stable conditions. The following are some of the generic
strategic alternatives available to a firm.
7.4 Strategic Choices in a Dynamic Environment
Industries operating in a dynamic environment have to cope with the uncertainty and risk
inherent in the industry environment. The industry structure is highly amorphous, unsettled and
rapidly changing and the rules of the game are largely undefined. Despite these factors, the
dynamic phase of an industry is perhaps the time when there is a tremendous amount of latitude
and freedom to experiment with new strategies and when the leverage from good choice is the
highest in determining performance.
One of the strategic choices in a dynamic environment available to a firm is shaping and
influencing the industry structure. A firm can set the rules of the game in areas such as product
policy and new product development, marketing approach, and pricing strategy. The firm can
seek to define the rules within the constraints dictated by the economics of the industry and its
own resources in a way that yields the strongest position in the long run.
Another strategic choice available to a firm to compete in a dynamic environment is changing
the orientation of its suppliers and channel partners. A firm must be willing to shift the
orientation of its suppliers and distributors as the industry grows and starts maturing. Suppliers
should be encouraged (sometimes coerced) to respond to the firms special needs in terms of
varieties, service and delivery. Similarly the distribution channels should be made more receptive
in terms of investing in distribution facilities and infrastructure, advertising, etc and cooperate
with the firm in all its marketing endeavours. Exploiting the supply chain in the early stages of
the industry can provide strategic leverage to the firm.
Given the dynamic nature of the industry environment and the fast pace of change, firms can
adopt the strategy of exploiting their innovations and building an enduring long run competitive
4
advantage based on low cost or differentiation. Three variants of innovative strategy are
available for a firm: i) to develop and market the innovation itself, ii) to develop the market and
innovation jointly with other companies through a strategic alliance, and iii) to license the
innovation to others and let them develop the market. The optimal choice of the strategy depends
on three factors, namely, the possession of complementary assets to exploit its innovation and
create a competitive advantage, the height of barriers to imitation by the competitors and the
presence of capable competitors that can rapidly imitate the innovation.
Complementary assets are those required to exploit an innovation such as competitive
manufacturing facilities capable of maintaining high product quality while ramping up the
volume to meet the rapidly growing customers demand and state-of-the-art manufacturing
facilities that enable the firm to move quickly down the experience curve without encountering
any hitches and bottle-necks in the production process. Complementary assets also include
marketing know-how, adequate and competent sales force, access to good distribution channels,
and an after-sales service and support network. These assets, in particular, can develop brand
loyalty and help the firm penetrate the market rapidly.
Barriers to innovation are factors that prevent the competitors from imitating a firms distinctive
and unique competencies. These barriers particularly are effective in preventing second and late
entrants from imitating the innovation. Ultimately, all innovations are susceptible to imitation,
but the higher the barrier the more difficult it is for the rivals to imitate.
Capable competitors are firms that can rapidly imitate the pioneering company. A rivals ability
to imitate an innovation essentially depends on its R&D skills and access to complementary
assets. In general, the greater the number of rivals with such capabilities, the more rapid is the
imitation likely to be.
The strategy of going alone with the innovation makes sense when i) the innovator has the
necessary complementary assets to develop the innovation, ii) the barriers to imitation are high,
and iii) the number of capable competitors is limited. The second variant of the innovation
strategy, namely, developing and marketing the innovation jointly through a strategic alliance
makes sense when i) the innovator does not possess complementary assets, ii) barriers to
imitation are high and iii) there are quite a few capable competitors. Such an alliance is expected
to prove mutually beneficial and each partner can share in high profits which neither of them is
capable of earning on their own. The final variant of the strategy which involves licensing makes
most sense when the i) innovating company lacks the complementary assets, ii) barriers to
imitation are low, and ii) there are several capable competitors.
A vital strategic decision for competing in a dynamic industry is the appropriate timing of entry.
While entry barriers are low in an emerging or embryonic industry, the risk can be quite
substantial. Entering early is generally recommended when:
Image and reputation are important to buyer and the firm is confident of developing a
good reputation by being a pioneer.
Customer loyalty is valuable and being first to the market helps build customer loyalty
Being early puts the firm ahead of others on the learning curve, experience is difficult to
imitate and it will be neutralized by future technological generations.
Absolute advantage can be gained by early commitment to suppliers, channel partners,
etc.
However, early entry is risky when:
Cost of opening up the market such as customer education/awareness, regulatory
approvals, etc. is great
5
Technological change will make early investments obsolete and the second and late
comers can gain advantage by having access to more advanced and newer technologies.
Early competition with small firms will be replaced bigger and more formidable
competition at a later stage.
7.5 Decision to Enter Dynamic Markets
A dynamic and developing industry is attractive to enter if it has the potential to provide above
average returns and if the firm is confident that it can create a defendable position in the long
run. Quite often firms enter dynamic and risky industries whom the existing firms are going
rapidly and making good profits or the ultimate size of the industry promises to be large. These
are valid reasons to enter the market, but a firm has to ultimately carry out a structural analysis of
the industry/environment (Porters five forces model) before leaping into the fray.
Activity 1
You work for a company in the IT Industry (software) that has developed new software for
banking industry. There are several other competitors who are also on the verge of introducing
software products for the same industry. You need to do the following:
i) Give a report to the management about the external environment. and the strategies to
compete in this environment.
ii) On the basis of this report, recommend strategies to compete in this environment.
With companies unable to maintain past growth rates merely by holding market share,
they turn their attention to attacking the shares of the others. This may lead to outbreaks
of price, service, and promotional warfare.
The product is no longer new and buyers are more knowledgeable and experienced,
having already purchased the product, sometimes repeatedly. The buyers' focus shifts
6
from deciding whether to purchase the .product at all to making choices among brands.
As a result of slower growth, more knowledgeable buyers, and usually greater
technological maturity, competition tends to become more cost- and service oriented.
As the industry adjusts to slower growth, the rate of capacity addition in the industry
slows down. Firms need to monitor competitors' capacity additions, closely time its
capacity additions with precision. This is rarely done and overshooting of industry
capacity relative to demand is, therefore, common.
As a result of technological maturity, often accompanied by product standardization and
increasing emphasis on costs, transition to stable environment is often marked by the
emergence of significant international competition. International rivals have different cost
structures and different goals compared to domestic firms.
Slowing growth, more sophisticated buyers, more emphasis on market share, and the
uncertainties and difficulties of the required changes usually mean that industry profits
fall in the short run from the previous levels. Some firms may be more affected than
others, the smaller firms generally the most. Falling profits reduce cash flow during a
period when they are needed the most.
Rapid growth in the dynamic stage tends to hide errors and allow most companies in the
industry to survive and even to prosper financially. Experimentation is high, and a wide variety
of strategies can coexist. Carelessness and negligence are, however, generally exposed by stable
industry, however. Maturity may force companies to meet head-on the need to choose among
the various strategies described in the next section.
7
from the line and focusing attention on items that have some distinctive advantage (technology,
cost, image, etc.) is more desirable.
Process Innovation
The importance of process innovations usually increases in stable and mature industry
environment, as does the advantage of designing the product and its delivery system to facilitate
lower-cost manufacturing. The success of the Japanese industry in industries such as electronics,
automobiles, etc. is attributed to this strategy.
Price Cutting
In some situations, price cutting can be used as a strategy to deter entry of other companies,
thereby protecting the profit margins of the incumbents in the industry. For instance, a firm can
charge a high price for the product initially to seize short term profits and then cut prices
aggressively to build market share and deter new entrants at the same time. The current players
in the industry can thus send a signal to the potential entrants that if they enter the industry, the
incumbent players will use their competitive advantage to drive down prices to a level which will
make it unviable for new entrants to compete at that level.
Excess Capacity
A third strategy that firms use to discourage entry of potential rivals involves maintaining excess
capacity that is, producing products much more in excess of the demand. The incumbent
companies may intentionally develop excess capacity to warn potential new entrants that if they
enter the industry, existing firms will strike back by increasing the output and putting a
downward pressure on prices until the entry would become unprofitable.
Buying Cheap Assets
Sometimes assets can be acquired very cheaply as a result of the distress sale of assets by
companies unable to make successful transition to stable environment. A strategy of acquiring
distressed companies or buying liquidated assets can improve margins and create a low-cost
position if the rate of technological change is not too great.
Competing Internationally
A firm may break out of the stifling stable environment by competing internationally where the
industry is more favourably structured. Sometimes equipment that is obsolete in the home market
can be used quite effectively in international markets, significantly lowering the costs of entry
there. Or industry structure may be a great deal more favourable internationally, with less
sophisticated and powerful buyers, fewer competitors, etc. The shortcomings of this strategy are
the usual risks involved in international competition.
Apart from discouraging new entrants, firms also use strategies to manage their competitive
interdependence and decrease rivalry. Several options are available to companies to manage
rivalry within the industry. Product differentiation is one such option. It allows a firm to compete
for market share by offering different products or by using different marketing techniques. The
four competitive strategies based on product differentiation are based on different combinations
of product and market segments (not markets as in Ansoffs matrix) are as follows:
Market Penetration
When a company expands market share in its existing product markets, it is said to follow
market penetration strategy. This strategy involves heavy advertising to promote and create
product differentiation. In a stable and mature industry the major objective of promotion is to
influence consumers choice for the companys brands and products. A company can thus
increase its market share by attracting customers.
Product Development
8
This strategy involves creation of new or improved products to replace existing ones. Product
development strategy is vital for maintaining product differentiation and building market share.
Market Development
Market development strategy involves finding new market segments for a companys products.
A firm following this strategy will try to capitalize on its brand reputation in one market segment
by looking for new market segments in which to compete.
Product Proliferation
This strategy is used to manage rivalry within an industry and to deter entry. Product
proliferation strategy essentially involves having a product in each market segment or niche and
compete face-to-face with rivals for the customers.
Activity 2
Search the Web for a company which is in a stable environment. Based on the information
available about the company and the industry it is operating in, try to explain and comment on
the current strategy it is pursuing.
7.8 Summary
In this unit we have discussed the various strategies that firms can use in different industry
environments. Developing an appropriate strategy to suit the needs of different industry
environments is crucial for a firms survival. Companies must always be prepared for changes in
the conditions in their environment if they are to respond to these changes in a timely manner.
In dynamic markets, developing a strategy to exploit technical innovations is a crucial aspect of
competitive strategy. The three strategic choices for a firm in a dynamic industry are i) to
develop and market the technology by itself, ii) to do so jointly with another company, or iii) to
license the technology to existing companies.
Stable environment is characterized by a few large companies whose actions are so highly
interdependent that the success of one companys strategy depends upon the responses of its
competitors. The principal actions initiated by companies to deter entry of competitors are i)
product proliferation, ii) price cutting, and iii) maintaining excess capacity. The principal actions
initiated by companies to manage rivalry in a stable and mature industry include market
penetration, product development, market development and product proliferation.
7.9 Self Assessment Questions
1) What are the characteristics of a dynamic environment? List some industries which are
facing this situation and describe the features of the environment in which they operate.
2) For a firm which is operating in an industry listed in the answer to the previous question,
suggest some strategies to survive and thrive.
3) How is stable industry environment different from a dynamic environment? Mention a
few industries which in your opinion are operating in a stable environment. Explain briefly the
characteristics of a stable industry environment.
4) Suggest suitable strategies for industries which you believe are operating in a stable
environment.
9
7.10 Keywords
Dynamic Environment: Dynamic environment is characterized by newly formed or re-formed
industries that has been created by technological innovations, emergence of new consumer
needs/segments or other socio-economic changes that elevate a new product or a service to the
level of potentially viable business opportunity.
Excess Capacity: A strategy that firms use to discourage entry of potential rivals by maintaining
excess capacity that is, producing products much more in excess of the demand.
Market Development: Market development strategy involves finding new market segments for
a companys products.
Market Penetration: When a company expands market share in its existing product markets, it
is said to follow market penetration strategy.
Product Life Cycle: An industry passes through a number of phases starting with introduction
followed by growth, maturity and decline phases. This concept is called product life cycle.
Product Proliferation: Most companies produce a range of products instead just one product.
This is done to target different segments with different products. This strategy of plugging
market niches is called product proliferation.
Price Cutting: In some situations, price cutting can be used as a strategy to deter entry of other
companies, thereby protecting the profit margins of the incumbents in the industry.
Stable Environment: As the industry traverses the dynamic phase, the intense competition
during this stage leads to a shake-out phase. As a result, the industry enters a stable phase
characterized by a small number of large companies.
7.11 Further Readings
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Unit 8 Strategies for Global Markets
Objectives
explain the global business environment and the need for companies to go global;
discuss the various strategic choices available for a company to go global; and
discuss the various modes of entry into global environment and the merits and demerits of
each mode of entry.
Structure
8.1 Introduction
8.2 Need for Global Expansion
8.3 Unique Competencies
8.4 Location Advantages
8.5 Experience Curve
8.6 Compulsions for Cost Reduction and Responsiveness
8.7 Responsiveness to Local Needs
8.8 Strategic Choice
8.10 Approaches to Global Entry
8.11 Summary
8.12 Self-Assessment Questions
8.13 Key words
8.14 Further Readings
8.1 Introduction
In this unit we look at the strategies companies adopt when they expand outside their domestic
marketplace and start to compete on a global scale. One alternative available for companies is to
follow the same strategy worldwide, which is referred to as a global strategy. Selling the same
product the same way in every nation allows a company to realize substantial cost savings from
greater economies of scale. These cost savings can then be passed on to consumers in the form of
lower prices, enabling firms to gain market share from competitors. However, to succeed in a new
marketplace, it may have to customize its product offering to cater to the tastes and preferences of
local consumers. While this may help, the shorter production runs associated with such a strategy
sometimes raise the costs of competing and lower a firms profit margins.
The decision to standardize or customize is a classic dilemma that confronts global companies. In
this unit, we consider the different strategies that companies use to compete in the global
marketplace and discuss the advantages and disadvantages of each. In this unit we also examine
the different approaches that companies employ to enter foreign markets-including exporting,
licensing, setting up a joint venture, and setting up a wholly owned subsidiary. The unit ends with
a discussion of the benefits and costs of entering into strategic alliances with global competitors.
8.2 Need for Global Expansion
Expanding globally allows companies to increase their profitability which is not possible to purely
domestic enterprises. Companies that operate internationally can i) earn a greater return from their
unique competencies; ii) realise location advantages by dispersing different value creation
activities to those locations where they can be performed most efficiently; and iii) come down the
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experience curve faster than the competitors, thereby offering more competitive products to the
consumers.
Unique competencies are defined as "unique strengths that allow a company to achieve superior
efficiency, quality, innovation, or customer responsiveness." Such strengths are typified by product
offerings that other companies find difficult to match or imitate. Thus, unique competencies are
vital for a company's competitive advantage. They enable a company to lower costs and also
differentiate its product offerings. Companies with valuable distinctive competencies can often
realise huge returns by applying those competencies and the products they produce to foreign
markets, where indigenous competitors lack similar competencies and products.
Location advantages are those that occur from performing a value creation activity in the most
advantageous location for that activity- in whichever part of the world that might be (transportation
costs and trade barriers permitting). Locating a value creation activity in the most favourable
location for that activity can have one of two effects. It can i) lower the costs of value creation,
helping the company achieve a low-cost position or ii) enable a company to differentiate its
product offering and charge a premium price. A company that realises location economies by
dispersing each of its value creation activities to its optimal location should have a competitive
advantage over a company that concentrates all its activities at a single location. It should be better
able to differentiate its product offering and lower its cost structure than its single-location
competitor. The basic assumption is that by dispersing its manufacturing and design activities, a
firm will be able to establish a competitive advantage for itself in the global marketplace.
Experience curve refers to the systematic decrease in production costs that occur over the life of a
product. Learning effects and economies of scale lie behind the experience curve and moving
down that curve allows a company to lower the costs. A company that moves down the experience
curve more quickly will have a cost advantage over its competitors. Most of the sources of
experience-based cost economies are generally found at the plant level. Dispersing the fixed costs
of building productive capacity over a large output reduces the cost of producing a product. Hence
the answer to riding down the experience curve as rapidly as possible is to increase the
accumulated volume produced by a plant as quickly as possible. Global markets are larger than
domestic markets and, therefore, companies that serve a global market from a single location are
likely to build up accumulated volume faster than companies that focus primarily on serving their
home market or on serving multiple markets from multiple production locations.
For more details on experience curve, refer to Unit 7, Block 3 of MS 11 : Strategic Management.
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generally increase cost pressures because of greater international competition. Countering
pressures for cost reductions requires that a company minimise its unit costs. To attain this goal, a
company may have to base its value creating activities at the most favourable low-cost location
anywhere in the world and offer a standardised product globally in order to ride down the
experience curve as quickly as possible.
Pressures for local responsiveness crop up due to differences in consumers' tastes and preferences,
differences in infrastructure, differences in distribution channels, and the demands of the host
government. Consumers' tastes and preferences differ significantly between countries due to
historic or cultural reasons. Hence, the product and marketing messages have to be customised to
appeal to the tastes and preferences of local consumers in such cases. This typically requires
entrusting the production and marketing decisions to local subsidiaries. Pressures for local
responsiveness also crop up due to differences in infrastructure and/or traditional practices among
countries, creating a need to customise products suitably. This may again require the delegation of
manufacturing and production functions to local subsidiaries.
Differences in distribution channels among countries may require adopting different strategies.
This may necessitate the delegation of marketing functions to national subsidiaries. Finally,
economic and political demands imposed by host governments may necessitate a degree of local
responsiveness. Generally, threats of protectionism, economic nationalism, and local content rules
all dictate that international businesses manufacture locally. Pressures for local responsiveness
restrict a firm from realizing full benefits from experience-curve effects and location advantages.
In addition, pressures for local responsiveness imply that it may not be possible to transfer from
one nation to another the skills and products associated with a company's distinctive competencies.
Companies use four basic strategies to enter and compete in the international environment which
are discussed below. Each of these strategies has its advantages and disadvantages.
International Strategy
Companies that pursue an international strategy create value by transferring valuable skills and
products to foreign markets where local competitors lack those skills and products. Most
international companies have created value by transferring differentiated product offerings
developed at home to new markets overseas. Consequently, they tend to centralise product
development functions in their home country. However, they also tend to establish manufacturing
and marketing functions in each major country in which they do business. Although they may
undertake some local customisation of product offering and marketing strategy, this tends to be
limited in scope. Ultimately, in most international companies the head quarters retains tight control
over marketing and product strategy.
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An international strategy makes sense if a company has valuable unique competencies that local
competitors in foreign markets lack and if the company faces relatively weak pressures for local
responsiveness and cost reductions. In such situations, an international strategy can be very
profitable. However, when pressures for local responsiveness are high, companies pursuing this
strategy lose out to companies that place a greater emphasis on customising the product offering
and market strategy to local conditions. Furthermore, because of the duplication of manufacturing
facilities, companies that pursue an international strategy tend to incur high operating costs.
Therefore, this strategy is often unsuitable for industries in which cost pressures are high.
Multidomestic Strategy
Companies pursuing a multidomestic strategy orient themselves toward achieving maximum local
responsiveness. As with companies pursuing an international strategy, they tend to transfer skills
and products developed at home to foreign markets. However, unlike international companies,
multidomestic companies extensively customise both their product offering and their marketing
strategy to different national environments. Consistent with this approach, they also tend to
establish a complete set of activities including production, marketing, and R&D in each major
national market in which they do business. As a result, they generally do not realise value from
experience-curve effects and location advantages and, therefore, often have a high cost structure.
A multidomestic strategy makes most sense when there are high pressures for local responsiveness
and low pressures for cost reductions. The high cost structure associated with the replication of
production facilities makes this strategy inappropriate in industries in which cost pressures are
intense. Another limitation of this strategy is that many multidomestic companies have developed
into decentralised groupings in which each national subsidiary functions in a largely autonomous
manner. As a result, after some time they begin to lose the ability to transfer the skills and products
derived from distinctive competencies to their various national subsidiaries around the world.
Global Strategy
Companies that follow a global strategy focus on increasing profitability by reaping the benefits of
cost reductions that come from experience-curve effects and location economies. That is, they are
pursuing a low-cost strategy. The various activities such as production, marketing, and R&D of
companies pursuing a global strategy are concentrated in a few favourable locations. Global
companies do not tend to customise their product offering and marketing strategy to local
conditions. This is because customization raises costs because it involves shorter production runs
and the duplication of functions. Instead, global companies prefer to market a standardised product
worldwide so that they can reap the maximum benefits from the economies of scale that lie behind
the experience curve. This strategy makes sense in those cases in which there are strong pressures
for cost reductions and where demands for local responsiveness are minimal. These conditions
exist in many industries manufacturing industrial goods.
Transnational Strategy
Companies whose operations are not confined to any country or a region and which pursue low
cost and product differentiation at the same time are referred to as transnational companies. In
essence, transnational companies operate on a global level while maintaining a high level of local
responsiveness. A transnational strategy makes sense when a company faces high pressures for
cost reductions and high pressures for local responsiveness. Companies that pursue a transnational
strategy basically try to achieve low-cost and differentiation advantages simultaneously. Although
this strategy looks attractive, in practice it is a difficult strategy to pursue. Pressures for local
4
responsiveness and cost reductions place conflicting demands on a company. Local responsiveness
raises costs, which clearly makes cost reductions difficult to achieve. Although a transnational
strategy apparently offers the most advantages, it should be remembered that implementing it
raises difficult organisational issues. The appropriateness of each strategy depends on the relative
strength of pressures for cost reductions and for local responsiveness.
Activity 1
Search the Web for a company site where there is a description of that company's international
operations. Based on this information, try to explain how the company entered foreign markets and
what overall strategy it has pursued (global, international, multidomestic, or transnational).
There are five main modes of entering a foreign market: exporting, licensing, franchising, entering
into a joint venture with a host country company, and setting up a wholly owned subsidiary in the
host country. Each entry mode has its advantages and disadvantages, and companies must weigh
these carefully when deciding which mode to use.
Exporting
Many manufacturing companies begin their quest for global expansion as exporters and then
switch to other modes. Exporting has two distinct advantages. First, it avoids the costs of
establishing manufacturing facilities in the host country, which are often quite substantial. Second,
by manufacturing the product in a centralised location and then exporting it to foreign markets, the
company may be able to realise substantial economies of scale from its worldwide sales. For
instance, many Indian companies in the floriculture business export their entire production to
Europe to take advantage of the lower cost of production and the favourable climatic conditions in
the country.
On the contrary, there are a number of negative aspects to exporting. First, exporting from the
company's home base may not be appropriate if there are low-cost manufacturing locations abroad.
A second drawback is that high transport costs can make exporting uneconomical, particularly for
bulk products. One way of overcoming this problem is to manufacture bulk products locally. This
strategy allows a company to realise economies from large-scale production and at the same time
minimise transport costs. Thus, many multinational companies manufacture their products from a
base in a region and serve several countries in that regional base. Third, tariff barriers can make
exporting uneconomical. In fact the threat of tariff barriers by a country may sometimes force a
company to set up manufacturing facilities in that country. Finally, the practice of delegating
marketing activities to a local agent among companies that are just beginning to export also poses
risks since there is no guarantee that the agent will act in the company's best interest. Moreover,
many foreign agents also deal with the products of competitors leading to divided loyalties.
Therefore, company would perform better if it manages marketing on its own. One way to do it is
to set up a wholly owned subsidiary in the host country to handle marketing locally. This can lead
to huge cost advantages arising from manufacturing the product in a single location and controlling
the marketing activities in the host country.
5
Licensing
Licensing is an arrangement by which a foreign licensee buys the rights to produce a company's
product in the licensee's country for a negotiated fee. The licensee then invests major share of the
capital required to commence the operations. The advantage of this arrangement is that the
company need not bear the development costs and risks associated with launching foreign
operations. Hence, licensing is a very attractive choice for companies that can not invest capital to
develop overseas operations or for companies unwilling to take the risk of committing substantial
financial resources in unfamiliar or politically volatile foreign environment. In high technology
areas it is quite common for companies to provide know-how through licensing arrangements. For
instance, Ranbaxy Laboratories Ltd. is seeking partners for out-licensing its urology, respiratory
and anti-infectives technologies.
Licensing as a mode of entry into global arena has three serious drawbacks. First, companies do
not reap the benefits of cost economies and location economies since licensees typically set up
their own manufacturing facilities. And in cases where these economies are important, licensing
may is not the best mode to go overseas.
Second, in a global marketplace it is necessary to coordinate all the operations across all the
countries in order to use the profits earned in one country to support competitive attack in another.
Licensing severely restricts a company's ability to do this. A licensee will not let a multinational
company to take its profits to support competitive moves of the company in other countries.
A third and a very major problem with licensing is the risk associated with licensing and sharing
technological know-how with foreign companies. Technological know-how provides a formidable
competitive advantage for many technology based companies and licensing its technology can
quickly erode its competitive advantage.
Franchising
A major disadvantage of franchising is the lack of quality control. A basic notion of franchising
arrangements is that the company's brand name conveys a message of quality to the consumers.
The geographic distance from the franchisees and the large number of franchisees make it difficult
for the franchiser to maintain quality and hence quality problems generally persevere. To
overcome this handicap, companies set up a subsidiary, which is wholly owned or a joint venture
with a foreign partner in each country and region in which they plan to operate. Closeness and the
limited number of independent franchisees to be monitored reduce the problem of quality control.
This type of arrangement is well accepted in franchising.
Joint Ventures
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Joint venture with a foreign partner to enter foreign markets has been the vogue in recent times. A
50:50 venture is quite common, in which each party takes a 50 percent ownership stake and
operating control is shared by a team consisting of managers from both parent companies. Some
companies, however, prefer joint ventures in which they have a majority shareholding since this
allows tighter control by the principal partner. As mentioned earlier, joint venture is a very mode
of entry into foreign markets. In our country we have seen a spate of joint ventures in various
sectors, particularly in automobile and pharmaceutical sector. Honda Companys joint venture with
Hero Cycles, Suzukis JV with TVS, Suzuki with Maruti Udyog, Wipro with GE are the examples
of a large number of JVs that have come up in recent years.
Joint ventures have a number of advantages, the first one being the benefit a company can derive
from a local partner's knowledge of a host country's business ecosystem. Second, a company might
gain by sharing high costs and risks associated with opening of a new market with a local partner.
Finally, political considerations in some countries make joint ventures the only practical way of
entering those markets.
Despite these advantages, joint ventures are difficult to establish and run because of two reasons.
First, as in the case of licensing, a company risks losing control over its technology to its venture
partner. To minimize this risk, the dominant company can seek a majority ownership stake in the
joint venture to exercise greater control over its technology provided the foreign partner is willing
to accept a minority ownership. The second disadvantage is that a joint venture does not give a
company the tight control over its subsidiaries needed to realise experience- curve effects or
location advantages or to engage in coordinated global attacks against its rivals.
A wholly owned subsidiary offers three advantages. First, when a company's competitive
advantage is based on its technological superiority, a wholly owned subsidiary makes sense, since
it reduces the company's risk of losing control over this critical aspect. For this reason, many high-
tech companies prefer wholly owned subsidiaries to joint ventures or licensing arrangements.
Second, a wholly owned subsidiary gives a company the kind of tight control over operations
required for global coordination to take profits from one country to support competitive strategy in
another. Finally, a wholly owned subsidiary may be the best choice if a company has to realise
location advantages and experience-curve effects. The entry of a number of South Korean
companies such as LG, Samsung, Hyundai into India by setting up subsidiaries without a local
partner are examples of wholly owned subsidiaries.
Activity 2
Assume that you work for a company in the pharmaceutical industry that has developed a new
anti-diabetic drug. You have already established a significant presence in your home market, and
now you are planning the global strategy development of the company. You need to decide the
following:
i) What overall strategy should you pursue a global strategy, a multidomestic strategy, an
international strategy, or a transnational strategy?
ii) What entry mode would you prefer (for example, franchising, joint venture, wholly owned
subsidiary)? What information do you need in order to make these kinds of decisions? On the basis
of what you do know, what strategies would you recommend?
8.11 Summary
In this unit we examined the various ways in which companies can benefit from global expansion.
We also discuss the optimal choice of entry mode to serve a foreign market. International
expansion represents a way of earning greater returns for companies by transferring the skills and
product offerings derived from their unique competencies to markets in which indigenous
competitors lack those skills. Due to national differences, a company can benefit by basing each of
activity it performs at the location where factor conditions are most favourable to the performance
of that activity. This is referred to as location advantage. By increasing sales volume rapidly,
global expansion can assist a company in the process of moving down the experience curve.
The best choice of strategy for a company to pursue is affected by two kinds of pressures:
pressures for cost reductions and pressures for meeting the needs of local markets (local
responsiveness). Pressures for cost reductions are greatest in industries producing commodity-type
products, for which price is the main competitive weapon. Pressures for local responsiveness arise
from differences in consumers' tastes and preferences in national infrastructure and/or traditional
practices, in distribution channels, and in demands by host governments.
Companies following an international strategy transfer the skills and products derived from unique
competencies to foreign markets and at the same time undertake some limited local customization.
Companies pursuing a multidomestic strategy customise their product offering, marketing strategy,
and business strategy to national conditions. Companies pursuing a global strategy focus on
deriving benefits from cost reductions that come from experience-curve effects and location
advantages. There are five different ways of entering a foreign market-exporting, licensing,
franchising, entering into a joint venture, and setting up a wholly owned subsidiary. The optimal
choice among entry modes depends on the company's strategy.
1) Discuss the need for companies to go global. What compels companies to go global?
2) Having decided to go global, what are the strategic alternatives available for a company?
3) List the various modes of entry into global markets. Discuss the merits and demerits of
each mode.
8.13 Keywords
Unique Competencies: are defined as unique strengths that allow a company to achieve superior
efficiency, quality, innovation, or customer responsiveness.
Location Advantages: are those that occur from performing a value creation activity in the most
advantageous location for that activity- in whichever part of the world that might be.
Experience Curve: refers to the systematic decrease in production costs that occur over the life of
a product.
8
International Strategy: A strategy to create value by transferring valuable skills and products to
foreign markets where local competitors lack those skills and products.
Transnational Strategy: A company whose operations are not confined to any country or a
region and which pursues low cost and product differentiation at the same time is said to follow a
transnational strategy.In essence, transnational companies operate on a global level while
maintaining a high level of local responsiveness.
Licensing: Licensing is an arrangement by which a foreign licensee buys the rights to produce a
company's product in the licensee's country for a negotiated fee.
Franchising: Franchising is a strategy similar to licensing. The only difference is that franchising
is employed mainly by service companies. The advantages of franchising are similar to those of
licensing. The franchiser does not bear the development costs and risks of commencing the
operations in a foreign market on its own since the franchisee typically assumes those costs and
risks.
Joint Ventures: A joint venture is an arrangement in which each party takes a ownership stake
and the operating control is shared by a team consisting of managers from both parent companies.
John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, International Business: Environments and
Operations, Prentice Hall; 10 edition, 2003.
9
UNIT 9 MARKET STRUCTURES AND NET WORK EXTERNALITIES
OBJECTIVES
STRUCTURE
9.1 Introduction
9.2 Classification of Market Structures
9.3 Perfect Competition
9.4 Monopoly
9.5 Monopolistic Competition
9.6 Duopoly and Oligopoly
9.7 Market Structures and Competition
9.8 Market Structures and Sustainable Competitive Advantage
9.9 Market Structures and Pricing Strategies
9.10 Summary
9.11 Self Assessment Questions
9.12 Further Readings
9.1 INTRODUCTION
A firm operates in complex environment, which has social, political, cultural, legal and
economic facets. The decision making process of the firm is influenced by identifying
opportunities and threats from these factors. Further internal capability factors in terms of
strengths and weaknesses decide the extent of sustainable competitive advantage. The
externalities influence the pricing strategy and competition level. The entry and exit of
any firm is being decided on the basis of its external environment. Market forces tend to
follow competition and they determine firms potential buyers. Market competition tends
to be different for different firms. When a market has large number of buyers and sellers,
the competition level at that situation will be distinct. The external forces also affect the
firm in terms of its production, sales, pricing etc. In this unit, first the classification of
market structure is discussed. Subsequently, the description of each type of market
structure along with issues of competition, sustainable competitive advantage, entry/exit
policy etc. is dealt with. In the end, these issues are discussed at macro level so that
competitive position of various market structures and network externalities may be
related to each other for effective strategic decision.
9.2 CLASSIFICATION OF MARKET STRUCTURES
Market means a place where people gather to carry out transaction and exchange
something for value. Market is an essential part of any economy and provides the sellers
and buyers a meeting place to facilitate exchange. Different experts have defined market
as follows:
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According to Jevons, The word market has been generalised so as to mean any body of
persons who are in intimate business relations and carry on extensive transactions in any
commodity.
In the words of Benham Market is an area over which buyers and sellers are in close
touch with one another, either directly or through dealers, that the price obtainable in one
part of the market affects the prices paid in other parts. Market is also described as an
organisation whereby buyers and sellers of goods are kept in close touch with each other.
Market can be classified according to the following bases:
Area
Market can be classified as local, regional, national and international markets.
Volume of Business
Market is classified on the basis of volume of business as wholesale and retail markets. In
the wholesale market quantities exchanged are large and in bulk while in retail they are
exchanged in smaller lots.
Time
On the basis of time, markets are divided as very short period markets, short period
markets and long period markets. Very short period markets are for commodities which
are perishable and here, supply is fixed. In short period markets, supply can be increased
but to a limited extent and in long period markets supply can be increased to any extent.
Status
According to status of sellers, markets are classified as primary, secondary and terminal
markets. Manufacturers are part of primary markets, wholesalers constitute secondary
market and retailers form part of terminal market.
Nature of Transactions
One can classify the market on the basis of nature of transactions as spot market and
future market.
Regulation
When the government stipulates certain regulations on the transactions then such a
market is called regulated market and when transactions are left to the market forces then
such a market is called unregulated market.
Structure
According to market structure, markets are of the following types:
a) Pure or Perfect Competition
b) Monopoly
c) Monopolistic Competition
d) Duopoly, Oligopoly
9.3 PURE OR PERFECT COMPOSITION
In this section, we shall discuss perfect competition.
Characteristics
A perfectly competitive market has a very large number of relatively small buyers and
sellers.
The product is homogeneous.
There is free entry and exit in the industry.
Every firms action is independent of the other firm.
In this market there is perfect mobility of factors.
The sellers operate in conditions of certainty having complete knowledge of costs,
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demand, price and quantities.
Equilibrium of the firm is attained where Marginal revenue is equal to marginal cost, i.e.,
MR=MC (MC curve cuts the MR curve from below).
Competition Level
If a firm in a perfectly competitive market raises the price of its product above the going
price, then it will not be able to sell its products. Therefore, each firm is insignificant.
Also, the firm is not able to earn profit by cutting the price because it can sell any
quantity of goods at the going rate.
When faced with competition, all the firms sell their product at the same price. The
average and marginal revenues would be consistent and equal.
Strategy
The firm should adjust its output in relation to the prevailing price so that it could
maximize its profit. The entry or exit is not possible in the short run, so the firm may
either earn a profit or suffer a loss in the short run.
In the long run, the firms operating in the market are free to enter or exit. So, if there is a
situation of profit, new firms would enter the market and compete with existing firms.
Supply would increase and price would shift downwards, thus eliminating the excessive
profit. However, if there is loss, some firms would exit, there would be shortage and
supply would decline leading to an upward shift in the price, thus elimination in the
losses.
Price Determination
Price is determined at a point where the demand of a commodity equals its supply. The
determination is different in different time periods i.e. very short run, short run and long
run.
a) Price Determination In Very Short Run
Supply of commodity is fixed.
Input supply is fixed
The demand varies and determines the price.
For perishable goods, the entire supply has to be sold at the earliest and for durable
goods, this is not the case.
For durable goods, supply can be adjusted with demand accordingly.
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Activity 1
1. State the impact of perfect competition.
...
...
...
2. How are prices determined under perfect competition?
...
...
...
9.4 MONOPOLY
There will be a single seller in monopoly. This is exactly opposite to perfect competition.
Characteristics
There is only one firm selling the product.
The firm has no rivals or direct competitors.
Substitutes may exist. However, close substitutes are non existent.
Difficult entry for other firms.
The monopolist is the price maker and tries to take the best of whatever demand and
cost conditions exist without the fear of new firms entering to compete.
Monopoly is not a permanent situation. Due to reasons like emergence of close
substitutes, entry of new firms, etc. a firm which is a monopoly now may not be a
monopoly in the future.
Price Determination under Monopoly
The price and output under monopoly are determined by taking into consideration
certain assumptions which include that the monopoly firm does not set discrimination
price. It aims at maximization of profits. The individual buyer is just a price taker and the
monopolist firm operates in the condition of no restrictions in terms of price.
The monopolist firm controls both the price and the supply of the commodity but one
at a time.
The firms demand curve is same as the demand curve of the industry.
The monopolist tries to maximize the profits by increasing the output to a level where
additional revenue exceeds additional cost. A monopolist could either earn profit or incur
losses in the short run.
Strategy
The firm can incur profit by keeping the price more than its cost and meeting the demand
by supplying specified units of the commodity.
However the firm can incur losses as well, due to its misjudgment in fixing the price or
determining demand. Also the danger of entry of competitors may lead to setting of
prices below the cost which may end up in a loss.
The monopolist in the short run can either fix the price or the quantity. He cannot fix both
at the same time. The firm has to develop a strategy which leads to maximisation of
profits or minimisation of losses. The firm has to be alert about the potential entry of its
competitors.
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b) Price Determination In The Long Run
The profits in the short run would definitely attract other firms to enter the market. With
the entry of new firms the market would change from a monopoly to a oligopoly or
perfect competition.
If the firm has control over the scarce resources, it can bar the entry of new firms and
enjoy its monopoly position. In the long run, it is not necessary for the firm to use its
existing plant at an optimum capacity due to lack of competition.
It is, however, necessary that the firm does not make losses in the long run. The size of
plant and the extent to which it can be utilized is dependent upon demand of the
commodity.
A monopoly firm is in a better position to exploit the market and it can limit the entry of
outside firms into the industry. There is concentration of economic power in the market
wherever monopoly exists.
9.5 MONOPOLISTIC COMPETITION
Monopolistic competition refers to a situation where the product to be sold is
differentiated and there are many sellers operating to sell it. The competition is not
perfect and is between firms making similar products (not substitutes).
Characteristics
There are many sellers and no seller is big enough to influence the market price.
Each seller has an independent price-output policy.
Product is heterogeneous due to differentiation. Product of each firm is a close
substitute of the product of other firm.
Patent rights, advertising, quality differentiation, etc. are used as the main
instruments of product differentiation.
There are no restrictions on the entry and exit of firms.
Each individual firm enjoys some monopoly power due to product differentiation
and hence, the demand curve is more elastic than that of the monopoly firm.
Price Determination in the Short Run
In the short run it is assumed that entry and exit is not possible for firms. The aim of
every firm is to maximize its profits.
Three conditions may be present in the short run, either the firm could earn super normal
profits or incur a loss or earn a normal profit.
Strategy
In the short run, it is not necessary that all the firms would earn super normal profits.
Some may incur losses or some may earn a normal profit.
Firms compete mostly on the basis of price they charge for their product. Each firm
charges different price and each firm produces different quantities. In case of losses, the
firm decreases its price so that it can at least cover its variable cost. It has to continue the
production till it starts recovering its fixed cost.
Though the products are not perfect substitutes, they are close substitutes and hence the
price changed by each firm is likely to be approximately equal to the others producing
similar products.
Price Determination in the Long Run
If industry seems to be profitable new firms would be attracted to enter it. But in lieu of
product differentiation they have to incur costs on R&D, advertising, promotion, etc. to
penetrate the market. Because of the entry of new competitors, the supply would increase
5
and the market share of firms already existing would decline. This would shift the
demand curve and abnormal profits would be reduced. Due to the existence of profits,
there would be continuous entry of new firms till they bring the demand curve to a
position where the excess profits do not exist. As the profits touch normal level, the entry
would stop. The equilibrium would be stable and the firm tends to lose if it either raises
or lowers its price. Besides the competition based on price, monopolistic competition can
also be characterised by non price competition where the strategy of the firm would be
product differentiation, heavy advertising, quality, services, design guarantees, etc. A
monopolistic firm can use other distinct kinds of strategy to stay different from other
firms in the industry.
9.6 DUOPOLY AND OLIGOPOLY
In this section, duopoly and oligopoly are briefly discussed.
Duopoly
The duopoly market structure has the following characteristics.
Characteristics
The number of sellers in this market structure is only two.
The decision of the sellers is not independent of each other.
The change in price and output by one seller affects the other seller who reacts to
the change.
The product can be homogenous or differentiated.
The decision variables include price, product differentiation, selling expenses, etc.
but the decisions depend upon the strategies of the competitor.
Product differentiation is the entry barrier and also the firm dominating the market
can pose as an entry barrier.
The price is determined in the market by demand and supply forces. The competition is
between the two firms operating in the market. They respond to each others strategies.
Oligopoly
Oligopoly is a situation where a few large firms compete against one another and are
interdependent with respect to decision making.
Characteristics
There are small number of large sellers.
The product they sell can be differentiated or homogeneous.
The policies of each seller have a noticeable impact due to the extent of influence
of each seller.
The element of interdependence.
Cross elasticity of demand is very high due to the close substitutes of the product.
Existence of price rigidity.
The firms may enjoy some monopoly power.
Strategies available to an oligopolist include advertising, quality improvement,
etc. as the firms suffer from rigidity of prices.
Oligopoly can be classified as perfect and imperfect oligopoly on the basis of
product differentiation, open or closed oligopoly on the basis of entry of firms,
partial or full depending upon presence or absence of market leader.
When the firms follow a common price policy, it is known as collusive oligopoly.
Strategy
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Because of the element of interdependence, oligopolist market is characterised by price
wars. The oligopoly firms may decide to collude in order to avoid price wars. In a cartel,
firms collude in setting prices and output levels. The necessary conditions for collusion
include:
Control of firms on supply in the market.
Not a very price elastic product.
Mechanism to detect and punish cheaters among the firms.
MRTP Laws do not allow collusion and collusion would result in higher price. Because
each firm has an incentive to secretly lower its prices and expand its market share, no
firm would like to change its price resulting in the rigidity of prices. Implicit collusion in
the form of price leadership may be done by the oligopolisitic firms.
Activity 2
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The different market structures have different view points with respect to competition. In
monopoly, competition is not fierce as the monopoly firm has an advantage over other
firms. This advantage may be in terms of product, process, technology, etc. In case of
monopolistic competition, all the firms try to achieve this advantage so that they could
be more successful than their competitors. Firms operations in oligopoly and duopoly
market structures also aim for sustainable competitive advantage to survive in the
market.
In the short run, a firms competitiveness derives from pricing or application attributes of
the products but in the long run, a firms competitiveness derives from its ability to
develop and grow at low cost and at a faster pace than its competitors. The most
important point about competitive advantage is that management must be able to
integrate corporate wide technologies and processes into competencies that provide a
solid ground to the individual business so that it could adopt quickly to the ever changing
opportunities. Core competence has been regarded as an effective way to help the
organisation in the task of restructuring its products, markets, management,
organisational setup and technology in the complex and dynamic environment.
According to Prahalad and Hemal, core competence is the collective learning in the
organisations, especially how to coordinate diverse production skills and integrate
multiple streams of technologies. When the organisation is faced with competition in the
market, it is the core competence which proves to be an asset and which can be enhanced
through application and sharing.
In all the market structures, price determination is an important strategy to win
competition but it is the core competence concept which focuses on the preservation of
firms existing superior skills. For instance, a monopolist would always like to remain a
monopolist by continuously improving and enhancing the product or service because of
which it has hold over the market. On the other hand, in monopolistic competitive
market every firm tries to compete through new ideas and strives to develop core
competencies. With respect to core competencies, Prahalad and Hemal provide the
following key issues:
A core competence is one that provides access to various markets. For example, a
firm can operate as a monopolist in one business and can operate in a monopolistic
competitive market at the same time in other business.
A core competence should make a significant contribution to the perceived customer
the benefits of the end product.
A core competence should be difficult for competitors to initiate. For instance, a firm
entering a monopoly market may acquire some of the processes that comprise core
competency but it will not be easier to duplicate monopolists pattern of internal
coordination.
In any market, sustainable competitive advantage plays a major role and core
competencies are nurtured so as to meet the turbulent environment and improve and grow
by grabbing the right opportunity at the right time.
Apart from core competence, the possible strategic alternative to have sustainable
competitive advantage for different market structures are as follows:
Monopoly- Stability is the best strategic alternative. For strengthening the position,
vertical integration (either forward or backward) will be most effective. If any competitor
enters, mergers and acquisitions may be the appropriate option.
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Perfect Competition- The firm should not go for advertising or price differentiation.
Concentration strategy will improve the economics of scale and firms sustainable
competitive advantage will increase.
Monopolistic Competition- Advertising, quality control and branding are the
appropriate measures. Strategic alliances with respect to price may work. Differentiation
strategy may work. Diversification strategy may further enhance the competitive strength.
Duopoly and Oligopoly- Wide variety of options are available. They may go for
diversification, integration, mergers, etc. They may look into promotional strategies for
better competitive advantage.
9.9 MARKET STRUCTURES AND PRICING
The different market structures adopt different pricing strategies. A few pricing strategies
help deterring the entry of competitors. They may also enhance competitive strength and
force some of the competitors to go for exit promoting strategies. Various pricing
strategies used by the firms in different market structures have different implications. A
few pricing strategies are narrated below:
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quality image. In monopolistic competition and monopoly, this pricing strategy gives
results.
6) Penetration Price
This strategy requires a highly price sensitive market with high price elasticity. It is
characterised by low price which is likely to discourage competition. The policy is to
charge low price so as to stimulate demand and capture large share of the market.
There are various other strategies as well like sliding down the demand curve, premium
pricing, fraction below competition, price discrimination and put-out pricing. A firm can
use any of these strategies to compete in the market. Different strategies could be used at
different time periods by the same firm as per the conditions.
Activity 3
1) Discuss alternative strategies for sustainable competitive advantage in different
market structures.
...
...
...
2) State alternative pricing strategies to be used in different market structures.
...
...
...
9.10 SUMMARY
The markets in which the firms operate can be classified according to nature of
transaction, time, volume, status, regulation, area and structure. According to structure
markets are classified as perfectly competitive market, monopolistic competitive market,
monopoly, duopoly and oligopoly. The price determination is different in different
market structures. It also differs in the long run and in the short run. Economic theory
suggests that there lies a continuum of market structure that comprises of perfect
competition at one end and monopoly at the other. Between these two extremes lie
monopolistic competition, oligopoly and duopoly. There are large number of buyers and
sellers in a perfectly competitive market. The firms have to determine the quantity to be
produced because price is fixed at the market rates. In the short run the firm in a perfectly
competitive market can earn profit or loss. In a monopoly, there is a single seller whose
product has non close substitutes. There is no free entry in its case. In monopolistic
competition firms deal in differentiated products and take independent decisions. They
may earn supernormal profits or normal profits or incur losses as well. Duopoly is a
situation where in homogeneous or differentiated products are sold by only two firms.
Each firm has to see how its actions are likely to affect its rivals and how they are likely
to react. Oligopoly is a situation where there are small number of large sellers. The
element of interdependence exists in this market. To avoid price wars, the oligopoly
firms may decide to collude. For sustainable competitive advantage, various strategic
alternatives may be used. Several pricing strategies are used by the firms. These include
price lining strategy, limit pricing strategy, stay-out pricing strategy, psychological
pricing, skimming and penetration pricing strategies.
9.11 SELF ASSESSMENT QUESTIONS
1) Differentiate between the different market structures and their impact on competition.
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2) Discuss strategy for sustainable competitive advantage in the monopolistic
competitive market.
3) What are the various pricing strategies available to the firms? Discuss each one of
them with reference to different market structures.
4) What are the strategies for firms operating in an oligopoly? What can they do to
avoid price wars? Suggest appropriate pricing and competitive strategies.
5) Write an essay on different market structures and network externalities i.e.
competition, pricing, etc.
9.12 FURTHER READINGS
Baumol, W.J. (2002). Economic Theory and Operations Analysis, Englewood Cliffs,
N.J. Prentice Hall, 2002.
Haynes, W.W. (1962). Pricing Decisions In Small Business, Lexinaton: University of
Kentucky Press, 1996.
Mehta, P.L., (1996)..Managerial Economic: Sultan Chand Sons, New Delhi, 2003.
Ghosh, P.K., Business Policy Strategic planning and Management , Sultan Chand
& Sons, New Delhi.
Kazmi, Azhar (2002). Business Policy and Strategic Management, Tata Mcgraw
Hill Publishing Co, Ltd., New Delhi.
Miller, A. A. and G. G. Den, (1996). Strategic Management Mcgraw hill, New
York.
Prashad, L.M., (2002). Business Policy: Strategic Management, Sultan Chand &
Sons, New Delhi.
Thompson, J.L. (1997). Strategic Management: Awareness and Change,
International Thompson Business Press, London.
Shrivastava, R.M., (1995). Corporate Strategic Management, Pragati Prakashan,
Meerut.
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Block 4 Strategic Enablers
Objectives
The objectives of this unit are to familiarlise you with
the importance of IT in strategy
the various factors, which influence the choice of IT architecture and infrastructure
role of IT innovation and performance of a firm
e-business and steps in e-business plan
the role of IT in service quality
Structure
10.1 Introduction
10.2 Information Technology and Strategy
10.3 Use of IT in strategy implementation
10.4 It for Innovation and Performance
10.5 e-Business
10.6 IT in Service Sector
10.7 Summary
12.8 Self-Assessment Questions
12.9 Further Readings
10.1 Introduction
Increasing competition, higher performance levels, globalization, and liberalization are
examples of the immense changes that most of the organizations are face today.
Companies are forced to continuously and organically re-organize and re-shape
themselves, meanwhile changing functional hierarchies into flexible, high performance
network organizations. To cope with these challenges, organizations need to consider
information technology (IT) as an important factor; not only to strengthen operational
efficiency and effectiveness, but also to quickly and constantly respond to customer
needs and competitive pressures with IT-enabled products, services, and distribution
channels, and IT-enabled links with customers, suppliers, and other stakeholders.
The rapid growth of technological innovations and the synthesis of information
technology and computer networks are radically changing the way companies compete.
Many business enterprises are making strategic commitments to technology for the
purpose of gaining and sustaining competitive advantage in their industry. The creation
of a competitive advantage through the use of information technology (IT) requires
business executives to control this vital corporate resource and manage its use.
Over the last two decades, information technology has progressed from a purely
academic topic to the point where it has been absorbed into the mainstream. There is
hardly a company of any size that does not depend on information technology for its
operational success. In spite of this success, information technology is often regarded as
necessary evil consuming vast amount of resources yet having little strategic impact on
an organization. Information technology is transactional and operational; it aids an
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organization to automate many of the main operational processes; it enhances efficiency
but its effectiveness is often a suspect.
Organizations see information technology as contributing to some of their goals - but
they tend to be those associated with financial performance rather than with performance
on the key and core strategic aspects. The nature and role of information technology has
developed over the years. The original notion and practice involved the automation of
simple, and single, existing manual and pre-computer mechanical processes. The next
stage saw information technology deployed to achieve integration and rationalization of
these separate, single systems. In each of these approaches, IT was (and largely still is)
used primarily as an operational support tool.
By contrast with other waves of new technology, IT has a number of distinctive features
that make its potential to influence social change very significantly. These features
include:
Ubiquitous application: Users irrespective of the type of business or role they
perform can apply information technology in many different ways. An e-mail
system, access to the Internet and data processing capability are just as relevant
for a hospital as for a component manufacturer. In fact it is highly likely that they
use similar hardware and software and could communicate and exchange data
quickly and easily should they need to.
Dramatic rate of cost decline: The price of processing power, data storage and
transmission has fallen drastically. Today a simple electronic toy contains more
processing power than was used on the Apollo space programme.
Universal ownership: The increasing utility and ever lower cost of hardware and
software means that they are now almost universally adopted. However the
availability of bandwidth to enable rapid communication and transmission of data
remains problem in India and is, therefore, a block to further development.
Exponential growth: Continuous, rapid development and innovation means that
the trends to cost reduction and capacity increase continue. The earliest telegraph
equipment, using movable arms, had a capacity of 0.2bits per second while a fibre
optic cable has a capacity of more than 10 billion bits per second. These
developments suggest that the pace of change is going to be least at maintained
and almost certainly increase due to endogenous growth.
A review of the literature suggests that many factors independently and collectively
influence a firm's competitiveness (Porter, 1980). However, a growing stream of research
since 1980 has examined the concept of IT as a powerful competitive factor for
organizations (Porter and Miller, 1985;Barney, 1999). Recent research has suggested the
need for a more integrative approach between IT objectives and business strategy. Other
research has examined the value of IT as a viable competitive factor resulting is increased
productivity, improved profitability, and value for customers. Studies on the role of IT in
competitiveness have been primarily focused on large organizations. Few studies have
emphasized the strategic importance and the value of IT in competitiveness. However, in
2
today's global market, and with the use of Internet and electronic business, even small
and medium-size enterprises (SMEs) employ IT to increase their competitive position
along with their large counterparts. This is believed to be due to fewer obstacles
associated with systems integration and more flexibility to implement change.
In order to take full advantage of IT and to compete in the global business environment,
the top management must recognize the strategic value of IT and exploit it. However,
very few understand technology issues to incorporate them into their strategic plans. For
this reason, IT professionals must identify information needs of the organization and
develop an IT strategy that is in line with the overall corporate strategic plan. User
departments and top management should participate in the development of an IT plan and
communicate their needs to IT professionals. An IT plan includes factors such as: a
computer hardware and software requirement, systems definition, changes to the existing
systems and procedures, and the schedules and resource requirements for each project.
10.2 Information technology and Strategy
Information technology (IT) in every organization normally evolves from a means to
improve the efficiency and effectiveness of as organization to a means to influence the
strategic position of the company. The way in which management controls IT has
changed simultaneously. In the first stage of IT implementation, efficiency is the primary
goal and the attention of management is mainly focused on technology. In this stage, the
IT professional is generally an outside consultant, who decides what is best for the
organization. In subsequent stages, the effective functioning of the organization becomes
as important a goal as efficiency. The management then becomes conscious of the fact
that, next to technology, the design and structure of the organization is a decisive factor.
User participation, information planning and the appointment of steering committees are
indications of this. These organizations increasingly recognize the need for a methodical
approach to IT planning, as a result of disruptions in management, reorganization, cost
increase, or new usage possibilities.
To a large extent, organizations which have more experience with automation realize that
IT can, not only improve the efficiency and effectiveness, but also that it is of decisive
importance to the company's success. IT planning, subsequently, acquires a strategic
quality in these organizations and, in fact, functions as a catalyst in all this. These
organizations set up business architecture and IT architecture, based on an objective,
qualitative and quantitative analysis into the current use of information technology.
A good strategy cannot easily be copied by competitors, because of the organizational,
financial, social and technical cost and the trial period involved in attaining the strategy.
Every organization has its own profile, environment and aims. Strategy indicates how the
organizational structure should be designed and what the use of IT should be and should,
therefore, be sufficiently concrete and specific. A specific strategy leads to a unique
interpretation of the architecture and the infrastructure.
A good strategy focuses less on the product or the service itself and more on the delivery
of services, reputation, etc. This is especially important for products that have been
"commoditized". That is the reason why strategies differ in the same sector to a high
3
degree. For example, difference in strategy arises when the focus of a company is either
the top or the bottom of the market. For instance, quality, product features and product
innovation are applied in a very different ways in different segments of the same market.
This leads to very different information needs and to a unique use of IT within the same
sector. For example, quality, customization and product innovation are of vital
importance to a premium car such as Mercedes while standardization, quality and low
cost/price are vital to a budget car such as Maruti 800. In both cases, IT should strongly
support these business processes and constantly provide the management with
appropriate information.
Steps in Designing IT Architecture and infrastructure
In practice the realization of strategy, architecture and infrastructure is an interactive
process . The development of an IT architecture starts with the business strategy. The
business strategy will determine the business architecture" the organization structure
and the organization processes and the business architecture in turn will determine the
IT architecture" and IT infrastructure.
Business Vision
The business strategy should be precise and unambiguous for proper design and
implementation of IT architecture. A good strategy starts with a clear business vision and
it clearly spells out the direction the company is expected to follow in the years to come.
A good business vision should be inspiring enough to cause people to consider that it is
worthwhile to give it their time and energy. A business vision should be a challenge: not
vague, but specifically focused on the organization. This is vital since it provides a
framework for strategy formulation.
Business objectives
A business objective can be defined as the choice of policy that the company wishes to
pursue to realize the business vision. The choices may concern the well-known "Ps": of
marketing, namely, product, price, promotion and place and also strategic factors such as
competition, clients, suppliers and replacement products. For example, the business
objectives may deal with policy alternatives such as, market share versus profitability;
short-term versus long-term orientation or; growth versus consolidation. Though the
objectives provide overall direction for the organizations, they still provide specific
direction for IT architecture and infrastructure.
Business Processes and operations
The business vision and the objectives by themselves do not sufficiently explain which
aspects of the business should be reinforced, or what competencies the company should
possess to perform well. Competencies can be of an economical, technological and an
organizational nature, as well as of a social nature. By identifying the required
competencies and establishing a set of performance measures, a firm can now translate
the business vision into a number of concrete items of which it should be capable. The
existing organization and IT will have to be modeled on this basis. Performance measures
specify the capabilities, which should be developed. The design criteria are the essential
4
attributes required for success on the basis of which the organization and the IT are
modeled. Performance measures can be very simple statements such as; "An important
client should have a contact point within the bank and, therefore, we should appoint a key
account manager." In practice this means a total transformation and it is quite natural that
the senior management must guide such reorganization.
Business Architecture
Strategy has important organizational and technological consequences. Therefore,
formulating a business strategy is insufficient to make the organization perform. The first
step, after developing the business strategy is to, therefore, determine the business
architecture required to operate business processes. The effects of the improved use of IT
can only be expected when the company processes have also been effectively structured
and when the responsibilities are well defined. This has consequences for the
organization structure. In the business architecture, attention has to be, therefore, paid to
the redesign of the organization and the way in which the organization should function in
the future.
The business architecture is divided into three closely related blueprints. These three
together constitute the business architecture:
Business function blueprint: This blueprint describes the dividing of company
processes into responsibility fields and how they are put into practice (centralized-
decentralized).
Data access blueprint: In order to implement the company positions, all information is
necessary. That is why the information needs are described.
Application access blueprint: In order to approach the information, applications are
necessary. In the application access blueprint the necessary applications are described.
IT Architecture
The distinction between business architecture and IT architecture is of major importance.
In many organizations the architecture is mainly determined by technical and economical
considerations. The organizational aspects are, therefore, mainly realized by means of the
technical opportunities (technology push) and not on the basis of strategic and/or
organizational considerations. Within the scope of the business needs, the business
architecture offers the possibility to choose the best IT solutions. In this way, the IT
architecture fulfils a "bridge" function between, on the one hand, business demands on
information supply and, on the other, technological opportunities.
In the business architecture, the way in which the organization should function in the
future is indicated, along with which information needs are important in this. The
business architecture describes this in a more functional sense. The IT architecture
translates the more functional description into technical solutions. The difference
between business architecture and IT architecture is, in fact, comparable with the
distinction between functional and technical design, which has been used by system
development methodologies for years.
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The business architecture is dominated by managerial and organizational questions
(what). The answers to these questions are translated, in the IT architecture, into
automation directions (how) and eventually in the choice of specific makes and types of
technical means: the IT infrastructure (with what).
IT Infrastructure
The IT infrastructure is described as the setting-up and management of the whole
hardware, software and data communication supply, in such a way that the business
architecture and IT architecture can be implemented successfully. The IT infrastructure
distinguishes itself from the IT architecture in that the concrete services and products are
specified. At first it was sufficient to indicate that there was a need for mini-computers
and workstations. In this phase it is determined which specific requirements the systems
should meet, in terms of speed, distributed databases and the corresponding machines,
local/long-distance communication opportunities, co-operative processing and user
interfaces. Also, specific brands and types of products are determined.
Components of IT Infrastructure
The IT infrastructure is not only a matter of hardware, but also a complete integration of
the information technology supply. Within this scope, the following components are
recognized in the IT infrastructure:
IT components: The components are formed by the various hardware components,
consisting of computers, displays, personal computers, printers, data communication
connections and disk units. The software for the steering of all these components is
included. In the choice of hardware components other factors prevail, such as
compatibility (to what extent can computer systems of different makes and models
actually exchange data), data communication possibilities, speed of processing, the
price/output-relation and the ease of operation.
IT services: IT services are services, which execute specific assignments for
applications. In the past, application programmers had to set up and develop their file
organization on their own. Nowadays, the database management systems take over a
large part of these activities. The same applies to the network management. The software
involved takes care of the accurate operation and control of the data communication
facilities and offers many facilities for management.
IT control instruments: The previous components, services and facilities cannot be put
in, in a sufficiently effective and efficient way, if attention is not paid to control
instruments as well. These instruments consist of: procedures, methods, techniques and
tools for system development and the quality and experience of the automation personnel.
The IT infrastructure will function better if the products and services are connected and
are in tune with each other. The company will profit more, and more directly by this. The
more one is capable of putting in the IT infrastructure, the better one can do in the
primary business processes. The IT infrastructure should not only support the most
obvious business processes, it is precisely the support of strategically important business
processes, which can lead to the greatest success. Therefore, it is important to select the
6
components and services in such a way that there is sufficient material for a fast and
effective creation of new company facilities.
Factors in the IT infrastructure
In developing the IT infrastructure, other factors play a role as well. These factors are,
among other things:
User-friendliness: An example of user-friendliness is the requirement that for every use
at every place of work, the same meaning should apply to function-tests. This can also go
in the direction of graphic presentations of data, the use of a mouse and the use of pull-up
and down menus for the entering of data coding. User-friendliness requires computer
capacity and may have consequences for the filling-in of blueprints.
Cost control: Cost control depends on the question as to whether intelligent terminals
are being used, or not, at the workstation, on the installation of applications and the data
storage at the workstation. The costs of hardware, communication and control should be
weighed against each other.
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Technological feasibility, where attention is paid to what might be feasible, in the
short and in the long term;
Complexity, e.g. which products and services exclude each other (possibly in the
short term);
Controllability, e.g. knowledge and experience of the employees;
Economic feasibility e.g. cost of acquisition and development and the operating
costs.
Activity 1
Name any five companies, which have recently adopted technology as a part of
the company strategy.
a
b
c
d
e
10.3 Use of IT in strategy implementation
Competitive Strategy and IT
Competitive strategy is an organizations approach to achieving sustainable competitive
advantage over, or reducing the competitive advantage of, its competitors. Porter (1980;
1985) suggests that the success of organizations depends on how well they cope with and
manage the five key "forces, namely, the bargaining power of suppliers; the bargaining
power of buyer; the threat of new entrants; the threat of substitute products; and rivalry
among existing firms, which shape an industry.
Successful organizations both react to, and influence, the five forces and by doing so,
influence the nature and shape of their own industry - to their own advantage, naturally in
promoting growth. To fuel this growth, there are two basic commercial strategies that
organizations can adopt: product differentiation (directly related to a number of the
options above); and low cost/price. These two basic strategies rely for their success on a
whole platform of "second order" strategies concerned with, for example, product range
and distribution. They are: cost leadership; differentiation; cost focus; and focused
differentiation.
Strategic cost measures which result in cost leadership are aimed at:
Reducing the total costs of the organization by reducing or avoiding specific
costs;
8
Working with suppliers, distribution channels, or customers to reduce or avoid
some of their costs so that the organization establishes a "preferential
partnership"; or
Increasing the cost-profiles of competitors.
If these are the activities, resulting in strategic advantage, they must be supported by
appropriate technology and IT. All activities, which form part of differentiation
strategy and which is a variant of the competitive strategy should be supported by
appropriate IT. Traditional data processing relates to accounting, order processing and
other administrative responsibilities. Things are now starting to change - partly as a result
of changes in technology and partly because senior managers are beginning to understand
the nature of their businesses and the importance of a few core processes and key tasks.
Thus IT is being aimed at the frontline, customer- oriented processes and activities
relating to the production, marketing, delivery, and servicing of the product.
The Value Chain and IT
All components of the value chain are interrelated. When addressing IT, it should be
designed to cut across the functional boundaries and integrate the various elements of the
chain. This should lead to both cheaper systems - and, much more importantly, higher
quality, more strategic information through improved linkages in the chain. IT can be
used to redesign and reconfigure the system by reordering, regrouping, and restructuring
the activities within the value chain.
Value Systems and IT
This value chain of an individual organization, which is competing in a particular
industry, is embedded in a larger stream of activities that Porter terms it "value system".
This relates to the external relationships with suppliers at one end, distributors at the
other and competitors in the middle. Again, competitive advantage stems from an ability
to manage these relationships more effectively than competitors. Certainly, in these days
of extensive - if not ubiquitous and total - networking, interoperability of systems is vital.
This extends outside of the organization so that it is certainly preferable for suppliers to
share common EDI systems - and even data structures - to facilitate simpler data
interchange with them. Again, this can lead to co-operative purchasing and economies of
scale. It may even extend to risk management and disaster recovery agreements between
organizations with similar standards and similar-sized technical installations.
For many organizations - especially small- and medium-sized enterprises (SMEs) -
competitors may be a source of assistance. In many industries, co-operation with
competitors is very common - through trade organizations, for example. Sometimes,
small organizations have to group together in alliances to compete against a dominant
large player. This cooperation may include a shared approach to, or at least experience
exchange in relation to, IT.
Cooperation among organizations in relation to IT usually takes the form of (a) vertical
integration, (b) outsourcing, and (c) quasi-diversification, whereby organizations
cooperate across markets or across industries in order to better exploit their key
9
resources. Adopting parallel or compatible IT means that relationships with other
organizations that were previously not possible due to high coordination costs or high
transaction risk may become feasible.
Occasionally, there is very wide co-operation on IT within a sector or industry. This
normally relates to infrastructure components such as networking and messaging but can
apply to transaction-based IT. Such co-operation may be to the benefit of all if it
produces lower costs or better quality service. EDI is an example of a shared technology -
offering economy of information. Few firms have investigated the issue of shared IT -
though the use of packaged software is obviously a form of this. All the strategies
discussed above require the organization to change. IT can be a supportive facilitator of
change - extending and enhancing organization choice and improving the quality of
decision making.
Activity 2
Give one example each of cast leadership:
Differentiation:
Cost focus:
Focused differentiation:
10.4 IT for innovation and performance
Businesses are increasingly finding themselves in business environments facing rapid
increases in both turbulence and complexity, leading to enhanced uncertainty and
increased competition, which in its most extreme form, is termed as hyper-competition
(D'Aveni, 1994). This has also led to an increased focus on innovation as a means of
creating and maintaining sustainable competitive advantages (Nonaka and Takeuchi,
1995). In the wake of this development, efficiency and rapid access to knowledge and
information (Barton, 1995; Grant, 1996) is becoming paramount. Consequently, spending
on information technology (IT) has surged during the last two decades.
One type of benefit that managers attribute to IT is speed and responsiveness
(Brynjolfsson, 1993). Speed is important in the development of successful innovations
(Kessler and Chakrabarti, 1996). There is a positive relationship between using IT to
increase effectiveness and the successful implementation of innovations. Grant (1996a;
1996b) focuses on knowledge integration within companies as important for creating
sustainable competitive advantages. Huber (1990) further argued that the use of IT leads
to more available and more quickly retrieved information. The importance of knowledge
integration and availability of information may be linked to the positive relationship
between using IT to improve internal communication and successful innovations,
facilitating a higher degree of coordination and integration of activities. Also, by using
IT, it is likely that the speed of the processes increases, leading to lower costs of
development and providing an earlier introduction to the market (Kessler and
Chakrabarti, 1996), which in turn will have a positive effect on the successful
implementation of innovations. Use of IT can also lead to new ways of managing the
company and enhancing productivity. This can be explained by the fact that IT has an
10
inherent potential in terms of improving coordination of cost reducing activities in the
company and thus raising cost efficiency.
Customer satisfaction
Berkley and Gupta (1994) found a positive relation between the use of IT to improve
service quality and customer satisfaction. This was also found by and pointed out as
being of significant importance for many firms by Quinn (1996). The positive link
between the use of IT to ease the work and customer satisfaction may be attributed to the
inherent time saving, which could be transformed into more attention directed towards
the customers, thus increasing customer focus and in turn customer satisfaction. The
positive relation between the use of IT and lower costs, and customer satisfaction may be
caused by customers benefiting from cost reductions in the way of price reductions,
which will lead to increased customer satisfaction.
10.5 E-Business
The use of the term e-business implies that it is distinct from business per se. There have
been arguments proposed that would suggest that the underpinnings of e-business are of
such significance that it can be regarded as discontinuously different. If this is so, then it
could be argued that a new business paradigm has emerged. The recent reversal of
fortunes of the dot.com businesses has graphically emphasized the fact that they, and e-
business, operate within the same business environment and context as conventional
bricks and mortar businesses (Porter, 2001). However, fundamental to this is the
technology that has enabled the e-business phenomenon to take place.
Web based Business Models
The rapid expansion of the worldwide web and e-Commerce has created a number of new
business paradigms. The array of business relationships which have emerged in recent
times include:
Business-to-Business (B2B)
Business-to-Consumer (B2C)
e- Market Places
11
exchange on such things as product warranty and service capabilities. Figure 10.1
explains the web models and this interrelationship.
12
that include downsizing, restructuring, re-engineering, outsourcing, and merging or
spinning off companies.
The transition of operations in many businesses to real time operation has begun to churn
up huge creative chaos inside corporations (McKenna, 1997). The Twenty-first century
Corporation must adapt itself to management via the Web. It must be predicted on
constant change, not stability, organized networks, not rigid hierarchies, built on shifting
partnerships and alliances, not self-sufficiency. Internet-based technologies are creating
information overloads where "a major task of practitioners is to help mobilize those
frozen by the overload of information". Web-based information systems are also causing
profound organizational changes: It seems logical to assert that Internet-based
information systems have created profound changes throughout organizations.
Researchers have begun to document the impact of these changes. One common thread
appears to be that applications should be Web-based in their design, and that they support
distributed collaboration and decision-making.
Organizational Change
In most organizations, few people possess all the information required to make optimal
decisions. By taking advantage of Web-based information systems, associates can access
information from many sources at any time and from any place. This has created more
team-based decisions and new organizational structures. Thus, the inference is that Web-
based information systems can lead to organizational changes by facilitating
organizations that are more organic in structure and can adapt more easily to share
information in a timely and coordinated fashion. Web-based technologies have similarly
created performance improvements in organizations by changing roles and patterns of
communication. Electronic networks open up new possibilities for reducing barriers to
communication and sharing organizational knowledge and electronic collaboration tools
can tap into expert knowledge and resources throughout an organization where
productivity, flexibility, and collaboration will reach new, unprecedented levels. Success
in increasingly competitive marketplaces will depend on effective communications and
knowledge sharing among members using collaborative electronic networks.
Time
In terms of the impact of Web-based information systems on time, Byrne asserts,
"Employees will increasingly feel the pressure to get breakthrough ideas to market first".
He further contends, "that rapid flow of information will permeate the organization.
Orders will be fulfilled electronically without a single phone call or piece of paper. The
`virtual financial close' will put real-time sales and profit figures at every manager's
fingertips via the click of a wireless phone or a spoken command to a computer". He
further contends, "It is about speed. All this work will be done in an instant". "The
Internet is a tool, and the biggest impact of that tool is speed", says Andrew S. Grove,
chairman of Intel.
The speed of actions, the speed of deliberations, and the speed of information have
increased, and it will continue to increase. That means the old, process-oriented
corporation must radically revamp. With everything from product cycles to employee
13
turnover on fast-forward, there is simply not enough time for deliberation or bureaucracy.
While this sounds like a positive impact, the shrinking time demands may cause
increased problems in other areas, for example, employee stress.
Web-based information systems will have a profound impact on the organization and its
structure. Organizational chart of large-scale enterprise had long been defined as a
pyramid of ever-shrinking layers leading to an omnipotent CEO at its apex. The twenty-
first century corporation, in contrast, is far more likely to look like a web: a flat,
intricately woven form that links partners, employees, external contractors, suppliers, and
customers in various collaborations. The players will grow more and more
interdependent. Fewer companies will try to master all the disciplines necessary to
produce and market their goods but will instead outsource skills - from research and
development to manufacturing - to outsiders who can perform those functions with
greater efficiency.
Therefore, as Web-based information technologies diffuse throughout organizations,
there may be profound impacts on organizational changes, including the general
flattening of organizational structures and the need to develop middle management teams
that operate effectively within this new environment. Web-based electronic networks
have been shown to have both positive and negative consequences. Anticipated, desirable
consequences have included timely savings, improved productivity, and improved
decision making via increased access to timely information. Innovation and creativity
were also shown to improve when workers could share ideas and knowledge. On the
other hand, researchers have demonstrated that Web-based information systems can also
have a negative impact on workers. People feel pressurised by the real-time demands
created by the non-stop presence of the Internet. They also sense loss of communication
and relationships created by virtual communities and meetings, relationships based on
physical and face-to-face meetings and conversations.
Identifying e-business application Areas
When examining the company for the possible application of e-business, one can focus
either on internal processes and systems or on the externally oriented processes. If the
main focus is to reduce costs or prepare systems for future e-business applications, the
internal perspective might fit best. If the aim is to improve the customer's perceived
value, one can best investigate the company's buying and selling processes.
Internal e-business Value Chain
Taking the value chain (Porter and Millar, 1985) and placing e-business technologies into
the framework gives an insight into the reach of these technologies into the value
activities. The exact meaning of all prevalent "e-" applications is less relevant as new
applications arise every day and definitions vary widely. Linkages already exist between
activities; some of these linkages have been integrated by using e-business technologies,
ultimately providing a fully integrated e-business process. It is important to realize that
these new applications have to be integrated with supporting and, if applicable, primary
processes to prevent creating islands of automation.
14
The physical processes might have to be rearranged to better align the original value
chain to the new e-business oriented value chain. Integration of the physical processes
and e-business applications is essential to achieve maximum results. It is said, "a business
is profitable if the value it creates exceeds the cost of performing the value activities"
(Porter and Millar, 1985). Analyzing the e-business value chain can help in lowering the
costs and increasing the value of activities. It has to be kept in mind that the supporting
processes should be prepared for future e-business developments before embarking into
large-scale "e-" systems.
Taking the Web marketplace as an example, one can see that, if a marketplace requires
sound estimates for the delivery time of a product, e-fulfillment systems have to be in
place and the factory floor automation has to be capable of providing this information.
Supporting processes are not only the technical infrastructure, but also the databases
holding all information and people capable of working with the systems.
Formulating an e-business Plan
Having identified the portfolio of specific e-business applications that need to be
developed from a strategic perspective, these applications have to be brought into line
with the existing IT architectures. Commonly identified IT architectures encompass the
following:
Information architecture;
Systems architecture;
IT infrastructure; and
Organizational architecture.
As a first step, the impact of the identified e-business applications on the information
architecture has to be assessed. The e-business applications can be integrated into the
information architecture, taking the customary view of information architecture as the
description of information systems areas in terms of the business processes they support
and the data they use. Three possible situations can occur at this architectural level:
(1) A e-business application fits well within one information systems area. This means
that the original information architecture is still valid.
(2) A e-business application covers two or more information systems areas. A decision
needs to be made whether to merge the affected areas or to rearrange them in such a way
that the e-business application falls into one new information systems area, together with
possibly existing or projected other applications. The relationships between information
systems areas have to be redefined in order to arrive at consistent information
architecture for the new situation.
(3) An e-business application does not fit in any information systems area. A new
information systems area has to be defined in terms of the business processes supported
and data items created and used by the e-business application. Careful analysis of
possible relationships with other information systems areas within the information
architecture is needed.
15
A similar process has to be followed through for the systems architecture. Specific
attention has to be given to the stewardship of the data items (who controls the creation of
data, which mechanisms have to be in place to control any occurring redundancy?) and
the integration of applications (how can we provide a consistent interface to the users?).
The consequences for the IT architecture might be more severe, as e-business
applications often call for substantially higher degrees of scalability and security.
Accordingly, the required capacities and skills for the supporting organizational
architecture may be very different from existing ones, which often gives rise to a renewed
outsourcing discussion.
Through assessing the impact of e-business applications on existing architectures, several
consequences are identified. Plans have to be made to properly incorporate these
consequences within the IT architectures, describing what changes are needed to existing
information systems, infrastructure, new developments or organizational layout. These
consequences give rise to projects within the overall IT project portfolio of the
organization. As a result, the project portfolio is populated with both e-business
application projects and projects that need to be carried out in order to properly integrate
the e-business applications with the business structures and IT architectures of the
organization. Standard project portfolio management techniques can be employed to
render a specific e-business plan for the organization.
16
disappointed because they are turned away. There is also a risk that the accepted
customers may receive inferior service. For many customers, even if it is good service, it
is no good when it is late or slow. Armed with the proper information, service firms may
be able to adjust capacity to match fluctuating demand levels. When peaks in demand are
predictable, forecasting and capacity management systems can be used to construct
detailed staff schedules that match capacities to demand.
In services, information must be secured from the buyer to specify the expected service.
This is important because the more complete the information, the easier it will be to
perform the other process functions. Customers also need to be made aware of the
various services available and the likely costs of each alternative. Such information
ensures that the needs and expectations of the customer are fulfilled and the
organization's time and resources are not wasted in dealing with customers whose needs
and expectations it cannot, or should not, fulfill.
Service errors are often caused by a misspecification of the service. For example, Federal
Express found that wrong ZIP codes, wrong street addresses and even wrong names
cause most of its routine mistakes. Often, a package misadventure begins when a clerk
misreads a customer's handwriting. To improve service specification, Federal Express has
introduced new self-serve kiosks, called FedEx Online, using bank automatic teller
machine (ATM) technology. Each kiosk has a touch-screen video display for customers
to price packages and print their own address labels (Ramirez, 1993). Major ocean
shipping companies now use a Windows-based electronic data interchange software
package called Ocean for customers to book and confirm their own orders. Ocean is
expected to reduce data errors because the information keyed in by customers is fed
directly into the carriers' systems (Radosevich, 1993a).
Service requires a long memory. With a computerized customer database, a firm can
attach a detailed personal service history to the names of its customers. A record of each
new service transaction can then be added to existing customer files. These updates help
sketch an increasingly detailed profile of each customer's preference and expectation and
create opportunities for more personalized and enhanced service. For example, Marriott's
guest recognition system allows personnel to call up information about guests who have
stayed at a Marriott hotel before. Marriott's system can predict that a particular guest will
want a non-smoking room, a king-sized bed, an iron and a hair dryer. Customer service
histories that are easily accessible allow frontline service providers to know on the spot
which customers are first-time clients and which are loyal repeat customers. Such
information allows service staff to acknowledge and personally reward the valued repeat
customer and to solicit feedback and other important information from new customers.
Customer files enhance service consistency and server competence. Customer service
records also ensure that service is personalized and consistent for repeat customers, even
after their regular service-delivery person moves on to another job. The Nordstrom
department store chain depends on its sales associates to provide individualized service to
its loyal customers. Currently, individual customer preferences are resident only in the
memory of a sales associate and the firm is working to convert this personal memory to
corporate memory. An information system that allows customer files to be called up at
many different locations would allow the firm to direct customers to different company
17
stores providing individual sales or services of special customer interest. This in turn will
help build a customer-company relationship that is stronger and more valuable than a
simple customer-store or customer-employee relationship. Customer service histories can
speed service. In the medical field, computerized patient records speed service, cut costs
and save lives. For example, computerized systems can warn physicians of potential
problems such as allergic reactions or duplicated tests.
Customer service expectations are a moving target. To deliver superior service, a
company must monitor customer expectations and customer response to the services it
offers. While market research can be used to determine customer expectations, often the
required information can be obtained at a significantly lower cost by listening to
customers and employees. Most of the good service providers have a communication
process to ensure that customer suggestions and requests are communicated up and down
the organization to the people who need this information.
Although customers are the best source of information, they will rarely volunteer the
necessary information. In industries characterized by large numbers of relatively small
transactions, such as financial services and retailing, computerized point-of-sale and bar-
code scanning devices can now record every customer service encounter. For example, in
supermarkets, scanners speed checkout and provide customers with detailed receipts.
Moreover, scanner systems provide management with continuous inventory updates and
a detailed analysis of performance by product, by department and by store. The intended
result is fewer inventory stock outs of popular items and improved customer satisfaction.
Knowledge
Service providers must possess the required skills and knowledge to perform service.
Greater knowledge allows frontline service workers the better to help their customers and
makes them capable of important judgements on matters that previously would have been
handled by managers. Because employees can experience intense frustration when facing
a customer and not having the answers, knowledge also supports employee job
satisfaction, motivation and confidence in dealing with customers.
Knowledge databases allow relatively inexperienced people to perform very sophisticated
tasks quickly. Whereas service providers, unaided by databases, are limited to their own
knowledge, those with access to fast-response decision-support systems effectively
possess the knowledge of many. This is particularly important when service firms rely on
entry-level, part-time or relatively inexperienced workers. Information systems can also
be used to reduce the knowledge required to deliver customized services and to improve
service consistency. If the most relevant customizing variables can be specified and
programmed in advance, the firm becomes less dependent on frontline personnel to
perform the customizing tasks. For example, employment agencies try to identify job
openings offering the desired salary, location, type of work and level of responsibility.
Computer programmes can be written to search the job-opening files and automatically
generate a list of feasible matches. Not only is the market knowledge institutionalized,
but also much of the necessary expertise.
18
Quality in services depends heavily on the ability of employees to share their knowledge.
Service expertise can be captured in either expert systems or group conferencing systems
that provide electronic bulletin boards for sharing problems and ideas. Many professional
service firms now find the core of their distinctive competence to lie in the accumulated
knowledge in their databases and the capacity of their members to access and build
solutions on these databases. For example, American Home Shield, a company providing
service contracts for electrical, plumbing and heating systems in individual homes, has
used the database it constructed to improve its service and learn as much as anyone about
the performance patterns of equipment supplied by major manufacturers (Heskett, 1986).
A number of software companies maintain textual databases of reported software
problems and solutions. As solutions to particular problems are found, they are added to
the database and become widely available to the technical support staff that takes calls
from users. By recording problems and solutions centrally, these databases give leverage
to the learning of each technical support person.
Job status
The longer it takes for service delivery to be completed, the more likely it is that
customers will require information on work-in-progress (such as estimated completion
times and projected costs). For example, Federal Express uses package barcodes that are
scanned six times during the shipping process to maintain real-time records on package
location. Recognizing customer concerns about whether the package actually arrived on
time, there is a money-back guarantee if a package cannot be located within 30 minutes
of a customer call. Many firms have developed customer information systems that allow
customers direct access to production and shipping files. These systems reduce customer
uncertainty and allow customers to measure firm performance. Frequent airline
passengers expect occasional delays. What upsets these passengers is the lack of
explanation and apology for delays. To be more responsive, Northwest Airlines passes
information from its flight monitoring system to co-coordinators located in each airport
who make sure passengers know the reasons for delay.
Quality control
Quality control consists of collecting data, monitoring (comparing the existing state with
the service standard) and corrective action. The objective is to make corrections to the
process before problems are created and customers complain. Many service problems can
be identified before customers experience them. Consider patients who arrive at their
doctor's office on time only to be told the doctor is running an hour late, or airline
passengers who, on arrival at the airport, are informed that their flight was cancelled
hours earlier. In situations like these, management could anticipate customer frustration
and take steps to alleviate it, including calling customers to warn them of the problem.
Quality control begins with data collection to determine the current state of the process.
This information is then compared to the service standard to determine if corrective
action is required. When service standards are subjective (e.g. courteous service) or when
the data are qualitative (e.g. employee behaviour, customer treatment, customer reaction),
qualities data are ordinarily collected by direct management observation. On the other
19
hand, objective performance data, such as customer waiting and service times or system
response times, can be collected and processed by information systems.
Complaints management
Customer complaints provide valuable information regarding service quality problems. A
problem resolution situation should be viewed as an opportunity to learn how to improve
service. The greatest risk is that customers will not bother to complain, but will simply
generate negative word-of-mouth advertising and take their business elsewhere. Service
firms should welcome complaints and make it easy for customers to complain. For
example, British Airways has installed what it calls Video Point booths at Heathrow
Airport in London so travelers can videotape their reactions on arrival. Customer service
representatives then view the tapes and respond.
The closer to the point of service delivery a complaint is made, the better is the service
recovery. Experience in many companies indicates that it takes longer to handle an
escalated complaint at the head office than it does at the point of service. Once a
complaint is lodged, fast response is the key. Customers should not have to wait weeks to
get an answer or to get a problem resolved. At Coca-Cola complaints are logged into a
complaint handling system and shared with all departments for analysis of likely causes
and appropriate corrective action. As soon as the investigation is complete and an
effective corrective action has been found, the customer receives a complete report of the
root cause and the actions taken, usually within 48 hours.
Successful service firms track complaints by type (e.g. poor employee attitude, slow
service), by frequency and by department. This is done because many service problems
are not so obvious and, without adequate tracking systems, often go undetected. Some
service companies also use complainant satisfaction tracking systems to measure the
success of their complaint handling systems. These systems generally send customers
who have complained a postage-paid reply card for evaluating the way their complaints
were handled. Customer replies can then be tabulated by individual customer service
representative, by location or by teams of complaint handling personnel.
Customer feedback is not always bad. Service firms also receive compliments. Customer
compliments provide an opportunity to increase employee motivation and improve
service quality. Unfortunately, many companies do not have an organized system for
routeing compliments back to employees. This is particularly true for geographically
widespread organizations where a compliment might be received in Singapore about
service delivered in Paris. Verbal compliments should be recorded (the format is not
important) and, with written comments, passed on to all employees who contributed to
the service complimented and to their immediate supervisors. Typically, the effort and
money spent on using compliments to motivate and encourage superior performance are
returned many times over.
Service recovery
The best service is preventive rather than reactive. But, despite one's best efforts,
mistakes are a crucial part of every service. The fact is, in services - often those delivered
20
in the customer's presence - errors are inevitable. But dissatisfied customers are not. A
good service recovery can turn angry, frustrated customers into loyal customers. Good
recoveries can, in fact, create more goodwill than if things had gone smoothly in the first
place.
Service failures are best resolved when and where they happen, before they become
costly to resolve and before they create lost revenue. To resolve problems when they
occur, frontline personnel must be trained and encouraged to use their judgment.
Employees need enough data to solve problems and make decisions while the customer is
still present. In many cases (such as billing problems), recovery efforts require customer
account histories and data from several company departments. If problems are to be
solved on the customer's first call, this information must be readily available to customer
service personnel. For example, image processing of credit card slips at American
Express allows customer service representatives to find image records of customer
transactions in seconds.
Nothing could be worse than saving a customer only to have the same mistakes repeated
because other employees who needed to know were not informed. To prevent problems
recurring, and to prevent weak recovery efforts that fail the customer twice, some firms
use recovery-tracking systems that capture information pertaining to each instance of
recovery service. This information is available so that all employees who deal with a
particular customer will know what occurred, what recovery methods were used and what
commitments were made. For instance, if a restaurant matre d'htel seats a patron with a
reservation very late and promises a free dessert, the waiting-on staff should not later add
this dessert to the customer's bill. To ensure accurate data, customer service
representatives should be able to input information directly into the recovery tracking
system. Direct access also facilitates retrieval of information helpful to recovery efforts.
Customer defections
Measuring service quality objectively through conformance to standards and subjectively
through customer surveys is not enough. These techniques miss former customers who
have left over the company's handling of an irregular situation. Identifying defecting or
lost customers and measuring defection rates can provide a way to measure and improve
service quality. The idea is to identify those customers who stopped doing business with
the firm, then find out why. Defections can then direct managers' attention to the specific
things that are driving customers away.
To measure defections one must have a defections scanning system to identify customers
who have ended their relationship with the firm. If service or billing histories of
customers are available, scanning the dates of last account activity easily identifies
defections. Alternatively, many service firms, such as airlines, hotels, restaurants, rental
car agencies, retail stores and even grocery stores, now have membership programmes
and customer databases.
Often, customers are given a membership card that entitles them to discounts, and all
subsequent purchases are logged against the card number. These databases then provide
21
service managers with an easy way to identify inactive customers and, often, clues as to
why customers are no longer buying.
10.7 Summary
The rapid growth of technological innovations and the synthesis of information
technology and computer networks are radically changing the way companies compete.
Many business enterprises are making strategic commitments to technology for the
purpose of gaining and sustaining competitive advantage in their industry. The creation
of a competitive advantage through the use of information technology (IT) requires
business executives to control this vital corporate resource and manage its use.
Organizations seek to gain competitive advantage in their selected markets via a number
of competitive approaches - based primarily on product, service, differentiation and
pricing policies. To understand the environment and customer behaviour they need
robust, reliable information. In order to deliver to their chosen strategy, they must
configure the organization (including extended configuration within the industry sector
through alliances and collaborative ventures) and the various functional processes to
deliver reliably and efficiently. Information Systems (IS) is used to configure the
organization appropriately and to ensure communication between the various
components. IS is then used to ensure effective communication within the extended value
chain involving suppliers and the distribution network. Organizations hoping to make
strategic use of IS must understand the nature of the inter-relationships of the above
elements, and understand the nature of the information flows between them. IS activity
and expenditure should be prioritized where it is clear that strategic information will
result or where the activity is not effective without an underpinning IS.
Organizations, which are at the beginning of the use of IT often, focus on efficiency.
They can do without a formal information planning method. The periodic drawing up of
priorities and action plans per system is often sufficient. In this organization, IT is often
placed in the existing procedure, without great changes in assignments or in the
organization structure. In a later stage, automation is applied to solve bottlenecks, in the
information supply and to improve effectiveness. For this purpose, it is necessary to chart
the company processes and the information needs. The (often functionally designed)
process structure of the organization usually remains intact. Most of the well-known
information planning methods are extremely suitable for this type of information
planning.
Increasingly more organizations, because of their complexity and the complexity and
competitiveness of the market, are compelled to function in a more client-oriented way.
In this case, information supply without bottlenecks is a necessary, but not a sufficient
condition. It is even more important to choose the right strategy, process structure and
responsibility, and in association with these, the right set of applications and the right
infrastructure. These organizations discover that the functional organization structure
involves obstacles and that information planning should not merely involve the
establishing of priorities for individual system development projects.
22
In high customer-contact services, a firm's ability to deliver quality service depends on its
capacity to collect, process and distribute information. The input function in services
includes assessing customer expectations, specifying the expected service and setting
corresponding service standards. Good service providers have communication processes
to facilitate the collection of customer data, suggestions, requests and transactions into
customer databases. These databases can then be used to construct detailed customer
profiles, eliminate service-specification errors, speed service and improve service
consistency. Output information is used to determine whether customer expectations are
met. While customers are the best judges of quality, many service firms lack adequate
systems for collecting and acting on customer data. Customer complaints provide
valuable information on service quality problems. If customers complain, employees
need enough information to solve problems and make decisions while the customer is
still present. Complaints should be tracked by type, frequency and department to identify
recurring problems that otherwise might go undetected. To prevent weak recovery efforts
that fail the customer twice, some firms use recovery-tracking systems to capture and
distribute information pertaining to each instance of recovery service.
1) Explain the role of information Technology (IT) in strategy implementation. How can
IT assist in enhancing the competitiveness of a firm?
2) What are the various components of IT architecture? What factors influence the
choice of a particular IT infrastructure?
3) What is e-business? Briefly explain the various web-based business? Explain the
steps involved in implementing an e-business plan?
4) How does IT improve innovative capacity and performance of a firm? Illustrate this
with an example by scanning various sources of information such as web, journals,
business dailies, etc.
Porter, M.E, Millar, V.E. (1985). "How information gives you competitive advantage",
Harvard Business Review, 149-60.
Porter, M.E. (1980). Competitive Strategy, The Free Press, New York.
23
Barton, D.L. (1995). Wellsprings of Knowledge: Building and Sustaining the Sources of
Innovation, Harvard Business School Press, Boston, MA
Berkley, B.J., Gupta, A. (1994). "Improving service quality with information technology
International Journal of Information Management, 14, 2, 109-21
Brynjolfsson, E. (1993). "The productivity paradox of information technology", Comm.
ACM, 35, 66-77.
Brynjolfsson, E. (1994). "Technology's true payoff'", Informationweek, 10, 34-6.
D'Aveni, R. (1994). Hypercompetition: The Dynamics of Strategic Maneuvering, Basic
Books, New York, NY.
Grant, R.M. (1996a). "Prospering in dynamically competitive environments:
organizational capability as knowledge integration", Organizational Science, 7, 4, 375-
87.
Grant, R.M. (1996b). "Toward a knowledge-based theory of the firm", Strategic
Management Journal, 17, special issue, 109-23.
Huber, G.P. (1990). "A theory of the effects of advanced information technologies on
organizational design, intelligence, and decision making", Academy of Management
Review, 15, 1, 47-91.
24
25
Unit 11 R& D and Strategy
Objectives
11.1 Introduction
An essential component of competitive strategy is recognizing the role that Research and
Development plays (R&D) in the competitive success of a firm, and acting to ensure that
technology decisions and policies contribute to the firm's competitive advantage. This
unit provides a framework, which can be used to analyze and understand the linkages
between R&D and competitive strategy and/or competitive advantage of a firm.
Moving down a notch, there is the single industry-business firm such as -- cement, or the
division of the multi industry-business firm such as Aditya Birla Group. At this level, the
issue of which business or industry to be in is important and the only issue is how to enter
or exit of a business or industry. This chosen the level at which competitive strategy
operates. Developing a competitive strategy essentially involves building a broad
framework for a firm on how it is going to compete, what its goals should be, and what
policies will be needed to carry out those goals. Moving down to the next level, there are
the functions of the firm-the engineering, manufacturing and production, marketing,
sales, service, personnel, human resources, purchasing, accounting, finance, planning,
etc. The term functional strategy is widely used at this level. The important point to
note is that functional strategies must all support, reinforce, and contribute to the
competitive strategy of the firm in order for the firm to effectively compete. In a
free-market economy, the generic goal of any firm is to enhance its competitiveness,
which can be defined as the ability of a firm to get customers to choose its product or
service over competing alternatives on a sustainable basis. Competitiveness is measured
by market share trends over time, and can be described in terms such as increasing,
decreasing, or stable. There means an important stipulation contained in the definition
described above, however, which is that competitiveness must be built on a sustainable
basis. It is possible, in the short run, for a firm to get customers to buy its products or
services over competing alternatives on an unsustainable basis by, for example,
mortgaging its assets and using the proceeds to subsidize and lower prices, thus attracting
customers until the earnings run out and the firm collapses.
The value chain can be used to organize all the activities of a firm into categories of
primary and support activities. value chain Activities are processes or things that are done
in a firm. In order to be identified and categorized, they must be distinct; they must have
a beginning and an end, which distinguishes them from other activities or operations.
Primary activities constitute the processes by which firms receive inputs (inbound
logistics), convert those inputs into outputs (operations), get those outputs to customers
(outbound logistics), persuade customers to buy the outputs (marketing and sales), and
support customers in using the outputs (service). Support activities are processes which
provide support to the primary activities and to each other in terms of purchasing inputs
(procurement); improving existing products or developing new products (research and
development); dealing with personnel (human resource management); and general
management, accounting, finance, and other activities which support the entire
organization rather than individual activities (firms infrastructure).
Using the value chain and focusing on categories, of activities enables one to see the firm
as a collection of activities rather than as an organization chart and administrative units
such as the purchasing department, the R&D, the manufacturing division, and the
personnel department. This is important because the value chain activities be analysed
much more effectively by using the value-chain analysis, firms can then create
competitive advantage in the following three ways:
1) By placing greater or lesser emphasis (allocation of resources, management time and
attention) on specific activities than competitors do.
2) By performing specific activities better (better management, more highly trained
people, better-maintained equipment) or differently (using an alternative-presumably
new or improved-technology) than competitors do.
3) By managing linkages among activities better than competitors do.
R&D and Competitive Advantage
On the basis of the previous discussion, the choice of which value chain activity should
a firm focus on should be governed by the competitive advantage(s) that the firm is
pursuing in implementing its competitive strategy. In other words, if low cost-low price
is the strategy, then low-cost technologies should be used, consistent with maintaining
acceptable levels of quality, availability, attractiveness, and so forth. (obviously,
technology choice interacts with other strategic variables. For example, low unit costs
are often achieved through economies of scale which in the past have depended on
mass-production technologies and large customer markets demanding standardized
products and services.) Similarly, if differentiation is the strategy, then activities such as
R&D which maximize the specific competitive advantage in terms of providing
products capable of higher performance, innovative products, etc, should be used,
consistent with the price premium customers are willing to pay for the uniqueness.
Activity 1. Think of an organization of your choice and apply the value choice analysis
by categorizing the fine in to organization into primary and second support
activities.
The selection of R&D projects is the most important of all the R&D management
activities. Unless an R&D department is working on the right R&D projects, all its
efforts could come to zero. Consequently, most R&D organizations spend a great deal of
time trying to select the right projects. What is rarely seen in these efforts to select the
right R&D projects, however, is the value of having an overall R&D strategy before
selecting R&D projects. A R&D strategy is important because it helps a R&D
organization select projects in terms of a broader outlook rather than just bit by bit.
When a R&D department has an overall strategy and has some strategic goals, it will
more likely select projects that are in tune with its technical strengths, the capabilities of
the company, and the demands of the marketplace. In order to develop a sound R&D
strategy, certain prerequisites must be in place.
Preconditions for Effective Development of an R&D Strategy
In order to develop a R&D strategy, a R&D organization first must make sure that
certain conditions are in place. There are seven prerequisites for developing a R&D
strategy:
1) A belief that a R&D strategy can solve problems
2) Creation of a planning staff within a large R&D department or the establishment of a
strong commitment by the R & D line managers in a small R &D organisation to
devote enough effort to doing R&D strategic planning
3) A method of linking R&D strategic planning to R&D operations
4) A mode of getting strategic marketing done
5) The active support from senior management
6) Prior efforts to develop a R&D strategy
7) A series of substantial and solid efforts that produce tangible results on their own,
but allow R&D people to get better at R&D strategic planning
The experiences of these R&D planners are typical. Someone usually has to develop the
methodology to be used in doing R&D strategic planning. Someone also has to be the
champion of R&D strategic planning, or it will not get done. In theory, R&D managers in
a large R&D organization can handle these responsibilities. In practice, R&D line
managers in a large R&D organization normally have so many other responsibilities that
they neglect R&D strategic planning. Thus, a R&D planning group usually proves to be
necessary to getting R&D strategic planning done.
In a small R&D organization, on the other hand, R&D line managers are the only ones
who can develop an R&D strategy because staff positions rarely exist. Thus, to get R&D
strategic planning done, the R&D line managers in a small R&D organization must add
the responsibilities of an R&D planning group to their normal responsibilities. These
R&D managers usually will not be able to devote much time to developing a planning
methodology. On the other hand, because they have responsibility for managing the R&D
groups, if the R&D managers in a small R&D organization do develop an R&D strategy,
they should have less difficulty in getting this strategy accepted and implemented. The
key to planning in either situation is that the doers, not the planners, must do the
planning. The role of the planners is to facilitate the planning process, which is an
important, although seldom appreciated, role.
Those R&D organizations that have been able to gain the active support of senior
business managers for their R&D strategy were helped by organizational factors. For
example, in a chemical company the R&D organization was able to gain the active
support of senior business managers because the chief executive officer is one of the
major proponents of R&D in the company. As opposed to most of the other senior
business managers in this company, this chief executive previously managed the division
of the company that sells to industrial customers. Because the customers of this division
are more knowledgeable about what R&D can contribute, this CEO realized how
valuable R&D can be and thus has not only supported R&D strategic planning but also
has actually encouraged the R&D organization to do it.
At another company, a key factor that allowed the R&D organization to first gain and
then maintain the support of senior business managers was leadership among senior
business managers. Stability and continuity in leadership was important because it took a
few years for the senior business managers of having a R&D strategy. By learning year
after year what the R&D was trying to accomplish with a R&D strategy, the senior
management was able to appreciate the benefits. The R&D department, in turn, could
build progress that it had made with these senior business managers in previous years.
The key to taking each of the steps discussed above is picking a problem that the R&D
organization is facing that also calls for a more systematic analysis of the use of R&D
resources. The value of carrying out a series of concrete steps is that together they serve
as stepping-stones to improve R&D strategic planning. Moreover, because they produce
tangible results along the way, they also help elicit support for the R&D strategic
planning process.
One way in which a R&D organization can maintain the vitality of planning process is
through carrying out a series of concrete efforts that produce tangible results on their
own, but also allow R&D people to improve planning expertise. A second method
involves benchmarking studies in which the R&D people compare the strengths and
weaknesses of their company's technologies in relation to the strengths and weaknesses
of their competitors' technologies. The R&D people can gain two things through this
effort: 1) they gain a much better understanding of how their company stands in relation
to competitors and 2) they learn how to analyze their technologies. For example, they
learn how to think more precisely about how their technical work could improve the
performance of the company's products. A third effort that the R&D organization can
consider involves using the techniques of portfolio management to evaluate the potential
and payoffs of various technologies.
Few R&D organizations in India have a R&D strategy or have established the conditions
required for developing a R&D strategy. For example, few R&D organisations have
perceived a R&D strategy as a way to solve a problem. Many large R&D organisations
do not have a R&D planning group, and organizations do not do R&D strategic planning.
Also, few R&D found a way to get strategic marketing done. Finally, in most companies
R&D strategic planning do not have the active support of senior management. In
addition, if one looks closely at the strategic goals of those R&D that have them, one also
finds that many of these goals were arrived analytically. That is, many of the strategic
goals of such R&D organisations have are intuitively obvious. For example, most of the
strategic goals that organizations have formulated are similar and quite predictable 1) to
ward out fundamental threats to the company's businesses. (2) to comply with government
regulations.
Few R&D organizations have conducted benchmarking their technologies to competitors'
technologies. Few R&D organizations carry out technology forecasting studies aimed at
understanding 1) what technological changes may be occurring in the next 5 to 10 years
and 2) what those technological changes may mean. Even those R&D organizations that
have made significant progress in an R&D strategy admit that they still have much to do
to improve the planning process. For example, the R&D organization may have a R&D
strategy, but the top management does not accept this R&D strategy. Many R&D
departments develop a R&D strategy, but they do not find a way to integrate their R&D
strategy with the marketing and manufacturing strategies in the companies. In addition,
the R&D strategy can be altered at the whim of anyone who at a later date becomes
involved in the planning process without necessarily informing any one else about the
changes in the plans.
The selection of R&D projects is the most important of all the R&D management
activities. Unless an R&D department is working on the right R&D projects, all its
efforts could come to naught. A R&D strategy is important because it helps an R&D
organization select projects in terms of a broader outlook rather than just bit by bit.
When a R&D department has an overall strategy and has some strategic goals, it will
more likely select projects that are in tune with its technical strengths, the capabilities of
the company, and the demands of the marketplace. In order to develop a R&D strategy,
certain prerequisites must be in place such as belief in R&D strategy as a tool to solve
problems, establishing a dedicated strategic planning group within the R&D department
and the top management commitment's to the R&D strategy.
Some companies in India have made significant progress in developing a R&D strategy.
Most companies, however, have barely started developing a R&D strategy. The
immediate challenge facing most firms, therefore, has to do with first establishing the
preconditions required for developing an R&D strategy. After doing this, they will then
be able to meaningfully deal with issues as to what the R&D priorities should be and how
R&D resources should be allocated.
Allio, Robert J. and Desmond Sheehan (1984), Allocating R&D Research Effectively,
Research Management, (July-Aug.), 14-20
Bachman, Paul W. (1972), The Value of R&D in Relation to Company Profits,
Research Management, 15, (May), 58-63.
Bitando, Domenic and Alan L. Frohman (1981), Linking Technological and Business
Planning, Research Management, (Nov.), 19-23.
Boer, John Seely (1991), Research that Reinvents the Corporation, Harvard Business
Review, (Jan-Feb), 102-111.
Chester, Arthur N. (1994), Aligning Technology with Business Strategy, Research
Technology Management, (Jan-Feb), 25-32.
Cohen. W.M. and D.A. Levinthal (1989), Innovation and Learning: The Two Faces of
R&D, Economic Journal
Menke, Michael M. (1994), Improving R&D Decisions and Execution, Research
Technology Management, (Sept-Oct), 25-32.
Mitchell, Graham R. and William F. Hamilton (1988), Managing R&D as a Strategic
Option, Research Technology Management, (May-June), 15-22.
Porter, E. Michael. (1985). Competitive Advantage Creating and Sustaining Superior
Performance. The free press
Unit 12 Knowledge Management
Objectives
The objectives of this unit are to:
Although the terms information and knowledge are often used interchangeably, there
is a clear distinction between information and knowledge. Information is a flow of
messages, while knowledge is created by that very flow of information and is anchored in
the beliefs and commitment of its holder. Traditional management models focus on how
to control the information flow and information processing within the organization. This
view, however, fails to capture the essence of organization as knowledge-creating entity.
What knowledge management should achieve is not a static management of
information or existing knowledge, but a dynamic management of the process of creating
knowledge out of knowledge. Hence one can argue that organizational knowledge
creation is a continuous self-transcending process, which requires a new kind of
management that goes beyond the traditional models of management.
Knowledge management is such a preposterous, pretentious and profoundly confusing
phrase that many of those who really understand KMincluding some of the fields
pioneers-refuse to use the term. If there is anything that those experts do agree on, it is
that knowledge management is not about managing people in any traditional sense. Nor
is knowledge management really about managing knowledge. They prefer terms such as
knowledge sharing, information systems, organizational learning, intellectual asset
management, performance enhancement, etc.
Knowledge management refers to strategies and structures for maximizing the return on
intellectual and information resources. Because intellectual capital resides both in tacit
form (human education, experience and expertise) and explicit form (documents and
data), KM depends on both cultural and technological processes of creation, collection,
sharing, recombination and reuse. The goal is to create new value by improving the
efficiency and effectiveness of individual and collaborative knowledge work while
increasing innovation and sharpening decision-making.
KM is the collection of processes that govern the creation, dissemination and utilization
of knowledge. In one form or another, knowledge management has been around for a
very long time. Practitioners have included philosophers, priests, teachers, politicians,
scribes, librarians, etc. The importance of knowledge as a key source of competitive
advantage is now well established in management studies. Knowledge is undoubtedly an
indispensable resource to create value for the next generation of society, Industries, and
companies. Yet, despite all the discussions and attentions in both the academic and
business worlds, very few have articulated how organizations actually create and manage
knowledge. Many companies still seem to remain locked in the phase of building
efficient and effective information technology (IT) systems when they try to manage
knowledge.
Ultimately, knowledge management is really just a way of looking at the world of
business. Its a realization that who and what are assets of the organization. And just
like building, operating and managing physical assets, knowledge assets need to be
managed for the greatest possible return on investment.
Knowledge Management (KM) is a management technique to effectively manage
knowledge in organization. It comprises of-
Financial factor
The cost of not managing knowledge greatly exceeds the cost of managing important
knowledge. Organizations have the habit of externalizing the cost of not managing the
knowledge to their customers.
Future trends
Those who want to think and act in integrated, creative ways and solve complex
problems need rich, integrated, up-to-date knowledge management environments to
support them. The gulf between traditional and knowledge-driven organizations is
growing as knowledge-driven organizations concentrate not only on present success but
their own evolution so they can better take advantage of the new knowledge-intense
environment.
Call it the knowledge management paradox: those who are so busy putting out fires
that they have no time to tackle knowledge management are those who most need to
manage their knowledge better. While many CEO put KM as the top priority, few
companies are still at a stage of implementation: Its the mind shift of the organizational
heads to add knowledge to the balance sheet. What we know now is that, those
companies that crack strategic knowledge management will be those most likely to
succeed in the new economy. The new economy is always termed as the knowledge
economy. Hence a company with higher knowledge quotient makes it big!
Internal sources emerging from the operations of the organization- internal sources
include the organizational operations such as design, development, engineering, sales,
marketing, manufacturing, customer contact, etc. This is the basic source of
organizational information, which is controllable and can be easily canalized to KR. In
the absence of any formal mechanism, this knowledge remains in the minds of
organization members and usually, disappears with them.
Types of Knowledge
There are two kinds of knowledge- explicit knowledge and tacit knowledge.
Explicit knowledge can be expressed in words and numbers and shared in the form of
data, scientific formulae, specifications, manuals and the like. This kind of knowledge
can be readily transmitted across individuals formally and systematically. Tacit
knowledge, or the other hand, is highly personal and hard to formalize, making it
difficult to communicate or share with others. Subjective insights, intuitions, and
hunches fall into this category of knowledge. Difficult to. verbalize, such tacit
knowledge is deeply rooted in an individuals actions and experience, as well as in the
ideals, values, or emotions he or she embraces.
These two types of knowledge are complementary to each other, and both are crucial to
knowledge creation. They interact with and change into each other in the creative
activities of human beings. Understanding this reciprocal relationship between explicit
knowledge and tacit knowledge is the key to understanding the knowledge-creating
process. The interaction between the two types of knowledge can also be called as the
knowledge conversion. Knowledge is created through such interactions among
individuals with different types and contents of knowledge.
Knowledge creation in organizations takes place primarily through the dynamic process
of four different modes of conversion between the two dimensions of knowledge.
Socialization: Tacit knowledge to conversion takes place when tacit knowledge within
one individual is shared by another through training.
Internalization: Explicit knowledge to tacit knowledge conversion takes place when new
explicit knowledge is shared throughout the firm and other members begin to use it to
broaden, extend and reframe their own tacit knowledge.
Most, if not all, firms in developing countries are engrossed in activities to catch up with
advanced countries. Even the majority of firms in advanced countries are engaged in
catching up, as not all firms can be pioneers of novel breakthroughs even in these
countries. Nonetheless, research on organizational knowledge creation and innovation is
concentrated mainly in advanced countries and is focused mostly on the pioneering
process. Research on those subjects in the catching up process, particularly in developing
countries, is, however, scanty. Table 12.1 shows the average amount spent on the
knowledge management by the companies in specific industries.
Table 12.1. Average amount, the companies in specific industries have spent on knowledge Management
Knowledge creation, whether for imitation or innovation, takes place at two levels-
individual and organization. The prime actors in the process of knowledge creation are
individuals within the organization. Knowledge creation in organizations is not,
however, the simple sum of knowledge creation by individuals. Rather it is the process
that creates knowledge, which is distributed across the organization, is communicated
among its members, has consensual validity, and is integrated into the strategy and
management of the organization. Individual knowledge creation is, therefore, an
indispensable condition for knowledge creation in the organization but cannot be the
sufficient one. Organizations create knowledge only when individual insights and skills
become embodied in organization routines, practices, and beliefs. Only effective
organizations can translate individual knowledge creation into organizational knowledge
creation.
Absorptive capacity has two important elements: prior knowledge base and intensity of
effort. First, the prior knowledge base refers to existing individual units of knowledge
available within the organization. Accumulated prior knowledge increases the ability
both to make sense of and to assimilate and use new knowledge. Relevant prior
knowledge base includes basic skills and general knowledge in the case of developing
countries, but it includes the most recent scientific and technological knowledge in the
case of industrially advanced countries. Thus prior knowledge base should be assessed in
its relation to the task difficulty involved. Second the intensity of effort refers to the
amount of energy expended by organizational members to solve problems. Learning how
to solve problems is usually built up over many practice trials involving related problems.
Such effort intensifies interaction among organizational members that facilitates
knowledge conversion and creation at the organizational level. The following case gives
an insight to the concept of knowledge creation.
It was in 1974 when the first local semiconductor firm was established by a Korean-
American scientist with a Ph.D. from Ohio State University and semiconductor design
experience at Motorola. Samsung bought out the company during a financial crisis that
occurred in the companys first year. With a large stake in consumer electronics,
Samsung made the acquisition turned-entrepreneur provided Samsung with an even
higher tacit knowledge base. His tacit knowledge was effectively transferred to Samsung
engineers. This enabled the firm to progressively produce various transistors and
integrated circuits on a small scale, largely for house consumer electronics. Samsung
also established its semiconductors R&D laboratory in 1982.
Samsung set up an R & D outpost in Silicon Valley in 1983 and hired five Korean-
Americans with doctorates in electronics engineering from Stanford, Michigan,
Minnesota, and Notre Dame Universities with semiconductor design experience at IBM,
Honeywell, Intel and National semiconductors. These scientists, plus about three
hundred American engineers, including several designers who left Mostek, brought to
Samsung the crucially important tacit knowledge to crack VLSI technology. Silicon
Valley was a strategic location for the development of the 64k DRAM. A high density of
scientists and engineers in the vicinity offered the rich source of critical information and
expertise that Samsung needed. The outpost also provided opportunities for engineers in
Korea to participate in training and research in USA and enabled them to learn
significantly about VLSI technology.
Samsung organized another R&D task force in Korea with Samsung engineers who were
experienced in LSI and trained on VLSIs at technology suppliers and two Korean-
American scientists. The scientists had 64k DRAM development experience at American
companies and gave Samsung a significantly higher level of tacit knowledge. Active
interaction between the outpost in Silicon Valley and the team in Korea, through training,
joint research, and consulting, elevated significantly both the tacit and explicit knowledge
within the Korean team in a very short period of time resulting in the effective transfer of
knowledge from silicon valley to Korea. This made Samsung engineers better equipped
to assimilate VLSI technologies from Micron Technology and Zytrex. In short, Samsung
had deliberate strategy to upgrade its prior tacit and explicit knowledge, expanding its
prior knowledge base.
The goal was clear to all members. Personal dedication and long working hours
expedited knowledge conversion at the individual level. The shared awareness of a crisis
and determination to solve problems within the assigned time frame intensified close
interaction among members. This, together with high prior knowledge, led to rapid
knowledge conversion among the individual members and to a high rate of knowledge
creation at the organizational level enabling Samsung to have a high absorptive capacity.
Samsung managed the crisis to become creative.
Samsung hit the market with a 64K DRAM in early 1984, some forty months after the
American pioneer and about eighteen months after the first Japanese version became
commercially available. Korea became the third country in the world to introduce
DRAM chips and significantly narrowed the technological gap with Japan and USA.
All mid sized and bigger organizations need to look at KM seriously- It is not just a fad
anymore nor a far of concept- it is real and here and is now available- it is of strategic
importance and we cannot afford to postpone it any longer except at the cost of survival.
Each industry has its own KM system evolved to suit its needs. Though the entire
process starts with a bang, but somewhere down the line the entire process stands still.
Following on the CMM Working model, we can devise a similar model for effective
working of a KMS in the organization as depicted below in figure 12.1.
Ever-Growing
Organization
Level 5
Corporate and Individual
Performance
Level 4
Delivery of Knowledge
Level 3
Grouping of Knowledge
Level 2
Technical Infrastructure and Knowledge
Resources
Level 1
Creation of Strategy for KMS
Figure 12.1: Working of a KMS in an organization.
Level 1: Creation of a Strategy for KMS
Termed as the creation of a strategy for KMS. This level involves a process where the
Best Practices of the organization are listed and accumulated. A strategy is evolved for
accumulation of entire gamut of the organizational and personal knowledge. Identify
organizational needs/objectives in line with the systems needs/ objectives. Establish
policies, which are to be adhered to.
This level would involve the design of repository, collaboration, dissemination, and
hardware specifications. Technology requirements as in Capture, Store, Search, Retrieve,
Message, Structure, Navigate, Share, Collaborate, Synthesize, Solve, Recommend,
Integrate, Maintain in Detail the process and functionality scope of the system, Process
would/may overflow as the input as the input of another process. Hence knowledge
could not necessarily be sequential. After knowledge is acquired, synthesized, or created,
it needs to be codified, accessed and transferred again. The knowledge cycle is supported
by collaboration.
Technology requirement scope lists technologies that collectively comprise full function
KM. Not every enterprise needs all functions, and no KM vendor/tools fulfill all of these
requirements. The selection of technologies is preceded by the clear definition of KM
strategy and scope. KM deals with enterprise-wide structured/unstructured data source,
representing multiple data types and formats. KM must bridge knowledge resources to
be accumulated as in the process of existing knowledge, knowledge sharing, knowledge
discovery, identification of intellectual assets of the personnel of the organization and
implementation of KM framework.
The level 2 of the system should allow us to summarize the planning and tracking of the
entire process. The process is under the control of a knowledge office and each
knowledge worker has the right to make the necessary contribution to the system.
This level would involve the proper grouping of all the knowledge accumulated during
level 2. Knowledge can be classified in the following groups: Individual
Group/Project/Corporate.
Corporate knowledge: This would cover the knowledge of the organization, policies,
practices, market trends, industry trends and the like, integration of external sources in
the knowledge base. Monitor, comment and synchronize the entire process of the
organizational knowledge. At the end of this level, all these three groups are to be in sync
with each other. Attention should also to be given to peer groups, inter-group
coordination, intra-group coordination, training program, organization process, and
organization process focus. This level should also ensure that the process is based on a
common, organization-wide understanding of the activities, roles, and responsibilities in
a defined process.
The level would start with the strategy of identifying audience for all the resources
accumulated. Personalization of the knowledge acquired would be done here. Audience
identified would have to be summarized and the entire visual to be presented to them for
proper usage. Establish a common bond and provide seamless access.
This level would require the knowledge office to measure the performances of the
corporate and the individual performances after effective dissemination of knowledge
through the KMS. The information, which has been gathered, has to be used effectively
for better performance of the organization and the individual.
Some of the tangible benefits of knowledge management are directly related to their
bottom line savings. In todays information-driven economy, companies continuously
tap most of the opportunities and ultimately derive most value from intellectual rather
than physical assets. According to many experts, to get the most value from a companys
intellectual assets, knowledge must be shared and served as the foundation for
collaboration. Consequently, an effective KM program should help a company leverage
the assets and provide the following benefits:
Fostering innovation by encouraging free flow of ideas
Improving customer service by streamlining response time
Boosting revenues by getting products and services to market faster
Enhancing employee retention rates by recognizing the value of employees
knowledge and rewarding them for it.
Streamlining operations and reducing costs by eliminating redundant or
unnecessary processes.
A creative approach to KM can result in improved efficiency, higher productivity
and increased revenues in practically any business function.
KM is beneficial especially in both social and business segments. Here are to few
examples where KM could provide great benefits:
Social (Governmental)
Business
Infosys built the k-shop architecture on Microsoft site serve technology, and all
employees can access it through a web interface. The company encourages people to
submit papers related to technology, domain, trends, culture, project experiences, internal
or external literature, etc. They can submit the articles in any format that the web
supports, and designed templates for various content types to ensure uniformity. In
addition, the K-shop has an excellent search facility that offers search through multiple
parameters. K-shop documents are available to all infosys employees and are segregated
based on the users selected keywords and content type.
Process assets database is a database which capture the as is projects deliverable. This
database contains the employees experiences on projects, projects artifacts such as
project plans, design documents, and test plans. Users can search the documents, based
on domain, technology, project type, project code, customer name, and so on. This helps
provide new project with information on similar, previously executed projects and helps
set quantitative goals.
The distinguishing feature, however, is KM with project level focus. Ready reaction to
customer request, improved productivity through rework, and teamwork are some of the
benefits of this approach. Dynamic KM, which takes the form of web sites to manage
knowledge content, training plan with material to tackle project attrition, weekly
knowledge sharing sessions, defining the KM activities in the project plan (2%-3%) etc, -
are some project related KM activities.
The K-shop owns around 12,600 documents. Knowledge Management has helped
infosys increase its productivity and reduce defect levels. A rough estimate shows that
infosys reduced its defects level by much as 40%, thus significantly reducing the
associated rework and the cost of detecting and preventing defects. Also, effective reuse
has increased productivity by 3%. All of this has been possible due to faster access to
accurate information and reuse of knowledge. A team of eight full time employees
designated as Brand Managers help build and maintain the KM infrastructure in
infosys.
Knowledge people make the difference goes the vision statement of Knowledge
Management at Satyam. Satyam declares, As we take our first steps into the new
millennium, organizations everywhere are beginning to see that knowledge is indeed the
foundation upon which all things grow. Business excellence does not come about
without a strong base in knowledge. Therefore those that will stay ahead in the new
economy are those who act upon this realization, and build their funds of knowledge.
Satyams knowledge initiative, apart from managing the existing knowledge resources of
the company, also fosters a culture of creating sharing knowledge across the organization.
Associates have access to a query-based KMS- the Knowledge Repository- that allows
them to gain the advantage of collective experience, thus optimizing their own time on
activities that build upon rather than repeat this experience.
The culture is one of effective communication and knowledge sharing across the
organization via exchange of information, ideas, thoughts, solutions, technologies and
best practices- and leveraging this combined intelligence to offer winning solutions to
global customers.
Given the high-velocity knowledge spiral of the present times, it becomes imperative for
knowledge-based organizations to continuously stay at the forefront of know-how and
technology. Satyam provides direct training and helps Associates become independent
learners.
Associates are encouraged to take the initiative to further their own learning. Knowledge
Enhancement provides multiple avenues for this purpose. Associates can take up to a
year of paid sabbatical leave to teach or conduct research. In addition to this Knowledge
Enhancement provides for reimbursement of tuition fee and certification programme
expenses-thereby facilitating knowledge acquisition through multiple means.
Satyam has links with institutions such as Harvard Business School, Massachusetts
Institute of Technology and Project Management Institute. Associates are exposed to the
latest knowledge through the best and most effective teaching methodologies. Satyam
has a strategic partnership with MIT that provides access to MITs knowledge base.
BaaN is a world leader in powerful, innovative, easy-to-use business software. They are
at the cutting edge of business technology used by industry leaders all over the world-
promoting collaboration between customers and suppliers, linking people and processes
across the world, and using the internet to make business faster and more cost-effective.
They have turned towards knowledge management, in keeping with the demands of time.
Two departments, namely, Knowledge Transfer and Knowledge Development are
projected for this purpose. Their main objective is to empower the members with skills
necessary to meet the external world. They have a centralized database system and it is
christened as SCOPUS. Intranet facility is provided for the members with their identity
and password to use the system.
One of the features of BaaN is the encouragement provided to the employees for
Knowledge management. ASK HR is one such technique that provides a chance to the
employees to make use of public folders and register their doubts and genuine problems.
Longer duration training programmes are provided for new recruits. The others receive
short or mini programmes to update their knowledge.
Baans attempts to multiply knowledge could be seen in the well-maintained library for
the purpose. They contain technical as well as non-technical printed material and is used
by those employees who crave for knowledge.
SPANDANA known as reaction is keenly felt in their monthly meetings. The people
talk and they talk openly and freely with the management. They are helpful in extending
the sharing of the knowledge, which is considered as rich source of knowledge. The
meetings also make the people to come out of their shell and express their genuine
concern for aspects that the organization stands for. Sharing of knowledge, beyond doubt
highlights the brighter side of the employees vast experiences in particular fields, their
updated knowledge, their concern for the system and their sense of responsibility.
Periodic Seminars and discussions help both in documentation and multiplying the
knowledge thus leading to an effective knowledge management.
KM suites provide solutions for creating centralized repositories for storing and sharing
data (knowledge) as well as providing solutions and tools for searching, retrieving and
managing this data.
Communication Layer
(Managing/Groupware/Intranet/Internet
Intelligence /Logical Layer
Agents/Filters/Data Mining/Work Flow)
User Interface Layer
USERS
Many software development organizations have been assessed for SEIs Capability
Maturity Model (CMM) in India and many had been assessed at level 5. This mandates
that the organization have a KR- and thus most of these organizations have instituted a
KR in their respective organizations. These are not accessible for public but are
accessible to their organizational members.
Data warehouse aids creation of KR. Data Warehousing has grown from data repository
to Knowledge Repository. Tools like, OLAP and data mining techniques facilitate
effective utilization of KR. These facilitate not only extraction of information but also
analysis. However, the costs are high in this segment.
Organizations have dispersed for real and critical reasons, says Chad Weinstein,
Director of Knowledge Management consultant for Sopheon PLC, a Minneapolis-based
professional services and software company. It lets them get the best talent, the best
resources and close proximity to potential clients or crucial suppliers. Along with the
opportunities that come with dispersion, a globetrotting, telecommuting workforce
presents challenges in managing and disseminating a corporations collective knowledge.
The first of those challenges is merely getting individuals within the company to
communicate with each other wherever they are located, according to Daniel Rasmus,
vice president and KM research leader for Giga Information Group Inc. in Aliso Viejo,
Calif. Ridiculous as it may sound, many organizations have trouble getting people to
share information who arent on the same floor, so adding remote workers or those in
other geographical locations can prove difficult, he says.
Enterprises are realizing how important it is to know what they know and be able to
make maximum use of the knowledge. This knowledge resides in many different places
such as: databases, knowledge bases, filing cabinets and peoples heads and are
distributed right across the enterprise. All too often one part of an enterprise repeats
work of another part simply because it is enterprise impossible to keep track of, and make
use of, knowledge in other parts. At Tata Steel, one incident more than any other drove
home this point. In 1999, a foreign technical consultant was summoned to the Indian steel
giant to solve a problem. He replied that he had already been engaged and solved it the
year before. In other words, the company, despite having a sophisticated IT
infrastructure, did not seem to systematically know what its problems were and how it
had been solving them.
Enterprises need to know:
Another reason for the difference between tacit and explicit knowledge is more than
academic is that, by and large, the distinction determines who owns the knowledge.
Explicit knowledge is most likely the property of the firm. One way or another it is either
data or work product. But since tacit knowledge cannot be codified, it effectively
remains the property of the knowledge worker. Companies have certainly tried to own
this knowledge. While the company employs them, knowledge workers are ethically
and sometimes contractuallyprohibited from sharing their knowledge with competitors.
But if the knowledge workers leave the firm they take that knowledge and its inherent
value with them.
Making this distinction between knowledge and the knowledge worker makes it easier to
account for knowledge assets. A knowledge worker is an asset that appreciates over
time. Knowledge itself is more often a depreciating asset. Patents, for example, quickly
lose their value if not licensed quickly. A sales lead becomes worthless if the contact
chooses a competitors product or leaves the customers company for another job. Unlike
other resources, however, knowledge is not subject to the law of diminishing returns; it is
not depleted through use.
Knowledge is not static. As with many physical assets, the value of knowledge can erode
over time. Since knowledge can get stale fast, the content in a KM programme should
constantly updated be amended, and deleted. Further, the relevance of knowledge at any
given time changes, as do the skills of employees. Therefore, there is no endpoint to a
KM programme. Like product development marketing and R and D, KM is constantly
evolving business practice. Another most important fact is that not all information is
knowledge. Companies diligently need to be on the lookout for information explosion
and overload. Here quality is the key and not quantity.
12.12 Summary
The importance of knowledge as a key source of competitive advantage is now well
established in management studies, as suggested by the growing literature focusing on
knowledge creation and transfer. Knowledge is undoubtedly an indispensable resource to
create value for the next generation of society, industries, and companies. Yet, despite all
the discussions and attentions in both the academic and business worlds, very few have
articulated how organizations actually create and manage knowledge. Many companies
still seem to remain locked in the phase of building efficient and effective information
technology (IT) systems when they try to manage knowledge.
12.13 Keywords
Knowledge is collection of facts, ideas, learnings and policies, practices and a lot more.
Knowledge can also be defined as agreed- upon explicit or formal facts, rules, policies
and procedures.
Skills are information processing competencies that can generate explicit knowledge.
Skills are learned by doing; knowledge is learned by studying or investigating.
Explicit Knowledge can be codified and expressed in a human or formal language. It can
be expressed in works and numbers and shared in the form of data, scientific formulae,
specifications, manuals and the like. This kind of knowledge can be readily transmitted
across individuals formally and systematically.
Socialization- Tacit knowledge to conversion takes place when tacit knowledge within
one individual is shared by another through training.
Noneka, Ikujiro. The Knowledge Creating Company, Harvard Business Review, Vol
34 (6).
13.1 INTRODUCTION
Post-industrial organizations today are knowledge-based organizations and their
success and survival depend on creativity, innovation, discovery and inventiveness.
An effective reaction to these demands leads not only to changes, in individuals and
their behaviour, but also to innovative changes in organizations to ensure their
existence (Read, 1996). It appears that the rate of change is accelerating rapidly as
new knowledge, idea generation and global diffusion increase (Chan Kim and
Mauborgne, 1999; Senge et al., 1999). Creativity and innovation have a role to play in
this change process for survival.
The challenge for companies is to be innovative and creative to bring to the market a
stream of new and improved, added value, products and services that enable the
business to achieve higher margins and thus profits to re-invest in the business.
Innovation can be defined as the successful exploitation of new ideas.
66
Personalized Recognition Innovation
Investment in Basic
Research
Gordon Technique
William J.J.Gordon worked with creative-thinking groups and had a creative variety
of other pursuits. He was concerned that people, when asked to come up with a
creative new idea, would instead incrementalize. That is, they would take an available
alternative and improve it bit by bit. While this might lead to marginally better
alternatives the alternatives probably would not be real breakthroughs. Gordon
decided that one way to avoid this problem would be simply not to tell people what
they were inventing. Thus, the Gordon technique uses an initial focus on function.
Rather than being told to build a better mousetrap, the group might first be told that
the focus was capturing. Instead of the group being instructed to design an improved
knife, the function could be given as severing.
Synectics
Idea Checklists
Several idea checklists have been developed to enhance creativity. These involve
asking a series of questions about how we might use something that we already have.
For example, one checklist of idea-spurring questions is called SCAMPER
(Substitute? Combine? Adapt? Modify or magnify? Put to other uses? Eliminate or
reduce? Reverse or rearrange?). Heres an example of adapting: Clarence Birdseye
worked as a fur trader in Labrador before World War I. He noted that Inuit preserved
fish by quick-freezing and that the fish, when thawed, were flaky and moist. Birdseye
adapted this process to make quick-frozen food available to the general public. This
replaced the old slow freeze process that left food dry and tasteless. The huge success
of quick frozen food led to the creation of General Foods.
Kiichiro Toyoda, the founder of Toyota, sought ways to eliminate large inventories
and the need for warehouses. American supermarkets fascinated him, and he noted
that they require vast amounts of food that cant be stored on site because of spoilage
and space considerations. When supplies run low, the staff contacts the appropriate
supplier and items arrive just in time. Toyota adopted this concept and streamlined
its operation, eliminating waste and warehouses and reducing costs dramatically.
Toyotas just-in-time approach gave it a huge competitive edge. Just in time is now
being adopted worldwide.
George Washington Carver asked the question How can peanuts be put to other uses?
And came up with over 300 applications. Many creative ideas have resulted from
asking how waste products could be put to other uses. Rubber bands are made from
surgical tubing; garbage is compressed into construction blocks; petrochemical waste
is sold as silly putty. The Goodyear Tire Company has a pollution-free heating plant
in Michigan that uses discarded tires as its only fuel.
Put to other uses? New ways to use as is? Other uses if modified?
Adapt? What else is like it? What other ideas does this suggest? Does past offer
parallel? What could I copy? Whom could I emulate?
Substitute? Who else instead? What else instead? Other ingredient? Other
material? Other process? Other power? Other place? Other approach? Other tone
of voice?
Round
Thick
Thickness
Thin
Metal Plastic
Material
The cells of the matrix then provide idea combinations. For instance, the axes for a
vehicle might be type of energy source (e.g., rollers, air, water, rails), and type of
vehicle (e.g. cart, chair, sling, bed). The above figure shows a simple application of
the checkerboard method to the design of paper clips. The benefit of the checkerboard
method of analysis is that it makes us aware of all possible combinations of the
attributes. Many, of course, will prove to be little value, but others may be
worthwhile. Like other creativity enhancement techniques, the checkerboard method
makes us view the world from a different perspective. It is very useful for producing
large numbers of new ideas.
Retroduction
We are the slaves of our assumptions; they dictate the way we behave. Retroduction
involves changing an assumption. This may serve two purposes. First, our
assumptions may be wrong. Second, even if our assumptions are correct we may gain
valuable new perspectives from looking at things from a different angle. Albert
Einstein, for instance, revised Isaac Newtons assumption that space is flat to the
assumption that space is curved and developed a new perspective on time and space.
As a simple example of the power of assumptions, consider paper clips, the subject.
The standard Gem paper clip, invented in 1899, accounts for most of the 20 billion
74 paper clips sold every year. More than 100 alternative designs have patented, varying
in size, material, and shape. Ring clips, owl clips, arrowhead clips, butterfly Innovation
clips, and many others have been offered, and their inventors present compelling cases
for their superiority. Nevertheless, they havent made a noticeable dent in Gems
market superiority. The reason is that inventors share a common and incorrect
assumption, that paper clips are used to clip sheets of paper. In fact, research shows
that only 20 percent of paper clips are used to hold papers. The rest are twisted or
broken by people during phone conversations, unwound to clean pipes, nails, or ears,
used to reinforce eyeglasses, or put to other creative uses. The Gem, unlike its
competitors, can easily be taken apart and reshaped.
Heres a final example: For years, bankers assumed that customers preferred human
tellers. In the early 1980s Citibank felt that installing automotive tellers would help it
cut costs. However, since Citibank executives assumed people would prefer not to use
machines, they reserved human tellers for people with large accounts and relegated
smaller depositors to the machines. The machines proved unpopular and Citibank
stopped using them, taking the failure as proof that its assumption was correct. Later,
another banker challenged this assumption. He asked, in effect, What if people really
like to use automatic teller? What if the Citibank customers who used the machines
simply resented being treated as second class citizens? He brought back the
automatic tellers with no class distinction and they were an immediate success.
People referring in gender, age, race, disability, status and sexual orientation bring to
organizations a variety of attitudes, values, and perspectives as well as a broad and
rich base of experience to address a problem. As a result as the group became more
diverse, the potential for creativity is enhanced. Innovative organizations have
generally done a better job than others in eradicating racism and sexism, and they tend
to employ more women and nonwhite men than do less innovative firms. In addition,
brainstorming groups made up of diverse ethnic and racial groups produce higher-
quality ideas than do homogeneous groups. Further, the presence in groups of
individuals holding minority views lead to critical analysis of decision issues and
alternatives, resulting in consideration of a larger number of alternatives and more
thorough examination of underlying assumptions. And because homogeneous groups
tend to value conformity and agreement and their members are sometimes afraid to
rock the boat, such groups often discourage critical thinking. Because of this,
diversity may foster more open, honest, and effective decision-making. Taken
together, this all suggests that diversity can yield many benefits for decision-making
creativity. However, diversity may also increase the potential for misunderstandings
and increase conflict and anxiety among members. The challenge is to manage
cultural diversity in such a way as to capture its benefits while minimizing potential
problems.
13.10 SUMMARY
The success and survival of companies in todays marketplace depend on creativity,
innovation, discovery and inventiveness. The challenge, therefore, for many
companies is to be innovative and creative to bring to the market a stream of new and
improved, added value products and services that enable the business to achieve
higher margins and thus profits to re-invest in the business. Innovation can be defined
as the successful exploitation of new ideas.
Virtually all companies talk about innovation and many may actually attempt to do
it, but only a few actually succeed in doing it. To be creative, an organization
requires an innovation strategy, a strategy that promotes the development and
implementation of new products and services. The origin of creativity and innovation
lies in a shared vision and mission, which are focused on the future. Furthermore, the
vision and mission of a creative and innovative organization are also customer and
market oriented- focusing on solving customers problems among other things. In
addition, a structure that supports creativity and innovation, values like flexibility,
freedom and cooperative teamwork is required to promote creativity and innovation.
Support mechanisms should be present in an organization to create an environment
that will promote creativity and innovation. Rewards and recognition and the
availability of resources, namely time, information technology and creative people,
are mechanisms that play this role.
The key distinguishing factor between innovative and less innovative firms is the
ability of management to create a sense of community in the workplace. Highly
innovative companies behave as focused communities whereas less innovative
companies units behave more like traditional bureaucratic departments. The concept
of autonomy appears to be one of central importance for building creative
78
organizations. Operational autonomy encourages a sense of the individual and Innovation
promotes entrepreneurial spirit, whereas strategic autonomy is more to do with the
level of alignment with organizational goals. It appears that firms that are most
innovative emphasize operational autonomy but retain strategic autonomy for top
management.
Innovative companies appear to rely heavily on personalized intrinsic awards, both for
individuals as well as groups. Less innovative companies tend to place almost
exclusive emphasis on extrinsic awards. Extrinsic rewards are things such as pay
increases, bonuses and shares and stock options. Intrinsic rewards are those that are
based on internal feelings of accomplishment by the recipient. Highly innovative
companies appear to place equal emphasis on the technical side as well as the social
side of the organization. In other words, they look to nurture not only technical
abilities and expertise but also promote a sense of sharing and togetherness. Slack is
the cushion of resources, which allows an organization to adapt to internal and
external pressures. Slack has been correlated positively to innovation. Moreover, it is
not just the existence of slack but also the existence of slack over time that appears to
have positive impact upon innovation.
Creativity involves more than the sudden moment of inspiration in which an idea
suddenly flashes in the brain. There are four stages to the creative process:
preparation, incubation, insight, and verification. Good problem solving occurs when
managers have many viable, creative alternatives to consider. To inspire employees to
approach problems creatively and to nurture a creative environment, organizations
follow three general approaches. These include hiring creative individuals, applying
specific creativity-enhancement techniques, and developing a creative organization. A
wide variety of popular techniques have been developed to enhance creativity, which
include Gordon Technique, Synectics, Idea Checklists, Attribute Listing,
Checkerboard Method and Retroduction.
80
Ford, C.M. (1995). Creativity is a Mystery: Clues from the Investigators Innovation
Notebooks, Ford, C.M., Gioia, D.A., Creative Action in Organizations: Ivory Tower
Visions & Real World Voices, Sage, London, 12-52.
Gardenswartz, L., Rowe, A. (1998). Why Diversity Matters, HR Focus, 75, 7, S1-
S3.
Judge, W.Q., Fryxell, G.E., Dooley, R.S. (1997). The New Task of R&D
Management: Creating Goal-directed Communities for Innovation, California
Management Review, 39, 3, 72-85.
Khalil, O.E.M., 1996, Innovative Work Environments: the Role of Information
Technology and Systems, SAM Advanced Management Journal, 61, 3, 32-6.
Lock, E.A., Kirkpatrick, S.A. (1995). Promoting Creativity in Organizations, Ford,
C.M., Gioia, D.A., Creative Action in Organizations: Ivory Tower Visions & Real
World Voices, Sage, London, 115-20.
Mumford, M.D., Whetzel, D.L., Reiter-Palman, R. (1997). Thinking Creatively at
Work: Organization Influences on Creative Problem Solving, The Journal of
Creative Behavior, 31, 1, 7-17.
Peters, T., Waterman, R. (1982). In Search of Excellence: Lessons from Americas
Best Run Companies, Warner Books, New York, NY.
Read, W.H. (1996). Managing the Knowledge-Based Organization: Five Principles
Every Manager Can Use, Technology Analysis and Strategic Management, 8, 3,
223-32.
Robbins, S.P. (1996). Organizational Behavior: Concepts, Controversies,
Applications, 7th ed., Prentice-Hall, Englewood Cliffs, and NJ.
Robbins, S.P. (1997). Essentials of Organizational Behavior, 5th ed., Prentice-Hall,
Upper Saddle River, NJ.
Senge, P., Kleiner, A., Roberts, C., Ross, R., Roth, G., Smith, B. (1999). The Dance of
Change: The Challenges of Sustaining Information in Learning Organizations, A
Fifth Discipline Resource, Nicholas Brearley, London.
Tushman, M.L., OReilly, C.A. III. (1997). Winning through Innovation: A Practical
Guide to Leading Organizational Change and Renewal, Harvard Business School
Press, Boston, MA.
Udwadia, F.E. (1990). Creativity and Innovation in Organizations: Two Models and
Managerial Implications, Technological Forecasting and Social Change: An
International Journal, 38, 1, 65-80.
West, M.A., Farr, J.L. (1990). Innovation at Work, West, M.A., Farr, J.L.,
Innovation and Creativity at Work: Psychological and Organizational Strategies,
Wiley, Chichester, 3-13.
81
UNIT 14 STRATEGY AND SOCIAL
RESPONSIBILITY
Objectives
After reading this unit you should be able to:
! explain the meaning of Corporate Social Responsibility (CSR);
! define and understand the scope of CSR for business;
! explain CSR and its importance for business;
! differentiate the philanthropic and the business integrated views of CSR;
! know CSR and companies in India; and
! explain measurement of CSR
Structure
14.1 Introduction
14.2 CSR and Historical Developments
14.3 Business Importance of CSR
14.4 CSR and Companies in India
14.5 The Measurement of CSR
14.6 Future of CSR
14.7 Summary
14.8 Self Assessment Questions
14.9 Further Readings
14.1 INTRODUCTION
Corporate social responsibility (CSR) is an evolving concept which is yet to command
a standard definition or a fully recognized set of criterion. With the given
understanding that businesses have a key role of job and wealth creation in society,
CSR is generally understood to be the way an organization achieves a balance
between economic, environmental, and social imperatives while they address the
expectations of the shareholders and the stakeholders. While businesses try to comply
with laws and regulations on social, environmental and economic objectives set by the
legislations and legal institutions, CSR is often understood as involving the private
sector commitments and activities those extend beyond this foundation of compliance
with laws. In fact the key feature of the concept is the way businesses engage or
involve the shareholders, employees, customers, suppliers, governments, non-
governmental organizations, international organizations, and others into the
organization.
CSR is generally seen as the business contribution to sustainable development which
has been defined as development that meets the present needs without compromising
the ability of future generations to meet their own needs, and is generally understood
as focusing on how to achieve the integration of economic, environmental, and social
imperatives. CSR also overlaps and often is synonymous with many features of other 5
Corporate Social related concepts such as corporate sustainability, corporate accountability, corporate
Responsibility
responsibility, corporate citizenship, corporate stewardship, etc.
Today it is generally accepted that business firms have social responsibilities that
extend well beyond what in the past was commonly referred to simply as the business
economic function. In earlier times managers in most cases had only to concern
themselves with the economic results of their decisions. Today managers must also
consider and weigh the legal, ethical, moral and social impact and repercussions of
each of their decisions.
Here we find that companies need to answer two aspects of their operations:
1) The quality of their management - both in terms of people and processes (the
inner circle).
2) The nature and quantity of their impact on society in the various areas.
Outside, stakeholders are taking an increasing interest in the activity of the company.
Most look to the outer circle - what the company has actually done, good or bad, in
8 terms of its products and services, in terms of its impact on the environment and on
local communities, or in how it treats and develops its workforce. It is believed that Strategy and Social
Responsibility
this model may be more sustainable because here social responsibility becomes an
integral part of the wealth creation process, which if managed properly should
enhance the competitiveness of business and maximize the value of wealth creation to
society. When times get hard, there is the incentive to practice CSR more.
Since the early 1980s, a significant body of CSR research has centred around the
debate over whether there is a relationship between good Corporate Social
Performance ( CSP) and strong financial performance and what kind of relationships
exist. Today businesses are becoming increasingly interested in the idea of the Triple
Bottom Line (TBL). This idea focuses not just on the economic value of the
businesses that they may gain from acting in certain way, but also on the value that
they may accrue to the companys bottomline by engaging in environmentally and
socially beneficial practices. The three line represent the economy, the environment
and the society and are all dependent on each other. Whether companies do actually
take each line into account is difficult to measure as the arguments surrounding
financial benefits of the company from being socially responsive are not clear cut.
Although positive relationships have been found, there are several difficulties inherent
in measuring these linkages. One problem is that it is not clear whether social
responsibility leads to increased financial performance or whether better profits lead
to more funds being available to devote to CSR activities. The other issue is that profit
is an incomplete measure of social performance (Lantos 2001). Yet another is the
difficulty of developing a consistent set of measures that define CSR or CSP.
The following factors are taken into account for understanding the importance of
CSR:
! Globalization and the associated growth in competition
! Increased size and influence of companies
! War for talent, companies competing for expertise
! Increased importance of intangible assets
Improved Financial Performance: While it remains difficult to determine a direct
causal relationship between increased accountability and financial performance, a
variety of studies suggest that such a link exists. For example, according to 2002
Global Investor Opinion Survey released by McKinsey & Company, a majority of
investors are prepared to pay a premium for companies exhibiting high governance
standards. Premiums averaged 12-14 percent in North America and Western Europe;
20-25 percent in Asia and Latin America; and over 30 percent in Eastern Europe and
Africa. The study also found that more than 60 percent of investors state that
governance considerations might lead them to avoid individual companies with poor
governance.
Heightened Public Credibility: Companies that demonstrate a willingness to provide
information that is credible, verifiable, and accessible can garner increased trust
among stakeholders. Forthright and candid reporting about company achievements as
well as performance shortfalls helps companies create a public reputation for honesty.
At the same time, companies that make a public commitment to increase
accountability and transparency need to ensure that they have robust systems for
implementation, lest the company risk negative public backlash for failing to live up
to its commitments.
Reduced Costs: The enhanced communication that is often part of corporate
accountability efforts can help build trust between companies and stakeholders, which
9
can reduce costly conflict and improve decision-making. Companies that proactively
Corporate Social and effectively engage shareholders and address their concerns can reduce the costs
Responsibility
associated with shareholder proposals. In addition, social and environmental reporting
efforts can help identify the effectiveness of various programmes and policies, often
improving operating efficiencies and reducing costs. Reporting information can also
help identify priorities to ensure that company is achieving the greatest possible
impact with available resources.
Increased Attractiveness to Investors: Investors whether shareholders invested in
socially responsible funds that screen companies for social and environmental
attributes, or large institutions welcome the increased disclosure that comes with
corporate accountability. A growing number of investors are including non-financial
metrics in their analysis of the quality of their investments. New metrics cover labour
and environmental practices; board diversity, independence, and other corporate
governance issues; and a wide variety of other social and environmental criteria.
Research suggests investors may be willing to pay higher prices for the stock of
companies considered to be accountable. For example, a 2000 survey of 200 large
institutional investors conducted by McKinsey & Co., the World Bank, and
Institutional Investors regional institutes found that three-quarters of stackholders
consider board practices as important as financial performance when evaluating
companies for investment. The study also found that more than 80 percent of investors
would be willing to pay more for the shares of a well-governed company than for a
poorly governed company with comparable financial performance.
Improved Relationships with Stakeholders: Companies that make an effort to be
transparent and accountable for their actions and decisions are better able to build
trust among their stakeholders. This engagement helps companies understand how
community groups and other stakeholders perceive them, and educates them about
future issues and concerns that may affect their operations. The information gained
can help companies better define priorities and ensure business activities align with
professed business principles or ethical codes. Many government agencies and
stakeholders look favourably at companies that self-identify and publicly disclose
accountability challenges and demonstrate that they are working to solve them. Best
practice solutions include the development of management systems that reduce the
likelihood of recurrence.
Early Identification of Potential Liabilities: The strategic information that can
come from efforts to develop a more accountable company including social and
environmental auditing and reporting and stakeholder dialogue can identify
practices or situations that could pose liabilities to a company. Early identification can
provide companies with the opportunity to resolve problems before they result in
costly legal actions or negative public exposure. Issues that might surface more
quickly in an accountable company include: environmental problems that could
endanger public health, workplace discrimination or harassment that could result in
lawsuits, marketing practices that do not price products or services equitably, or hiring
practices that inadvertently give unfair advantage to certain populations. Social and
environmental auditing and reporting can also identify where company practices may
be in violation of government regulations or the standards or expectations of key
stakeholder groups.
Marketplace Advantages: Accountability can make entry and success in new
markets easier by helping establish direct relationships with key customers and
business partners. These relationships can contribute to innovation in product
development or delivery, help mitigate potential negative media coverage, and
enhance market presence. Some companies have used dialogue with stakeholders to
help make decisions on overseas investments and operations, or to overcome the
10 challenges of operating in markets with different cultures, laws, and languages. For
example, Unilevers Indian subsidiary, Hindustan Lever, has worked with local Strategy and Social
Responsibility
stakeholders to develop a new delivery system for laundry detergent in Indian
villages. The company was experiencing difficulty in selling its product until it was
suggested by stakeholders that the company package its product in single-use
quantities that would be affordable to local residents with limited disposable incomes.
Improved Overall Management: Many companies that have developed clear CSR
performance and accountability systems inside their organizations report experiencing
an improvement in their management practices overall. Increasingly, companies are
finding that the impact of systems designed to increase accountability for CSR
performance is not limited to the CSR realm, but can also impact performance in other
areas as the culture of the organization undergoes change. An analysis of Fortune 500
companies conducted at the Boston College, Carroll School of Management found
that companies judged as treating their stakeholders well are rated by peers as also
having superior management.
Improved Organizational Effectiveness: The process of self-assessment and
evaluation, which is part of increasing accountability can have beneficial impact on
company operations. For example, social and environmental auditing and reporting
give companies the opportunity to assemble and assess more comprehensive
information on operations and impacts. This information can help coordinate and
maximize efficiencies and collaborations across departments, facilities, and business
units. Through this process, companies compile examples of successful programmes
from various parts of their organizations and share the learnings throughout the
company, leading to more effective and efficient policies and practices. Dialogue and
partnerships with stakeholder groups can help companies build skills and
competencies, or align company operations with overarching mission and values.
Decreased Risk of Adverse Publicity: Accountable companies may be better
prepared to address the concerns of customers or other stakeholders who might
otherwise take negative action on social issues. For example, by engaging in a
dialogue with stakeholders about their interests and concerns, and addressing those
concerns in business implementation processes, companies may be able to head off or
minimize the impacts of boycotts organized by consumer groups. Similarly,
companies that proactively address the concerns of shareholders can reduce the risk of
adverse publicity stemming from high-profile shareholder disputes.
Activity 1
a) Explain with examples the nature of activities of a company which would qualify
for under its CSR initiatives as the concept of CSR evolved since the beginning
of 20th century with charity principle.
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b) Suggest some more benefits/importance of CSR for business allover.
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11
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Corporate Social
Responsibility 14.4 CSR AND COMPANIES IN INDIA
In India, most of the work done by companies is still in nature of philanthropy.
Consider that of the six short listed companies for the Business World FICCI CSR
award for year 2003, five ( Lupin, Canara Bank, Indal, Gujrat Ambuja and Wipro ) are
involved in community development work. This means building roads, running
schools and hospitals, creating income-generating schemes and similar projects . Only
ITCs CSR its e-choupal project and others - has direct linkages with its business.
This is understandable given that many of the traditional development indicators life
expectancy, infant and child mortality, sanitation facilities and access to primary
education are still abysmal for India. In fact even the government expects Corporate
India to participate in welfare programmes even though it is a tacit admission that the
state has failed to deliver even the most basic amenities. But of late experts argue that
as India gets integrated into the global economy, companies should pick up projects
that are business centric. The CSR initiatives should become a part of the business
process.
In an era of no free lunches , the attraction that the business centric model of CSR
holds is obvious. But if more Indian Companies are to adopt that, some other things ,
too, need to change besides mindsets and developmental needs. The links between
good CSR and good business have to be established clearly. Sure even overseas there
is still no way that the capital markets reward good CSR practices directly or are
willing to ovelook other flaws in lieu of good CSR. But experience shows that
substantial benefits do flow in different ways.
Research in West shows that investors are increasingly questioning companies on
corporate social practices and are allying with those that have high respect for CSR. In
fact there is a whole eco-system being built around this concept with outfits like
Ethical Investment Research Service, a U K based independent researcher of ethical,
social and environmental practices advising outfits like Goldman Sachs, J P Morgan,
Redit Suisse, Merill Lynch and Standard Life on CSR practices of companies.
Moreover the likes of FTSE and Dow Jones are coming up with indices such as the
FTSE 4 Good and the DOW Jones Sustainability World Index. The FTSE 4 Good is
an index comprising stocks of companies with good practices. To be a part of FTSE 4
good family of indices one need to apply to the FTSE 4 Good applications committee.
In the absence of all these , its quite unlikely that CSR in India will change from
being more philanthropic to more business centric in the near future. Yet such
developments taking place worldwide and also because India is developing as back
office centre, movement towards business centric CSR models is possible.
Taking clue from the Business World FICCI CSR Awards, still it is not clear how
much Indian companies invest in CSR but from the list of the companies that applied
and evidence on ground suggest that time has come and is important for large
companies to enter into business centric CSR models. However, considering India
where so much is to be done, it doesnt matter whether companies take business
centric view or the philanthropic centric view.
14.7 SUMMARY
With the given understanding that businesses have a key role of job and wealth
creation in society, CSR is generally understood to be the way an organization
achieves a balance between economic, environmental, and social imperatives while
they address the expectations of the shareholders and the stakeholders. Companies of
late see CSR as an integral part of the long term business strategy. Now a days lots of
companies are taking it seriously for good of business. Very briefly, the following
strategic steps should be taken by a firm to fulfill its social responsibility.
1) Assessment of economic and social impact
2) Assessment of social environment
3) Appraisal of the firms policies and practices
4) Formulating objectives and strategies
5) Developing operational plans and programmes
6) Monitoring social programmes
7) Summary of the outcomes and performance
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UNIT 15 ETHICS AND VALUES
Objectives
After reading this unit you should be able to:
! explain the meaning of business ethics;
! understand the concept and scope of business ethics;
! understand ethics and its relation to different stakeholders;
! build the case for ethics in business and new dimensions in the changing
business paradigm;
! discuss on ethics in market place and organizations external and internal
exchanges
! debate towards the objections to bringing ethics into business
Structure
15.1 Introduction
15.2 Concept of Business Ethics
15.3 Scope of Ethics
15.4 Stakeholders and Ethics
15.5 Business and Ethics
15.6 Business Ethics and External Environment
15.7 Business Ethics and Internal Environment
15.8 Ethics and Business : Objections
15.9 Summary
15.10 Self Assessment Questions
15.11 Further Readings
15.1 INTRODUCTION
Every business has an ethical duty to each of its associates namely, owners or
stockholders, employees, customers, suppliers and the community at large. Each of
these affect organization and is affected by it. Each is a stakeholder in the enterprise
with certain expectations as to what the enterprise should do and how it should do it.
Business ethics is applied ethics. It is the application of our understanding of what is
good and right to that assortments of institutions, technologies, transactions, activities
and pursuits that we call business. Ethical behaviour is the best long term business
strategy for company , however this does not mean that occasions may never arise
when doing what is ethical will prove costly to a company nor does it mean that
ethical behaviour is always rewarded or that unethical behaviour is always punished.
On the contrary, unethical behaviour sometimes pay off and the good sometimes lose.
Strategy means merely that over the long run and for most of the part, ethical
behaviour can give a company significant competitive advantages over companies that
18 are not ethical.
Ethics and Values
15.2 CONCEPT OF BUSINESS ETHICS
A discussion of business ethics must begin by providing a framework of basic
principles for understanding what is meant by the terms good and right, only then we
can proceed to discuss the implications of ethics to our business world.
Managers should hold and develop a deeper knowledge of the nature of ethical
principles and concepts and an understanding of how these apply to ethical problems
encountered in business. This type of knowledge and understanding should help
managers more clearly see their way through the ethical uncertainties that confront
them in their business lives.
According to the dictionary, the term ethics has a variety of meanings. One of the
meanings given to it is, the principles of conduct governing an individual or a
group. We sometimes use the term personal ethics while referring to the rules by
which an individual lives his or her personal life. A second and more important
meaning of ethics according to the dictionary is, ethics is the study of morality.
Although ethics deals with morality, it is not quite the same as morality. Ethics is a
kind of investigation and includes both the activity of investigating as well as the
results of that investigation whereas morality is the subject matter that ethics
investigates.
Now the basic question which arise is what morality is. It is often said that morality is
the standards which individual or group determine about deciding what is right or
wrong and good or evil. Moral standards include the norms we have about the kind of
actions we believe are normally right and wrong as well as the values we place on the
kinds of objects we believe are morally good and morally bad. Moral norms can
usually be expressed as general rules or statements such as Always tell the truth or
it is wrong to kill innocent people
Ethics is the discipline that examines ones moral standards or the moral standards of
the society. It asks how these standards apply to our lives and whether these standards
are reasonable or unreasonable that is whether they are supported by good reasons
or poor ones.
Ethics is however not the only way to study morality. The social sciences such as
anthropology, sociology and psychology also study morality but do so in a way that is
quite different from the approach to morality that is characteristics of ethics. It is a
descriptive study which tries to describe or explain the world without reaching any
conclusions about whether the world is as it should be and does not try to reach any
conclusions about what things are truly good or bad or right or wrong. Ethics in
contrast, is a study of moral standards whose explicit purpose is to determine as far as
possible whether a given moral standard is more or less correct.
The above conveys an idea of what ethics is. Now coming to business ethics, it is a
specialized study of moral right and wrong. It concentrates on moral standards as they
apply to business policies, institutions and behaviour and how these apply to the
systems and organizations through which modern societies produce and distribute
goods and services and to the people who work within these organizations. Business
ethics therefore includes not only the analysis of moral norms and moral values but
also attempt to apply the conclusions of this analysis to that assortment of institutions,
technologies, transactions, activities and pursuits that we call business.
To cope up with their complex coordination and control problems, the officers and
managers of large corporations adopt formal bureaucratic systems of rules that link
together the activities of the individual members of the organization so as to achieve
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certain outcomes or objectives. So long as the individual follows these rules the
Corporate Social outcome can be achieved, the outcome can be achieved even if the individual does not
Responsibility
know what it is and does not care about it.
Business enterprises are the primary economic institutions through which people in
modern societies carry on the tasks of producing and distributing goods and services.
20 ..
.. Ethics and Values
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2) Explain how ethics is important for business.
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UNIT 16 SOCIAL AUDIT
Objectives
After reading this unit you should be able to:
! explain the meaning of social audit;
! state the scope and objectives of social audit;
! emphasise the need for social audit ;
! identify different types of social audit;
! highlight key developments in social transparency and reporting
Structure
16.1 Introduction
16.2 Scope and Objectives
16.3 CSR and Corporate Accountability
16.4 Types of Social Audit
16.5 Key Developments in Transparency and Reporting
16.6 Summary
16.7 Key Words
16.8 Self Assessment Questions
16.9 Further Readings
16.1 INTRODUCTION
The term social audit may be interpreted in several ways. As far as common
understanding goes, it is an essential assessment of how well a company has
discharged its social obligations. However experts see it as a systematic and
comprehensive evaluation of an organizations social performance which is
interpreted as organizational efforts in enriching the general welfare of the whole
community and the whole society.
The need for social audit arises because of various reasons. In order to reach the
objective of enriching economic wealth for the shareholders, the firm do it at the cost
of social and environmental disorder. And since many would not take into account the
social costs of such negative implications, their prices do not reflect the real cost. The
organizations do it more because of competitive reasons. However if the larger
interest of society is to be preserved, there has to be some consideration for social
good.
The company is expected to behave and function as a socially responsible member of
the society like any other individual. It cannot shun moral values nor can it ignore
actual compulsions. There is a need for some form of accountability on part of the
management which is not only limited to shareholder alone. In modern times, the
objective of business has to be the proper utilization of resources for the benefit of
others. A profit may still be a necessary part of the total picture but it sould not be the
only purpose. The company must accept its obligation to be socially responsible and
30
to work for the larger benefit of the community.
Society expects businesses to share the fruits of progress and growth. Moreover, the Social Audit
social concern by the organization proves to be an asset for them in the long run
especially under environmental distress because of the goodwill and the positive
image earned all through these years.
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Activity 1 Social Audit
Enumerate examples where you see firms calculating the wealth generated, without
taking into account the social and environmental costs.
Illustrate few examples of Indian companies who in your opinion care for
environmental protection or are driven by ethical norms or are conscious of extending
equal opportunity to its employees while pursuing their commercial activity of
generating wealth.
16.6 SUMMARY
Social Audit in business intends to examine an organizations efforts in enriching the
general welfare of the whole community and the whole society. In modern times, the
objective of business is to provide benefits to others and the society expects
businesses to share the fruits of progress and growth. Corporate accountability 37
Corporate Social encompasses the systems which a company establishes in order to develop policies,
Responsibility
indicators, targets and processes to manage the full range of its activities towards
society. Demand for increased corporate accountability today comes from all sectors
and various types of social audit system is being developed in order to take such
accounts. Few key developments enabled by technology and information revolution
has broadened the scope for such an audit to be made within organizations and shared
in public.
17.1 INTRODUCTION
The first generation of Corporate Social Responsibility (CSR) showed how companies
can be socially responsible in ways that do not detract from commercial success rather
contribute to it. It was the most traditional and widespread form of CSR and often
manifested itself as corporate philanthropy. It rose to heights in 1990s when huge
amount of money was being donated by individuals. It was not a part of the main
business of the company but may have added commercial value through reputation
enhancement.
However as the concept evolved, corporate philanthropy is considered as a practice by
companies of all sizes and sectors making charitable contributions to address a variety
of social, economic and other issues as part of their overall corporate citizenship
strategy. Historically many businesses played a significant role in their local
communities by providing financial support to a variety of non profit organizations
and charitable causes. In recent years several events and trends have contributed to
companies changing the way they approach their philanthropy. The most prominent
changes include :
! Adoption of a strategic approach to philanthropy in which companies align
charitable giving with the companys core business interests;
! Expansion of the geographic focuses of corporate giving to reflect the needs and
expectations of a global workforce and customer base.
! Development of measurement tools for evaluating the impact of charitable
contributions.
! Innovation in the ways companies incorporate greater stakeholder participation
in philanthropic activities, create long-term relationships with nonprofit
organizations and organize their philanthropic programmes.
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Corporate Social Activity 1
Responsibility
Mention the prominent changes which have occurred with philanthropy.
17.4 SUMMARY
Historically many businesses played a significant role in their local communities by
providing financial support to a variety of non profit organizations and charitable
causes. In recent years several events and trends have contributed to companies
changing the way they approach their philanthropy. Corporations can use their
charitable efforts to improve their competitive context, the quality of the business
environment in the locations where they operate. Using philanthropy to enhance
competitive context means aligning social and economic goals and improving
companys long-term business prospects which is well illustrated in the examples
discussed.
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Philanthropy as a Strategic
17.7 FURTHER READINGS Choice
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