ED

IT

OR

IA

L

It giv

es me im

men

se pleasu

re to p

lace the m

aiden

issue o

f our jo

urn

al ‘Vig

nan

a Jyoth

i Journ

al of

Man

agem

ent’ in

your h

ands.

A research

journ

al of an

y B

school is its in

tellectual cap

ital. Lately, B

schools are b

eing ju

dged

not

only

on th

e basis o

f quality

of teach

ing b

ut also

on th

e basis o

f enco

urag

emen

t that th

ey g

ive to

research.

This o

ften g

ets man

ifested in

the q

uality

research u

ndertak

en b

y th

e faculty

and also

in th

e platfo

rm

that is created

to sh

are the research

undertak

en b

y th

e faculty

of o

ther p

restigio

us B

schools. T

he

journ

al is a hum

ble attem

pt m

ade b

y th

e institu

te to en

courag

e quality

research am

ong th

e mem

bers o

f

teachin

g fratern

ity o

f B sch

ools. It is an

attempt to

build

a storeh

ouse o

f articles which

are hig

hly

info

rmativ

e, touch

ing th

e vario

us facets o

f areas of m

anag

emen

t. It is expected

that th

e journ

al would

facilitate dissem

inatio

n o

f know

ledge related

to th

e latest dev

elopm

ents in

vario

us areas o

f man

agem

ent

educatio

n. W

e would

constan

tly striv

e to in

clude em

pirical an

d co

ncep

tual p

apers o

f hig

h stan

dard

s in

our fu

ture issu

es also. It is ex

pected

that in

futu

re, the jo

urn

al would

be lo

oked

upon as a p

latform

to

brin

g to

geth

er the b

est thin

k tan

ks in

our co

untry

who are research

orien

ted.

We h

ope, th

e articles inclu

ded

in th

e journ

al would

go a lo

ng w

ay in

enhan

cing th

e know

ledge o

f the

faculty

about th

e research th

at is bein

g u

ndertak

en in

the area o

f their in

terest. This w

ould

furth

er

enhan

ce their sk

ills to tak

e up q

uality

research.

Edito

r

Vig

nan

a Jyoth

i

Journ

al of M

anag

emen

t

Volu

me 1

Issue 1

July

-Decem

ber 2

009

Modellin

g S

trategies fo

r Corp

orate G

row

th:

Kam

al Ghosh

Ray

1

The A

rchitectu

re of V

alue C

reating M

argers &

Acq

usitio

ns

Trad

e Disp

utes in

Practice

Win

ston C

han

g3

3

Em

plo

yee E

ngag

emen

t : The O

nly

Way

Ahead

Kak

oli S

en4

6

Expan

din

g th

e Valu

e Horizo

n o

f HR

: An E

nab

ler and

Dim

ple G

rover

55

Facilitato

r to B

uild

ing C

orp

orate G

overn

ance P

ractices

Serv

ice Quality

and C

usto

mer S

atisfaction: A

Case S

tudy in

Lew

lyn L

. R. R

odrig

ues

63

Gen

eral Insu

rance u

sing C

usto

mized

SE

RV

PE

RF

Instru

men

tG

opalak

rishna B

K. V

. M. V

arambally

Why sh

ould

we S

tudy H

um

an R

esources M

anag

emen

t?S

.R. T

ulasi

72

Chan

ge G

ender R

ole A

ttitudes an

d F

amily

Purch

ase Decisio

ns

Pin

ni V

asanth

a Lak

shm

i7

9

Dep

osits R

epay

able b

y B

anks th

rough E

quated

Month

ly In

stallmen

ts:V

ipin

Desai

91

A P

rop

osal fo

r an In

no

vativ

e Pro

du

ct and

its Po

tentiality

Stu

dy

Resistan

ce over S

hift S

ystem

R.K

rishn

aven

i1

01

Rav

i Chin

nath

ambi

Mod

elling S

trateg

ies for C

orp

ora

te Gro

wth

: Th

e Arch

itecture o

f

Valu

e Crea

ting M

ergers &

Acq

uisitio

ns

Kam

al Ghosh

Ray

*

Ab

stract

Today, co

mpan

ies are under p

ressure to

increase sh

arehold

er valu

e at the fastest p

ossib

le time. T

he C

EO

s

are on th

e run to

gen

erate and d

eliver it. T

he cu

t thro

at com

petitio

n is n

ot h

elpin

g th

e CE

Os to

achiev

e faster

gro

wth

. They

are either ally

ing w

ith o

r grab

bin

g th

e smaller co

mpetito

rs or su

rrenderin

g to

the b

igger p

layers

for th

e purp

ose. M

ergers an

d acq

uisitio

ns (M

&A

) are believ

ed to

be th

e fastest way

s of ap

peasin

g th

e shareh

old

ers.

Most o

f the b

oard

s and C

EO

s can n

ot th

ink o

f any o

ther altern

atives b

ut fo

r M&

As, b

ecause M

&A

s are consid

ered

to b

e dom

inan

t strategies fo

r surv

ival an

d g

row

th all o

ver th

e corp

orate w

orld

. At th

e same tim

e, there are fears

of b

reachin

g th

e ‘agen

cy co

ntracts’ an

d th

e conseq

uen

tial impacts (Jen

sen, 1

986). T

he m

anag

ers are strivin

g fo

r

achiev

ing q

uick

success fro

m M

&A

s. As a resu

lt, com

pan

ies are form

ulatin

g M

&A

strategies an

d alig

nin

g w

ith

the co

rporate strateg

ies to ach

ieve g

row

th th

rough th

e pow

erful to

ol o

f ‘synerg

y’. T

his p

aper m

akes a m

odest

attempt to

form

ulate an

d d

esign a m

odel fo

r mak

ing a v

alue creatin

g an

d su

ccessful M

&A

decisio

n.

Key

Word

s: Agen

cy C

ontracts, R

egim

e shift, M

ergers an

d A

cquisitio

ns, S

ynerg

y.

Intro

du

ction

In b

usin

ess, there are co

nsid

erable ‘reg

ime sh

ifts’1 h

appen

ing alm

ost at reg

ular in

tervals. M

&A

s are rampan

t

in in

dustries w

hich

are experien

cing ‘reg

ime sh

ifts’ in term

s of reg

ulatio

n, p

ractice or tech

nolo

gy. In

ord

er to

cope w

ith th

e regim

e shifts, th

e man

agers m

ake ap

pro

priate strateg

ies to m

axim

ize their firm

valu

e thro

ugh th

e

route o

f org

anic g

row

th o

r acquisitio

n. G

orto

n, et.al. (2

006) p

ropose a th

eory

of m

ergers w

hich

connects m

erger

motiv

es and a reg

ime sh

ift leadin

g to

som

e valu

e enhan

cing M

&A

opportu

nities. T

hey

opin

e that an

y an

ticipatio

n

of th

e regim

e shift can

lead to

merg

ers, either fo

r defen

sive o

r positio

nin

g reaso

ns. D

efensiv

e merg

ers occu

r

wh

en m

anag

ers acqu

ire oth

er firms to

avo

id b

eing

acqu

ired th

emselv

es. Merg

ers may

also allo

w a firm

to

positio

n itself as a m

ore attractiv

e takeo

ver targ

et and earn

a takeo

ver p

remiu

m. T

he id

entity

of acq

uirers an

d

targets an

d th

e pro

fitability

of acq

uisitio

ns d

epen

d, am

ong o

ther facto

rs, on th

e distrib

utio

n o

f firm sizes w

ithin

an in

dustry. In

any m

erger an

d acq

uisitio

n (M

&A

) deal, th

e buyer is p

rimarily

driv

en b

y co

mm

ercial consid

erations

rather th

an fin

ancial co

nsid

eration

s. Th

e ration

ale beh

ind

each ty

pe o

f acqu

isition

is differen

t. Fin

ancial

acquisitio

ns are o

ften o

pportu

nistic d

eals that d

o n

ot fit in

to an

y b

road

strategy fo

r dev

elopin

g th

e busin

ess. In

a ‘merg

er’ strategy tw

o firm

s agree to

integ

rate their o

peratio

ns o

n a relativ

ely co

-equal b

asis so th

at their

com

bin

ed reso

urces an

d cap

abilities create a stro

nger co

mpetitiv

e advan

tage. T

he R

eckitt &

Colem

an, U

.K. an

d

Ben

ckiser, N

etherlan

ds jo

ined

han

ds to

form

‘Reck

itt-Ben

ckiser’ w

ith co

mplem

entary

pro

ducts an

d g

eograp

hical

pen

etration. B

ecause th

e merg

er created th

e world

’s leadin

g h

ouseh

old

cleanin

g p

roducts g

roup, th

e new

firm

had

substan

tial mark

et pow

er with

significan

t cost red

uctio

ns an

d im

pro

ved

pro

fitability. W

ith an

‘acquisitio

n’

strategy a firm

buys a co

ntro

lling o

r hundred

percen

t interests in

anoth

er firm w

ith th

e inten

tion o

f apply

ing co

re

com

peten

ce more effectiv

ely b

y m

akin

g th

e acquired

firm a su

bsid

iary b

usin

ess house w

ithin

its pro

duct p

ortfo

lio.

Most o

f the m

ergers are frien

dly

transactio

ns, w

hereas acq

uisitio

ns m

ay in

clude u

nfrien

dly

takeo

vers also

. A

‘takeo

ver’ b

id can

be a p

art of an

acquisitio

n strateg

y, where th

e target firm

does n

ot so

licit the acq

uirin

g firm

’s

bid

. For ex

ample, in

2008, Y

ahoo receiv

ed an

unso

licited tak

eover b

id fro

m G

oogle co

rporatio

ns, w

hich

was

finally

defen

ded

by th

e form

er. In all th

e cases like m

erger, acq

uisitio

n o

r takeo

vers o

r alliance, th

e philo

sophy

that w

ork

s beh

ind is g

row

th. A

cquisitio

n b

ased g

row

th an

d o

rgan

ic gro

wth

are the tw

in altern

atives o

f a large

*P

rofesso

r-Fin

ance &

Risk

Man

agem

ent an

d D

irector-V

ign

ana Jy

oth

i Institu

te of M

anag

emen

t, Hy

derab

ad.

E-m

ail: dr.k

amalg

ho

shray

@v

jim.ed

u.in

/ kg

ho

shray

@y

aho

o.co

.in

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

1

com

pan

y’s strateg

ic appro

ach to

busin

ess gro

wth

. The M

&A

strategy is su

pposed

to b

e consisten

t with

the

com

pan

y’s o

verall m

ission, o

bjectiv

es and g

oals to

gro

w eith

er thro

ugh n

ew in

vestm

ents in

pro

jects or a b

usin

ess

com

bin

ation. A

com

pan

y is ex

pected

to set o

ut its b

usin

ess objectiv

es and g

row

th strateg

y in

a clear, rational

and fin

ancial n

um

ber o

riented

way. T

his is n

ot ju

st a boss’s d

irective to

beco

me a so

much

billio

n d

ollar co

mpan

y

in so

man

y y

ears. The T

op ex

ecutiv

es must estab

lish sp

ecific criteria based

on th

e objectiv

es they

hav

e set and

the strateg

y o

f gro

wth

they

hav

e form

ulated

(Agraw

al and M

andelk

er, 1987). T

he criteria sh

ould

be ex

pressed

in clear term

s of g

oals lik

e: (1) d

iversificatio

n o

f pro

ducts an

d serv

ices in th

e related o

r unrelated

areas, (2)

vertical in

tegratio

n b

y ex

pan

din

g in

acquisitio

n o

f input an

d in

distrib

utio

n, (3

) the co

nseq

uen

tial busin

ess risk,

(4) ex

pan

sion o

f mark

et share b

y fu

rther in

vestm

ents o

r acquirin

g th

e com

petito

rs, (5) g

eograp

hical access, n

ew

pro

ducts o

r technolo

gies, to

p lin

e (the rev

enues), b

otto

m lin

e (the p

rofits), R

OI, E

VA

, etc.

Motiv

atio

nal H

yp

oth

eses for M

&A

The p

rimary

motiv

es of alm

ost all M

&A

s and th

e resultan

t busin

ess com

bin

ations are co

ngru

ent w

ith th

e

main

purp

ose fo

r the ex

istence in

the b

usin

ess as well as m

axim

ising sh

arehold

er valu

e. The in

crease in th

e

shareh

old

er’s wealth

of th

e com

bin

ed en

tity eith

er could

be a resu

lt of v

alue created

by th

e M&

A d

eal or b

y

transfer o

f wealth

from

bondhold

ers to sh

arehold

ers with

no ch

ange in

the to

tal mark

et capitalisatio

n o

f the

com

bin

ed en

tity. When

two en

tities com

bin

e, the m

erged

entity

is expected

to m

ake m

ore m

oney. T

his can

be

achiev

ed b

y:

1.

Impro

vin

g th

e efficiency

and effectiv

eness o

f the co

mbin

ed in

stitutio

ns th

rough eco

nom

ies of scale an

d

cost sav

ing;

2.

Increasin

g th

eir mark

et pow

er, expan

din

g o

peratio

ns an

d territo

ry, leadersh

ip in

selling p

rices and serv

ice

fees, reven

ue im

pro

vem

ent, etc.

3.

Increasin

g th

eir access to th

e safety n

et.

Sev

eral hypoth

eses hav

e been

advan

ced to

explain

the m

otiv

es for b

usin

ess com

bin

ations th

rough M

&A

s.

These h

ypoth

eses are presen

ted in

Tab

le-1. M

any o

f these h

ypoth

eses attempt to

explain

the cap

ital mark

et

reaction to

target an

d acq

uirin

g firm

s. Som

e of th

ese hypoth

eses assum

e a non-w

ealth creatin

g b

ehav

iour o

n th

e

part o

f acquirers (e.g

., hubris h

ypoth

esis2) an

d p

redict th

at the sh

are price o

f target firm

s will rise an

d th

ose th

us

assum

e wealth

-creating b

ehav

iour p

redictin

g th

at the sh

are prices o

f target firm

s will rise w

ith n

o im

pact o

n

share p

rices of acq

uirers (R

oll, 1

986). T

he recen

t meg

a M&

A d

eals hav

e thro

wn ch

allenges, w

hich

should

be

pro

perly

addressed

to en

sure su

ccess of th

ese deals. T

he ch

allenges to

execu

te an M

&A

deal in

clude b

oth

the

opportu

nities to

achiev

e a pro

fitable M

&A

deal (e.g

., finan

cial ben

efits to b

oth

shareh

old

ers of th

e acquirer an

d

target in

stitutio

n) an

d rem

ov

ing

ob

stacles du

ring

the co

mb

inatio

n p

rocess w

here b

oth

hu

man

and

ph

ysical

resources are ev

entu

ally fo

rced to

join

. Thus, b

oth

finan

cial opportu

nities an

d th

e related o

bstacles (e.g

., differen

t

corp

orate cu

ltures) sh

ould

be ex

amin

ed an

d assessed

when

contem

platin

g an

M&

A d

eal. It is practically

impossib

le

to id

entify

all causes an

d effects o

f the M

&A

s. But attem

pts can

be m

ade to

attribute sev

eral factors to

the

curren

t rapid

pace o

f M&

As. T

he ex

traord

inary

dev

elopm

ent in

the eq

uity

and d

ebt m

arkets, h

as enco

urag

ed th

e

ever-in

creasing m

erger w

ave. T

he ex

cess capital h

as gone in

to sto

cks, w

hich

has p

ush

ed th

eir valu

es to a h

igh

level in

the p

ast decad

e and en

courag

ed sh

arehold

ers of b

oth

the acq

uirer an

d targ

et to tak

e advan

tages o

f M&

A

deals. T

he g

lobally

abundan

t finan

cial capital resu

lted fro

m g

lobalizatio

n o

f econom

ies and b

usin

esses, low

er

trade b

arriers, technolo

gical ad

van

ces, and p

rivatizatio

n, w

hich

are consid

ered o

ther im

portan

t forces d

rivin

g

M&

A tran

sactions.

Man

y co

mpan

ies use acq

uisitio

ns to

pursu

e a strategy fo

r gro

wth

in tu

rnover, m

arket sh

are and p

rofits. In

som

e cases, the b

uyer acq

uires m

ore b

usin

esses than

it wan

ts to k

eep. In

such

circum

stances it w

ill try to

sell off

unw

anted

busin

esses, retainin

g o

nly

those th

at fit its strategic o

bjectiv

es. Defen

sive reaso

ns fo

r acquisitio

ns

inclu

de th

e need

for reo

rgan

ization w

ithin

an in

dustry

and a m

erger o

r acquisitio

n can

help

to elim

inate o

ver-

capacity

(Ericso

n an

d P

akes, 1

995).

Modellin

g S

trategies fo

r Corp

orate G

row

th

2.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Fin

ancial o

pportu

nities o

ccasionally

can en

courag

e merg

ers or acq

uisitio

ns. W

hile d

ecidin

g acq

uisitio

n o

f oth

ers’

busin

ess, a distin

ction n

eeds to

be m

ade b

etween

(a) com

pan

ies that seek

acquisitio

ns to

add v

alue to

their

busin

ess by ach

ievin

g a b

etter rate of g

row

th an

d (b

) com

pan

ies that id

entify

takeo

ver targ

ets where th

ey can

captu

re and ex

plo

it the v

alue th

at already ex

ists in th

e busin

ess, with

out n

ecessarily creatin

g m

ore g

row

th.

Com

pan

ies can m

ake a d

istinctio

n b

etween

acquisitio

ns fo

r strategic (o

r com

mercial) reaso

ns an

d acq

uisitio

ns

for in

vestm

ent reaso

ns. C

orp

orate raid

ers prim

arily are co

ncern

ed w

ith th

e poten

tial finan

cial ben

efits of tak

eovers.

They

look fo

r underv

alued

com

pan

ies to b

uy ch

eaply, an

d u

nlo

ck th

e valu

e quick

ly, perh

aps b

y b

reakin

g u

p th

e

acquired

com

pan

y in

to sm

aller div

isions th

at can b

e resold

at a pro

fit.

Mod

els for G

row

th S

trateg

y th

rou

gh

New

Pro

jects or M

&A

s

The first co

nsid

eration in

dev

elopin

g an

appro

priate strateg

y fo

r gro

wth

is to d

ecide w

heth

er the co

mpan

y

will set u

p a n

ew p

roject o

r will g

o fo

r an acq

uisitio

n o

r even

a merg

er. Merg

ers and acq

uisitio

ns are u

ndoubted

ly

the to

ols fo

r corp

orate g

row

th. E

ven

two d

ecades earlier, m

any w

ell know

n co

rporate h

ouses lik

e the T

atas used

to b

elieve in

div

ersification an

d g

row

th o

nly

thro

ugh n

ew g

reen field

and g

rey field

pro

jects. Today, M

&A

has

taken

the fo

refront b

ecause it is relativ

ely easy

and q

uick

meth

od to

gro

w. B

ut it req

uires m

ore o

f com

plex

and

intellectu

al decisio

ns rath

er than

clear-cut lo

ng-term

pro

ject decisio

n startin

g w

ith fo

rmulatio

n an

d en

din

g w

ith

implem

entatio

n. In

the case o

f M&

A, it is v

ery clear th

at there is h

ardly

any o

pportu

nity

for in

creasing th

e

overall p

roductio

n cap

acity w

hereas; a n

ew p

roject g

ives rise to

gen

eration o

f new

capacity. W

hich

decisio

n

man

agem

ent w

ill take; n

ew p

roject o

r M&

A? T

he au

thor su

ggests th

e follo

win

g m

odels fo

r this p

urp

ose an

d

initiates fu

rther d

iscussio

ns in

the fo

llow

ing p

aragrap

hs.

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

3

Fin

an

cial M

od

el in th

e Case o

f a N

ew P

roject

In th

e case of a n

ew p

roject, th

e pro

ject cost an

d th

e mean

s of fin

ance are estim

ated as u

nder:

Total p

roject co

st (TP

C) =

IFA +

WC

M+

PE

,

wh

ere,

Investm

ent in

fixed

assets = I

FA

(land, p

lant an

d m

achin

eries,

build

ings, fu

rnitu

re, etc.)

Work

ing cap

ital marg

in =

WC

M

Pre-o

perativ

e expen

ses = P

E

and

Mean

s of fin

ance =

Sources o

f total p

roject fin

ance (T

PF

) = E

P + D

P ,

wh

ere,

Issue o

f Equity

shares =

EP

Raisin

g o

f Deb

t = D

P

Hen

ce, Initial in

vestm

ent fo

r the n

ew p

roject (I

New

pro

ject ) = C

ash o

utflo

w n

eeded

for b

usin

ess gro

wth

thro

ugh

green

field p

roject. In

oth

er word

s, IN

ew p

roject

= T

PC

= T

PF

= E

P + D

P = I

FA +

WC

M+

PE

Cash

inflo

w fro

m th

e new

pro

ject is disco

unted

presen

t valu

e of th

e free cashflo

w to

be g

enerated

by th

e

pro

ductio

n an

d sales o

f the g

oods an

d serv

ices from

the p

roject fo

r a finite p

eriod, g

enerally

an ex

plicit p

eriod,

for w

hich

the p

rojectio

ns can

be m

ade w

ith h

igh d

egree o

f certainty. T

herefo

re, the p

resent v

alue o

f the fu

ture

cash flo

w fro

m p

roject is g

iven

by:

PV

FC

FP =

[FC

FP

t /(1+

WA

CC

)t], w

here,

FC

FP

= F

ree cash flo

w3,

WA

CC

= W

eighted

averag

e cost o

f capital

t = 1

,2,3

……

n y

ears for w

hich

disco

untin

g w

ould

be d

one

n=

explicit p

eriod fo

r which

pro

jected free cash

flow

can b

e ascertained

with

reasonab

ly h

igh d

egree o

f certainty.

In a p

roject ‘n

’ can b

e as short as p

ossib

le. In case o

f pro

ject evalu

ation o

r pro

ject appraisal, fin

ancial

institu

tions co

nsid

er 5 to

7 y

ears as the reaso

nab

le perio

d d

epen

din

g u

pon th

e natu

re of th

e pro

duct an

d th

e type

of th

e mark

ets. With

in th

is perio

d, th

e busin

ess is expected

to attain

matu

rity an

d stab

ilize the u

ncertain

ty.

Hen

ce,

PV

FC

FP =

[FC

FP

1 /(1+

WA

CC

)1]+

[FC

FP

2 /(1+

WA

CC

)2]+

[FC

FP

3 /(1+

WA

CC

)3]+

……

……

……

…

+ [F

CF

Pn /(1

+W

AC

C)

n]

Goin

g b

y th

e simple cap

ital budgetin

g tech

niq

ues, th

e net p

resent v

alue (N

PV

) of th

e new

pro

ject is giv

en as:

NP

VN

ew p

roject =

[FC

FP

t /(1+

WA

CC

)t] –

[IN

ew p

roject ], o

r

NP

VN

ew p

roject =

[FC

FP

t /(1+

WA

CC

)t] –

[IFA +

WC

M+

PE ], o

r

NP

VN

ew p

roject =

[FC

FP

t /(1+

WA

CC

)t] –

[EP +

DP ].

Modellin

g S

trategies fo

r Corp

orate G

row

th

4.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Fin

an

cial M

od

el in th

e Case o

f Ou

trigh

t Acq

uisitio

n o

f a C

om

pan

y

For o

btain

ing an

equal g

row

th th

rough o

utrig

ht acq

uisitio

n o

f a com

pan

y, the acq

uirer p

ays fo

r what h

e

gets. H

e receives fro

m th

e target co

mpan

y: fix

ed assets (F

A), w

ork

ing cap

ital (WC

), i.e. [curren

t assets (CA

)

less curren

t liabilities (C

L)] an

d in

tangib

le assets (I) like g

oodw

ill, bran

ds, w

ork

force, cu

stom

er relationsh

ips,

etc. The acq

uirer p

ays a p

rice for th

e net assets h

e gets p

lus a p

remiu

m (P

R ), if any d

epen

din

g u

pon h

is barg

ainin

g

pow

er. Therefo

re, the ag

reed p

rice of an

acquisitio

n is g

iven

by:

Pacq

uisitio

n = F

A+

WC

+I+

PR

A carefu

l acquirer also

need

s to co

nsid

er two v

ery im

portan

t aspects im

med

iately o

n acq

uisitio

n. T

hese are:

1.

Som

e capital ex

pen

ditu

res (ER ) are to

be in

curred

for th

e org

anizatio

nal restru

cturin

g in

cludin

g d

ow

nsizin

g

of su

rplu

s work

force o

r revam

pin

g an

y p

lant an

d m

achin

eries, etc.

2.

Imm

inen

t div

estitures o

f SB

Us (strateg

ic busin

ess units) n

ot fallin

g u

nder co

re com

peten

cy an

d n

ot b

eing

finan

cially v

iable. U

nder su

ch situ

ations, th

e acquirer g

ains so

me cash

flow

(CF

Div

estitures ) an

d reso

rts to

assets strippin

g b

y co

nvertin

g so

me o

f the assets in

to cash

and red

ucin

g th

e effective b

uyin

g co

st

Th

e acqu

irer also in

curs ex

pen

ses (EX ) to

ward

s vario

us ad

viso

ry serv

ices, execu

tive trav

el, legal an

d

regulato

ry m

atters, etc. Hen

ce, the cash

out flo

w n

eeded

for b

usin

ess gro

wth

thro

ugh acq

uisitio

n is n

oth

ing b

ut

the acq

uirer’s n

et investm

ent (I

Acq

uisitio

n ). This is g

iven

by th

e expressio

n as b

elow

:

IA

cquisitio

n = P

acquisitio

n - CF

Div

estitures +

EX , o

r

IA

cquisitio

n = [F

A+

WC

+I+

PR ] - C

FD

ivestitu

res + E

X

Lik

e the n

ew p

rojects, th

e cash in

flow

from

the acq

uisitio

n is th

e disco

unted

presen

t valu

e of th

e free cash

flow

from

acquisitio

n to

be o

btain

ed fro

m th

e acquired

com

pan

y fo

r a finite p

eriod, g

enerally

an ex

plicit p

eriod,

for w

hich

the p

rojectio

ns can

be m

ade w

ith h

igh d

egree o

f certainty. T

herefo

re, the p

resent v

alue o

f the fu

ture

cash flo

w fro

m acq

uisitio

n (P

VF

CFA ) is g

iven

by:

PV

FC

FA =

[FC

FPA

t /(1+

WA

CC

)t], w

here,

FC

FPA

= F

ree cash flo

w fro

m acq

uisitio

n,

WA

CC

= W

eighted

averag

e cost o

f capital

t = 1

,2,3

……

n =

the ex

plicit n

um

ber o

f years fo

r which

disco

untin

g w

ould

be d

one

n=

explicit p

eriod fo

r which

pro

jected free cash

flow

can b

e ascertained

with

reasonab

ly h

igh d

egree o

f certainty.

In case o

f acquisitio

n ev

aluatio

n, id

entical tim

e horizo

n o

f 5 to

7 y

ears (like p

roject ev

aluatio

n) is as th

e

reasonab

le perio

d fo

r ‘n’. U

nlik

e busin

ess valu

ation o

f the targ

et, ‘contin

uin

g v

aluatio

n’ is n

ot d

esirable fo

r

finan

cial evalu

ation fo

r com

pariso

n w

ith th

e alternativ

e strategy w

ith a n

ew p

roject.

Hen

ce,

PV

FC

FA =

[FC

FA

1 /(1+

WA

CC

)1]+

[FC

FA

2 /(1+

WA

CC

)2]+

[FC

FA

3 /(1+

WA

CC

)3]+

……

…..

+ [F

CFA

n /(1+

WA

CC

)n].

Goin

g b

y th

e simple cap

ital budgetin

g tech

niq

ues, th

e Net P

resent V

alue (N

PV

) from

the acq

uisitio

n is g

iven

by

:

NP

VA

cquisitio

n = [F

CFA

t /(1+

WA

CC

)t] –

[IA

cquisitio

n ], o

r

NP

VA

cquisitio

n = [F

CFA

t /(1+

WA

CC

)t] –

[Pacq

uisitio

n - CF

Div

estitures +

EX ], o

r

NP

VA

cquisitio

n = [F

CFA

t /(1+

WA

CC

)t] –

[[FA

+W

C+

I+P

R ] - CF

Div

estitures +

EX ].

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

5

Modellin

g S

trategies fo

r Corp

orate G

row

th

Th

e Th

um

b R

ules fo

r Ch

oosin

g fro

m N

ew P

rojects a

nd

M&

A A

lternativ

es

The fo

llow

ing th

um

b ru

les can b

e mad

e for th

e choice b

etween

acquirin

g a co

mpan

y as a g

oin

g co

ncern

or

initiatin

g a n

ew g

reen field

or g

rey field

pro

ject:

1.

If, NP

VA

cquisitio

n > N

PV

New

pro

ject , acquisitio

n is p

referred o

ver n

ew p

roject.

2.

If, NP

VA

cquisitio

n < N

PV

New

pro

ject , new

pro

ject is preferred

over acq

uisitio

n.

3.

If, NP

VA

cquisitio

n = N

PV

New

pro

ject , acquisitio

n o

r new

pro

ject is indifferen

t choice.

A C

om

pariso

ns o

f Gro

wth

strateg

ies thro

ugh

New

Pro

ject an

d M

&A

Com

pan

ies all over p

refer M&

A ro

ute to

gro

w b

ut th

at is not th

e only

way

to fo

llow

. A n

ew p

roject m

ay

som

etimes b

e a much

superio

r meth

od fo

r gro

wth

. The fo

llow

ing co

mpariso

n in

Tab

le-2 can

thro

w so

me m

ore

lights o

n th

is.

6.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

New

Pro

ject Strateg

y

Decid

ing B

etween

Acq

uisitio

n a

nd

Org

an

ic Gro

wth

Som

etimes, acq

uisitio

ns are fo

und to

be th

e best m

ethod o

f achiev

ing strateg

ic aims o

f gro

wth

and ex

pan

sion.

At so

me o

ther tim

es, in-h

ouse o

rgan

ic dev

elopm

ent is m

ore ap

t than

the o

ther. T

he ch

oice b

etween

acquisitio

n

and o

rgan

ic gro

wth

for n

ew p

roduct-m

arket d

evelo

pm

ents d

epen

ds o

n a n

um

ber o

f key

factors. A

fundam

ental

distin

ction b

etween

acquisitio

n b

ased S

trategy an

d o

rgan

ic gro

wth

strategy is d

rawn in

Tab

le-3.

Valu

e Crea

ting M

od

els in M

&A

In an

acquisitio

n, th

e acquirer b

uys a b

undle o

f tangib

le and in

tangib

le assets off th

e shelf alo

ng w

ith th

e

capab

ilities in an

y fo

rm o

f M&

A. A

n acq

uisitio

n also

brin

gs to

geth

er two b

undles o

f reven

ue g

eneratin

g cap

acities

and cap

abilities. S

ustain

able co

mpetitiv

e advan

tage is created

when

there is n

o m

ismatch

betw

een th

e resources,

capab

ilities and o

pportu

nities av

ailable to

the tw

o firm

s4. A

firm’s d

istinctiv

e capab

ilities can b

e a source o

f

sustain

able co

mpetitiv

e advan

tages an

d th

at may

inclu

de th

e firm’s m

anag

emen

t architectu

re & sty

le, capacity

for in

novatio

n an

d rep

utatio

n, as d

istinct fro

m th

e reputatio

n o

f its pro

ducts etc. V

alue created

in m

ergers an

d

acquisitio

ns can

be d

ifferentiated

by th

e sources o

f that v

alue. T

here are th

ree bro

ad g

eneric m

odels o

f valu

e

creation in

M&

A an

d th

ese are:

1.

Donor-recip

ient m

odel

2.

Particip

ative m

odel an

d

3.

Collu

sive m

odel

Don

or-recip

ient m

od

el: In th

is model, reso

urces an

d o

r capab

ilities are transferred

of fro

m th

e acquirer to

the

acquired

firm. V

alue is created

when

such

a transfer im

pro

ves th

e strategic an

d fin

ancial p

erform

ance o

f the

acquired

. Under th

is meth

od, V

alue creatio

n tak

es place w

hen

the p

oorly

perfo

rmin

g firm

is taken

over b

y an

acquirer w

ith a su

perio

r and rep

uted

firm. O

f course, th

e acquirer m

ust g

uard

again

st the tran

splan

t rejection

syndro

me, i.e. th

e acquired

firm b

eing resistan

t to th

e transfer.

Particip

ativ

e mod

el: Under

this m

odel, th

ere is a poolin

g o

f the reso

urces an

d cap

abilities o

f the co

mbin

ing

firms, w

hich

is a two-w

ay ex

chan

ge p

rocess an

d as a resu

lt good an

d h

ealthy in

teractions an

d m

utu

al learnin

g

betw

een th

e firms tak

e place. S

uch

poolin

g m

akes m

ore effectiv

e use o

f the tw

o firm

s’ resources an

d en

han

ces

their jo

int cap

abilities. E

conom

ies of sco

pe an

d scale are ex

pected

to b

e achiev

ed th

rough p

articipativ

e mode o

f

po

olin

g.

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

7

Collu

sive m

od

el: This m

odel n

ecessitates poolin

g o

f strategic assets

5. The co

min

g to

geth

er of th

e two firm

s in

an acq

uisitio

n creates o

r strength

ens th

ose strateg

ic assets. Cartels, v

ertical integ

ration an

d licen

sing are th

e

good ex

amples o

f collu

sive m

ode. A

ugm

entatio

n o

f the strateg

ic assets is a great so

urce o

f sustain

able co

mpetitiv

e

advan

tage an

d v

alue ad

ditio

n.

Corp

ora

te Ob

jectives a

nd

Stra

tegy fo

r M&

A

A co

mpan

y’s p

rimary

objectiv

e is finan

cial and can

be ex

pressed

in g

eneral term

s, as max

imisin

g sh

arehold

er

valu

e. The o

bjectiv

e can also

be m

ore sp

ecific like in

creasing earn

ings p

er share ev

ery y

ear or ach

ievin

g a

return

on cap

ital emplo

yed

in ex

cess of th

e target set. C

om

pan

ies must h

ave co

mpatib

le busin

ess objectiv

es that

support th

eir prim

ary fin

ancial o

bjectiv

es, which

are as follo

ws:

1.

Pro

vid

ing a h

igh q

uality

pro

duct o

r service

2.

Mark

et leadersh

ip in

the fo

rm o

f geo

grap

hical m

arket lead

ership

, with

in a co

untry, a g

roup o

f countries o

r

glo

bally.

3.

Tech

nolo

gical lead

ership

.

4.

Inn

ov

ation

.

5.

Bein

g th

e low

est cost p

roducer in

the in

dustry.

There are also

finan

cial policy

constrain

ts on b

usin

ess objectiv

es. For ex

ample, a co

mpan

y m

ight h

ave th

e

objectiv

e of av

oid

ing ex

cessive fin

ancial risk

s and as a co

nseq

uen

ce, it mig

ht d

ecide to

limit its b

orro

win

gs to

main

tain an

optim

al gearin

g o

r leverag

e. This m

ay affect its p

lans fo

r expan

sion an

d g

row

th. A

s a result, M

&A

activity

may

be ab

sent in

such

com

pan

ies or th

ere can b

e limited

efforts fo

r achiev

ing co

rporate g

row

th. A

strategy is a b

road

based

form

ula fo

r how

an o

rgan

isation in

tends to

achiev

e its objectiv

es. Objectiv

es alone d

o

not g

ive a co

mpan

y an

y sen

se of d

irection o

r scope. S

trategy estab

lishes th

e rules o

r guid

elines an

d sp

ecific

steps o

n h

ow

objectiv

es should

be ach

ieved

. Pro

duct/m

arket strateg

ies, for ex

ample, create a fram

ework

for

decisio

n m

akin

g b

y in

dicatin

g h

ow

the co

mpan

y in

tends to

com

pete in

its mark

ets, and w

hat its g

oals sh

ould

be

for each

of its p

roducts an

d m

arkets. T

he o

bjectiv

es of p

roduct-m

arket strateg

y are to

:

1.

Increase m

arket sh

are in o

rder to

achiev

e econom

ies of scale an

d b

etter pro

fit marg

ins

2.

Obtain

low

er cost p

roductio

n facilities

3.

Div

ersify in

to n

ew m

arkets, b

ecause ex

isting m

arkets are n

ot larg

e enough to

support fu

ture g

row

th.

4.

Div

ersify in

to n

ew p

roducts o

r services, b

ecause th

e com

pan

y’s ex

isting p

roduct ran

ges is in

declin

e or is

insu

fficient to

sustain

futu

re gro

wth

.

Any M

&A

deal d

ecision is b

asically m

eant to

achiev

e certain strateg

ic objectiv

es of th

e acquirer. T

hese

strategic o

bjectiv

es are varied

: gro

wth

of th

e firm, g

ainin

g co

mpetitiv

e advan

tage in

existin

g p

roduct-m

arkets,

mark

et for p

roduct ex

tensio

n o

r risk red

uctio

n, etc. L

ike all o

ther strateg

ic decisio

ns, m

ergers an

d acq

uisitio

ns

are supposed

to satisfy

the criterio

n o

f valu

e additio

n to

all. Lynch

and L

ind (2

002) su

ggest th

at M&

As are o

ne

of th

e central tech

niq

ues fo

r org

anisatio

nal g

row

th, w

hile H

urtt, K

reuze an

d L

ang

sam (2

00

0) g

o fu

rther to

suggest th

at gro

wth

is the p

rimary

reason fo

r M&

As.

Perry

and H

erd (2

004) o

bserv

ed th

e importan

t role p

layed

by strateg

ic plan

nin

g w

hen

consid

ering M

&A

s

for g

row

th o

f an o

rgan

isation. T

hey

also o

bserv

ed th

at that sin

ce the 1

990s, co

mpan

ies shifted

the fo

cus fro

m a

cost sav

ing p

erspectiv

e to u

ndertak

ing M

&A

s as a strategic v

ehicles fo

r corp

orate g

row

th. A

study co

nducted

by H

ardin

g an

d R

ovit (2

004) rev

ealed th

e importan

ce of alig

nin

g co

rporate strateg

y to

plan

nin

g fo

r merg

ers and

acquisitio

ns. T

hey

studied

more th

an 1

,700 M

&A

s and in

terview

ed 2

50 C

EO

s and th

ey fo

und th

at almost o

ne

third

of th

e CE

Os in

terview

ed h

ad clear strateg

ic rationales fo

r the M

&A

, or th

ey u

ndersto

od th

e long-term

finan

cial contrib

utio

ns th

e deals w

ould

mak

e to th

eir com

pan

ies. Interestin

gly, th

e study also

found th

at over

Modellin

g S

trategies fo

r Corp

orate G

row

th

8.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

half o

f these co

mpan

ies, who claim

ed to

had

clear rationales fo

r their M

&A

s, came to

post-M

&A

conclu

sions

that th

eir rationales h

ad b

een w

rong.

Morck

, Shleifer an

d V

ishny,(1

988) o

bserv

ed th

at man

agers d

erive a p

rivate b

enefit fro

m o

peratin

g a firm

in ad

ditio

n to

the v

alue o

f any o

wnersh

ip sh

are of th

e firm th

ey h

ave, if an

y. In o

ther w

ord

s, the self-in

terested

man

agers m

ay h

ave a p

reference fo

r keep

ing th

eir firms in

dep

enden

t as in th

e new

com

bin

ed firm

they

may

lose p

rivate b

enefits o

r they

are likely

to p

lay su

bo

rdin

ated ro

les or lo

se their jo

bs. W

hen

man

agers m

ake

decisio

ns in

their o

wn in

terests, the ad

ded

valu

e is appro

priated

by m

anag

ers to th

e detrim

ent o

f shareh

old

ers.

When

they

act in in

terest of th

e shareh

old

ers the ad

ded

valu

e is reflected in

shareh

old

ers’ wealth

. For certain

types o

f strategy su

ch as m

arket o

r pro

duct ex

tensio

n, acq

uisitio

n m

ay b

e one o

f several altern

atives fo

r achiev

ing

the sam

e objectiv

es. The o

ther altern

atives in

clude o

rgan

ic gro

wth

, join

t ven

tures an

d co

-operativ

e alliances.

Preferen

ce for acq

uisitio

n o

ver th

e alternativ

es should

be ju

stified b

y th

eir relative b

enefits an

d co

sts. Acq

uisitio

ns

are to b

e understo

od in

the co

ntex

t of th

e firm’s b

road

er corp

orate an

d b

usin

ess strategy fram

ework

. Differen

t

typ

es of acq

uisitio

ns are co

nsid

ered b

y th

e com

pan

y’s strateg

ic cho

ices and

imp

eratives. A

cqu

isition

s are

differen

tiated b

y th

e source o

f valu

e creation in

each. A

particu

lar type o

f acquisitio

n is th

e outco

me o

f the

strategic th

inkin

g o

f the acq

uisitio

n lo

gic, targ

et pro

file, the fram

ework

for th

e evalu

ation o

f targets an

d th

e

post-acq

uisitio

n in

tegratio

n. M

ergers an

d acq

uisitio

ns are g

enerally

follo

wed

by ch

anges in

the o

rgan

ization

structu

re of a firm

. In a m

ajor h

orizo

ntal m

erger th

e acquired

firm is in

tegrated

into

the o

rgan

ization stru

cture o

f

the acq

uirin

g firm

. In an

M&

A, each

firm h

as a set of cap

abilities an

d o

pportu

nities an

d th

ey m

ust ex

plo

it these

effectively

in relatio

n to

chan

gin

g en

viro

nm

ents. T

he d

ynam

ics of co

mpetitio

n an

d eco

nom

ic chan

ge h

ave a

bearin

g o

n th

e strategic d

ecision o

f M&

A. It req

uires co

ntin

uous reassessm

ent o

f the p

ositio

n an

d realig

nm

ent

with

the n

ew ch

allenges an

d o

pportu

nities. A

ccord

ingly, th

e acquirin

g firm

is required

to m

ake strateg

ic decisio

ns

in resp

ect of u

ncertain

ty an

d risk

, especially

with

respect to

post m

ergers ev

ents.

Stra

tegies fo

r Increa

sed M

ark

et Pow

er

One o

f the p

rimary

reasons fo

r merg

ers and acq

uisitio

ns is to

achiev

e greater m

arket p

ow

er, which

exists

when

a firm is ab

le to sell its g

oods o

r services ab

ove co

mpetitiv

e levels o

f prices o

r when

the co

sts of its

prim

ary o

r sup

po

rt activities are b

elow

levels o

f its com

petito

rs. Th

ere are com

pan

ies wh

o m

ay h

ave co

re

com

peten

cies, but th

ey lack

the size to

exercise th

eir mark

et pow

er. Mark

et pow

er is deriv

ed fro

m th

e size of

the firm

and its reso

urces &

capab

ilities to co

mpete in

the m

arketp

lace (Westo

n, C

hung an

d S

iu, 1

998). H

ence,

most o

f the m

ergers an

d acq

uisitio

ns are strateg

ically d

esigned

to ach

ieve g

reater mark

et pow

er, thro

ugh b

uyin

g

a com

petito

r, a supplier, a d

istributo

r, or so

me o

ne’s b

usin

ess in th

e related in

dustry

so as to

exercise co

re

com

peten

ce and g

ain co

mpetitiv

e advan

tage in

the m

arket. C

om

pan

ies use h

orizo

ntal o

r vertical M

&A

s6 in

ord

er to in

crease their m

arket p

ow

er, which

are briefly

discu

ssed in

the fo

llow

ing p

aragrap

hs:

Corp

ora

te an

d B

usin

ess Stra

tegies

Corp

orate strateg

y relates to

arrangin

g th

e busin

ess activities o

f the co

rporates as a w

hole, w

ith a v

iew to

achiev

ing certain

pred

etermin

ed o

bjectiv

es at the co

rporate lev

el. These o

bjectiv

es inclu

de o

rderly

redirectio

n

of th

e firm’s activ

ities, dep

loyin

g su

rplu

s cash fro

m o

ne b

usin

ess to fin

ance p

rofitab

le gro

wth

in an

oth

er, explo

iting

interd

epen

den

ce among p

resent o

r pro

spectiv

e busin

esses with

in th

e corp

orate p

ortfo

lio, an

d risk

reductio

n.

Corp

orate strateg

y also

aims at d

evelo

pin

g a n

um

ber o

f distin

ctive cap

abilities i.e. co

re com

peten

cies, which

the firm

can tran

slate into

sustain

able co

mpetitiv

e advan

tage an

d ad

d v

alue. T

hese d

istinctiv

e capab

ilities inclu

de

the firm

’s architectu

re, reputatio

n an

d in

novatio

n. A

rchitectu

re com

prises th

e intern

al relations b

etween

the

firm an

d its em

plo

yees, th

e extern

al relations b

etween

the firm

and its su

ppliers o

r custo

mers, an

d n

etwork

s

with

in g

roups o

f collab

oratin

g firm

s.

Busin

ess strategy is co

ncern

ed w

ith im

pro

vin

g th

e com

petitiv

e positio

n o

f an in

div

idual b

usin

ess, with

a

view

to m

axim

izing th

e contrib

utio

n th

at the in

div

idual b

usin

ess mak

es to th

e corp

orate o

bjectiv

es. It also aim

s

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

9

at exp

loitin

g th

e strategic assets th

at the b

usin

ess has accu

mu

lated. T

he strateg

ic assets inclu

de: n

atural

monopolies, b

arriers to en

try in

the fo

rm o

f sunk co

sts, the ex

perien

ce curv

e effect, reputatio

n, ad

vertisin

g an

d

mark

et know

ledge, an

d ex

clusiv

ity th

rough licen

sing. C

orp

orate strateg

y h

as an all-firm

enco

mpassin

g fo

cus

and ex

plo

its the d

epen

den

cies amongst v

arious co

mponen

ts of b

usin

ess, whereas b

usin

ess strategy fo

cuses o

n

a narro

w ran

ge o

f mark

ets. The d

istinctiv

e capab

ilities that th

e firm h

as built at th

e corp

orate lev

el, such

as

reputatio

n o

r innovato

ry flair, are av

ailable to

be ex

plo

ited to

geth

er with

the strateg

ic assets to en

han

ce the

com

petitiv

e advan

tage o

f the b

usin

esses.

Hard

ing an

d R

ovit (2

004) su

ggest th

e need

for alig

nm

ent b

etween

corp

orate strateg

y an

d M

&A

strategy.

Som

e CE

Os lam

ent after th

e failed M

&A

deal th

at they

did

not lin

k th

eir merg

er and acq

uisitio

n strateg

y w

ith

their co

rporate p

lan. M

any firm

s believ

e that ju

st by en

tering in

the em

ergin

g m

arkets lik

e Chin

a and In

dia,

thro

ugh acq

uisitio

ns, th

ey can

achiev

e substan

tial gro

wth

. This is an

d ‘ad

hoc’ d

ecision, m

ay n

ot b

e aligned

with

the strateg

ic fit. After in

itially ad

optin

g an

‘ad h

oc’ ap

pro

ach to

acquisitio

ns m

any O

rgan

isations feel th

at

they

sho

uld

hav

e un

dertak

en m

ore fo

cused

app

roach

es, draw

ing

detailed

strategic p

lann

ing

pro

cess so th

at

M&

A b

ecom

es more d

riven

by strateg

ic merit rath

er than

transactio

n d

riven

. Firm

s try to

mak

e acquisitio

ns as

a strategy to

quick

ly p

ositio

n th

emselv

es for ch

anges th

at occu

r in th

e info

rmatio

n tech

nolo

gy m

arket an

d to

reduce p

roduct tim

e to m

arket. It m

ay b

e emphasised

that m

any o

rgan

izations feel th

at M&

As are o

nly

meth

ods

of realisin

g strateg

ic objectiv

es rather th

an strateg

ic plan

nin

g p

rocess, w

hich

the au

thor d

eclines to

accept.

Stra

tegies fo

r En

tering a

New

Mark

et

A firm

selects a particu

lar mark

et to serv

e and th

e mark

et entry

mode is a ch

oice am

ongst sev

eral alternativ

es

like o

rgan

ic gro

wth

, acquisitio

n o

r strategic allian

ce. The ch

oice o

f entry

mode d

epen

ds o

n th

e follo

win

g facto

rs:

1.

Deg

ree of co

mpetitio

n in

the h

ost m

arket

2.

Risk

s in g

reen field

investm

ents fo

r org

anic g

row

th

3.

Availab

ility o

f org

anizatio

nal reso

urces fo

r org

anic g

row

th

4.

Poten

tials for ap

pro

priate v

alue ad

ditio

n

5.

Advan

tages o

f fast entry

In th

e host m

arket, h

igh lev

el of co

mpetitio

n g

ives rise to

excess cap

acity. Therefo

re, any effo

rts mad

e to

build

new

capacity

will in

vite retaliatio

n fro

m th

e existin

g p

layers. In

such

cases, acquisitio

n o

f an ex

isting firm

will red

uce th

e risk o

f retaliation

. Mo

reov

er, a new

ven

ture is o

ften m

ore risk

y th

an th

e acqu

isition

of an

existin

g g

oin

g co

ncern

even

though it m

ay av

oid

the p

roblem

s of in

tegratio

n w

ith an

acquisitio

n. A

firm m

ay n

ot

hav

e all the n

ecessary reso

urces an

d cap

abilities to

com

pete effectiv

ely in

the h

ost m

arket b

ut it can

access all

the reso

urces an

d cap

abilities th

rough acq

uisitio

n o

r strategic allian

ce. The ab

ility o

f a firm to

add ap

pro

priate

valu

e from

the n

ew m

arket en

try w

ill dep

end o

n th

e org

anizatio

nal fo

rm o

f that en

try. The ab

ility is m

axim

ized

with

entry

thro

ugh o

rgan

ic gro

wth

and b

ecom

es more d

ifficult w

ith acq

uisitio

n, strateg

ic alliance an

d jo

int

ven

ture. A

t times m

ergers an

d acq

uisitio

ns are th

e quick

est mean

s of en

try in

to n

ew m

arkets w

ith m

ore o

f

strategic ad

van

tages. It is w

ell know

n h

ow

ever, M

&A

are more ex

pen

sive d

ue to

the co

ntro

l prem

ium

that th

e

acquirer h

as to p

ay to

the sh

arehold

ers of th

e target co

mpan

y. Acq

uisitio

n m

ay also

not b

e possib

le if suitab

le

targets are n

ot av

ailable. T

herefo

re, the ch

oice o

f entry

mode is in

fluen

ced b

y p

roper ev

aluatio

n o

f the ab

ove

alternativ

es.

Rev

isiting B

usin

ess Stra

tegy fo

r M&

A D

ecision

s

There are certain

gen

eric analy

tical framew

ork

s which

can b

e revisited

in th

e contex

t of strateg

ic decisio

ns

for m

ergers an

d acq

uisitio

ns. T

hese strateg

ic framew

ork

s are based

on B

CG

matrix

, Anso

ff matrix

, pro

duct life

cycle an

alysis, v

alue ch

ain an

alysis an

d P

orter’s fiv

e force an

alysis. A

brief an

alysis o

f these strateg

y fram

ework

s

are done in

the fo

llow

ing p

aragrap

hs.

Modellin

g S

trategies fo

r Corp

orate G

row

th

10.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

BC

G M

atrix

An

aly

sis: The B

CG

(Bosto

n C

onsu

lting G

roup) m

atrix, as sh

ow

n in

Fig

ure-1

classifies a firm’s

busin

ess portfo

lio in

two d

imen

sions: m

arket g

row

th rate o

f pro

ducts an

d th

e com

pan

y’s relativ

e share o

f that

mark

et. When

dem

and fo

r the p

roducts rises rap

idly, firm

s hav

e more p

rofitab

le opportu

nities, im

ply

ing th

e

attractiven

ess of th

e mark

et. Mark

et share rep

resents th

e firm’s co

mpetitiv

e strength

in th

at mark

et. A ‘cash

cow

’ is a matu

re busin

ess with

low

gro

wth

opportu

nities, b

ut w

here th

e firm h

as a hig

h m

arket sh

are. A ‘star’ is

a pro

du

ct with

hig

h g

row

th o

pp

ortu

nities an

d w

here th

e firm co

mm

and

s a hig

h m

arket sh

are. A ‘d

og

’ is a

busin

ess in w

hich

the m

arket g

row

th is lo

w an

d th

e firm’s m

arket sh

are is also lo

w. A

‘questio

n m

ark’ is y

oung

busin

ess with

plen

ty o

f gro

wth

pro

spects, b

ut w

here th

e firms h

as a low

mark

et share an

d faces h

eavy co

mpetitio

n.

The fo

ur ty

pes o

f busin

esses or p

roducts h

ave d

ifferent p

rofiles in

terms o

f pro

fitability, in

vestm

ent n

eeds an

d

free cash flo

ws. T

he ‘cash

cow

’ is a pro

fitable, lo

w-in

vestm

ent b

usin

ess with

hig

h free cash

flow

. Sin

ce the

busin

ess is matu

re and p

robab

ly o

ligopolistic, in

vestm

ent in

mark

et dev

elopm

ent, research

and d

evelo

pm

ent

(R&

D) o

r additio

nal p

roductio

n cap

acity is n

o lo

nger n

eeded

. Thus a ‘cash

cow

’ thro

ws o

ff surp

lus cash

. The

‘star’ is a hig

h-p

rofit, h

igh-in

vestm

ent b

usin

ess with

low

free cash flo

w. T

he h

igh p

rofits are retain

ed to

mak

e

additio

nal in

vestm

ents in

ord

er to m

aintain

the h

igh m

arket sh

ares held

by th

e firm in

a fast-gro

win

g m

arket. A

‘do

g’ is a lo

w-p

rofit, p

ossib

ly lo

ss-mak

ing

bu

siness w

ith lo

w free cash

flow

and

low

inv

estmen

t, po

ssibly

requires d

isinvestm

ent. It rep

resents a p

roduct m

arket w

hich

is declin

ing fo

r a variety

of reaso

ns. T

he ‘q

uestio

n

mark

’ is a hig

h-in

vestm

ent b

usin

ess with

poten

tially h

igh p

rofits an

d a lo

w (o

r neg

ative) free cash

flow

.

The h

igh in

vestm

ent is n

ecessary to

build

up th

e mark

et and th

e firm’s m

arket sh

are. In an

M&

A d

eal, the

BC

G m

atrices of b

oth

the acq

uirin

g an

d acq

uired

com

pan

ies are to b

e com

bin

ed th

rough p

roper calib

ration, so

as to u

nderstan

d th

e resultan

t strength

of th

e BC

G m

atrix o

f the co

mbin

ed en

tity.

The A

ppen

dices-1

,2,3

,4&

5 ex

plain

the v

arious effects o

f strategy calib

ration fo

r com

bin

ing th

e two B

CG

matrices o

f the targ

et as well as th

e acquirer. A

ppen

dix

-1 d

epicts th

e pre-m

erger p

ositio

n o

f the p

roduct p

ortfo

lio

of th

e two m

ergin

g co

mpan

ies. The targ

et is hav

ing all th

e four classified

pro

ducts classes w

hereas th

e acquirer

has o

nly

cash co

w an

d star p

roducts. T

he o

verall p

re-merg

er RO

I (return

on in

vestm

ent) o

f the targ

et is 16.5

%

whereas th

e same fo

r the acq

uirer is 3

6.7

% an

d th

e com

bin

ed p

re-merg

er RO

I is low

er at 28.6

%. S

uppose,

imm

ediately

on acq

uisitio

n, th

e acquirer d

ivests th

e dog an

d q

uestio

n m

ark p

roducts o

f the erstw

hile targ

et, then

dep

endin

g u

pon th

e valu

ations fo

r div

estmen

t and ch

ances o

f additio

nal o

peratio

nal sy

nerg

y (say

reductio

n in

cost o

f goods so

ld), th

e RO

I of th

e com

bin

ed en

tity can

be im

pro

ved

.

Four altern

ative situ

ations h

ave b

een n

um

erically p

resented

in A

ppen

dices-2

,3,4

&5. T

he altern

ative 1

is

presen

ted in

Ap

pen

dix

-2, w

hich

dep

icts that if th

e two

pro

du

cts (do

g an

d q

uestio

n m

ark) o

f the targ

et are

div

ested at th

eir book v

alue w

ith n

o ad

ditio

nal o

peratin

g sy

nerg

y, the im

med

iate post-m

erger R

OI o

f the co

mbin

ed

entity

rises to 3

2.5

% fro

m 2

8.6

%. T

he altern

ative 2

as presen

ted in

Appen

dix

-3, su

ggests th

at if the tw

o p

roducts

(dog an

d q

uestio

n m

ark) o

f the targ

et are div

ested at th

eir book v

alues, b

ut w

ith ad

ditio

nal o

peratin

g sy

nerg

y (in

the fo

rm o

f 10%

reductio

n in

overall co

st of sales), th

e imm

ediate p

ost-m

erger R

OI o

f the co

mbin

ed en

tity rises

to 3

5.8

% fro

m th

e orig

inal p

ositio

n o

f 28.6

%. T

he altern

ative 3

is presen

ted in

Appen

dix

-4, su

ggests th

at if the

Modellin

g S

trategies fo

r Corp

orate G

row

th

Fig

ure 1

. Bosto

n C

onsu

lting G

roup B

usin

ess Portfo

lio M

atrix

Cash

cow

Star

Do

g Q

uestio

n

Mark

Hig

h

Lo

w

Mark

et Gro

wth

Slo

w F

ast

Mark

et

Sh

are

Vig

nan

a Jyoth

i Journ

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anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

11

two p

roducts (d

og an

d q

uestio

n m

ark) o

f the targ

et are div

ested at m

ore th

an th

eir book v

alues, resu

lting in

no

additio

nal o

peratin

g sy

nerg

y, the im

med

iate post-m

erger R

OI o

f the co

mbin

ed en

tity rises to

33.4

% fro

m th

e

orig

inal p

ositio

n o

f 28.6

%. T

he altern

ative 4

, presen

ted in

Appen

dix

-5, su

ggests th

at if the tw

o p

roducts (d

og

and q

uestio

n m

ark) o

f the targ

et are div

ested at m

ore th

an th

eir book v

alues, w

ith ad

ditio

nal o

peratin

g sy

nerg

y

(in th

e form

of 1

0%

reductio

n in

overall co

st of sales), th

e imm

ediate p

ost-m

erger R

OI o

f the co

mbin

ed en

tity

rises to 3

6.8

% fro

m th

e orig

inal p

ositio

n o

f 28.6

%. T

he resu

lts of th

is illustratio

n can

be su

mm

arized in

Tab

le-

4, w

hich

suggests th

at in o

rder to

gro

w th

rough M

&A

, appro

priate strateg

ies for p

ost-m

erger in

tegratio

n o

r

calibratio

n o

f pro

duct p

ortfo

lios are to

be fo

rmulated

and im

plem

ented

in su

ch a w

ay th

at the co

mbin

ed en

tity’s

pro

duct p

ortfo

lio m

atrix b

ecom

es stronger th

an th

e existin

g stan

d alo

ne m

atrices of th

e com

bin

ing en

tities.

Read

ers can rew

ork

upon th

e illustratio

n in

terms o

f furth

er investm

ent fo

r questio

n m

ark an

d related

cash

flow

s and so

on fo

r evalu

ation o

f alternativ

es. The B

CG

matrix

help

s iden

tify th

e SW

OT

of th

e pro

duct p

ortfo

lio

and

pro

vid

es gu

idan

ce as to w

hich

bu

sinesses can

be d

ivested

, retained

or stren

gth

ened

thro

ug

h ad

ditio

nal

investm

ent. T

he B

CG

matrix

analy

sis can p

rovid

e a directio

n o

f a com

pan

y’s strateg

ic move in

terms o

f mark

et

attractiven

ess and co

mpetitiv

e strength

.

An

soff M

atrix

An

aly

sis: The A

nso

ff matrix

explain

s four p

ossib

le strategic ch

oices av

ailable b

efore a firm

,

dep

endin

g o

n th

e relationsh

ip b

etween

its pro

ducts an

d m

arkets p

ortfo

lio. F

igure-2

constru

cts Anso

ff matrix

,

which

dep

icts mark

et ‘pen

etration’, ‘m

arket ex

tensio

n’, p

roduct ex

tensio

n’ an

d d

iversificatio

n. M

arket p

enetratio

n

hap

pen

s, when

the firm

increases m

arket sh

are of its ex

isting p

roduct in

the ex

isting m

arkets. M

arket ex

tensio

n

takes p

lace, when

the co

mpan

y sells its ex

isting p

roducts in

new

geo

grap

hical m

arkets. P

roduct ex

tensio

n is th

e

one w

hen

the firm

sells new

pro

ducts in

its presen

t mark

ets related to

the ex

isting p

roducts. D

iversificatio

n

hap

pen

s when

the firm

sells new

pro

ducts in

new

mark

ets.

The p

ositio

nin

g o

f a firm in

the m

arket w

ith resp

ect to th

e pro

ducts d

epen

ds o

n its o

wn ev

aluatio

n o

f the

attractiven

ess of th

e mark

et, com

petitiv

e strength

s and th

e poten

tials for v

alue creatio

n. T

he relativ

e dem

ands

for ex

isting o

r the n

ew m

arket d

epen

ds u

pon th

e firm’s strateg

ic choices fo

r gro

wth

and ex

pan

sion, w

hich

are

Modellin

g S

trategies fo

r Corp

orate G

row

th

Mark

et pen

etration P

roduct ex

tensio

n

Mark

et exten

sion

Div

ersification

Existin

g

New

Pro

duct

Existin

g N

ew

Fig

ure-2

. Anso

ff pro

duct-m

arket m

atrix

Mark

ets

12.

Vig

nan

a Jyoth

i Journ

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anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

influ

enced

by co

re com

peten

cies or d

istinctiv

e capab

ilities of th

e firm, co

nstitu

ting a firm

’s com

petitiv

e strength

.

In an

M&

A d

eal, the acq

uirin

g co

mp

any

mu

st exam

ine th

e target’s p

resent p

ositio

n in

the m

arket an

d th

e

op

po

rtun

ities for m

igratin

g to

the n

ew m

arkets. S

om

etimes, th

e acqu

isition

may

pro

vid

e an o

pp

ortu

nity

of

enterin

g a n

ew m

arket w

ith ex

isting

pro

du

cts of th

e target th

rou

gh

the m

arket d

om

inan

ce of th

e acqu

iring

com

pan

y. An acq

uisitio

n d

ecision m

ay p

rovid

e an o

pportu

nity

to th

e acquirin

g co

mpan

y to

enter a n

ew m

arket

and alter th

e relative p

resence in

the p

roduct-m

arket p

ortfo

lio. E

xam

ple: W

hen

ICIC

I Ban

k acq

uired

the B

ank

of M

adura, IC

ICI B

ank au

tom

atically m

ade its p

resence in

the so

uth

India, b

ecause IC

ICI B

ank d

id n

ot h

ave

any p

resence in

the so

uth

India, w

hereas erstw

hile B

ank o

f Mad

ura w

as hav

ing its g

ood p

resence in

south

becau

se of its o

rigin

. Lik

e BC

G m

atrix an

alysis, sim

ilar kin

d o

f exercise can

be d

one in

the case o

f Anso

ff

matrix

analy

sis with

the p

roduct-m

arket p

ortfo

lios o

f both

the targ

et and th

e acquirin

g co

mpan

ies. Acco

rdin

gly,

strategic ch

oice can

be m

ade fo

r the co

mbin

ed en

tity to

positio

n in

the m

ost so

ught after q

uad

rant o

f the m

atrix,

dep

endin

g u

pon th

e core co

mpeten

cy o

r core cap

ability

thro

ugh fu

rther in

vestm

ents o

r div

estmen

ts.

Pro

du

ct Life C

ycle A

naly

sis: Pro

duct life cy

cle analy

sis can d

erive so

me ratio

nale fo

r M&

A strateg

y fo

r the

acquirer as w

ell as the targ

et. The p

roduct life cy

cle concep

t as dep

icted in

Fig

ure-3

traces the ev

olu

tion o

f a

pro

duct an

d its asso

ciated m

arket o

ver tim

e. The g

eneric fo

ur stag

es of a p

roduct’s life are: lau

nch

, gro

wth

,

matu

rity an

d d

ecline. T

he firm

which

launch

es a new

pro

duct h

as a small m

arket w

ith h

igh p

rofit m

argin

and

the p

roduct can

be a fast m

over. A

fast movin

g p

roduct ex

pen

ds reso

urces an

d n

eeds ad

ditio

nal p

roductio

n

capacity

on b

uild

ing u

p o

f the d

eman

d fo

r the p

roduct. M

arket d

evelo

pm

ent ex

pen

ditu

re can b

e regard

ed as

pro

duct d

evelo

pm

ent ex

pen

ditu

re in term

s of d

istributio

n ch

annels, o

utb

ound lo

gistics an

d ad

vertisin

g. A

s the

mark

et expan

ds, th

e pro

duct en

joys h

igh m

argin

s on in

creasing sales. S

ubseq

uen

tly an

d co

nseq

uen

tly, the

expan

din

g m

arket w

ith h

igh p

rofits attracts co

mpetin

g firm

s and p

roducers. B

y th

e simple law

s of d

eman

d-

supply, th

e increased

supply

leads to

a low

er pro

fit marg

in as th

e com

petitio

n b

ecom

es inten

se, even

though

there is fu

rther ex

pan

sion

of m

arket d

eman

d. T

he firm

s then

beg

in to

com

pete o

n w

ider fro

nts e.g

.; price,

distrib

utio

n, p

roduct d

ifferentiatio

n (su

ch as p

roduct q

uality

and after-sales serv

ice, etc.). Durin

g th

is phase,

com

petitio

n is to

ugh w

hen

mark

et is gro

win

g at faster rate. T

hereafter, m

arket g

row

th slo

ws d

ow

n d

ue to

too

man

y m

arket o

perato

rs leadin

g to

excess p

roductio

n cap

acity. Com

petitio

n b

ecom

es keen

er, pro

fit marg

ins are

under p

ressure an

d sh

ake-o

ut starts in

the in

dustry. In

this p

hase, red

uctio

n o

f excess cap

acity is o

ften ach

ieved

thro

ugh d

efensiv

e merg

ers7. S

hak

e-out lead

s to sy

nch

ronizatio

n o

f pro

ductio

n cap

acity w

ith th

e mark

et dem

and

and sm

all com

petito

rs may

go fo

r conso

lidatio

n an

d am

algam

ation fo

r achiev

ing eco

nom

ies of scale. S

ooner o

r

later, pro

duct’s life reach

es the m

aturity

stage.

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

13

Fig

ue-3

. The p

roduct life cy

cle

The d

uratio

n o

f the p

hase d

epen

ds u

pon th

e natu

re of th

e pro

duct, e.g

. in th

e case of so

me n

ecessity p

roducts fo

r

which

substitu

tes emerg

e slow

ly, the m

aturity

phase can

relatively

be p

rolo

nged

. But, fo

r oth

er pro

ducts, co

nsu

mer

tastes may

chan

ge o

r substitu

tes may

be in

ven

ted, b

ringin

g ab

out th

e declin

e of th

e pro

duct. A

fter that, th

e

mark

et settles dow

n an

d b

ecom

e slow

er and o

ligopolistic co

mpetitio

n em

erges. P

rofit m

argin

s beco

me lo

w,

com

petito

r achiev

es significan

t and fairly

stable m

arket sh

are. The in

vestm

ent req

uirem

ents b

ecom

e low

also.

At th

is stage, v

olu

mes are fallin

g, p

rofit m

argin

s are low

also. In

deed

, this p

hase req

uires d

isinvestm

ent, w

hich

may

beco

me a so

urce o

f cash in

flow

.

Therefo

re, the p

roduct life cy

cle concep

t help

s iden

tify o

pportu

nities fo

r acquisitio

n o

r div

estmen

t of a

single p

roduct, w

heth

er the rig

ht tim

e is at the g

row

th o

r declin

e phase. T

he B

CG

matrix

, as explain

ed in

earlier

parag

raphs co

mplim

ents th

e pro

duct life cy

cle analy

sis, for in

stance, a ‘star’ is a b

usin

ess in th

e gro

wth

phase,

while a ‘d

og’ is in

the d

ecline p

hase, an

d so

on.

Porter

’s Fiv

e Forces M

od

el

Porter (1

985) co

ncep

tualized

com

petitiv

e structu

re of a firm

’s enviro

nm

ent w

ith fiv

e dim

ensio

ns, as sh

ow

n

in F

igure-4

. These fiv

e dim

ensio

ns are: (a) ex

isting lev

el of co

mpetitio

n in

the firm

’s industry, (b

) threat o

f the

new

entran

ts, (c) neg

otiatin

g o

r barg

ainin

g p

ow

er of su

ppliers o

f inputs, (d

) neg

otiatin

g o

r barg

ainin

g p

ow

er of

the b

uyers o

f the firm

’s outp

ut, an

d (e) th

e threat o

f substitu

tes. These fiv

e forces are n

ot eq

ual in

strength

s.

Their relativ

e strength

s vary

over tim

e with

in th

e same in

dustry

or acro

ss industries. T

he stren

gth

s of th

e five

com

petitiv

e forces are d

etermin

ed b

y a n

um

ber o

f factors, w

hich

need

furth

er analy

sis. The facto

rs listed in

Tab

le-5 su

ggest th

at there are a n

um

ber o

f strategic ch

oices b

efore th

e corp

oratio

ns to

ward

s surv

ival an

d g

row

th.

As stated

at the b

egin

nin

g o

f the ch

apter, th

e strategic ch

oices fo

r gro

wth

draw

academ

ic and m

anag

erial attentio

n

tow

ards fo

rward

-lookin

g an

d scen

ario-b

uild

ing ap

pro

ach fo

r the firm

’s futu

re strategic o

pportu

nities fo

r merg

ers

and acq

uisitio

ns. T

he P

orter’s fiv

e forces m

odel can

be u

sed fo

r analy

sis and u

nderstan

din

g o

f the strateg

ic

strength

s and m

arket attractiv

eness o

f the firm

’s and co

mpetito

r’s existin

g p

ortfo

lio o

f busin

esses. This w

ould

help

the targ

et and th

e acquirin

g co

mpan

ies to co

nfig

ure th

eir busin

esses in th

e post-m

erger scen

ario. In

the

pro

cess, a firm can

use su

ch an

alysis to

assess its com

petitiv

e strength

s and w

eaknesses in

ord

er to m

atch th

ese

again

st the o

pportu

nities an

d th

reats as posed

by th

e five fo

rces.

Such

a SW

OT

analy

sis will h

elp d

iscover a m

ismatch

betw

een th

e firm’s p

resent cap

abilities an

d th

ose, w

hich

are need

ed to

create, sustain

or stren

gth

en co

mpetitiv

e advan

tages in

a mark

et. Acco

rdin

gly, an

acquisitio

n can

be w

ell plan

ned

.

Modellin

g S

trategies fo

r Corp

orate G

row

th

14.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Fig

ure- 4

: Porter’s fiv

e forces m

odel o

f com

petitio

n

Tab

le-5: F

actors d

etermin

ing stren

gth

s of th

e five co

mpetitiv

e forces

Co

mp

etitive fo

rces S

treng

then

ed b

y

New

entran

tL

ow

level o

f entry

barriers th

rou

gh

econ

om

ies of scale, fu

rther cap

ital

inv

estmen

ts, etc.

Pro

du

ctL

ow

er prices o

f sub

stitutes, b

uy

er’s willin

gn

ess to g

o fo

r sub

stitutes,

sub

stitutio

nlo

wer p

rod

uct sw

itchin

g co

sts, etc.

Su

pp

lier po

wer

Hig

h co

st of sw

itchin

g to

oth

er sup

pliers fo

r the b

uy

ers, no

n-av

ailability

of su

bstitu

tes,

con

centratio

n o

n a few

sup

pliers, etc.

Bu

yer p

ow

erC

on

centratio

n o

n a few

bu

yers, lo

w co

st of sw

itchin

g to

oth

er sellers,etc.

Ex

isting

rivalry

Lo

w in

du

stry g

row

th, h

igh

com

mitted

fixed

man

ufactu

ring

costs, lo

w

and

com

petitio

np

rod

uct d

ifferentiatio

n, etc.

Valu

e Ch

ain

An

aly

sis : In an

M&

A strateg

y, valu

e chain

analy

sis can b

e carried o

ut at th

e busin

ess unit lev

el as

well as co

mpan

y lev

el. Such

analy

sis seeks to

iden

tify th

e cost stru

cture o

f a firm’s activ

ities. As ex

plain

ed b

y

Porter (1

980), a firm

is a ‘collectio

n o

f activities th

at are perfo

rmed

to d

esign, p

roduce, m

arket, d

eliver, an

d

support its p

roducts’. A

ll these activ

ities contrib

ute to

the co

st structu

re of th

e firm an

d so

me o

f these activ

ities

differen

tiate the firm

’s pro

ducts fro

m th

ose o

f its com

petito

rs. A ty

pical v

alue ch

ain o

f a man

ufactu

ring firm

represen

ts the b

reakdow

n o

f the v

alue o

f the to

tal outp

ut (in

the fo

rm o

f reven

ue) in

to its co

mponen

ts of p

rofit

marg

in an

d co

sts, as show

n in

Fig

ure-5

. The co

sts are bro

adly

div

ided

into

those ex

pen

ded

on p

rimary

and

support activ

ities. These co

sts are then

bro

ken

dow

n in

to v

arious fu

nctio

nal co

sts. Prim

ary activ

ities are those

directed

tow

ards th

e pro

curem

ent o

f inputs, m

akin

g o

f finish

ed p

roducts, sale an

d tran

sfer to th

e buyer, an

d after

sale service. S

tud

y o

f a firm’s v

alue ch

ain h

elps u

nd

erstand

the b

ehav

iou

r of co

sts in o

rder to

iden

tify th

e

po

ssible so

urces o

f differen

tiation

(Sh

ank

and

Go

vin

drajan

(19

93

). Acco

rdin

g to

Po

rter, a firm secu

res its

com

petitiv

e advan

tage b

y d

ifferentiatin

g its v

alue ch

ain. C

ost-b

ased co

mpetitiv

e advan

tage (i.e. co

st leadersh

ip

or b

eing th

e low

est cost p

roducer) is reflected

in th

e valu

e chain

in th

e form

of eco

nom

ies of scale in

operatio

ns.

Sim

ilarly, pro

duct d

ifferentiatio

n as a co

mpetitiv

e advan

tage is also

reflected in

the v

alue ch

ain in

the fo

rm o

f

technolo

gy d

evelo

pm

ent. T

he an

atom

y o

f valu

e chain

of a firm

suggests th

at the m

anag

emen

t can create o

r

impro

ve its co

mpetitiv

e advan

tage b

y fu

rther calib

ration o

r reconfig

uratio

n. A

s a result, th

e firm’s d

istinctiv

e

capab

ilities can b

e traced an

d reco

nfig

ured

to create a stro

nger v

alue ch

ain. In

the m

ergers an

d acq

uisitio

ns

contex

t, the acq

uirer is certain

ly co

ncern

ed w

ith tw

o v

alue ch

ains: its o

wn an

d th

at of th

e target. T

ruly, an

ticipated

synerg

y fro

m th

e merg

er can n

ot b

e realized u

nless th

e two v

alue ch

ains are reco

nfig

ured

so as to

create or

impro

ve th

e com

petitiv

e advan

tages fo

r the co

mbin

ed firm

. The reco

nfig

uratio

n p

rocess w

ill involv

e tedio

us

pro

cess chan

gin

g o

f one o

r both

of th

e valu

e chain

s and ch

angin

g o

f valu

e chain

s will also

mean

chan

gin

g th

e

org

anizatio

nal stru

ctures o

f two firm

s.

Modellin

g S

trategies fo

r Corp

orate G

row

thFig

ure-5

: Valu

e chain

of m

anufactu

ring firm

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

15

Under th

e norm

al circum

stances, th

is is a difficu

lt job an

d its acco

mplish

men

t will d

epen

d o

n th

e political

and cu

ltural p

rocesses o

f restructu

ring th

e merg

ing o

rgan

izations. A

cquisitio

ns are d

riven

by d

ifferent v

alue

creation

log

ic, based

on

wh

ich th

e valu

e chain

s of b

oth

the m

ergin

g firm

s are to b

e recon

figu

red. S

ay fo

r

exam

ple, if th

e logic is eco

nom

ies of scale th

en th

e pro

ductio

n facilities o

f both

firms are ratio

nalized

and

integ

rated to

reduce th

e operatin

g co

st com

ponen

t of th

e valu

e chain

. Therefo

re, if the eco

nom

y o

f scale in th

e

purch

ase of in

puts is th

e logic b

ehin

d th

e acquisitio

n, th

en th

e inbound lo

gistics co

mponen

t will h

ave to

be

reconfig

ured

to red

uce th

e input co

st of th

e com

bin

ed en

tity. Sim

ilarly, when

the acq

uirer aim

s at larger v

olu

me

of sales fro

m th

e target in

the p

ost-m

erger p

eriod, acq

uired

com

pan

y’s o

wn d

istributio

n n

etwork

can b

e rationalized

to red

uce th

e cost o

f the o

utb

ound lo

gistics co

mponen

t of th

e valu

e chain

.

Even

though, th

e strategic co

nsid

eration fo

r a conglo

merate m

erger can

be th

e expected

reductio

n in

the

cost o

f capital, th

ere are possib

ilities of red

uctio

n o

f the firm

s’ infrastru

cture co

sts. In so

me cases, so

me o

f the

activities o

f the acq

uired

firm b

ecom

e redu

nd

ant, su

ch as R

&D

and

desig

n cap

ability, h

um

an reso

urce

man

agem

ent, fin

ancial m

anag

emen

t, etc. As th

ese activities are term

inated

in th

e even

t of m

erger, th

e support

activity

com

po

nen

ts of th

e acqu

ired firm

’s valu

e chain

beco

me slim

. Wh

en th

e prim

e mo

tive fo

r M&

A is

finan

cial, the h

ead o

ffice staff and

oth

er central an

d co

mm

on

fun

ction

s of th

e target are tran

sferred to

the

acquirer an

d co

nseq

uen

tly th

e overall in

frastructu

re cost co

mponen

t reduces. T

he resu

ltant v

alue ch

ain in

the

post m

erger p

eriod b

ecom

es stronger th

rough th

e reconfig

uratio

n o

f the su

pport v

alue d

rivers in

the en

larged

valu

e chain

. In th

e case of related

merg

er, recon

figu

ration

or recalib

ration

of v

alue d

rivers in

the p

rimary

activities are to

be carefu

lly strateg

ized. S

imilarly, in

the case o

f conglo

merate m

erger, th

e valu

e driv

ers in th

e

sup

po

rt activities n

eed carefu

l calibratio

n an

d co

nfig

uratio

n. T

here m

ay n

ot b

e any

ideal situ

ation

for th

e

integ

ration o

f the v

alue ch

ains o

f the acq

uirer an

d th

e acquired

; care should

be tak

en in

holistic reco

nfig

uratio

n,

recalibratio

n an

d in

tegratio

n o

f the m

axim

um

num

ber o

f com

ponen

ts in th

e respectiv

e valu

e chain

s. How

ever,

any ch

anges in

the v

alue ch

ain w

ill be reflected

in th

e form

of in

crease in rev

enues, co

sts, pro

fit marg

in, cash

flow

, RO

I, EV

A, etc. an

d d

ecrease in in

vestm

ent req

uirem

ents o

f the co

mbin

ed en

tity. In M

&A

s, where fin

ancial

synerg

ies are expected

, the co

st of cap

ital may

also b

e reduced

. Therefo

re, the p

resent v

alue o

f the in

cremen

tal

cash flo

ws at th

e new

reduced

cost o

f capital ad

ds v

alue b

ecause o

f the acq

uisitio

n.

Form

ula

ting S

trateg

ies for M

ergers a

nd

Acq

uisitio

ns

An o

rgan

ization m

ust set o

ut its b

usin

ess objectiv

es and g

row

th strateg

y in

a clear, rational, an

d d

ata-

orien

ted w

ay. Top ex

ecutiv

es should

establish

specific criteria, b

ased o

n th

e objectiv

es that th

ey h

ave d

etermin

ed

and o

n a strateg

y o

f gro

wth

thro

ugh acq

uisitio

n, to

describ

e what a v

iable targ

et com

pan

y w

ould

brin

g to

the

party. T

hey

should

express th

ese criteria in term

s of su

ch g

oals as m

arket sh

are, geo

grap

hical access, n

ew

pro

ducts o

r technolo

gies, an

d g

eneral am

ounts fo

r finan

cial synerg

y (Jo

hnso

n, S

choles an

d W

hittin

gto

n, 2

0080).

In strateg

y d

evelo

pm

ent, it is o

ften im

po

rtant to

help

the C

EO

’s direct rep

orts g

ain clarity

abo

ut w

hat th

e

strategy m

eans fo

r them

perso

nally

and d

evelo

p sp

ecific action p

lans fo

r implem

entin

g th

at strategy. T

he v

ery

importan

t aspect o

f strategy fo

rmulatio

n is th

e determ

inatio

n o

f a specific m

ethod fo

r conductin

g th

e merg

er

transactio

n an

d th

e subseq

uen

t integ

ration. In

this p

hase, th

e CE

O’s o

ffice work

s with

vario

us fu

nctio

ns lik

e

org

anisatio

nal d

evelo

pm

ent, H

R, m

arketin

g, O

peratio

ns, fin

ance, etc. an

d th

e SB

U (strateg

ic busin

ess units)

head

s in o

rder to

map

the en

tire M&

A p

rocess, d

efinin

g sp

ecific responsib

ilities. This p

hase co

nsid

ers and

evalu

ates the fo

llow

ing ty

pical strateg

y an

d risk

issues o

f the M

&A

:

1.

What k

ind o

f cost stru

cture sh

ould

the id

eal target h

ave?

2.

What k

ind o

f mark

et chan

nels sh

ould

the targ

et pro

vid

e?

3.

What k

ind o

f org

anizatio

nal co

mpeten

cy an

d cap

abilities sh

ould

the targ

et hav

e?

4.

Should

the targ

et pro

vid

e optim

um

leverag

e and cap

ital structu

re and th

e greatest n

um

ber o

f sources o

f

syn

ergies?

5.

Should

there b

e acquisitio

ns o

f strategic cu

stom

er accounts o

f the targ

et or its v

alue ad

din

g m

arket seg

men

ts?

Modellin

g S

trategies fo

r Corp

orate G

row

th

16.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

6.

In w

hich

part o

f the w

orld

or reg

ion ad

ditio

nal cap

acity sh

ould

be b

uilt?

7.

How

the acq

uisitio

n targ

ets be id

entified

?

8.

What k

ind o

f busin

ess and m

anag

emen

t structu

re and g

overn

ance p

rocess o

f the targ

et will h

elp so

lid

integ

ration

?

M&

A P

lan

Follo

win

g an

alysis o

f vario

us o

ptio

ns, if it is sen

sible to

go fo

r an acq

uisitio

n o

r merg

er, then

it is necessary

to

draw

an M

&A

plan

and im

plem

ent it. T

he m

erger an

d acq

uisitio

n p

lan req

uire a d

ifferent ty

pe o

f implem

entatio

n

strategy. T

he M

&A

plan

focu

ses on sh

ort-term

rather th

an lo

nger-term

strategic issu

es. It consists o

f man

agem

ent

objectiv

es, resource assessm

ent, m

arket an

alysis, clearly

specified

actions, tim

etable fo

r com

pletin

g th

e acquisitio

n

and id

entify

ing th

e indiv

iduals resp

onsib

le for m

akin

g it all h

appen

. These are ex

pressed

in term

s of m

anag

emen

t

objectiv

es and tactics d

efined

in th

e plan

. The ‘o

bjectiv

es’ specify

man

agem

ent’s ex

pectatio

ns fo

r the acq

uisitio

n,

whereas th

e ‘tactics’ pro

vid

e guid

ance as to

how

the acq

ui-sitio

n p

rocess in

cludin

g th

e specificatio

n an

d th

e criteria

for selectin

g p

oten

tial acquisitio

n targ

ets are to b

e execu

ted. T

actics inclu

de m

anag

emen

t’s choice o

f the m

ethod o

f

pay

men

t (stock

, cash, d

ebt o

r a com

bin

ation), w

illingness to

accept im

med

iate EP

S d

ilutio

n, p

reference fo

r a

stock

purch

ase or asset p

urch

ase, and so

on. T

he o

bjectiv

es and tactics o

f acquisitio

n p

lan sh

ould

be co

mpletely

con-sisten

t with

the firm

’s strategic o

bjectiv

es, which

are both

finan

cial and n

on-fin

ancial.

Fin

an

cial O

bjectiv

es: The

finan

cial objectiv

es in th

e merg

ers and acq

uisitio

n p

lan m

ay in

clude a m

inim

um

rate

of retu

rn o

n in

vestm

ent o

r rate of o

peratin

g p

rofit o

n rev

enues, to

tal reven

ues, cash

-flow

or an

y o

ther fin

ancial

targets to

be ach

ieved

with

in a sp

ecified tim

e perio

d. T

he m

inim

um

or req

uired

rates of retu

rn m

ay b

e targeted

substan

-tially h

igher th

an th

ose sp

ecified in

the b

usin

ess plan

, which

relates to th

e required

return

to sh

arehold

ers on

capital em

plo

yed

. The req

uired

return

for th

e acquisitio

n m

ay reflect a su

bstan

tially h

igher lev

el of risk

due to

the

perceiv

ed v

ariability

of th

e amount an

d tim

ing o

f the ex

pected

cash flo

ws resu

lting fro

m th

e acquisitio

n. T

he th

eory

of

contracts su

ggests th

at the g

oal o

f the m

anag

ers of a firm

is to m

axim

ize the w

ealth o

f the o

wners o

f the firm

(i.e., the

shareh

old

ers) and th

e presu

mptio

n is th

at man

agers sh

ould

accept o

nly

those in

vestm

ents co

ntrib

utin

g to

shareh

old

er

wealth

(Laffo

nt an

d M

artimort, 2

006). G

enerally, sh

arehold

ers’ wealth

max

imizatio

n is v

iewed

as the p

rimary

goal o

f

busin

ess but m

any firm

s add th

e desire to

meet th

e need

s of o

ther stak

ehold

ers to th

is over arch

ing o

bjectiv

e. Failu

re

to m

ake g

ood-faith

efforts to

meet th

e reasonab

le need

s of th

e oth

er stakeh

old

ers may

seriously

impact th

e

firm’s ab

ility to

satisfy its sh

arehold

ers due to

closu

re, strikes, state-im

posed

rules, en

viro

nm

ental reg

ulatio

ns an

d

failure to

receive reg

ulato

ry o

r shareh

old

er appro

val to

com

plete th

e pro

posed

M&

A tran

saction.

Non

-finan

cial O

bjectiv

es: No

n-fin

ancial o

bjectiv

es are basically

the m

otiv

ation

s for m

akin

g M

&A

s wh

ich

necessitate ach

ievin

g th

e finan

cial return

s as stipulated

in th

e busin

ess plan

. on m

any in

stances, su

ch o

bjectiv

es

pro

vid

e substan

tially m

ore g

uid

ance fo

r those resp

onsib

le for m

anag

ing th

e acquisitio

n p

rocess th

an fin

ancial targ

ets.

The n

on-fin

ancial o

bjectiv

es in th

e acquisitio

n p

lan in

clude th

e follo

win

g:

1.

Rig

hts to

pro

ducts, p

atents, co

pyrig

hts o

r bran

d n

ames.

2.

Gro

wth

opportu

nities in

the sam

e or related

mark

ets.

3.

New

distrib

utio

n ch

annels in

the sam

e or related

mark

ets.

4.

Additio

nal p

roductio

n cap

acity in

strategically

located

facilities.

5.

R&

D cap

abilities.

6.

Access to

pro

prietary

technolo

gies, p

rocesses, so

ftware an

d sk

ills.

The first co

nsid

eration in

form

ulatin

g an

M &

A strateg

y is to

decid

e wheth

er or n

ot an

acquisitio

n o

r even

a merg

er is an ap

pro

priate strateg

y fo

r gro

wth

. In all p

robab

ility, the M

& A

strategy sh

ould

be co

nsisten

t with

the acq

uirer’s o

verall m

ission, o

bjectiv

es, and g

oals o

f gro

win

g th

rough b

usin

ess com

bin

ations. T

able-6

explain

s

furth

er the co

mplim

entary

and su

pplem

entary

relationsh

ips an

d alig

nm

ent b

etween

busin

ess plan

and M

&A

plan

. The strateg

y sh

ould

express fin

ancial o

bjectiv

es of M

&A

(inclu

din

g acq

uisitio

n p

rice), acquisitio

n criteria,

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

17

and acq

uisitio

n b

udget in

clear and ratio

nal term

s. This m

ay b

e more d

etailed an

d m

ore q

uan

titative th

an th

e

CE

O’s statem

ents to

beco

me an

‘x’ billio

n d

ollar co

mpan

y in

‘y’ num

ber o

f years. In

ord

er to stay

off th

e boss’s

black

list, man

y a tim

e the strateg

ic plan

ners fo

rmulate M

&A

policy

and strateg

y w

hich

are not o

nly

bias to

ward

s

boss’s w

ishes b

ut m

ay b

e the cau

ses for th

e beg

innin

g o

f a failed m

erger. T

he acq

uisitio

n criteria sh

ould

specify

the o

bjectiv

es such

as div

ersification, ex

pan

sion, h

orizo

ntal / v

ertical integ

ration an

d th

e like. T

he acq

uisitio

n

plan

should

specify

qualificatio

ns, talen

ts, and p

lans o

f man

agem

ent fo

r post-acq

uisitio

n in

tegratio

n, risk

pro

file

of m

anag

emen

t (e.g., h

igh risk

target w

ith a g

reater poten

tial for h

igh retu

rns v

ersus lo

w risk

pro

bab

ility o

f

low

er return

s), and th

e required

cash flo

w in

cludin

g th

e meth

od o

f finan

cing th

e purch

ase price (e.g

., deb

t,

equity, o

r a com

bin

ation o

f both

). The M

&A

strategy sh

ould

also sp

ecify th

e types o

f adviso

rs and in

termed

iaries

need

ed fo

r M&

A co

nsu

ltations. A

dviso

rs and in

termed

iaries inclu

de: acco

untan

ts, attorn

eys an

d leg

al experts,

busin

ess bro

kers, in

vestm

ent b

ankers, len

din

g so

urces, M

&A

specialists, etc.

The su

ccess of an

M&

A d

epen

ds o

n th

e focu

s and u

nderstan

din

g o

f a well d

rawn b

usin

ess plan

. There are

vario

us q

uestio

ns th

at must b

e addressed

in d

evelo

pin

g a v

iable b

usin

ess plan

and th

ese inclu

de:

1.

Where an

d h

ow

should

the firm

com

pete?

2.

How

can th

e firm satisfy

custo

mer n

eeds b

etter than

the co

mpetito

rs?

3.

Why is th

e chosen

M&

A strateg

y p

referable to

oth

er optio

ns?

In o

rder to

answ

er these q

uestio

ns, th

e busin

ess plan

nin

g p

rocess sh

ould

consist o

f a thoro

ugh an

alysis o

f

custo

mers’ n

eeds an

d an

inten

sive an

alysis o

f the firm

’s SW

OT

in term

s of co

mpetitio

n. T

he p

lannin

g p

rocess

should

result in

a clearly articu

lated m

ission an

d set o

f quan

tified o

bjectiv

es with

associated

time fram

es and

Modellin

g S

trategies fo

r Corp

orate G

row

th

18.

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nan

a Jyoth

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emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

ind

ivid

uals resp

on

sible fo

r meetin

g th

ese ob

jectives b

y th

e targeted

dates. T

he assu

mp

tion

s un

derly

ing

the

strategy an

d su

pportin

g fin

ancial statem

ents sh

ould

be id

entified

clearly. Of co

urse th

is is crucial b

ecause th

e

reasonab

leness o

f any b

usin

ess strategy is so

lely d

epen

den

t on th

e credib

ility o

f its underly

ing assu

mptio

ns.

Fin

ally, an ap

pro

priate M

&A

strategy is selected

from

a range o

f reasonab

le optio

ns. H

ow

ever, th

ere is a linkag

e

betw

een th

e acquisitio

n p

lan an

d b

usin

ess plan

. Acq

uisitio

n p

lan d

escribes h

ow

the firm

will en

cash th

e busin

ess

strategy th

rough an

acquisitio

n o

r merg

er. The sam

e logic ap

plies if th

e implem

entatio

n o

f the firm

’s busin

ess

plan

requires an

y k

ind o

f busin

ess com

bin

ation lik

e join

t ven

ture o

r busin

ess alliance.

Arch

itecture fo

r M&

A

An M

&A

architectu

re has to

be d

evelo

ped

follo

win

g th

e listed d

ow

n g

uid

ance fo

r the arch

itects of m

ergers

and acq

uisitio

ns. T

he fo

llow

ing are so

me o

f the featu

res, which

are linked

to M

&A

architectu

re:

1.

Iden

tify th

e specific p

urp

ose o

f the acq

uisitio

n. T

his sh

ould

inclu

de w

hat sp

ecific goals are to

be ach

ieved

(e.g., co

st reductio

n, access to

new

custo

mers, d

istributio

n ch

annels o

r pro

prietary

technolo

gy, so

ftware,

enhan

ced p

roductio

n cap

acity, etc.) and h

ow

the ach

ievem

ent o

f these g

oals w

ill better en

able th

e acquirin

g

firm to

implem

ent its b

usin

ess strategy.

2.

Estab

lish a tim

etable fo

r com

pletin

g th

e acquisitio

n (in

cludin

g in

tegratio

n) if th

e target firm

is to b

e merg

ed

with

the acq

uirin

g firm

’s operatio

ns.

3.

Evalu

ate the acq

uirer’s fin

ancial an

d m

anag

erial capab

ility to

com

plete an

acquisitio

n.

4.

Indicate th

e acquirer’s p

references fo

r a “friendly

” acquisitio

n o

f contro

lling in

terest usin

g sto

ck, d

ebt,

cash, o

r any co

mbin

ation, etc.

5.

Dev

elop screen

ing criteria fo

r iden

tifyin

g p

oten

tial target firm

s and ex

plain

plan

s for co

nductin

g th

e search

as to w

hy th

e target u

ltimately

be selected

and h

ow

initial co

ntact w

ith th

e target firm

would

be m

ade.

6.

Iden

tify k

ey b

uy

er/seller issues fo

r establish

ing

neg

otiatio

n strateg

y. Reco

mm

end

a deal stru

cture th

at

addresses th

e prim

ary n

eeds o

f all parties in

volv

ed. C

om

men

t on th

e characteristics o

f the d

eal structu

re

like acq

uisitio

n v

ehicle (i.e., th

e legal stru

cture to

be u

sed in

acquirin

g th

e target firm

), the p

ost clo

sing

org

anizatio

n (i.e., th

e legal fram

ework

to b

e used

to m

anag

e the p

ost acq

uisitio

n co

mbin

ed en

tity), m

ode o

f

pay

men

t (i.e., cash, p

aper, o

r som

e com

bin

ation), fo

rm o

f acquisitio

n (i.e., w

heth

er assets or sto

ck are

bein

g acq

uired

) and tax

structu

re (i.e., wheth

er it is a taxab

le or a n

ontax

able tran

saction).

7.

Indicate h

ow

to clo

se the g

ap b

etween

the seller’s p

rice expectatio

ns an

d th

e acquirer’s o

ffer price.

8.

In o

rder to

dev

elop a p

relimin

ary m

inim

um

and m

axim

um

purch

ase price ran

ge an

d d

etermin

e the in

itial

offer p

rice. For th

is purp

ose, p

rovid

e pro

jected 5

-year fin

ancial statem

ents alo

ng w

ith k

ey assu

mptio

ns o

f

the acq

uirin

g an

d targ

et firms in

div

idually

and m

ake co

nso

lidated

statemen

ts with

and w

ithout th

e effects

of sy

nerg

y. Iden

tify an

initial o

ffer price, th

e com

positio

n (i.e., cash

, stock

, deb

t, or so

me co

mbin

ation) o

f

the o

ffer price, an

d w

hy it is b

elieved

that th

e offer p

rice is right in

terms o

f meetin

g th

e prim

ary n

eeds o

f

both

target an

d acq

uirer sh

arehold

ers.

9.

Determ

ine w

heth

er the p

roposed

offer p

rice can b

e finan

ced w

ithout en

dan

gerin

g th

e com

bin

ed firm

’s

credit w

orth

iness o

r seriously

erodin

g fu

ture p

rofitab

ility an

d cash

flow

. For listed

firms, atten

tion is to

be

giv

en to

the n

ear-term im

pact o

f the acq

uisitio

n o

n th

e EP

S o

f the co

mbin

ed firm

s.

10

.D

evelo

p in

tegratio

n strateg

ies to id

entify

the p

oten

tial integ

ration ch

allenges an

d p

robab

le solu

tions in

cludin

g

exit strateg

y fo

r the fin

ancial b

uyers.

An acq

uisitio

n is o

ne o

f the m

any o

ptio

ns av

ailable fo

r implem

entin

g a b

usi-n

ess strategy. T

he d

ecision to

pursu

e an acq

uisitio

n rests o

n th

e desire to

achiev

e contro

l and a p

erceptio

n th

at the acq

uisitio

n w

ill result in

achiev

ing th

e desired

objectiv

es more rap

idly

than

oth

er optio

ns. In

the p

rocess, m

any acq

uirers p

ay to

o m

uch

for g

ainin

g co

ntro

l. At tim

es, an altern

ative o

ptio

n m

ay p

rove to

be less risk

y. A firm

may

choose to

implem

ent

what am

ounts to

a phased

acquisitio

n b

y first en

tering in

to a jo

int v

entu

re with

anoth

er com

pan

y b

efore acq

uirin

g

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

19

it at a later date. O

nce a firm

consid

ers an acq

uisitio

n as a k

ey to

realizing th

e strategic m

ove in

the b

usin

ess

plan

, an M

&A

plan

is dev

eloped

. The m

ergers an

d acq

uisitio

ns p

lan p

rovid

es the d

etails need

ed to

implem

ent

effectively

the firm

’s busin

ess strategy. T

he acq

uisitio

n p

lan d

efines th

e specific o

bjectiv

es what th

e man

agem

ent

hopes to

achiev

e by co

mpletin

g an

acquisitio

n. T

he M

&A

plan

addresses issu

es of reso

urce av

ail-ability

and

iden

tifies the sp

ecific tactics the m

anag

emen

t cho

oses to

com

plete a tran

saction

. Th

e acqu

isition

plan

also

establish

es a sched

ule o

f milesto

nes to

keep

the p

rocess o

n track

and

clearly d

efines th

e auth

ority

and

responsib

ilities of th

e indiv

iduals w

ho are en

trusted

with

man

agin

g th

e acquisitio

n p

rocess.

Reso

urce A

vaila

bility

: At th

e beg

innin

g o

f the acq

uisitio

n p

rocess, it is im

portan

t to k

now

the am

ounts o

f the

firm’s av

ailable reso

urces th

at senio

r man

agem

ent w

ill com

mit to

a merg

er or acq

uisitio

n. B

efore u

ndertak

ing

a search fo

r po

tential targ

et, the acq

uirer firm

need

s to d

evel-o

p targ

et selection

criteria and

loo

k in

to th

e

finan

cial resources av

ailable an

d req

uired

to b

e raised fro

m th

e mark

et for strik

ing th

e deal. It is to

be seen

if the

target firm

has th

e poten

tial pool o

f funds p

rovid

ed b

y th

e intern

al cash flo

w o

f the co

mbin

ed co

mpan

ies in

excess o

f norm

al operatin

g req

uirem

ents, as w

ell as the cap

acity o

f the co

mbin

ed firm

to issu

e new

equity

shares o

r increase th

e leverag

e. A firm

is alway

s attractive to

raise sufficien

t funds fo

r an acq

uisitio

n if th

e acquirin

g

firm can

dem

onstrate th

at it can earn

its cost o

f capital. T

ruly, th

e senio

r man

agem

ent’s risk

toleran

ce play

s an

importan

t role in

determ

inin

g w

hat th

e acquirer b

elieves it can

afford

to sp

end o

n a m

erger o

r acquisitio

n. A

t the sam

e

time, risk

-averse m

anag

emen

t may

be in

clined

to co

m-m

it only

a small p

ortio

n o

f the to

tal finan

cial resources fo

r

M&

A.

Determ

inin

g A

fford

ab

ility a

nd

Risk

s: While m

akin

g an

acquisitio

n d

ecision, v

arious ty

pes o

f risks co

nfro

nt th

e

senio

r man

agem

ent an

d th

ese risks affect th

e afford

ability

of an

M&

A o

pportu

nity. T

hese risk

s are operatin

g,

finan

cial, and o

ver-p

aym

ent. D

epen

din

g u

pon h

ow

man

agers p

erceive th

ese risks, th

ey w

ill com

mit p

oten

tial

resources av

ailable fo

r mak

ing an

acquisitio

n d

ecision. T

he risk

s are:

Op

eratin

g R

isk: T

his risk

is gen

erally p

erceived

to b

e hig

her fo

r M&

As, if it is u

nrelated

to th

e acquirer’s co

re

busin

ess.O

peratin

g risk

add

resses the ab

ility o

f the b

uy

er to m

anag

e the acq

uired

com

pan

y effectiv

ely an

d

efficiently. L

ack o

f understan

din

g o

f man

agers in

the acq

uirin

g co

mpan

y o

f the co

mpetitiv

e dynam

ics of th

e new

mark

et and th

e inner w

ork

ings o

f the targ

et firm m

ay n

egativ

ely affect th

e post-m

erger in

tegratio

n. A

s a result

man

agem

ent o

f the co

mbin

ed co

mpan

y w

ould

be serio

usly

affected.

Fin

an

cial R

isk: F

inan

cial risk arises w

hen

the b

uyer is w

illing to

leverag

e an M

&A

transactio

n an

d accep

t

dilu

tion o

f near-term

earnin

gs p

er share, resu

lting in

hig

h ch

ances o

f shareh

old

er valu

e destru

ction. A

cquirer

man

agem

ent’s to

lerance o

f finan

cial risk can

be m

easured

by th

e credit ratin

g to

som

e exten

t. In o

rder to

main

tain a

specific cred

it rating, th

e acquirin

g co

mpan

y m

ust m

aintain

certain lev

els of fin

ancial ratio

s such

as deb

t-equity

and

interest co

verag

e. A firm

’s increm

ental d

ebt cap

acity can

be ap

pro

xim

ated b

y co

mparin

g th

e relevan

t finan

cial

ratios to

those o

f com

parab

le firms in

the sam

e industry

that are rated

by th

e credit ratin

g ag

encies. T

he d

ifference

represen

ts the am

ount th

ey th

eoretically

could

borro

w w

ithout jeo

pard

izing th

eir curren

t credit ratin

g. T

he

man

agem

ent can

also g

ain in

sight in

to h

ow

much

EP

S d

ilutio

n eq

uity

investo

rs may

be w

illing to

tolerate

thro

ugh in

form

al discu

ssions w

ith an

alysts an

d can

mak

e an assessm

ent o

f recently

done co

mparab

le M&

A

transactio

ns fin

anced

by issu

ing sto

cks.

Overp

aym

ent R

isk: H

ubri th

eory

suggests th

at acquirer h

as a tenden

cy to

overp

ay fo

r an acq

uisitio

n. T

he

overp

aym

ent risk

involv

es the d

ilutio

n o

f EP

S o

r a reductio

n in

its gro

wth

rate resultin

g fro

m p

ayin

g sig

nifican

tly

more th

an th

e econom

ic valu

e of th

e acquired

com

pan

y. The effects o

f overp

aym

ent o

n earn

ings d

ilutio

n can

last for y

ears. Imm

ediately

on acq

uisitio

n, th

e acquirer m

y h

ave g

o fo

r a series of in

ternal restru

cturin

g affectin

g

gro

wth

of E

PS

adversely. H

ow

ever, acq

uirer m

anag

emen

t may

argue th

at the sav

ings resu

lting fro

m co

mbin

ing th

e

two en

tities will raise th

e com

bin

ed E

PS

gro

wth

. But th

e risk is th

at the sav

ings m

ay b

e real-ized d

urin

g th

e time

frame as assu

med

by m

anag

emen

t and as a resu

lt the slo

wdow

n in

earnin

gs m

ay ex

tend b

eyond th

e nex

t few

Modellin

g S

trategies fo

r Corp

orate G

row

th

20.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

years. F

ailure to

achiev

e the p

ost-m

erger E

PS

gro

wth

rates is likely

to resu

lt in a su

bstan

tial deterio

ration in

the

enlarg

ed firm

’s mark

et valu

e.

Tactics fo

r M&

A A

rchitectu

re

Tactics fo

r M&

A arch

itecture reflect sen

ior m

anag

emen

t’s preferen

ces for co

nductin

g th

e acquisitio

n d

eal pro

cess.

Dep

endin

g u

pon m

anag

emen

t’s risk to

lerance an

d b

iases, man

agem

ent can

pro

vid

e guid

ance to

those ex

ecutiv

es

responsib

le for n

egotiatin

g th

e M&

A tran

saction in

the fo

llow

ing m

atters:

1.

Freezin

g th

e criteria (e.g., size, p

rice range, cu

rrent p

rofitab

ility, gro

wth

rate, or g

eograp

hic lo

cation) to

be

used

to ev

aluate p

rosp

ective targ

et candid

ates.

2.

Determ

inin

g an

d selectin

g th

e meth

ods fo

r findin

g th

e acquisitio

n can

did

ates (e.g., so

liciting b

oard

mem

bers,

analy

zing co

mpetito

rs and co

ntactin

g b

rokers, in

vestm

ent b

ankers, len

ders, law

firms, an

d th

e trade p

ress).

3.

Fix

ing th

e roles an

d resp

onsib

ilities of th

e acquisitio

n team

, inclu

din

g th

e use o

f outsid

e consu

ltants an

d

quan

tifyin

g d

efinin

g th

e team’s b

udget Id

entify

ing accep

table so

urces o

f finan

cing (e.g

., equity

issues, b

ank

loan

s, unsecu

red b

onds, seller fin

ancin

g, o

r asset sales).

4.

Choice b

etween

‘asset purch

ase’ or ‘sto

ck p

urch

ase’ and m

ode o

f pay

men

t (cash, sto

ck, o

r deb

t or a co

mbin

ation).

5.

Allo

wan

ces for g

oodw

ill or o

ther in

tangib

le assets.

6.

Open

ness to

partial o

r full acq

uisitio

n.

7.

Willin

gness to

launch

friendly

or u

nfrien

dly

acquisitio

n.

8.

Fix

ing affo

rdab

ility lim

its (such

as max

imum

price, b

ook earn

ings b

efore in

terest and tax

es, or cash

flow

multip

le or a m

axim

um

purch

ase consid

eration).

9.

Choice b

etween

related an

d u

nrelated

acquisitio

ns an

d so

on.

Wh

ole h

earted in

vo

lvem

ent an

d p

articipatio

n b

y m

anag

emen

t will h

elp d

ramatically

in th

e successfu

l

implem

entatio

n o

f the acq

uisitio

n p

rocess. B

ut u

nfo

rtunately, at th

e beg

innin

g o

f the p

rocess, sen

ior m

anag

emen

t

does n

ot sh

are significan

t info

rmatio

n w

ith o

ther m

anag

ers, desp

ite recognizin

g th

e valu

e of co

mm

unicatio

n

which

leads to

limited

particip

ation b

y o

ther lev

els of m

anag

emen

t, misco

mm

unicatio

n, co

nfu

sion, an

d p

oor ex

ecutio

n

of th

e M&

A p

rocess.

Tim

e Sch

edu

le: There sh

all be a p

roperly

structu

re and d

esigned

acquisitio

n p

lan, w

hich

is basically

a sched

-ule

of all th

e key

even

ts that m

ust tak

e place th

roughout th

e acquisitio

n p

rocess alo

ng w

ith a tim

e line. E

ach ev

ent

should

be ch

aracterized b

y b

egin

nin

g an

d en

d-in

g m

ilestones o

r dates as w

ell as the n

ame o

f the in

div

iduals

responsib

le for en

surin

g th

at each m

ilestone is ach

ieved

. The tim

etable o

f even

ts can b

e aggressiv

e but realistic,

lest due d

iligen

ce is not d

one p

roperly. T

he tim

etable sh

ould

moti-v

ate all particip

ants in

the p

rocess to

work

as

exped

itiously

as possib

le to m

eet the m

anag

emen

t objectiv

es establish

ed in

the acq

uisitio

n p

lan. H

ow

ever, an

over o

ptim

istic timetab

le may

pro

ve to

be d

e-motiv

ating to

those in

volv

ed b

ecause u

nco

ntro

llable o

r unfo

reseen

circum

stances m

ay d

elay reach

ing certain

milesto

nes, affectin

g th

e success in

the p

ost-m

erger p

eriod.

Assets D

eal a

nd

Sto

ck D

eal: W

hile co

ntem

platin

g th

e M&

A d

eal, both

the b

uyer an

d seller strateg

ies wheth

er

the tran

saction w

ould

be an

asset transactio

n o

r a stock

transactio

n. T

he b

uyer m

ay w

ant to

buy th

e assets,

becau

se he o

r she can

avoid

poten

tial lawsu

its from

inheren

t corp

orate liab

ilities and can

write u

p o

r write d

ow

n

the assets, claim

ing larg

er dep

reciation to

avail m

ore tax

advan

tages. O

n th

e oth

er han

d, th

e seller would

prefer

stock

sale as he o

r she m

ay face a tax

liability

for d

epreciatio

n w

rite back

and fo

r selling th

e mach

inery

at a

hig

her v

alue th

an th

at show

n o

n th

e written

dow

n b

ook v

alue. A

n asset sale is also

time co

nsu

min

g an

d co

stly

becau

se there w

ill be leg

al transfer o

f each asset. It is also

more d

ifficult b

ecause o

f the n

eed fo

r third

-party

consen

ts on leased

and lo

aned

assets, etc. when

it is an asset sale; th

e purch

ase price is assig

ned

to sp

ecific

assets at their fair m

arket v

alue, n

ot th

e dep

reciated v

alue as p

er the b

ooks. T

he d

ifference b

etween

the p

urch

ase

price an

d th

e allocatio

n o

f the p

urch

ase price is g

oodw

ill. Under th

e vario

us tax

laws, g

oodw

ill can b

e amortized

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

21

over a lo

ng p

eriod o

f time d

epen

din

g u

pon a co

untry

along w

ith o

ther in

tangib

les. Both

stock

purch

ase and asset

purch

ase can b

e thro

ugh cash

pay

men

t or ex

chan

ge o

f acquirer’s sh

ares. So, it is n

ecessary to

understan

d th

e

pro

s and co

ns o

f asset and sto

ck p

urch

ases.

Syn

ergy fo

r M&

A S

uccess

Synerg

y8 is a m

uch

-loved

and o

verw

ork

ed m

anag

emen

t jargon an

d so

metim

es loosely

used

to d

escribe a

mysterio

us ch

emistry

betw

een th

e com

bin

ing en

tities. In fact, th

e term refers to

the co

mbin

ation o

f vario

us

physical, fin

ancial an

d in

tellectual assets su

ch th

at their v

alue is g

reater than

the su

m o

f their in

div

idual w

orth

.

Siro

wer (1

997) o

bserv

ed, “T

he easiest w

ay to

lose th

e acquisitio

n g

ame is b

y failin

g to

defin

e synerg

y in

terms

of real an

d m

easurab

le impro

vem

ents in

com

petitiv

e advan

tage, su

ch as cash

flow

s”. Synerg

y is o

ne o

f the

prim

e motiv

ating fo

rces for d

ecidin

g th

e merg

ers and acq

uisitio

ns b

ut m

any a tim

e the m

anag

emen

ts of b

oth

acquirin

g an

d targ

et com

pan

ies tend to

oversim

plify

it by co

nsid

ering th

at the co

rporate co

mbin

ation w

ill alway

s

create greater sh

arehold

er valu

e than

if they

operate in

div

idually. T

echnically

speak

ing, S

ynerg

y is th

e ability

of

the m

erged

com

pan

y to

gen

erate hig

her sh

arehold

ers’ wealth

than

the stan

dalo

ne en

tities. Eco

nom

ically, it is the

ability

of th

e com

bin

ed en

tity to

furth

er limit co

mpetito

rs’ abilities to

contest th

eir or th

e targets’ cu

rrent in

put

mark

ets, pro

cesses, or o

utp

ut m

arkets an

d/o

r the ab

ility to

open

new

mark

ets and/o

r encro

ach in

to th

e com

petito

rs’

mark

ets where th

ese com

petito

rs cannot resp

ond. S

om

e merg

ers create synerg

ies becau

se the co

mbin

ed firm

can eith

er cut co

sts or u

se the co

mb

ined

assets mo

re effectively

to g

enerate m

ore cash

flow

and

valu

e for

shareh

old

ers and th

is is gen

erally a g

ood reaso

n fo

r a merg

er. Synerg

ies are supposed

to create th

e follo

win

g

ben

efits to ju

stify th

e M &

A:

1.

Cost red

uctio

n : th

e com

bin

ed firm

can o

perate m

ore efficien

tly th

an th

e separate firm

s due to

:

a.E

conom

ies of scale: co

nso

lidatio

n o

f man

ufactu

ring reso

urces can

push

merg

ed firm

to a m

ore co

st effective

scale of o

peratio

n.

b.

Eco

no

mies o

f vertical in

tegratio

n: b

ecause su

pp

ly ch

ain relatio

nsh

ips are w

ithin

the firm

, pro

fits that

would

norm

ally g

o to

oth

er busin

esses are retained

.

c.C

om

plem

entary

resources: red

undan

t or u

nder-u

tilised reso

urces are co

mbin

ed o

r conso

lidated

.

2.

Tax

ben

efits: these are lu

crative in

centiv

es for m

ergers an

d acq

uisitio

ns. S

uch

ben

efits are gen

erally w

rite-

off o

f unab

sorb

ed lo

sses of th

e target co

mpan

y. When

the targ

et firm h

as significan

t unab

sorb

ed tax

losses

from

form

er years, th

ese can b

e applied

to th

e inco

me o

f the co

mbin

ed firm

after the acq

uisitio

n o

r merg

er,

thus red

ucin

g cash

out flo

w th

rough tax

savin

gs.

3.

Unused

deb

t capacity

: if the targ

et firm h

as a low

er deb

t-equity

ratio (D

ER

) than

that o

f the b

iddin

g firm

,

the u

nused

deb

t capacity

can lead

to in

cremen

tal tax sh

ields, w

hich

accrues to

the co

mbin

ed firm

.

4.

Surp

lus fu

nds: ex

cess funds in

the targ

et com

pan

y m

ay rem

ain u

npro

ductiv

e and id

le and th

at can b

e

turn

ed o

ver to

positiv

e NP

V in

the co

mbin

ed o

rgan

ization (F

ama an

d F

rench

, 1997).

5.

Asset w

rite-ups: th

e assets of th

e target firm

may

be re-assessed

or rev

alued

at a hig

her m

arket v

alue fo

r

inclu

sion

on

the co

mb

ined

firm’s b

alance sh

eet. Dep

end

ing

up

on

the sp

ecific cou

ntry

’s tax law

s, the

resultin

g in

cremen

tal dep

reciation m

ay p

roduce a tax

shield

, which

adds v

alue to

the co

mbin

ed o

rgan

isation.

Syn

ergy M

od

el

To ex

press sim

ply, V

synerg

y = V

A(E

nlarg

ed) –

(VA +

VB ), o

r VA

(Enlarg

ed) =

(VA +

VB ) +

Vsy

nerg

y

wh

ere,

VA

(Enlarg

ed) is th

e valu

e of th

e com

bin

ed an

d en

larged

entity

after merg

er,

VA &

VB

are the stan

d alo

ne v

alues o

f the co

mbin

ing en

tities ‘A’ an

d ‘B

’, where ‘A

’ is the acq

uirin

g co

mpan

y an

d

‘B’ is th

e target co

mpan

y.

Vsy

nerg

yis th

e valu

e of sy

nerg

y.

Modellin

g S

trategies fo

r Corp

orate G

row

th

22.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

In o

ther w

ord

s, synerg

y ex

ists when

VA

(Enlarg

ed) >

(VA +

VB ) an

d th

is can n

ot h

appen

unless th

e disco

unted

presen

t

valu

e of n

et increm

ental cash

flow

s for a co

nsid

erable p

eriod o

f time fro

m th

e merg

er is positiv

e. Therefo

re the

valu

e of estim

ated p

re-merg

er synerg

y [V

synerg

y(E

) ]can b

e expressed

as:

Vsy

nerg

y(E

) = [!

CF

t /(1+

WA

CC

)t]=

!C

F1 /(1

+W

AC

C)

1+!

CF

2/(1

+W

AC

C)

2+!

CF

3/(1

+W

AC

C)

3 + …

……

.. +

!C

Ft /(1

+W

AC

C)

t ,

Wh

ere,

!C

Ft is th

e estimated

post-m

erger in

cremen

tal cash flo

w fo

r an accep

table ex

plicit tim

e perio

d ‘t’

=!

Rev

enues

t –!

Costs

t – M

erger ex

pen

ses – !

Tax

es t –

!C

apital R

equirem

ents

t ,

WA

CC

is weig

hted

averag

e cost o

f capital o

f the en

larged

com

bin

ed en

tity.

At th

e time o

f M&

A d

ecision th

e valu

e of sy

nerg

y [V

synerg

y(E

) ] is estimated

. But after th

e deal is o

ver, it is

essential to

track th

e valu

e of sy

nerg

y to

understan

d h

ow

the estim

ated sy

nerg

y is b

eing realized

. Ideally, th

e

valu

e of sy

nerg

y realised

can b

e expressed

as Vsy

nerg

y(R

) = P

ost-m

erger V

A(E

nlarg

ed) –

Pre-m

erger[(V

A+

VB )].T

herefo

re,

imm

ediately

after closin

g th

e deal, v

aluatio

ns o

f the en

larged

and co

mbin

ed en

tity [V

A(E

nlarg

ed) ] at d

ifferent in

tervals

are necessary

to track

the m

ovem

ent o

f actual realisatio

n o

f synerg

y. For th

is purp

ose, v

aluatio

n an

alysis can

be

done fo

r differen

t time p

eriods as co

mpared

to (a) d

ate of d

eclaration an

d (b

) date o

f closin

g th

e deal. T

his

analy

sis pro

vid

es the v

ariance b

etween

the p

re-merg

er synerg

y estim

ated [V

synerg

y(E

) ] and th

e post-m

erger sy

nerg

y

realised [V

synerg

y(R

) ].If [V

synerg

y(E

) ] is greater th

an [V

synerg

y(R

) ] , there is in

cremen

tal merg

er gain

and if it is v

ice

versa, th

en th

ere arises neg

ative sy

nerg

y (also

called an

ergy) th

rough th

e M&

A tran

saction. Id

eally, it is expected

that [V

synerg

y(E

) ] will b

e equal to

[Vsy

nerg

y(R

) ].

In an

M&

A d

ecision, th

e man

agers’ estim

ates of sy

nerg

ies are gen

erally o

verb

low

n. M

ost o

f the ex

ecutiv

es

feel that th

ey o

ught to

be creatin

g a larg

e synerg

y th

rough th

e acquisitio

n th

ey are p

lannin

g. T

hey

may

not h

ave

special in

sights in

to th

e synerg

y o

pportu

nities o

r aptitu

de fo

r nurtu

ring sy

nerg

y. As a resu

lt they

may

feel that

synerg

y effect is p

erpetu

al and th

erefore, w

hile v

aluin

g sy

nerg

y th

ey co

nsid

er the term

inal v

alue. T

he au

thor is

of o

pin

ion th

at com

putin

g term

inal v

alue o

f the in

cremen

tal cash flo

w d

ue to

perp

etual sy

nerg

y fo

r infin

ite

perio

d is a w

rong effo

rt. As is w

ell know

n, a m

erger b

ecom

es uneco

nom

ical over a p

eriod o

f time b

ecause

synerg

y realizatio

n ceases d

ue to

vario

us reaso

ns. T

herefo

re, the au

thor su

ggests th

at if presen

t valu

e of ad

ditio

nal

cash flo

w fo

r a finite p

eriod is ad

ded

with

the term

inal v

alue fo

r unlim

ited p

eriod, th

e valu

e of sy

nerg

y w

ould

be

overstated

and as a resu

lt the M

&A

would

beco

me fin

ancially

failure. T

he p

ost m

erger in

tegratio

n p

lan h

as a

great im

pact o

n ach

ievin

g th

e savin

gs o

r additio

nal cash

flow

s in th

e form

of sy

nerg

y. Contin

uous m

otiv

ation o

f

man

agers w

ith sp

ecial com

pen

sation p

ackag

es are to b

e targeted

tow

ards ach

ievin

g sy

nerg

istic savin

gs th

roughout

perp

etually. It m

ay b

e little conserv

ative ap

pro

ach b

ut so

unds realistic to

valu

e synerg

y fo

r a finite p

eriod;

oth

erwise h

uge fo

recasted p

ost-acq

uisitio

n v

alue o

f the acq

uirer w

ill not m

aterialize in th

e med

ium

term.

Iden

tificatio

n a

nd

Rea

lisatio

n o

f Poten

tial S

yn

ergies

It has b

een o

bserv

ed th

at when

the m

ergers are d

eclared to

the p

ublic, th

e CE

Os o

f the m

ergin

g co

mpan

ies

categorically

spell o

ut th

e types o

f synerg

ies they

believ

e to accru

e in th

e post-m

erger scen

ario. T

hey

do n

ot

quan

tify fin

ancially

to th

e public b

ut d

escribe q

ualitativ

ely. Fin

ancial q

uan

tification o

f synerg

y is eith

er done

meticu

lously

by th

e due d

iligen

ce team o

r it simply

remain

s a calculated

guess. B

ased o

n th

eir experien

ces, and

dep

endin

g u

pon th

e natu

re of th

e com

pan

ies’ econom

ic pro

files they

can id

entify

the p

oten

tial sources fro

m

where th

e synerg

ies are seemed

to accru

e. How

ever, a reaso

nab

le estimate o

f the eco

nom

ic gain

s of th

e pro

posed

merg

er would

substan

tially in

fluen

ce, perh

aps d

ecide th

e conclu

sion ab

out th

e deal. S

om

e times, th

e CE

Os m

ay

simply

and casu

ally set o

ut targ

ets for th

e synerg

ies out o

f the p

roposed

merg

er deal w

ithout id

entify

ing th

e

possib

le sources o

f synerg

ies. As a resu

lt in m

any su

ch cases th

e post m

erger fin

ancial calcu

lations b

ring lo

t of

disap

poin

tmen

ts, affecting sh

arehold

er valu

e. After id

entify

ing all th

e possib

le sources o

f synerg

ies, one h

as to

evalu

ate it realistically. A p

ruden

t man

agem

ent can

iden

tify th

e sources fro

m w

here th

e merg

er ben

efits will

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

23

accrue. A

s observ

ed b

y W

eston an

d W

eaver (2

001), th

e synerg

y (o

r efficiency

gain

s) com

e from

a wid

e range o

f

items listed

in A

pp

end

ix-6

. So

me o

f the sy

nerg

ies are mo

re pro

bab

le than

oth

ers; som

e are mo

re speed

ily

realisable th

an o

thers w

hile so

me sy

nerg

ies are more co

mplicated

than

oth

ers.

Cu

stom

er Based

Syn

ergy R

ealisa

tion

: One o

f the w

ays to

assess realisation o

f synerg

y is to

evalu

ate the

outco

me o

f a merg

er or acq

uisitio

n w

ith resp

ect to retu

rn o

n cu

stom

er RO

C9. T

his is a m

easure to

determ

ine th

e

valu

e created th

rough M

& A

for th

e custo

mers o

f both

the acq

uirin

g an

d th

e target co

mpan

ies. Max

imizin

g

overall R

OC

of th

e custo

mers o

f the co

mbin

ed en

tity req

uires a firm

to fav

our, su

pport, o

r expan

d th

ose elem

ents

of th

e custo

mer b

ase hav

ing th

e hig

hest R

OC

. ‘Custo

mer S

ynerg

y’ is a stro

ng ratio

nale fo

r a merg

er but in

fact,

majo

rity o

f acquirin

g firm

s are quite p

oor at ex

plo

iting su

ch sy

nerg

ies. If the m

anag

ers of th

e com

bin

ed firm

hav

e experien

ce in creatin

g a cu

lture o

f custo

mer tru

st, and are co

mm

itted to

creating lo

ng-term

valu

e as well as

short-term

pro

fits, then

such

synerg

ies are much

more lik

ely to

be realized

. The th

eory

of sy

nerg

y su

ggest th

at

the R

OC

of th

e com

bin

ed en

tity w

ill be g

reater than

the R

OC

of th

e two in

dep

enden

t merg

ing en

tities, calculated

based

on th

eir stand alo

ne cu

stom

er equity. R

eturn

on C

usto

mer h

elps d

etermin

e wheth

er real valu

e is created

with

such

a com

bin

ation o

r not (A

ng an

d C

hen

g, 2

003).

If two in

dep

enden

t entities, A

(acquirin

g co

mpan

y) an

d T

(target co

mpan

y) m

erge to

create entity

A(en

larged

) , then

the m

erger creates real v

alue o

f:

RO

CA

(enlarg

ed) ,>

RO

CA +

RO

CT , w

here,

RO

CA

(enlarg

ed)

= [ "

i A(en

larged

) + !

CE

A(en

larged

) ] ÷ C

EA

(enlarg

ed) , an

d

RO

CA +

RO

CT

= ["

i A + !

CE

iA +"

i T + !

CE

iT ] ÷ [C

Ei-1

A + C

Ei-1

T ]

Wh

ere,

"i is th

e cash flo

w fro

m cu

stom

ers of th

e acquirin

g co

mpan

y A

and th

e target co

mpan

y T

durin

g p

eriod i,

!C

Ei is ch

ange in

custo

mer eq

uity

durin

g p

eriod i fo

r the acq

uirin

g co

mpan

y A

and th

e target co

mpan

y T

and,

CE

i-1 is the cu

stom

er equity

at the b

egin

nin

g o

f perio

d i

Cu

stom

ers are the sin

gle m

ost co

nstrain

ed reso

urces. In

cremen

tal capital is alw

ays av

ailable fo

r go

od

investm

ents, b

ut in

cremen

tal custo

mers aren

’t alway

s availab

le, even

if the p

roducts are g

ood. C

apital can

be

allocated

to p

roducts an

d p

roducts can

be allo

cated to

custo

mers. T

he R

OC

pred

iction req

uires in

form

ation o

n

how

custo

mers w

ill chan

ge th

eir futu

re beh

avio

ur b

ased o

n th

e treatmen

t they

receive to

day

from

the co

mpan

ies.

An in

sight in

to cu

stom

er trust can

pro

vid

e a tremen

dous co

mpetitiv

e advan

tage. T

here can

be eco

nom

ic barriers

to th

is strategy b

ut in

som

e of th

e busin

esses or b

usin

ess units, th

e RO

C m

atrix w

ill guid

e the m

anag

ers to

determ

ine w

here an

d w

hen

it is more feasib

le to ap

ply

RO

C tech

niq

ue fo

r the M

& A

decisio

n.

Peo

ple B

ased

Syn

ergy R

ealisa

tion

: Em

plo

yees at ev

ery lev

el of th

e org

anizatio

n h

elp to

forg

e a corp

orate

bran

d id

entity

and rep

utatio

n. E

mplo

yees h

elp create n

ew stream

s of rev

enue b

y b

eing clo

se to th

e mark

et place

and reco

gnizin

g n

ew o

pportu

nities. C

orp

orate lead

ers use v

arious reso

urces to

mobilize p

eople’s en

ergies to

ward

s

a set of strateg

ic goals. T

alented

peo

ple co

ntrib

ute th

eir expertise w

ithin

a supportiv

e and en

ablin

g co

rporate

cultu

re. Man

y o

f the p

eople b

ased sy

nerg

ies arise from

the fo

llow

ing:

1.

Bran

d an

d co

rporate id

entity

2.

Cap

ital and n

ew stream

s of rev

enue

3.

Core co

mpeten

cies in m

anag

emen

t or b

usin

ess pro

cesses

4.

Peo

ple w

ho p

ossess u

niq

ue sk

ills or cu

stom

er relationsh

ips

5.

Cultu

re or o

peratin

g en

viro

nm

ent

6.

Man

agem

ent reso

urces

Modellin

g S

trategies fo

r Corp

orate G

row

th

24.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

In reality, a fu

lly fo

rmed

merg

er strategy is a m

yth

. Very

often

the m

anag

emen

t team h

ardly

pre-estim

ate

and p

redict sy

nerg

ies to b

e deriv

ed fro

m co

st cuttin

g, eco

nom

ies of scale, etc. M

ost o

f these sy

nerg

ies are won

thro

ugh th

e better ex

plo

itation o

f tangib

le assets. A carefu

l look at so

me o

f the p

rom

ised sy

nerg

ies reveals th

at

they

are actually

con

servativ

e estimates. O

n th

e lon

ger-term

syn

ergies th

at can o

nly

be ach

ieved

thro

ug

h

leverag

ing th

e new

entity

’s intellectu

al assets, there is o

ften silen

ce.

Gro

wth

Syn

ergy v

ersus E

fficiency

Syn

ergy

It is a fact that alm

ost all m

ergers o

ffer opportu

nities to

save m

oney, b

ut th

e prim

ary reaso

n fo

r the m

erger

decisio

n as w

ell as the fo

cal poin

t durin

g p

ost-m

erger in

tegratio

n sh

ould

be g

row

th. T

here are tw

o k

inds o

f

synerg

ies: ‘efficiency

synerg

y’ an

d ‘g

row

th sy

nerg

y’. C

om

pan

ies place to

o m

uch

emphasis o

n ‘co

st’ or ‘efficien

cy

synerg

ies’, ignorin

g g

row

th p

oten

tials of th

e com

bin

ed en

tity. Gro

wth

mean

s unlo

ckin

g th

e “merg

er added

valu

e” by

takin

g ad

van

tage o

f the p

ositiv

e com

bin

ation

s offered

by

the co

mp

any

’s com

bin

ed reso

urces, in

terms o

f attractive g

row

th o

pportu

nities su

ch as cro

ss-selling p

ossib

ilities or k

now

ledge sh

aring in

research an

d

dev

elopm

ent, rev

enues, p

rofits, cap

ital form

ation, em

plo

ym

ent g

eneratio

n as id

entified

durin

g d

ue d

iligen

ce.

In m

any p

ress conferen

ces, the C

EO

s of th

e acquirin

g co

mpan

ies talk ab

out sy

nerg

ies, which

they

essentially

refer to co

st-cuttin

g. T

hey

may

quick

ly p

lace a sum

mary

on so

me sav

ings o

f a few m

illion ru

pees h

ere and th

ere

on acco

unt o

f the m

ergers. W

hen

asked

, “then

what?” o

r “What h

appen

s nex

t?” or “W

hat h

appen

s after cost-

cut?”, th

e CE

Os m

ay n

ot g

ive an

y p

ositiv

e answ

ers, rather th

ey m

ay d

iplo

matically

say, “To

be p

erfectly

honest: I d

on’t q

uite g

et the q

uestio

n.” E

ver sin

ce the last m

erger w

ave in

the late 1

980s, h

ardly

there is an

y

press release o

f the m

ergin

g co

mpan

ies with

out so

me h

ard referen

ce to th

e money

to b

e saved

on acco

unt o

f

“synerg

ies.” The w

ord

“gro

wth

” remain

s almost n

on-ex

istent in

the C

EO

s’ press co

nferen

ces. Synerg

y is o

ften

treated as a sy

nonym

for co

st-cuttin

g an

d a eu

phem

ism fo

r job cu

ts and facto

ry sh

utd

ow

ns. M

erged

com

pan

ies

are rarely su

ccessful in

capitalizin

g o

n th

e synerg

ies they

pro

claimed

prio

r to strik

ing th

e deal. T

he co

mpan

ies

either m

ake w

rong effo

rts or fo

cus so

lely o

n ach

ievin

g an

ticipated

‘efficiency

synerg

ies’ at the ex

pen

se of th

e

gro

wth

synerg

ies. There are co

mm

on m

isconcep

tions am

ong m

anag

ers that th

e merg

ed co

mpan

y w

ill hav

e to

underg

o a slu

mp in

sales and sh

rink b

efore co

nso

lidatin

g an

d startin

g to

gro

w. O

ne n

eeds to

elaborate o

n h

ow

to

look fo

r, recognize, an

d tak

e advan

tage o

f the g

row

th sy

nerg

ies that really

matter an

d th

at should

hav

e help

ed

driv

e your m

erger d

ecision to

beg

in w

ith (B

anerjee an

d O

wers, 1

992). T

he tim

e and reso

urces sp

ent o

n ach

ievin

g

efficiency

synerg

ies should

be k

ept to

the m

inim

um

necessary, so

that th

e upsid

e opportu

nities o

ffered b

y th

e

“gro

wth

” synerg

ies are not o

verlo

oked

or m

issed (B

aum

ol, 1

959).

Co

nclu

sion

In th

is pap

er, merg

ers and acq

uisitio

ns h

ave b

een p

laced in

the b

road

er persp

ective o

f a firm’s co

rporate

and b

usin

ess strategies. It is th

e firm’s strateg

ic choice w

heth

er it should

undertak

e M&

A fo

r sustain

able g

row

th

or it w

ould

resort to

org

anic ex

pan

sion. If it is an

M&

A, th

en w

hat w

ould

the ty

pe b

e: acquisitio

n, m

erger,

alliance o

r what? A

strategic an

alysis o

f merg

ers and acq

uisitio

ns sh

ould

also b

e undertak

en in

the lig

ht o

f valu

e

creation lo

gic an

d id

entify

ing th

e sources o

f valu

e creation. A

n an

alytical fram

ework

for a strateg

ic analy

sis of

busin

ess gro

wth

thro

ugh n

ew p

roject an

d acq

uisitio

ns h

as been

pro

vid

ed h

erein. U

sing th

e models d

erived

from

this fram

ework

, acquirers can

dev

elop th

e acquisitio

n criteria w

hich

poten

tial targets m

ust satisfy. T

he stu

dy

indicates co

ncern

s for th

e hard

analy

sis of q

uan

tifiable eco

nom

ic and fin

ancial asp

ects of acq

uisitio

ns. A

naly

sis

of so

ft, non-q

uan

tifiable facto

rs is often

more im

portan

t than

the h

ard an

alysis. T

hese so

ft factors in

clude th

e

political an

d cu

ltural d

imen

sions o

f both

the acq

uirer an

d th

e target. T

here is a g

eneral say

ing an

d it is a m

atter

of fact th

at majo

rity o

f merg

ers and

acqu

isition

s are fou

nd

to b

e un

successfu

l, the p

rime reaso

n b

eing

too

ambitio

us an

d im

practical estim

ation o

f synerg

y n

ot fin

ally m

aterializing in

the p

ost-m

erger p

eriod. T

herefo

re,

ill plan

nin

g an

d b

ad ex

ecutio

n are th

e reasons fo

r not realizin

g th

e estimated

synerg

y. Som

e times, co

mpan

ies

go fo

r tight secrecy

in th

e matter o

f M&

A as a resu

lt, a large co

mm

unicatio

n g

ap em

erges b

etween

the su

per to

p

and to

p m

anag

emen

ts. M&

A p

lannin

g m

ust tak

e care of in

ternal co

mm

unicatio

n asp

ect very

carefully. A

t the

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

25

same tim

e super to

p m

anag

emen

t insists fo

r quick

execu

tion o

f the M

&A

deals leav

ing m

any m

istakes b

een

com

mitted

from

target search

to v

aluatio

n to

synerg

y estim

ation to

integ

ration. T

he strateg

y fo

rmulatio

n seem

s

to b

e reasonab

ly co

rrect but th

e execu

tion b

ecom

es un-co

mpatib

le with

the k

ind o

f a particu

lar M&

A d

eal due

to m

any u

nfo

reseen facto

rs which

inclu

de u

nrealistic v

aluatio

n o

f estimated

synerg

y an

d lack

of fo

resights

tow

ards p

ost-m

erger in

tegratio

n in

terms o

f cultu

re, pro

cess and p

eople.

Refe

ren

ces

Ag

rawal, A

nu

p, an

d G

ersho

n N

. Man

delk

er (19

87

), “Man

agerial In

centiv

es and

Co

rpo

rate Inv

estmen

t and

Fin

ancin

g D

ecisions,” Jo

urn

al o

f Fin

ance 4

2(4

): 823-8

37.

An

g, Jam

es S., an

d Y

ing

mei C

hen

g (2

00

3), “D

irect Ev

iden

ce on

the M

arket-D

riven

Acq

uisitio

ns T

heo

ry,”

work

ing p

aper, F

lorid

a State U

niv

ersity.

Ban

erjee, Ajey

o, an

d Jam

es Ow

ers (1992), “W

ealth R

eductio

n in

White K

nig

ht B

ids,” F

inancia

l Managem

ent

21(3

): 48-5

7.

Bau

mol, W

illiam (1

959), B

usin

ess Beh

avio

r, Valu

e, and G

row

th, N

ew Y

ork

, New

York

: Macm

illan.

Ericso

n, R

ichard

and A

riel Pak

es (1995), “A

n A

lternativ

e Theo

ry o

f Firm

and In

dustry

Dynam

ics,” Review

of

Eco

nom

ic Stu

dies 6

2: 5

3-8

2.

Fam

a, Eugen

e and K

enneth

Fren

ch, (1

997), “In

dustry

Costs o

f Equity,” Jo

urn

al o

f Fin

ancia

l Eco

nom

ics 43(2

):

15

3-1

93

.

Gorto

n G

ary, Matth

ias Kah

l and R

ichard

J. Rosen

(2006), “

Eat o

r be ea

ten: a

theo

ry of m

ergers a

nd firm

size”,

Work

ing P

aper S

eries, WP

-06-1

4, F

ederal R

eserve B

ank o

f Chicag

o.

Hard

ing, D

. and R

ovit, S

. (2004), B

uild

ing D

eals on B

edro

ck. H

arva

rd B

usin

ess Review

, 82 (9

): 121-1

28.

Lynch

, J. G. an

d L

ind, B

. (2002), E

scapin

g m

erger an

d acq

uisitio

n m

adness. S

trateg

y and L

eadersh

ip, 3

0 (2

): 5-

12

.

Hurtt, D

. N., K

reuze. J. G

. and L

angsam

, S. A

. (2000), C

an th

is merg

er be sav

ed? Jo

urn

al o

f Corp

ora

te

Acco

untin

g &

Fin

ance, 1

1 (2

): 17-2

4.

Jensen

, Mich

ael C. (1

986), “A

gen

cy C

osts o

f Free C

ash F

low

, Corp

orate F

inan

ce, and T

akeo

vers,” A

merica

n

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nom

ic Review

76(2

): 323-3

29.

Johnso

n G

erry, Kev

an S

choles an

d R

ichard

Whittin

gto

n (2

008), E

xplo

ring C

orp

orate S

trategy, P

earson, N

ew

Delh

i.

Laffo

nt Je

an

-Jacq

ues a

nd

Dav

id M

artim

ort, (2

00

6), T

he T

heo

ry o

f Incen

tives: T

he P

rincip

al A

gen

t

Model,P

rinceto

n U

niv

ersity P

ress, Prin

ceton.

Morck

, Ran

dall, A

ndrei S

hleifer, an

d R

obert V

ishny (1

990), “D

o M

anag

erial Objectiv

es Driv

e Bad

Acq

uisitio

ns?,”

Journ

al o

f Fin

ance 4

5(1

): 31-4

8.

Perry, J. S

. and H

erd, T

. J. (2004), M

ergers an

d acq

uisitio

ns: R

educin

g M

&A

risk th

rough im

pro

ved

due d

iligen

ce,

Stra

tegy a

nd L

eadersh

ip, 3

2 (2

): 12-1

9.

Porter M

ichael E

. (1985), C

om

petitiv

e Advan

tage: C

reating an

d S

ustain

ing S

uperio

r Perfo

rman

ce, The F

ree

Press, N

ew Y

ork

.

Porter M

ichael E

. (1980), C

om

petitiv

e Strateg

y: T

echniq

ues fo

r Analy

zing In

dustries an

d C

om

petito

rs, The

Free P

ress, New

York

.

Roll, R

ichard

(1986), “T

he H

ubris H

ypoth

esis Of C

orp

orate T

akeo

vers,” Jo

urn

al o

f Busin

ess 59(2

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16.

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g S

trategies fo

r Corp

orate G

row

th

26.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Shyu Y

ih-W

en an

d K

uan

gyu H

sia (2008), “D

oes sto

ck m

arket v

olatility

with

regim

e shifts sig

nal th

e busin

ess

cycle in

Taiw

an?”, In

ternatio

nal Jo

urn

al o

f Electro

nic F

inance 2

008 - V

ol. 2

, No.4

pp. 4

33 - 4

50

Siro

wer M

ark L

, (1997), ‘T

he S

ynerg

y T

rap: H

ow

Com

pan

ies Lose th

e Acq

uisitio

n G

ame’, F

ree Press, N

ew

Yo

rk,1

99

7.

Shan

k Jo

hn K

. and V

ijay G

ovin

drajan

(1993), S

trategic C

ost M

anag

emen

t: The N

ew T

ool fo

r Com

petitiv

e

Advan

tage, T

he F

ree Press, N

ew Y

ork

.

Westo

n J.F

red &

Sam

uel C

. Weav

er Book (2

001), M

ergers an

d A

cquisitio

ns, M

cGraw

-Hill, N

ew Y

ork

.

Westo

n, J. F

red, K

wan

g S

. Chung, an

d Ju

an A

. Siu

(1998), T

akeo

vers, R

estructu

ring, an

d C

orp

orate G

overn

ance,

Upper S

addle R

iver, P

rentice H

all, NJ.

En

d N

otes

1Reg

ime sh

ifts sign

ify rap

id reo

rgan

ization

s of b

usin

ess from

on

e relatively

stable state to

ano

ther. B

usin

ess

cycles m

ay b

e con

sidered

as regim

e shifts. S

hy

u an

d H

sia (20

08

) con

firm a cau

sal relation

ship

betw

een

stock

return

vo

latility an

d th

e bu

siness cy

cle. Th

ey o

bserv

ed th

at the sm

oo

thed

pro

bab

ilities for m

ediu

m

and

hig

h v

olatility

regim

es lead to

fluctu

ation

s in th

e coin

ciden

t econ

om

ic ind

ex, w

hile a ch

ang

e in th

e

coin

ciden

t econ

om

ic ind

icators p

recedes th

e filter pro

bab

ilities for lo

w v

olatility

regim

es.

2Th

is is an in

teresting

hy

po

thesis reg

ardin

g tak

eov

er mo

tives. T

he p

ride o

f the m

anag

ers of th

e acqu

iring

firm m

ay p

lay ro

les in ju

stifyin

g th

e M&

As an

d th

e takeo

vers. T

he h

ub

ris hy

po

thesis im

plies th

at man

agers

seek to

acqu

ire firms fo

r their o

wn

perso

nal m

otiv

es and

that th

e pu

re econ

om

ic gain

s to th

e acqu

iring

firm

are no

t the so

le mo

tivatio

n o

r even

the p

rimary

mo

tivatio

n in

the acq

uisitio

n. In

such

cases, man

agers m

igh

t

pay

a prem

ium

for a firm

that th

e mark

et has alread

y co

rrectly v

alued

and

as such

the p

ride o

f man

agem

ent

allow

s them

to b

elieve th

at their v

aluatio

n is su

perio

r to th

at of th

e mark

et. Imp

licit in th

is theo

ry is an

un

derly

ing

con

victio

n th

at the m

arket is efficien

t and

can p

rov

ide th

e best in

dicato

r of th

e valu

e of a firm

.

Th

ere are evid

ences th

at the sto

ck p

rices of th

e acqu

iring

firms fall after th

e mark

et beco

mes aw

are of th

e

takeo

ver b

id. T

his o

ccurs b

ecause th

e takeo

ver is n

ot in

the b

est interests o

f the acq

uirin

g firm

’s stock

ho

lders

and

do

es no

t represen

t an efficien

t allocatio

n o

f their w

ealth. O

n th

e oth

er han

d, th

e stock

prices o

f the

target firm

s increase w

ith th

e bid

becau

se the acq

uirin

g firm

is no

t on

ly g

oin

g to

pay

a prem

ium

bu

t also

may

pay

a prem

ium

in ex

cess of th

e valu

e of th

e target. T

hu

s, the co

mb

ined

effect of th

e increasin

g v

alue o

f

the targ

et and

the fallin

g v

alue o

f the acq

uirin

g firm

can so

me tim

es be n

egativ

e. A n

um

ber o

f stud

ies sho

w

that th

e acqu

iring

firm’s an

no

un

cemen

t of th

e takeo

ver resu

lts in a d

ecline in

the v

alue o

f the acq

uirer’s

stock

, con

sequ

ently, sig

nifican

t neg

ative retu

rns are b

oo

ked

by

the in

vesto

rs.

3Free cash

flow

can b

e com

pu

ted in

two

way

s; (a) ind

irect meth

od

and

(b) d

irect meth

od

. Un

der th

e ind

irect

meth

od

, Free cash

flow

= n

et inco

me (i.e. earn

ing

s after tax) +

dep

reciation

+ d

ecrease in acco

un

ts receivab

le

(or m

inu

s increase) +

decrease in

inv

ento

ries (or m

inu

s increase) +

increase in

accou

nts p

ayab

le (or m

inu

s

decrease) +

increase in

taxes p

ayab

le (or m

inu

s decrease) +

after-tax in

terest exp

enses –

gro

ss inv

estmen

ts

in p

lant, m

achin

ery, equ

ipm

ent at co

st, etc. Altern

atively, as p

er direct m

etho

d, F

ree cash flo

w =

sales –

(cost o

f go

od

s sold

+ sellin

g, g

eneral an

d ad

min

istration

exp

enses) –

taxes o

n in

com

e + d

epreciatio

n +

decrease in

accou

nts receiv

able (o

r min

us in

crease) + d

ecrease in in

ven

tories (o

r min

us in

crease) + in

crease

in acco

un

ts pay

able (o

r min

us d

ecrease) + in

crease in tax

es pay

able (o

r min

us d

ecrease) + after-tax

interest

exp

enses –

gro

ss inv

estmen

ts in p

lant, m

achin

ery, equ

ipm

ent at co

st, etc.

4R

esou

rces inclu

de m

arketin

g ex

cellence, a d

istribu

tion

netw

ork

, R&

D an

d su

rplu

s op

erating

capacity.

So

me o

f these reso

urces are in

the fo

rm o

f strategic assets lik

e mark

et po

wer an

d en

try b

arriers.

5Strateg

ic assets as tho

se characteristics o

f the m

arket stru

cture w

hich

giv

e a firm its co

mp

etitive ad

van

tage.

6Th

e merg

er or acq

uisitio

n o

f a firm co

mp

eting

in th

e same in

du

stry is referred

to as a h

orizo

ntal acq

uisitio

n.

In a h

orizo

ntal acq

uisitio

n acq

uirin

g firm

’s mark

et po

wer in

creases by

exp

loitin

g co

st-based

and

reven

ue-

based

syn

ergies. V

ariou

s researches su

gg

est that h

orizo

ntal m

ergers an

d acq

uisitio

ns o

f firms (w

ith sim

ilar

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

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009.

27

characteristics in

clud

ing

their b

usin

ess ph

iloso

ph

ies) result in

hig

her p

erform

ances th

an w

hen

firms w

ith

dissim

ilar characteristics co

mb

ine th

eir op

eration

s. In a v

ertical merg

er or acq

uisitio

n, a firm

acqu

ires a

sup

plier o

r distrib

uto

r and

the acq

uirer m

od

ifies and

imp

rov

es the v

alue ch

ain th

rou

gh

calibratio

n o

f vario

us

valu

e driv

ers. In th

e ph

armaceu

tical ind

ustry, th

e man

ufactu

rer has a ten

den

cy to

acqu

ire the d

rug

distrib

uto

r

to create m

ore v

alue b

y o

wn

ing

its ow

n d

istribu

tion

sou

rce. So

me tim

es, vertical acq

uisitio

ns lead

to alien

ate

som

e of th

e custo

mers, ev

en th

ou

gh

there are ch

ances o

f increasin

g th

e firm’s p

erform

ance. P

epsiC

o

disco

vered

this effect after acq

uirin

g P

izza Hu

t, Taco

Bell, an

d K

FC

. On

e ob

jective o

f these acq

uisitio

ns

was to

use th

e three restau

rant ch

ains as d

istributio

n ch

annels to

sell Pep

si’s drin

ks. S

oon, C

oca-C

ola co

nvin

ced

Wen

dy

’s and

oth

er fast foo

d ch

ains th

at selling

Pep

si in th

eir stores in

directly

ben

efited th

ose o

f their

com

petito

rs that P

epsiC

o o

wn

ed. L

ater, Pep

siCo

spu

n o

ff its three fo

od

un

its to fo

rm T

ricon

, a separate

entity. T

hu

s, man

y firm

s balan

ce anticip

ated b

enefits o

f a vertical m

ergers an

d acq

uisitio

n h

avin

g p

oten

tial

risks.

7Th

e directo

rs of a th

reatened

com

pan

y m

ay acq

uire an

oth

er com

pan

y fo

r shares as a d

efensiv

e measu

re to

forestall th

e un

welco

me tak

eov

er bid

. Fo

r this p

urp

ose, th

ey p

ut larg

e blo

ck o

f shares o

f their o

wn

com

pan

y

in th

e han

ds o

f shareh

old

ers of frien

dly

com

pan

y to

mak

e their o

wn

com

pan

y least attractiv

e for tak

eov

er

bid

. Also

, it is a form

of sh

ark rep

ellent: a strateg

ic mo

ve b

y a tak

eov

er target co

mp

any

to m

ake its sto

ck less

attractive to

a po

tential acq

uirer. T

he d

efensiv

e merg

er strategy

is for th

e target co

mp

any

to co

mb

ine w

ith

ano

ther co

rpo

ration

that w

ou

ld create an

titrust o

r oth

er regu

latory

pro

blem

s if the o

rigin

al un

wan

ted tak

eov

er

pro

po

sal was co

nsu

mm

ated.

8A ‘2

+ 2

= 5

’ effect is po

pu

larly d

escribed

as syn

ergy, w

hich

sign

ifies that th

e com

bin

ed effo

rts of tw

o o

r

mo

re agen

ts create such

effects, wh

ich are g

reater than

the su

m o

f their in

div

idu

al effects. Sy

nerg

y h

as its

imp

ortan

ce in b

usin

ess, med

icine, sp

orts, an

d p

erform

ing

arts, and

man

y field

s, wh

ich req

uire sp

irited team

wo

rk. T

he term

syn

ergy

is som

e times lo

osely

used

or ex

pressed

in v

agu

e terms w

itho

ut u

nd

erstand

ing

the

real mean

ing

in th

e con

text o

f merg

ers & acq

uisitio

ns. S

yn

ergy

mean

s that th

e wh

ole is w

orth

mo

re than

the

sum

of th

e parts. A

2-1

= 2

effect is called ‘rev

erse syn

ergy

’, wh

ich im

plies th

at in th

e even

t of d

ivestm

ent

of a p

art of th

e firm d

oes n

ot red

uce th

e firm v

alue.

9RO

C is eq

ual to

a firm’s cu

rrent p

eriod

cash flo

w fro

m its cu

stom

ers plu

s any

chan

ges in

the u

nd

erlyin

g

custo

mer eq

uity

as div

ided

by

total cu

stom

er equ

ity at th

e beg

inn

ing

of th

e perio

d. C

usto

mer eq

uity

is the

agg

regate life-tim

e valu

e of firm

’s curren

t and

futu

re custo

mers, w

hich

is the n

et presen

t valu

e of all th

e

futu

re stream o

f cash flo

ws a co

mp

any

exp

ects to g

enerate fro

m th

e presen

t and

the fu

ture cu

stom

ers.

Modellin

g S

trategies fo

r Corp

orate G

row

th

28.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Modellin

g S

trategies fo

r Corp

orate G

row

th

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

29

Modellin

g S

trategies fo

r Corp

orate G

row

th

30.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Modellin

g S

trategies fo

r Corp

orate G

row

th

Ap

pen

dix

-6

Sources o

f Gain

s and S

ynerg

y in

M&

A

Vig

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ecember 2

009.

31

Modellin

g S

trategies fo

r Corp

orate G

row

th

32.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Tra

de D

ispu

tes in P

ractice

Win

ston W

. Chan

g*

Ab

stract

This p

aper d

iscusses W

TO

’s trade d

ispute settlem

ent p

roced

ure. It also

discu

sses NA

FT

A’s u

niq

ue d

ispute

settlemen

t system

that su

bjects an

tidum

pin

g an

d co

unterv

ailing d

uty

determ

inatio

ns to

bin

ational p

anel rev

iews

instead

of th

e more co

nven

tional ju

dicial rev

iews. T

he p

aper th

en stu

dies sev

en n

otab

le trade d

ispute cases. It

analy

zes the k

ey so

urces o

f these d

isputes, so

me fro

m co

nflicts b

etween

natio

nal law

s and th

e WT

O ru

les, som

e

from

special in

terest gro

ups’ actio

ns, an

d so

me fro

m sp

ecial treatmen

ts for th

e less-dev

elopin

g co

untries. T

he

pap

er cautio

ns th

at the W

TO

rulin

gs are o

ften m

et with

delay

ed im

plem

entatio

n o

r non-im

plem

entatio

n o

n o

ne

pretex

t or an

oth

er, particu

larly b

y th

e majo

rs. This co

uld

underm

ine th

e futu

re effectiven

ess of th

e WT

O.

Key

Word

s: AD

, CV

D, G

AT

T, W

TO

, NA

FT

A, an

d T

rade D

isputes.

Intro

du

ction

Trad

e conflicts are in

evitab

le in an

interlo

ckin

g w

orld

econom

y th

at is full o

f com

plex

rules an

d reg

ulatio

ns.

Each

country

has its o

wn d

om

estic laws an

d th

e World

Trad

e Org

anizatio

n (W

TO

) also h

as a set of ru

les guid

ing

intern

ational trad

e. Issues reg

ardin

g th

e conflict b

etween

a country

’s trade law

s and W

TO

’s rules h

ave o

ften

surfaced

. Un

fair trade p

ractices, such

as du

mp

ing

and

exp

ort su

bsid

ies, hav

e pro

du

ced n

um

erou

s WT

O

antid

um

pin

g an

d co

unterv

ailing cases. E

ven

with

in a free trad

e area, trade d

isputes are also

often

observ

ed.

This p

aper d

iscusses W

TO

’s trade d

ispute settlem

ent p

roced

ure an

d th

e uniq

ue d

ispute settlem

ent sy

stem

in th

e North

Am

erican F

ree Trad

e Agreem

ent (N

AF

TA

). It exam

ines sev

en n

otab

le trade d

ispute cases, so

me o

f

wh

ich are lo

ng

-stand

ing

disp

utes an

d so

me are recen

t even

ts. Th

e pap

er analy

zes the k

ey so

urces o

f these

disp

utes, so

me fro

m co

nflicts b

etween

natio

nal law

s and th

e WT

O ru

les, som

e from

special in

terest gro

ups’

pro

tection o

f their self in

terests, and so

me fro

m sp

ecial treatmen

ts for th

e less-dev

elopin

g co

untries. T

he p

aper

show

s that th

e WT

O ru

lings are o

ften m

et with

delay

ed im

plem

entatio

n o

r non-im

plem

entatio

n o

n o

ne p

retext

or an

oth

er, particu

larly b

y th

e majo

rs. It cautio

ns th

at such

outco

mes co

uld

underm

ine th

e futu

re effectiven

ess

of th

eW

TO

. 1

Th

e Gen

eral A

greem

ent o

n T

ariffs a

nd

Tra

de (G

AT

T)

At th

e end o

f World

War II, m

any n

ations w

anted

to fo

rm th

e Intern

ational T

rade O

rgan

ization (IT

O) to

pro

mote m

ultilateral trad

e agreem

ents in

ord

er to p

reven

t the recu

rrence o

f econom

ic dep

ressions lik

e that o

f

the 1

930s. T

hese n

ations sig

ned

the G

eneral A

greem

ent o

n T

ariffs and T

rade (G

AT

T) in

1947 as a tem

porary

measu

re until all m

ember g

overn

men

ts ratified th

e ITO

. Unfo

rtunately, th

e ITO

did

not co

me in

to b

eing sin

ce

the U

.S. C

ongress refu

sed to

ratify it. T

he G

AT

T, h

ow

ever, d

id n

ot req

uire co

ngressio

nal ap

pro

val sin

ce it is

neith

er an in

stitutio

n n

or an

org

anizatio

n, b

ut is m

erely an

agreem

ent u

nder th

e pro

visio

ns o

f the R

ecipro

cal

Trad

e Act o

f 1934. It b

egan

its pro

visio

nal ex

istence o

n 1

January

1948 w

hen

23 co

ntractin

g p

arties (technically

not m

embers) sig

ned

the ag

reemen

t. The U

.S. in

itiated n

egotiatio

ns w

ith o

ther co

ntractin

g p

arties to reg

ulate

45,0

00 tariff rates an

d also

particip

ated in

man

y ro

unds o

f multilateral tariff red

uctio

ns.

Alth

ough th

e GA

TT

did

not h

ave th

e auth

ority

to en

force its ru

les, it noneth

eless conducted

several ro

unds

of trad

e neg

otiatio

ns o

n tariffs an

d o

ther trad

e barriers. In

the h

alf centu

ry fo

llow

ing th

e initial 1

947 G

AT

T

agreem

ent, eig

ht ro

un

ds o

f GA

TT

trade n

ego

tiation

s redu

ced th

e averag

e tariff on

ind

ustrial p

rod

ucts fro

m

roughly

40%

to 3

.8%

, and w

orld

trade v

olu

me g

rew fo

urteen

fold

. As a resu

lt, tariffs as a barrier to

trade h

ave

beco

me less sig

nifican

t than

nontariff b

arriers.

* D

epartm

ent o

f Eco

no

mics, S

tate Un

iversity

of N

ew Y

ork

at Bu

ffalo, B

uffalo

, New

Yo

rk 1

42

60

, US

A E

-mail: eco

ww

c@b

uffalo

.edu

.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

33

The eig

hth

round o

f GA

TT

talk, th

e Uru

guay

round, to

ok eig

ht y

ears to n

egotiate b

etween

1986 an

d 1

994,

and b

roke su

bstan

tial new

gro

unds th

an th

e com

bin

ed p

revio

us ro

unds o

f multilateral n

egotiatio

ns. It co

nclu

ded

with

123 n

ations ag

reeing to

create the W

TO

. The W

TO

is a legal o

rgan

ization th

at is perm

anen

t and h

as a

bro

ader ran

ge o

f responsib

ilities than

its subsu

med

GA

TT

. It is an in

ternatio

nal in

stitutio

n resp

onsib

le for settlin

g

world

trade d

isputes an

d p

rom

otin

g fu

rther trad

e liberalizatio

n. Its m

embersh

ip h

as reached

153 m

embers recen

tly.

The m

embers d

o n

ot h

ave to

be fu

ll sovereig

n n

ation-states, b

ut th

ey m

ust b

e indep

enden

t custo

ms territo

ries,

such

as Hong K

ong. C

urren

tly, there are 3

0 o

bserv

er govern

men

ts that are n

ot y

et mem

bers. 2

The W

TO

establish

ed a set o

f agreem

ents th

at contain

s 558 p

ages o

f legal d

ocu

men

ts and so

me 2

5,0

00

pag

es of in

div

idual tariff rates an

d o

ther co

ncessio

ns. T

his set o

f agreem

ents in

cludes b

oth

the n

ew ag

reemen

ts

in th

e Uru

guay

round an

d th

e orig

inal G

AT

T (“G

AT

T 1

947”) th

at had

been

amen

ded

thro

ugh v

arious ro

unds o

f

prev

ious n

egotiatio

ns.

WT

O’s D

ispu

te Settlem

ent P

roced

ure

The d

ispute settlem

ent p

roced

ure is th

e most im

portan

t functio

n o

f the W

TO

. When

a mem

ber state fin

ds

its tradin

g p

artner(s) v

iolates th

e WT

O ru

les, it must fo

llow

its disp

ute settlem

ent p

roced

ure to

seek rem

ediatio

n.

This p

reven

ts unilateral actio

n o

f one m

ember ag

ainst o

ther m

embers an

d p

rovid

es an en

forcin

g p

ow

er for th

e

harm

ed co

mplain

ant to

seek co

mpen

sation fro

m th

e rule v

iolato

rs. The W

TO

, how

ever, en

courag

es the in

volv

ed

parties to

settle their d

ispu

te them

selves at an

y stag

e. Th

e detailed

rules an

d p

roced

ures are co

ntain

ed in

Understan

din

g o

n R

ules an

d P

roced

ures G

overn

ing th

e Settlem

ent o

f Disp

utes (D

SU

).T

he D

SU

is praised

for

enhan

cing th

e stability

and fairn

ess of th

e world

tradin

g sy

stem.

If, after the in

itial 60 d

ays o

f consu

ltations an

d m

ediatio

n, n

o v

olu

ntary

settlemen

t is reached

, then

the

com

plain

ant state can

request th

e setup o

f a disp

ute settlem

ent p

anel, w

hich

norm

ally co

nsists o

f three ad

hoc

mem

bers th

at are appoin

ted b

y th

e Secretariat. In

six m

onth

s, the p

anel files its rep

ort, first to

the in

volv

ed

parties, an

d tw

o w

eeks later to

all oth

er WT

O m

embers. If th

ere is no ap

peal, th

en w

ithin

60 d

ays, th

e Disp

ute

Settlem

ent B

ody (D

SB

) shall ad

opt th

e report, u

nless it d

ecides b

y co

nsen

sus n

ot to

do so

or a p

arty to

the

disp

ute d

ecides to

appeal. T

he w

hole p

rocess w

ithout ap

peal tak

es about o

ne y

ear to o

btain

a decisio

n.

An ap

peal is m

ade to

a standin

g A

ppellate B

ody w

hich

only

consid

ers issues o

f law an

d th

e pan

el’s legal

interp

retations. W

ithin

30 d

ays o

f receivin

g th

e Appellate B

ody’s rep

ort, th

e DS

B sh

all either ad

opt o

r reject it

by co

nsen

sus. T

he in

volv

ed p

arties must u

nco

nditio

nally

accept th

e rulin

gs an

d rem

edial reco

mm

endatio

ns.

The resp

onden

t state must th

en co

mply

imm

ediately

with

the reco

mm

endatio

ns an

d ru

lings. If it feels

impracticab

le to d

o so

imm

ediately, th

en w

ithin

thirty

day

s of th

e final rep

ort, it m

ust in

form

the D

SB

of its

reason

able co

mp

liance tim

e. Ho

wev

er, if the co

mp

lainan

t state disag

rees, the issu

e will th

en b

e settled b

y

bin

din

g arb

itration. If th

e remed

ial measu

res taken

by th

e responden

t state are not satisfacto

ry to

the co

mplain

ant

state, the d

isagreem

ent sh

all be d

ecided

, if possib

le, by th

e same p

anel th

at heard

the o

rigin

al disp

ute. T

here w

ill

be n

o fu

rther p

ossib

ility o

f appeal.

Fin

ally, if later a responden

t state fails to carry

out satisfacto

ry rem

edial m

easures w

ithin

the ag

reed-u

pon

time, it m

ay n

egotiate w

ith th

e com

plain

ing state fo

r mutu

ally accep

table co

mpen

sation. H

ow

ever, if n

o ag

reemen

t

can b

e reached

with

in 2

0 d

ays o

f the rem

edial p

eriod, th

e com

plain

ant state m

ay req

uest au

thorizatio

n fro

m th

e

DS

B to

susp

end its co

ncessio

ns an

d o

ther o

blig

ations p

revio

usly

mad

e to th

e responden

t state under th

e covered

agreem

ents. U

nless th

e DS

B d

ecides b

y co

nsen

sus to

reject the req

uest, it sh

all gran

t the au

thorizatio

n w

ithin

30

day

s of th

e remed

ial perio

d an

d sh

all set the criteria fo

r retaliation. If th

e responden

t state objects to

the lev

el of

the retaliatio

n m

easures, an

oth

er arbitratio

n is p

rovid

ed fo

r, if possib

le, by th

e orig

inal p

anel m

embers, o

r by an

arbitrato

r or arb

itrators ap

poin

ted b

y th

e Directo

r-Gen

eral. The arb

itration m

ust b

e com

pleted

with

in 6

0 d

ays

from

expiratio

n o

f the rem

edial p

eriod.

Trad

e Disp

utes in

Practice

34.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

The D

SU

calls for sp

ecial consid

erations to

the p

roblem

s and in

terest of d

evelo

pin

g co

untries. If a d

evelo

pin

g

country

is one p

arty to

a disp

ute, it is en

titled to

hav

e at least one p

anelist w

ho is fro

m a d

evelo

pin

g co

untry. If

it is a respo

nd

ent p

arty, the in

itial con

sultatio

n tim

e befo

re a pan

el is con

ven

ed m

ay b

e exten

ded

, and

the

dead

line fo

r it to m

ake its d

ocu

men

t subm

ission to

a pan

el may

be relax

ed. F

urth

er, form

al com

plain

ts again

st

the least d

evelo

ped

countries are d

iscourag

ed. If co

nsu

ltations fail, th

e Directo

r-Gen

eral or th

e Chairm

an o

f the

DS

B sh

all offer to

p-lev

el med

iation fo

r settlemen

t befo

re a request fo

r a pan

el is mad

e.

NA

FT

A’s U

niq

ue D

ispu

te Settlem

ent S

ystem

NA

FT

A w

as signed

by th

ree mem

ber states—

the U

.S., C

anad

a, and M

exico

. It was an

expan

sion o

f the

1989 U

.S.-C

anad

a Free T

rade A

greem

ent an

d w

ent in

to effect o

n 1

January

1994. N

AF

TA

imm

ediately

elimin

ated

duties o

n h

alf of all U

.S. g

oods sh

ipped

to M

exico

and C

anad

a, and g

radually

phased

out o

ther tariffs o

ver a 1

4

year p

eriod. It p

rovid

ed en

han

ced p

rotectio

n o

f intellectu

al pro

perty

rights an

d rem

oved

a great d

eal of in

vestm

ent

restrictions am

ong m

ember co

untries.

NA

FT

A h

as a un

iqu

e disp

ute settlem

ent sy

stem. C

hap

ter 19

of N

AF

TA

sub

jects antid

um

pin

g an

d

counterv

ailing d

uty

determ

inatio

ns to

bin

ational p

anel rev

iews in

stead o

f the m

ore co

nven

tional ju

dicial rev

iews.

In th

e U.S

., the rev

iews o

f agen

cy d

ecisions o

n th

e impositio

n o

f these d

uties are n

orm

ally h

eard b

efore th

e U.S

.

Court o

f Intern

ational T

rade. N

AF

TA

parties, h

ow

ever, h

ave th

e optio

n o

f appealin

g th

e decisio

ns to

bin

ational

pan

els, com

po

sed o

f five citizen

s from

the tw

o in

vo

lved

cou

ntries. D

ecision

s by

Ch

apter 1

9 p

anels can

be

challen

ged

befo

re a NA

FT

A E

xtrao

rdin

ary C

hallen

ge C

om

mittee. S

uch

a com

mittee, h

ow

ever, d

oes n

ot fu

nctio

n

as an o

rdin

ary ap

peal—

it will o

nly

vacate o

r reman

d a d

ecision if it in

volv

es a significan

t and m

aterial error th

at

threaten

s the in

tegrity

of th

e NA

FT

A d

ispute settlem

ent sy

stem.

Som

e Nota

ble T

rad

e Disp

utes

As o

f April 2

009, th

e WT

O h

as han

dled

over 3

90 d

isputes sin

ce 1995. S

o far th

is year it h

as taken

on th

ree

cases: Can

ada’s co

mplain

t about K

orean

limits o

n b

eef imports, G

uatem

ala’s challen

ge ag

ainst C

hin

a on ex

port

subsid

ies, and th

e U.S

.’s com

plain

t again

st the E

U o

ver p

oultry. A

strikin

g recen

t pattern

is the stead

y d

ecline in

case filings o

ver tim

e. In th

e first five y

ears since W

TO

’s arrival, th

ere were 1

85 d

ispute cases filed

. In th

e nex

t

five y

ears, from

20

00

to 2

00

4, th

e cases decreased

to 1

41

, and

from

20

04

to A

pril 2

00

9, th

e cases furth

er

decreased

to 6

7.

The N

AF

TA

has h

ad a n

um

ber o

f disp

ute cases am

ong its m

embers. T

here are th

ree so far in

2009, in

volv

ing

hydro

gen

pero

xid

e and tw

o steel trad

e issues. It also

pro

duced

a Mex

ican retaliatio

n ag

ainst th

e U.S

as a result

of recen

t U.S

. Congressio

nal d

ecision to

blo

ck M

exican

truck

s from

U.S

. road

s that effectiv

ely w

ithdrew

a

neg

otiated

settlemen

t to M

exico

’s 2001 case v

ictory. M

exico

has resp

onded

by re-im

posin

g p

re-1993 tariffs o

n

$2.4

billio

n w

orth

of A

merican

exports o

n farm

pro

ducts an

d lig

ht-m

anufactu

re goods. T

otal U

.S. ex

ports to

Mex

ico in

2008 w

ere $151 b

illion. In

what fo

llow

s, we selectiv

ely d

iscuss a n

um

ber o

f notab

le trade d

ispute

cases.

Un

ited S

tates v

s. Can

ad

a: S

oftw

ood

Lu

mb

er

## ### Th

e Disp

utes:

For alm

ost 2

5 y

ears, the U

nited

States an

d C

anad

a hav

e been

engag

ed in

a series of trad

e

disp

utes o

ver C

anad

ian so

ftwood p

roducts (n

otab

ly lu

mber, flo

orin

g, an

d sid

ing d

erived

from

conifero

us w

ood).

The U

.S. h

as argued

that b

ecause n

on-m

aritime p

rovin

cial govern

men

ts in C

anad

a ow

n m

uch

of th

e timber

lands an

d ch

arge p

rivate firm

s arbitrary

extractio

n ren

ts (stum

pag

e fees) that are less th

an th

ose th

rough co

mpetitiv

e

bid

din

g, it am

ounts to

a subsid

y th

at need

s to b

e offset b

y co

unterv

ailing d

uties. In

terested C

anad

ian p

arties and

govern

men

t officials h

ave co

untered

that b

ecause stu

mpag

e pro

gram

s are univ

ersal and n

ot co

nfin

ed to

one

particu

lar industry, th

e policy

cannot b

e classified as a su

bsid

y u

nder th

e U.S

. law.

Trad

e Disp

utes in

Practice

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

35

Early

Ph

ases: F

rom

early 1

980’s to

Novem

ber 2

006, th

e disp

ute w

ent th

rough sev

eral phases. T

he first o

ccurred

in 1

982 w

hen

Am

erican lu

mber co

mpan

ies petitio

ned

the D

epartm

ent o

f Com

merce (D

OC

) for co

unterv

ailing

duties. T

heir req

uest w

as den

ied b

ecause th

e DO

C, lik

e the C

anad

ians, failed

to see h

ow

the n

on-d

iscrimin

atory

stum

pag

e system

cou

ld b

e cou

nterv

ailed if n

ot law

fully

con

sidered

an in

du

stry-sp

ecific sub

sidy. In

stead o

f

appealin

g, th

e lum

ber lo

bby re-su

bm

itted its p

etition in

1986 an

d as a resu

lt spark

ed a seco

nd p

hase o

f deb

ate.

This tim

e the p

etition w

as accepted

by th

e DO

C after th

ey co

nclu

ded

that th

e Can

adian

softw

ood in

dustry, in

particu

lar, was b

enefitin

g fro

m th

e equiv

alent o

f a 15%

subsid

y. Fearin

g th

e loss o

f reven

ue fro

m a p

unitiv

e

duty, C

anad

a neg

otiated

a Mem

oran

dum

of U

nderstan

din

g (M

OU

) with

the U

.S. th

at required

Can

ada to

impose

a 15%

export tax

and to

grad

ually

transfer stu

mpag

e man

agem

ent co

sts to p

rivate firm

s.

In 1

991, C

anad

a with

drew

from

the M

OU

claimin

g th

at the ag

reemen

t was n

o lo

nger n

ecessary. The U

.S.

DO

C d

isag

reed

an

d se

lf-initia

ted

a c

ou

nte

rvailin

g d

uty

inv

estig

atio

n w

hic

h u

ltimate

ly re

sulte

d in

the

implem

entatio

n o

f a 6.5

1%

ad v

alorem

tax o

n C

anad

ian lu

mber im

ports. 3 In

response, C

anad

a bro

ught th

e issue

befo

re a bin

ational d

ispute reso

lutio

n b

ody o

f the n

ewly

form

ed C

anad

a-US

Free T

rade A

greem

ent. T

he b

ody,

consistin

g o

f three C

anad

ians an

d tw

o A

merican

s, voted

along n

ational lin

es and ru

led ag

ainst th

e U.S

. becau

se

of a lack

of ev

iden

ce. Shortly

thereafter th

e United

States T

rade R

epresen

tative (U

ST

R) to

ok th

e case to th

e

Extrao

rdin

ary C

hallen

ge C

om

mittee (E

CC

) allegin

g, am

ong o

ther th

ings, a co

nflict o

f interest in

volv

ing tw

o o

f

the C

anad

ian ju

dg

es. In 1

99

4 th

e EC

C, also

rulin

g o

n n

ation

al lines, stru

ck d

ow

n th

e Am

erican ch

alleng

e.

Desp

ite som

e early resistan

ce, the U

.S. ev

entu

ally refu

nded

all of th

e collected

tariff reven

ue an

d in

1996 th

e

two co

untries sig

ned

the S

oftw

ood L

um

ber A

greem

ent w

hich

restricted th

e volu

me o

f Can

adian

lum

ber ex

ports

for th

e ensu

ing fiv

e years.

Recen

t Dev

elop

men

ts:F

ollo

win

g th

e expiratio

n o

f the S

oftw

ood L

um

ber A

greem

ent in

2001, th

e Am

erican

lum

ber in

dustry

asked

the D

OC

to im

plem

ent b

oth

counterv

ailing d

uties an

d an

tidum

pin

g m

easures o

n im

ports

of C

anad

ian lu

mber. L

ater that y

ear, prelim

inarily

DO

C in

vestig

ations co

nclu

ded

that C

anad

ian lu

mber im

ports

should

be su

bject to

punitiv

e duties. In

additio

n, th

e United

States In

ternatio

nal T

rade C

om

missio

n (IT

C) ru

led

that su

bsid

ized C

anad

ian lu

mb

er po

sed a serio

us th

reat to th

e Am

erican so

ftwo

od

ind

ustry. A

final D

OC

determ

inatio

n in

2002 lo

wered

the in

itial counterv

ailing an

d an

tidum

pin

g rates to

18.7

9%

and 8

.43%

, respectiv

ely.

Can

ada req

uested

the D

OC

and

ITC

rulin

gs b

e review

ed b

y N

AF

TA

and

the W

TO

. A m

ultitu

de o

f

con

tradicto

ry fin

din

gs an

d ru

ling

s ensu

ed as each

institu

tion

arrived

at differen

t op

inio

ns, so

metim

es even

reversin

g th

eir orig

inal co

nclu

sions. N

otab

ly, although th

e WT

O in

itially ag

reed w

ith N

AF

TA

’s judgm

ent th

at

Can

adian

lum

ber w

as not a th

reat to A

merican

dom

estic pro

ducers, an

d th

us n

ot su

sceptib

le to tariffs, it later

annulled

the d

ecision an

d sid

ed w

ith th

e U.S

. Conseq

uen

tly, the U

.S. an

d C

anad

a contin

ued

to b

attle verb

ally

and leg

ally o

ver w

hich

body h

ad ju

risdictio

n an

d w

heth

er Can

ada w

as entitled

to b

illions o

f dollars in

duty

restitutio

n. 4

Perm

an

ent o

r Tem

pora

ry R

esolu

tion

?: In

April 2

006, a ten

tative d

eal was reach

ed b

etween

the tw

o co

untries.

It required

the U

.S. to

return

about 8

0%

of th

e five b

illion d

ollars it h

ad co

llected in

tariff reven

ue. T

he C

anad

ian

oblig

ations d

epen

d o

n th

e prev

ailing m

onth

ly p

rice of lu

mber. If th

e price is ab

ove $

355 p

er thousan

d m

easured

board

feet (MB

F), C

anad

ian lu

mber ex

ports are u

nrestricted

, but if th

e price is b

elow

$355 p

er MB

F, each

Can

adian

exportin

g reg

ion m

ust im

pose eith

er an ex

port tax

with

a soft v

olu

me cap

, or a lo

wer ex

port tax

with

a hard

volu

me cap

, or “v

olu

me restrain

t.”5

On 1

2 S

eptem

ber 2

006, th

e two co

untries sig

ned

a com

preh

ensiv

e Softw

ood L

um

ber A

greem

ent u

nder

Article 3

.6 o

f the D

SU

coverin

g th

e disp

ute cases D

S236, D

S247, D

S257, D

S264, D

S277 an

d D

S311. T

his

agreem

ent carries a term

of sev

en y

ears.

In A

ugust 2

007, th

e US

TR

announced

that th

e U.S

. will in

itiate arbitratio

n p

roceed

ings u

nder th

e 2006

Softw

ood L

um

ber A

greem

ent to

com

pel C

anad

a to liv

e up to

its oblig

ations. 6 In

Feb

ruary

2008, th

e London

Court o

f Intern

ational A

rbitratio

n trib

unal ag

reed w

ith th

e U.S

. that C

anad

a failed to

pro

perly

adju

st export

Trad

e Disp

utes in

Practice

36.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

volu

mes fro

m its eastern

pro

vin

ces for th

e perio

d Jan

uary

thro

ugh Ju

ne 2

007 b

ut n

o v

olu

me ad

justm

ents w

ere

required

for its w

estern p

rovin

ces. It ruled

that C

anad

a must co

llect an ad

ditio

nal 1

0%

export ch

arge o

n so

ftwood

lum

ber sh

ipm

ents fro

m its eastern

pro

vin

ces until ab

out $

54.8

millio

n h

as been

collected

. Can

ada o

ffered to

tend

er a pay

men

t of $

36

.66

millio

n, b

ut w

as rejected. B

ecause C

anad

a did

no

t take th

e requ

ired rem

edial

actions b

y th

e 28 M

arch 2

009 d

eadlin

e, the U

.S. h

as announced

that startin

g 1

5 A

pril 2

009, it w

ill collect a 1

0%

import d

uty

on certain

softw

ood lu

mber p

roducts fro

m th

e Can

adian

pro

vin

ces of O

ntario

, Queb

ec, Man

itoba

and S

askatch

ewan

until it h

as collected

$54.8

millio

n. 7

In Jan

uary, 2

008, C

anad

a created a C

$1 b

illion fu

nd to

assist its forest in

dustry. In

response, th

e U.S

.

initiated

anoth

er arbitratio

n p

roceed

ing, ch

argin

g th

at certain C

anad

ian p

rogram

s for so

ftwood lu

mber p

roducers,

inclu

din

g g

rants, lo

ans, lo

an g

uaran

tees and tax

credits an

d o

ther fo

rest man

agem

ent p

rogram

s are in v

iolatio

n

of th

e Softw

ood L

um

ber A

greem

ent. T

he trib

unal h

as yet to

render its ru

ling. 8

Bra

zil vs. U

nited

Sta

tes: Cotto

n

Th

e Disp

ute

: In th

e cotto

n m

arket, th

e U.S

. is the larg

est exporter an

d th

e second larg

est pro

ducer in

the w

orld

while B

razil is the fifth

largest p

roducer. S

ince 2

002, B

razil has tak

en a n

um

ber o

f steps to

halt A

merican

cotto

n

subsid

ies which

it claims v

iolatin

g th

e WT

O ru

les. It charg

ed th

at the su

bsid

ies caused

the w

orld

cotto

n p

rices

to fall b

elow

fair mark

et valu

es and

thu

s hin

dered

the g

row

th o

f Brazilian

firms. T

he U

.S. co

nten

ded

that

govern

men

t pay

men

ts to co

tton farm

ers should

not b

e classified as an

unfair trad

e practice b

ecause th

ey d

id n

ot

exceed

WT

O m

andated

subsid

y th

reshold

s.

Early

Ph

ases:

In 2

002, B

razil form

ally acted

on its d

ispleasu

re with

U.S

. cotto

n su

bsid

ies by req

uestin

g W

TO

consu

ltations (W

TO

DS

267). A

fter three u

nsu

ccessful m

eetings b

etween

the tw

o n

ations, B

razil petitio

ned

the

WT

O fo

r the fo

rmatio

n o

f a DS

B p

anel. A

s with

most first tim

e DS

B p

anel req

uests, th

e defen

dan

t, in th

is case

the U

.S., b

lock

ed th

e pro

ceedin

gs in

accord

ance w

ith th

e WT

O ru

le. Brazil’s su

bseq

uen

t petitio

n fo

r the

establish

men

t of a d

ispute settlem

ent p

anel w

as auto

matically

appro

ved

by th

e DS

B in

March

2003. T

he p

anel’s

final d

etermin

ation cam

e a year an

d a h

alf later and fo

und th

e U.S

. guilty

of:

1.

exceed

ing W

TO

allotted

subsid

y lev

els:

2.

giv

ing d

irect pay

men

ts to farm

ers—a p

rogram

that is n

ot ex

empt fro

m W

TO

eductio

n co

mm

itmen

ts becau

se it could

not b

e verified

as com

pletely

indep

enden

t inco

me su

pport;

3.

usin

g ex

port g

uaran

tees that are essen

tially ex

port su

bsid

ies; and b

asing its d

om

estic

support m

easures o

n m

arket co

nditio

ns, th

us in

creasing su

pplies an

d lo

werin

g p

rices, ultim

ately resu

lting

in “serio

us p

rejudice” to

Brazil. 9

(Sch

nep

f 2006)

Clearly

the D

SB

decisio

n w

as a significan

t loss fo

r the U

.S. co

tton in

dustry

but also

poten

tially fo

r oth

er

Am

erican ag

ricultu

ral firms. T

he U

.S. im

med

iately ap

pealed

, but in

March

2005, th

e appellate p

anel u

pheld

the

prev

ious ru

ling. S

oon after, th

e U.S

. Secretary

of A

gricu

lture an

nounced

that h

e was sen

din

g C

ongress a d

raft of

policy

chan

ges th

at would

elimin

ate or alter th

e pro

gram

s pro

hib

ited b

y th

e WT

O. E

nco

urag

ed b

y th

e U.S

.’s

prelim

inary

effort to

com

ply

with

the W

TO

rulin

g, B

razil temporarily

susp

ended

all punitiv

e actions, su

ch as

retaliatory

tariffs.

In resp

onse, th

e U.S

. dro

pped

the “S

tep 2

” cotto

n su

bsid

y w

hich

guaran

teed co

tton ex

porters an

artificial

dom

estic price an

d also

guaran

teed U

.S. m

ill users th

e low

er intern

ational p

rice. The U

.S. refu

sed fu

rther ch

anges

desp

ite losin

g ap

peals o

n th

e oth

er subsid

ies.

Recen

t Dev

elop

men

ts:C

iting failu

re by th

e U.S

. to rem

ove co

tton su

bsid

ies prev

iously

declared

illegal b

y

the W

TO

, Brazil in

early S

eptem

ber 2

006 req

uested

the W

TO

’s form

al investig

ation o

f Am

erican co

mplian

ce.

Once ag

ain th

is first petitio

n w

as blo

cked

by th

e U.S

. but B

razil launch

ed a seco

nd su

ccessful attem

pt. T

he U

.S.

claimed

it had

sufficien

tly am

ended

its policies, an

d th

erefore, th

ere was n

o b

asis for an

investig

ation. 1

0(Sch

nep

f

20

06

)

Trad

e Disp

utes in

Practice

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

37

The W

TO

confirm

ed in

2007 th

at the U

.S. failed

to b

ring its co

tton su

bsid

ies into

com

plian

ce with

an

earlier rulin

g an

d req

uired

the U

.S. to

mak

e an 8

2%

cut in

trade d

istortin

g su

bsid

ies to A

merican

farmers. T

he

U.S

. rejected th

e cuts. S

ubseq

uen

tly, in th

e same y

ear, a WT

O co

mplian

ce pan

el conclu

ded

that th

e U.S

. had

not

adeq

uately

chan

ged

its cotto

n su

pport m

easures to

fully

com

ply

with

its oblig

ations u

nder th

e WT

O ru

les.

The U

.S. ap

pealed

the ru

ling in

Feb

ruary

2008, b

ut w

as unsu

ccessful. O

n 2

5 A

ugust 2

008, B

razil requested

that th

e arbitratio

n p

roceed

ings b

e resum

ed. T

he fin

al arbitratio

n resu

lts are still pen

din

g. 11 P

revio

usly, B

razil

had

requested

auth

orizatio

n to

impose $

3 b

illion w

orth

of san

ctions. Its o

fficials hav

e indicated

that th

ey are

likely

to p

ursu

e a smaller claim

by tak

ing in

to acco

unt so

me rem

edial actio

ns th

e U.S

. has tak

en, w

hich

inclu

de

repealin

g th

e Step

2 su

bsid

y p

rogram

and refo

rmin

g th

ree export cred

it guaran

tee pro

gram

s. Asid

e from

usin

g

import tariffs ag

ainst th

e U.S

., Brazil h

as also th

reatened

to w

ithdraw

certain in

tellectual p

roperty

rights an

d

services co

mm

itmen

ts.

Un

ited S

tates v

s. Eu

rop

ean

Un

ion

: Boein

g a

nd

Airb

us

Th

e Disp

ute

:B

oein

g an

d A

irbus are an

intern

ational d

uopoly

in th

e pro

ductio

n o

f civil aircrafts. W

ith th

e help

of h

eavy E

uro

pean

govern

men

t subsid

ies in its early

years, A

irbus h

as turn

ed aro

und an

d em

erged

as a fierce

com

petito

r of B

oein

g. In

recent y

ears, Airb

us h

as captu

red ab

out h

alf of th

e mark

et. Consid

ering th

is industry

’s

massiv

e research an

d d

evelo

pm

ent co

sts, very

large w

ork

force w

ith p

roductio

n facilities scattered

across th

e

glo

be, th

ere are a multitu

de o

f pro

tection in

centiv

es for th

e concern

ed g

overn

men

ts.

Both

the U

.S. an

d th

e EU

hav

e accused

each o

ther o

f gran

ting su

bsid

ies and sp

ecial ben

efits to th

eir firms

in v

iolatio

n o

f the W

TO

rules.

Early

Ph

ases:

Quarrels o

ver aircraft su

bven

tion started

to receiv

e attentio

n in

the m

id-1

980s w

hen

the U

.S.

entered

trade talk

s with

Britain

, Fran

ce, and

West G

erman

y w

ith th

e ho

pe o

f redu

cing

Eu

rop

ean sales an

d

pro

ductio

n su

bsid

ies. The U

.S. claim

ed th

at subsid

ies to A

irbus v

iolated

the G

AT

T 1

979 ag

reemen

t on civ

il

aircraft, wh

ile the E

uro

pean

s argu

ed th

at Bo

eing

ben

efited fro

m b

oth

go

vern

men

t tax b

reaks an

d research

fundin

g. N

egotiatio

ns w

ent o

n fo

r years, b

ut in

1992, sh

ortly

after the U

.S. th

reats to fo

rmally

issue a co

mplain

t

with

the G

AT

T, th

e U.S

. and th

e Euro

pean

Com

munity

(EC

) reached

an ag

reemen

t. The acco

rd, w

hich

would

last appro

xim

ately ten

years, stip

ulated

that th

e EC

limit A

irbus p

roductio

n su

bsid

ies to o

ne-th

ird o

f dev

elopm

ent

costs an

d th

at the U

.S. cap

indirect aid

to B

oein

g at 4

% o

f the co

mpan

y’s to

tal reven

ue.

Recen

t Dev

elop

men

ts:In

the su

mm

er of 2

004 th

e U.S

. told

the E

U th

at it wan

ted A

irbus p

roductio

n su

bsid

ies

removed

, arguin

g th

at the 1

992 treaty

had

expired

and w

as no lo

nger v

alid. F

urth

ermore, th

e U.S

. warn

ed th

at

if the E

U d

id n

ot co

mply, th

e issue w

ould

be referred

to th

e WT

O. S

om

e observ

ers attributed

the U

.S. p

olicy

chan

ge to

Boein

g’s lo

ss of m

arket sh

are, the p

endin

g co

mpletio

n o

f the m

assive A

irbus A

-380 ju

mbo jet, an

d

the u

pco

min

g A

merican

presid

ential electio

n. T

he U

.S. an

d th

e EU

each req

uested

consu

ltations w

ith th

e WT

O

in O

ctober 2

004, an

d after m

onth

s of u

nsu

ccessful b

ilateral neg

otiatio

ns, th

e WT

O ev

entu

ally estab

lished

multip

le

DS

B p

anels to

investig

ate a variety

of claim

s. Sim

ilar to p

revio

us d

isputes, th

e U.S

. asserts that th

e pro

ductio

n

subsid

ies pro

vid

ed to

Airb

us are u

nfair u

nder th

e WT

O ru

les, while th

e EU

conten

ds th

at the U

.S. in

directly

supports B

oein

g th

rough tax

break

s and ex

clusiv

e aerosp

ace research co

ntracts.

Citin

g th

e extrem

e com

plex

ity o

f the issu

e, multip

le com

plain

ts, and th

e num

ber o

f parties in

volv

ed, th

e

WT

O an

nounced

in A

pril 2

006 th

at it does n

ot ex

pect th

e pan

els to arriv

e at any co

nclu

sions so

on. O

n 1

1 Ju

ly

2008, th

e Pan

el info

rmed

the D

SB

that it n

ow

expects to

com

plete its w

ork

in 2

009. 1

2

Un

ited S

tates v

s. Bra

zil: Con

centra

ted O

ran

ge J

uice

Th

e Disp

ute

:B

razil is the larg

est pro

ducer o

f oran

ge ju

ice in th

e world

and is also

the larg

est exporter w

hile

the U

.S. is th

e world

’s largest im

porter. D

ue to

geo

grap

hic an

d clim

ate differen

ces, Brazil’s h

arvest seaso

n

occu

rs three m

onth

s earlier than

the U

.S. T

rade in

oran

ge ju

ice eases seasonal sh

ortag

e in th

e U.S

.

Trad

e Disp

utes in

Practice

38.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Conflict o

ver B

razilian co

ncen

trated o

range ju

ice exports to

the U

.S. b

egan

a little more th

an 2

5 y

ears ago

and co

ntin

ues to

this d

ay. The U

.S. co

nten

ds th

at Brazilian

firms sell o

range ju

ice in A

merican

mark

ets at less

than

fair valu

e (LT

FV

) and th

at the B

razilian g

overn

men

t subsid

izes its industry

thro

ugh, am

ong o

ther th

ings,

child

labor an

d tax

rebates. 1

3 Brazil d

enies th

ese charg

es and claim

s that th

e U.S

. tariffs are unw

arranted

and

disp

roportio

nate to

the alleg

ed in

juries.

Early

Ph

ases:

After a series o

f frosts d

evastated

the F

lorid

a citrus in

dustry

in th

e late 1970s an

d early

1980s,

the v

olu

me o

f cheap

imported

Brazilian

concen

trated o

range ju

ice soared

to co

mpen

sate for th

e declin

e in th

e

U.S

. pro

du

ction

. Betw

een 1

97

7 an

d 1

98

1, im

po

rts jum

ped

from

16

millio

n g

allon

s per y

ear to 8

9 m

illion

gallo

ns. F

lorid

a oran

ge ju

ice firms, fearin

g th

eir ow

n v

iability, p

etitioned

the D

OC

and th

e ITC

for co

unterv

ailing

duties in

1982. T

he p

laintiffs claim

ed th

at Brazilian

concen

trated o

range ju

ice firms u

nfairly

ben

efited fro

m

low

interest rates, tax

rebates, etc. A

year later, th

e DO

C reach

ed an

agreem

ent w

ith th

e Brazilian

govern

men

t

which

resulted

in an

export tax

on B

razilian firm

s in ad

ditio

n to

a U.S

. counterv

ailing d

uty

already in

place.

In 1

986, a co

nso

rtium

of F

lorid

a citrus g

row

ers again

filed a co

mplain

t with

the D

OC

and th

e ITC

. How

ever,

this tim

e they

sought an

tidum

pin

g d

uties o

n B

razilian co

ncen

trated o

range ju

ice. The A

merican

firms arg

ued

that B

razilian ex

ports w

ere bein

g so

ld fo

r LT

FV

and w

ere desig

ned

to w

ipe o

ut an

already crip

pled

industry.

Soon after, th

e DO

C ru

led in

favor o

f the A

merican

firms an

d im

plem

ented

antid

um

pin

g d

uties ran

gin

g fro

m 1

to 8

%. B

y 1

995 all tax

es on B

razilian o

range ju

ice imports h

ad g

one u

p to

about 5

0%

.

Recen

t Dev

elop

men

ts:In

the m

id-1

990s, w

ith talk

s of N

AF

TA

expan

sion in

to a F

ree Trad

e Area o

f the

Am

ericas (FT

AA

), the red

uctio

n o

f agricu

ltural su

bsid

ies and th

e reductio

n o

f U.S

. tariffs on B

razilian o

range

juice lo

oked

pro

misin

g. Y

et as the talk

on F

TA

A b

roke d

ow

n o

n a n

um

ber o

f fronts, it b

ecame clear th

at the

oran

ge ju

ice disp

ute w

as far from

over. In

2002 B

razil requested

a WT

O rev

iew o

f Flo

rida’s “eq

ualizin

g ex

cise

tax” o

n g

rounds th

at it was an

unfair p

rotectio

n. T

he tw

o p

arties later info

rmed

the W

TO

that th

ey h

ad reach

ed

a mutu

ally ag

reed u

pon so

lutio

n. B

ut in

the fall o

f 2003 th

e DO

C an

d IT

C in

itiated y

et anoth

er dum

pin

g p

robe

desp

ite findin

g n

o ev

iden

ce of in

jury

in th

eir prelim

inary

investig

ations.

In F

ebru

ary 2

006, th

e final d

etermin

ation o

f the D

OC

and IT

C o

vertu

rned

their earlier d

ecisions an

d firm

-

specific an

tidum

pin

g m

easures ran

gin

g fro

m alm

ost 1

0%

to a w

hoppin

g 6

0%

were im

posed

. 14 T

ropican

a Pro

ducts,

Inc., a resp

on

den

t, app

ealed th

e case to th

e U.S

. Co

urt o

f Intern

ation

al Trad

e (CIT

) wh

ich, in

Ap

ril 20

07

,

reman

ded

the case to

the IT

C fo

r re-exam

inatio

n. O

n rem

and, th

e ITC

upheld

its inju

ry d

etermin

ation.

In N

ovem

ber 2

008, B

razil requested

a WT

O co

nsu

ltation o

n U

.S.’s an

ti-dum

pin

g ad

min

istrative rev

iews

and o

ther m

easures related

to im

ports o

f certain o

range ju

ice from

Brazil. 1

5 It charg

es that so

me m

easures o

f

U.S

. laws, reg

ulatio

ns, p

roced

ures, p

ractices and m

ethodolo

gies o

n th

e oran

ge ju

ice issue are in

consisten

t with

the W

TO

rules. A

disp

ute settlem

ent p

anel h

as yet to

be estab

lished

.

Un

ited S

tates v

s. Bra

zil, Ch

ina, E

cuad

or, In

dia

, Th

aila

nd

, an

d V

ietnam

: Sh

rimp

Th

e Disp

ute: S

ince th

e late 1990s, th

e Unites S

tates has accu

sed a n

um

ber o

f Asian

and L

atin A

merican

natio

ns, m

ost n

otab

ly T

hailan

d, B

razil, Ecu

ador, C

hin

a, Vietn

am, an

d In

dia o

f dum

pin

g sh

rimp o

nto

the A

merican

mark

et at LT

FV

. In ad

ditio

n, th

e U.S

. alleges th

at the sh

rimp in

dustries in

man

y o

f these co

untries are su

bsid

ized

by th

eir govern

men

ts. All o

f these n

ations refu

ted th

ese claims an

d arg

ued

that th

e U.S

. was m

erely p

rotectin

g

an in

efficient d

om

estic industry

that co

uld

not co

mpete w

ith larg

e foreig

n sh

rimp farm

s.

Early

Ph

ases:

Rum

blin

gs th

at U.S

. shrim

pers w

ere about to

petitio

n th

e DO

C fo

r antid

um

pin

g m

easures o

n

shrim

p im

ports b

egan

in 1

998. T

he m

ovem

ent h

ad g

ained

mom

entu

m a few

years p

rior as A

merican

dem

and

soared

and d

om

estic suppliers stru

ggled

to co

mpete w

ith ev

er increasin

g ch

eap fo

reign im

ports. A

t the tim

e,

there w

ere more th

an 5

0 co

untries an

d th

eir exports o

f shrim

p w

ere more th

an tw

ice the am

ount o

f shrim

p

caught in

the U

.S. T

hose in

favor o

f tariffs claimed

that th

e foreig

n firm

s were g

uilty

of d

um

pin

g, w

hile so

me

Am

erican d

etractors an

d th

e accused

parties asserted

that fo

reign sh

rimp farm

s had

a com

parativ

e advan

tage

Trad

e Disp

utes in

Practice

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

39

ov

er the A

merican

ind

ustry

wh

ich relied

solely

on

wh

at cou

ld b

e caug

ht in

the G

ulf o

f Mex

ico. T

he U

.S.

shrim

pers started

explo

ring leg

al actions ag

ainst th

e foreig

n p

roducers. In

Decem

ber 2

003, th

e South

ern S

hrim

p

Allian

ce’s law firm

, Dew

ey B

allantin

e LL

P, deliv

ered 1

48,8

00 p

ages o

f petitio

ns an

d su

pportin

g d

ocu

men

ts in

two v

ans to

the D

OC

and th

e ITC

, charg

ing d

um

pin

g fro

m fo

reign p

roducers in

Brazil, C

hin

a, Ecu

ador, In

dia,

Thailan

d, an

d V

ietnam

. 16(H

itt and H

ookw

ay 2

007)

Recen

t Dev

elop

men

ts:In

Decem

ber 2

004, th

e ITC

released its fin

al determ

inatio

ns. It fo

und th

at firms fro

m

all six co

untries w

ere guilty

of d

um

pin

g w

arm w

ater shrim

p an

d p

rawns, d

espite a few

contrad

ictory

prelim

inary

rulin

gs. B

ut it also

conclu

ded

that in

dustries in

the U

.S. p

roducin

g can

ned

warm

water sh

rimp an

d p

rawns w

ere

not m

aterially in

jured

or th

reatened

by im

ports fro

m C

hin

a, Thailan

d, an

d V

ietnam

even

though th

ey w

ere sold

in th

e U.S

. at LT

FV

, and su

ch im

ports fro

m B

razil, Ecu

ador, an

d In

dia w

ere neg

ligib

le. Dum

pin

g m

argin

s and

subseq

uen

t antid

um

pin

g tariffs o

n im

ports o

f warm

water sh

rimp an

d p

rawns w

ere installed

in F

ebru

ary 2

005,

which

ranged

from

3.5

% to

more th

an 1

00%

dep

endin

g o

n th

e orig

inatin

g co

untry

and firm

. 17

The accu

sed n

ations an

d o

ther co

ncern

ed states h

ad fo

rmally

requested

either co

nsu

ltation w

ith th

e U.S

.

under th

e ausp

ices of th

e WT

O o

r thro

ugh D

SB

pan

els regard

ing th

is issue. In

Novem

ber 2

005, E

cuad

or req

uested

consu

ltations w

ith th

e U.S

. concern

ing D

OC

’s practice o

f “zeroin

g.”

18 (C

han

g 2

008). T

he W

TO

ruled

in fav

or

of E

cuad

or. T

he U

.S. ag

reed to

recalculate th

e du

mp

ing

marg

in w

itho

ut zero

ing

. As a resu

lt, it fou

nd

that

Ecu

ador d

id n

ot co

mm

it dum

pin

g.

The U

.S. sh

rimpers w

anted

even

more. O

n th

e first anniv

ersary o

f the sh

rimp tariffs in

Feb

ruary

2006, th

e

South

ern S

hrim

p A

lliance filed

a sweep

ing rev

iew req

uest, citin

g so

me 8

00 fo

reign p

roducers an

d p

rocesso

rs.

This actio

n sp

ooked

more th

an 1

00 fo

reign sh

rimp su

ppliers in

to p

ayin

g m

illions o

f dollars to

the A

lliance in

return

for d

roppin

g th

e action. 1

9 On th

e tariff’s second an

niv

ersary in

Feb

ruary

2007, th

e Allian

ce requested

the

U.S

. govern

men

t for an

oth

er bro

ad tariff rev

iew. B

ut th

is time n

ew sh

rimper factio

ns jo

ined

the act, w

antin

g a

piece o

f the actio

n. A

gro

up rep

resentin

g sh

rimpers an

d p

rocesso

rs, the L

ouisian

a Shrim

p A

ssociatio

n, filed

its

ow

n rev

iew req

uest, claim

ing th

at it did

not g

et a dim

e from

the A

lliance. M

eanw

hile, th

e state of L

ouisian

a,

which

pro

vid

ed earlier fu

ndin

g to

the A

lliance, h

as also m

ade in

quiries ab

out th

e Allian

ce’s finan

ces and w

heth

er

it should

receive a sh

are of th

e pie.

In 2

005, th

e U.S

. required

exporters at risk

of d

efaultin

g o

n th

e pay

men

t of an

ti-dum

pin

g d

uties to

post a

bond co

verin

g th

e full am

ount. In

dian

exporters d

eemed

such

a measu

re unreaso

nab

le by arg

uin

g th

at it resulted

in an

excessiv

e finan

cial burd

en o

n th

e exporters. In

dia an

d T

hailan

d b

oth

requested

consu

ltations w

ith th

e U.S

.

in 2

006 o

ver th

e measu

re and req

uested

establish

ing W

TO

pan

els to reso

lve th

e disp

utes. A

disp

ute settlem

ent

pan

el ruled

in F

ebru

ary 2

008 th

at the U

.S. m

easure v

iolated

the W

TO

rules th

at pro

hib

it importers fro

m im

posin

g

policies o

ther th

an ex

tra duties to

counter d

um

pin

g (L

ynn 2

008).

Ecu

ad

or, C

olo

mb

ia a

nd

U.S

. vs. E

U: B

an

an

as

Sin

ce the 1

990s, sev

eral Latin

Am

erican b

anan

a pro

ducers an

d th

e U.S

. hav

e clashed

with

the E

U o

ver its

system

for g

rantin

g p

referential m

arket access to

ban

anas fro

m its fo

rmer co

lonies in

African

, Carib

bean

and

Pacific (A

CP

) countries. 2

0 Countries su

ch as E

cuad

or, C

olo

mbia, an

d th

e U.S

. (which

interv

ened

on b

ehalf o

f

the U

.S. b

anan

a exporters su

ch as C

hiq

uita) h

ave w

on a series o

f cases conten

din

g th

at EU

’s tariffs, quotas an

d

import licen

ses discrim

inated

again

st Latin

Am

erican b

anan

a exporters. 2

1(P

atterson 2

001)

In 1

997, th

e WT

O A

ppellate B

ody o

rdered

the E

U to

modify

its ban

ana im

port reg

ime. T

wo y

ears later, the

WT

O fu

rther ru

led th

at Bru

ssels’ reform

s had

still not g

one far en

ough, an

d th

at the U

.S. w

as auth

orized

to

retaliate again

st the E

U. A

fter neg

otiatio

ns w

ith E

cuad

or an

d th

e U.S

. in 2

001, an

agreem

ent w

as reached

that

main

tained

the E

U’s p

references fo

r AC

P ex

ports u

ntil th

e end o

f 2005, an

d refo

rmed

the E

U’s tariff-rate q

uota

(TR

Q) to

a ‘tariff-only

regim

e,’ which

would

at least main

tain to

tal mark

et access for M

ost F

avored

Natio

n

(MF

N) b

anan

a suppliers w

ho d

id n

ot h

ave th

e ben

efit of p

references. 2

2

Trad

e Disp

utes in

Practice

40.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

EU

’s new

tariff levels w

ere later challen

ged

by E

cuad

or an

d th

e U.S

. Tw

o sep

arate WT

O arb

itrations b

oth

confirm

ed th

at the n

ew rates w

ere too h

igh to

pass th

e total m

arket access test. T

he E

U n

oneth

eless implem

ented

a new

ban

ana im

port reg

ime at th

e beg

innin

g o

f 2006 w

ithout ag

reemen

ts from

the affected

countries. T

he n

ew

regim

e carried an

MF

N tariff rate o

f EU

R176 p

er tonne, an

d acco

rded

a 750,0

00 to

nne d

uty

-free quota fo

r the

AC

P co

untries, b

eyond w

hich

the M

FN

rate beg

an to

apply. 2

3

Ecu

ado

r believ

ed th

at EU

’s new

imp

ort reg

ime w

as still no

t in co

mp

liance w

ith th

e 19

97

rulin

gs an

d

requested

a new

consu

ltation o

n 1

6 N

ovem

ber 2

006. S

pecifically, it arg

ued

that th

e new

MF

N tariff rate o

f

EU

R176 p

er tonne far ex

ceeded

the E

UR

75 p

er tonne in

-quota M

FN

rate form

ally b

ound in

the E

U’s o

wn

sched

ule o

f com

mitm

ents to

the W

TO

. The E

U co

untered

that im

port v

olu

mes fo

r MF

N b

anan

as orig

inatin

g

from

Latin

Am

erica as a whole ro

se 8.2

% in

2006. 2

4 Under th

e new

tariff regim

e, the sh

are of L

atin A

merican

ban

anas in

the E

U m

arket h

ad actu

ally d

eclined

.

On 2

1 M

arch 2

007, C

olo

mbia req

uested

consu

ltations w

ith th

e EU

concern

ing th

e com

plian

ce of E

U’s

new

tariff regim

e with

the W

TO

rulin

gs. It ch

arged

that E

U’s n

ew b

anan

a import reg

ime is in

consisten

t with

the

GA

TT

1994 fo

r the fo

llow

ing reaso

ns:

1. “T

he M

FN

tariff rate of E

UR

176/to

nne is in

consisten

t with

Article II:1

becau

se it exceed

s the d

uties set fo

rth

in th

e EC

’s Sch

edule o

f Concessio

ns;

2. O

nly

AC

P b

anan

as ben

efit from

the ap

plicatio

n o

f a zero tariff, w

hich

is inco

nsisten

t with

Article I:1

. This

inco

nsisten

cy can

not b

e justified

under th

e Article I “D

oha W

aiver” as th

at waiv

er ceased to

apply

to b

anan

as as

of 1

January

2006 b

ecause th

e EC

no lo

nger o

bserv

es the term

s and co

nditio

ns o

f that w

aiver, in

particu

lar

becau

se the E

C h

as failed to

rebin

d its im

port tariff o

n b

anan

as and at a lev

el that resu

lts in at least m

aintain

ing

total m

arket access fo

r MF

N b

anan

a suppliers, tak

ing in

to acco

unt all E

C W

TO

mark

et-access com

mitm

ents;

3. T

he ap

plicatio

n o

f the A

CP

TR

Q en

tails discrim

inatio

n b

etween

AC

P b

anan

as and M

FN

ban

anas, w

hich

is

inco

nsisten

t with

vario

us p

rovisio

ns o

f Article X

III. Moreo

ver, th

is inco

nsisten

cy can

not b

e justified

under th

e

Article X

III ‘Doha W

aiver’ sin

ce that w

aiver ex

pired

on 3

1 D

ecember 2

005 an

d h

as not b

een ex

tended

.”25

Sin

ce Colo

mbia w

as not a p

arty to

Ecu

ador’s p

ast pan

el cases, it was n

ot ab

le to retaliate ag

ainst th

e EU

even

if Ecu

ador w

ould

win

its new

com

plain

t. The tw

o cases are v

ery sim

ilar, but E

cuad

or’s case is o

n E

U’s

nonco

mplian

ce with

the W

TO

’s earlier rulin

gs w

hile C

olo

mbia’s case in

cludes m

ore sp

ecific and u

p-to

-date

charg

es on v

iolatio

ns o

f the W

TO

pro

visio

ns. C

olu

mbia w

as also seek

ing to

subject its case to

accelerated

pro

cedures, arg

uin

g th

at the p

roduct at issu

e was p

erishab

le, and as a d

evelo

pin

g co

untry, it d

epen

ded

heav

ily

on its ex

ports o

f ban

anas. 2

6 As o

f this w

riting, th

e WT

O h

as not y

et issued

its report an

d C

olu

mbia h

as not

requested

the estab

lishm

ent o

f a DS

B p

anel.

On 2

9 Ju

ne 2

007, th

e U.S

. requested

the estab

lishm

ent o

f a WT

O p

anel ch

argin

g th

at the E

C h

ad failed

to

brin

g its im

port reg

ime fo

r ban

anas in

to co

mplian

ce with

its WT

O o

blig

ations. In

July

2007, th

e DS

B referred

the m

atter to th

e orig

inal p

anel. In

April 2

008, a seco

nd W

TO

pan

el ruled

in fav

or o

f Ecu

ador’s co

mplain

t. Also

,

in D

ecember 2

008, a W

TO

Appellate B

ody u

pheld

an earlier p

anel d

ecision th

at the E

U b

anan

a import reg

ime

vio

lated th

e WT

O ru

les. These d

ecisions co

uld

pav

e the w

ay fo

r Ecu

ador an

d th

e U.S

. to im

pose trad

e sanctio

ns

again

st the E

U. In

an earlier p

hase o

f this lo

ng-ru

nnin

g case, th

e U.S

. imposed

sanctio

ns ag

ainst E

U’s ex

ports in

the am

ount o

f $191.4

millio

n a y

ear for sev

eral years.

In F

ebru

ary 2

009, th

e EU

reported

ly o

ffered to

low

er its 176 p

er metric to

nne M

FN

ban

ana tariff w

ith th

e

follo

win

g sch

edule: im

med

iate reductio

n to

136 p

er tonne, th

en th

ree-year fro

zen rate at 1

36 startin

g 2

January

20

11

, and

then

follo

wed

by

grad

ual red

uctio

ns to

11

4 p

er ton

ne b

y 2

01

9. T

he o

ffer dem

and

ed in

return

a

defin

itive en

d to

WT

O litig

ations an

d an

understan

din

g th

at the E

U w

ould

hav

e fulfilled

all of its o

blig

ations

even

under an

even

tual D

oha R

ound ag

reemen

t. Ecu

ador ap

pears to

be w

illing to

accept th

e offer, b

ut C

osta

Rica, b

ankin

g o

n sig

nin

g a co

mpreh

ensiv

e Cen

tral Am

erica-EU

deal in

January

2010—

which

could

furth

er

low

er the tariff—

has so

far refused

to accep

t. 27

Trad

e Disp

utes in

Practice

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

41

Th

e EU

an

d th

e U.S

. vs. In

dia

: Win

es & S

pirits T

ariffs

In M

arch 2

006, th

e EU

sought th

e establish

men

t of a W

TO

disp

ute p

anel to

rule o

n alleg

ed In

dia’s ex

cessive

tariffs on w

ines an

d sp

irits imports, after th

e EU

failed to

resolv

e the d

ispute in

prio

r consu

ltations w

ith In

dia.

It argued

that v

arious d

uties o

n w

ines an

d sp

irits imports resu

lted in

a com

bin

ed rate far ex

ceedin

g th

e max

imum

150%

duty

set out in

India’s W

TO

tariff sched

ule. T

he E

U also

challen

ged

India’s v

iolatio

n o

f a WT

O ru

le by

forb

iddin

g th

e sale of im

ported

win

es and sp

irits in th

e south

ern In

dian

state of T

amil N

adu, w

here o

nly

Indian

-

mad

e win

es and sp

irits could

be so

ld.

Acco

rdin

g to

the E

U, In

dia ap

plied

, on to

p o

f the o

rdin

ary cu

stom

s duties o

f 100%

for w

ines an

d 1

50%

for

spirits, ad

ditio

nal d

uties o

n im

ported

win

es at rates of 2

0 to

75%

and o

n im

ported

spirits at rates o

f 25 to

150%

.

In ad

ditio

n, In

dia also

applied

an “ex

tra additio

nal d

uty

” on im

ported

win

es and sp

irits at a rate of 4

%. A

foreig

n

spirit o

r win

e hav

ing a d

eclared v

alue o

f $40 w

ould

cost co

nsu

mers at least $

120 fo

r spirits an

d n

early $

85 fo

r

win

es. For a sp

irit with

a declared

valu

e of $

10, th

e duties w

ould

hav

e push

ed u

p th

e final p

rice by a h

efty

550%

. As a resu

lt, India, th

e world

’s largest w

hisk

ey m

arket, o

nly

imported

15%

of w

ines an

d less th

an 1

% o

f

spirits.O

n 1

3 Ju

ly 2

007, th

e EU

susp

ended

its WT

O ch

allenge d

ue to

New

Delh

i’s decisio

n to

elimin

ate som

e

duties o

n w

ine an

d sp

irits imports. H

ow

ever, th

e EU

was still u

nsatisfied

with

India’s p

rogress an

d an

nounced

,

in D

ecember 2

007, th

at it would

press ah

ead fo

r a pan

el rulin

g. 2

8(Mercer 2

007)

The U

.S., fo

llow

ing E

U’s lead

, requested

consu

ltations w

ith In

dia in

March

2007 reg

ardin

g its tariff p

olicy

on w

ines an

d sp

irits. Shortly

thereafter, th

e EU

and A

ustralia fo

rmally

petitio

ned

the W

TO

to jo

in th

e pro

ceedin

gs.

A D

SB

pan

el was estab

lished

in Ju

ne o

f that y

ear after the p

arties failed to

reach a m

utu

al agreem

ent. In

dia

argued

that th

e additio

nal an

d ex

tra-additio

nal d

uties w

ere perm

itted b

ecause th

ey sim

ply

offset certain

intern

al

taxes, su

ch as v

alue-ad

ded

taxes. T

he D

SB

pan

el agreed

with

India, ru

ling th

at any im

port ch

arges aim

ed at

offsettin

g in

ternal tax

es need

only

serve th

e same fu

nctio

n as th

e intern

al taxes b

ut n

eed n

ot b

e equiv

alent in

amount to

those in

ternal tax

es. How

ever, u

pon U

S’s ap

peal, an

Appellate B

ody in

Novem

ber 2

008 rev

ersed th

at

decisio

n an

d ag

reed w

ith th

e U.S

. that su

ch im

port ch

arges can

not resu

lt in h

igher am

ounts b

eing ch

arged

to

imports th

an to

like d

om

estic pro

ducts. S

om

e called th

e U.S

. victo

ry “larg

ely m

oral” sin

ce India w

ithdrew

the

additio

nal d

uty

and m

odified

the ex

tra-additio

nal d

uty

in 2

007. In

additio

n, th

e Appellate B

ody d

id n

ot req

uire

India to

brin

g its im

port d

uties in

line w

ith W

TO

rules b

ecause it lack

ed su

fficient in

form

ation to

determ

ine

wheth

er those d

uties w

ere in fact illeg

ally h

igh.

Sep

arately, on 2

2 S

eptem

ber 2

008, th

e EU

requested

for co

nsu

ltations w

ith In

dia. T

he E

U claim

ed th

at

som

e Ind

ian states d

iscrimin

ate again

st imp

orted

win

es and

spirits b

y restrictin

g th

eir retail and

wh

olesale

distrib

utio

n an

d also

by g

rantin

g tax

exem

ptio

n o

nly

to lo

cal win

es. In O

ctober 2

008, A

ustralia an

d th

e U.S

.

requested

to jo

in th

e consu

ltations, w

hich

were h

eld in

Novem

ber 2

008. 2

9 Subseq

uen

tly, on 1

5 D

ecember 2

008,

the E

U req

uested

supplem

entary

consu

ltations w

ith In

dia reg

ardin

g d

iscrimin

atory

taxatio

n o

n im

ported

bottled

win

es by th

e Indian

state of K

arnatak

a. On 2

3 D

ecember, 2

008, th

e U.S

. requested

to jo

in th

e supplem

entary

consu

ltations. A

DS

B p

anel h

as yet to

be estab

lished

.

Co

nclu

sion

Th

e GA

TT

achiev

ed a su

bstan

tial liberalizatio

n o

f the w

orld

trade b

y red

ucin

g tariffs an

d o

ther trad

e

barriers. It, h

ow

ever, d

id n

ot h

ave th

e auth

ority

to en

force its ru

lings o

n trad

e disp

utes am

ong m

ember co

untries.

On

the co

ntrary, th

e WT

O is em

po

wered

with

the au

tho

rity to

enfo

rce its rulin

gs b

y au

tho

rizing

sanctio

ns

again

st the o

ffendin

g p

arties, thus fo

rcing th

e even

tual reso

lutio

n o

f a trade d

ispute. W

e hav

e seen m

any cases

of trad

e disp

utes su

ccessfully

resolv

ed b

y th

e WT

O. It h

as served

the d

isciplin

ary ro

le again

st the u

nju

stified

disto

rtion

s to th

e wo

rld trad

e. With

mo

re and

mo

re cases settled u

nd

er the W

TO

jurisd

iction

, the w

orld

is

movin

g to

ward

a better trad

ing sy

stem.

Trad

e Disp

utes in

Practice

42.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

We h

ave sh

ow

n th

at the d

isputes o

ften w

ere triggered

by co

nflicts b

etween

natio

nal law

s and th

e WT

O

rules. H

ow

ever, th

ey w

ere more o

ften trig

gered

by sp

ecial interest g

roups seek

ing to

pro

tect their o

wn in

terests.

We h

ave also

show

n th

at the W

TO

rulin

gs w

ere met w

ith d

elayed

implem

entatio

n o

r non-im

plem

entatio

n o

n

on

e pretex

t or th

e oth

er, particu

larly b

y th

e majo

rs. 30 P

rolo

ng

ed n

on

-resolu

tion

cou

ld u

nd

ermin

e the fu

ture

effectiven

ess of th

e WT

O.

The rap

id rise o

f preferen

tial tradin

g arran

gem

ents su

ch as th

e free trade areas (F

TA

s) and th

e custo

ms

unio

ns (C

Us) can

bypass so

me o

f the W

TO

obstacles. T

he N

AF

TA

’s uniq

ue sy

stem o

f disp

ute settlem

ent can

be

a usefu

l model fo

r oth

er tradin

g b

locs to

emulate. T

here are still n

um

erous trad

e-related issu

es remain

ing to

be

resolv

ed. T

hey

inclu

de, b

ut n

ot lim

ited to

, enviro

nm

ental issu

es, poverty, m

arket stab

ility, com

petitio

n ru

les,

agricu

ltural su

bsid

y, ob

stacles on

services reg

ulatio

n, lib

eralization

of d

om

estic regu

lation

s that h

ind

er

intern

ational trad

e, pro

duct an

d lab

or m

arket p

olicies th

at prev

ent th

e realization o

f econom

ies of scale an

d

impro

vem

ents in

pro

ductiv

ity, regulatio

n o

f food safety

and tech

nical stan

dard

s, and reg

ulatio

n o

f world

finan

cial

mark

ets. The cu

rrent D

oha ro

und n

egotiatio

ns are aim

ing at sev

eral aspects o

f these issu

es. The w

orld

tradin

g

system

, though v

astly im

pro

ved

since th

e establish

men

t of th

e GA

TT

, is still far from

perfect.

Referen

ces

Brid

ges W

eekly Tra

de N

ews D

igest (2

006), ‘E

cuad

or U

npeels N

ew C

hap

ter in B

anan

a Disp

ute w

ith E

U’, v

ol.

10, n

o. 3

9, N

ovem

ber 2

2.

Brid

ges W

eekly Tra

de N

ews D

igest (2

007), ‘E

U B

anan

a Import R

ules C

hallen

ged

Again

, This T

ime b

y C

olo

mbia’,

vol. 1

1, n

o. 1

1, M

arch 2

8.

Chan

g, W

W (2

008), ‘A

ntid

um

pin

g, C

ounterv

ailing, an

d S

afeguard

Measu

res’, Gita

m R

eview o

f Intern

atio

nal

Busin

ess, vol. 1

, issue 1

, July, p

p. 1

-34.

Co

un

cil of th

e EU

Gen

eral Secretariat (2

00

9), G

enera

l Overview

of A

ctive WT

O D

ispu

te Settlem

ent C

ases

Invo

lving

the E

U a

s Co

mp

lain

an

t or D

efend

an

t an

d o

f Active C

ases u

nd

er the T

rad

e Ba

rriers Reg

ula

tion

,

January

23, v

iewed

1 A

pril (2

009), <

http

://trade.ec.eu

ropa.eu

/doclib

/docs/2

007/m

ay/trad

oc_

134652.p

df>

.

Fro

ese, MD

. (2006), ‘C

ontin

gen

t Pro

tection M

easures an

d th

e Man

agem

ent o

f the S

oftw

ood L

um

ber T

rade in

North

Am

erica’, The E

stey Cen

treJo

urn

al o

f Intern

atio

nal L

aw

and T

rade P

olicy 7

, pp. 1

26-5

1.

Hitt, G

& H

ookw

ay, J (2007), ‘S

eafood F

ight: U

.S. S

hrim

pers H

aul C

ash fro

m L

ow

er-Cost R

ivals’, T

he W

all

Street Jo

urn

al, A

pril 2

.

ITC

SD

(2009), ‘B

anan

a Update’, N

ews a

nd A

nalysis 1

3, n

o. 1

, March

.

ITC

(2005), ‘C

ertain F

rozen

or C

anned

Warm

water S

hrim

p an

d P

awns F

rom

Brazil, C

hin

a, Ecu

ador, In

dia,

Thailan

d, an

d V

ietnam

’, Publicatio

n 3

748.

ITC

(2007), ‘C

ertain O

range Ju

ice from

Brazil’, P

ublicatio

n 3

930.

Lynn, J (2

008), ‘W

TO

Pan

el Rules ag

ainst U

.S. in

Shrim

p C

ases’, Reu

ters, Feb

ruary

29.

Mercer, C

2007, E

U to

Press A

hea

d w

ith In

dia

Spirit T

ariffs D

ispute, D

ecember 4

, view

ed 1

April (2

009), <

http

://ww

w.b

everag

edaily.co

m/>

.

Patterso

n, E

(2001), T

he U

S-E

U B

anana D

ispute, A

SIL

Insig

hts, T

he A

merican

Society

of In

ternatio

nal L

aw,

Feb

ruary, v

iewed

1 A

pril 2

009, <

http

://ww

w.asil.o

rg/in

sigh63.cfm

>.

Sch

nep

f, R (2

00

5),

‘Back

gro

un

d o

n th

e U

.S.-B

razil W

TO

Co

tton

Su

bsid

y D

ispu

te’, C

RS

Rep

ort

forC

on

gress

RL

32

57

1.

Sch

nep

f, R (2

006),‘U

.S. A

gricu

ltural P

olicy

Resp

onse to

WT

O C

otto

n D

ecision’, C

RS

Rep

ort fo

r Congress

RS

22

18

7.

Trad

e Disp

utes in

Practice

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

43

TE

D C

ase

s Stu

die

s 20

09

a, U

S-C

an

ad

a S

oftw

oo

d L

um

ber D

ispu

te, v

iew

ed

1 A

pril (2

00

9), <

http

://

ww

w1

.american

.edu

/TE

D/u

scanad

a.htm

>.

TE

D C

ase

s Stu

die

s (20

09

)b, S

weet O

ran

ges?

vie

wed

1 A

pril 2

00

9, <

http

://ww

w1

.am

eric

an

.ed

u/T

ED

/

oran

ge.h

tm>

.

World

Trad

e\Interactiv

e (2007), ‘U

.S. A

ccuses C

anad

a of N

onco

mplian

ce with

Softw

ood L

um

ber A

greem

ent’,

vol. 1

4, Issu

e 159, A

ugust 9

.

World

Trad

e\Interactiv

e (2009), ‘U

.S. L

evies 1

0%

Import T

ariffs on S

oftw

ood L

um

ber fro

m F

our C

anad

ian

Pro

vin

ces’, vol. 1

6, Issu

e 71, A

pril 9

.

WT

O (1

996), ‘E

uro

pean

Com

munities—

Reg

ime fo

r the Im

portatio

n, S

ale and D

istributio

n o

f Ban

anas’, W

TO

DS

27

.

WT

O (2

002), ‘U

nited

States—

Subsid

ies on U

plan

d C

otto

n’, D

ispute D

S267.

WT

O (2

007)b

, ‘United

States—

Measu

res Affectin

g T

rade in

Larg

e Civ

il Aircraft—

Seco

nd C

om

plain

t’, Disp

ute

DS

35

3,

WT

O (2

007)c, ‘E

uro

pean

Com

munities—

Reg

ime fo

r the Im

portatio

n o

f Ban

anas’, D

ispute D

S361,

WT

O (2

008)a, ‘In

dia—

Certain

Tax

es and O

ther M

easures o

n Im

ported

Win

es and S

pirits’, D

ispute D

S380.

WT

O (2

008)b

, ‘United

States—

Anti-D

um

pin

g A

dm

inistrativ

e Rev

iews an

d O

ther M

easures R

elated to

Imports

of C

ertain O

range Ju

ice from

Brazil’, D

ispute D

S382.

WT

O (2

009)a, C

hro

nolo

gical L

ist of D

isputes C

ases.

WT

O (2

009)b

, Index

of D

isputes Issu

es.

WT

O (2

009)c, U

nderstan

din

g th

e WT

O: M

embers an

d O

bserv

ers.

En

dn

otes

1Fo

r a com

plete list o

f the W

TO

cases, see its Ch

ron

olo

gical L

ist of D

ispu

tes Cases (2

00

9a) an

d In

dex

of

Disp

utes Issu

es (20

09

b).

2 Fo

r the lists o

f mem

bers an

d o

bserv

ers, see WT

O (2

00

9c).

3Fo

r add

ition

al info

rmatio

n o

n h

ow

the D

OC

pro

ceeded

in th

is case, see TE

D C

ase Stu

dies (2

00

9a).

4 Fo

r a com

preh

ensiv

e cov

erage o

n th

e issues, see F

roese (2

00

6) an

d W

TO

(20

02

) with

oth

er sub

sequ

ent

cases listed th

erein.

5 Reg

ion

s ado

ptin

g a so

ft vo

lum

e cap, su

ch as B

ritish C

olu

mb

ia, are also su

bject to

a “surg

e” mech

anism

. If

its exports ex

ceed th

e volu

me cap

by m

ore th

an o

ne p

ercent in

a month

, a retroactiv

e add

ition

al exp

ort tax

mu

st be im

po

sed o

n all so

ftwo

od

exp

orts fro

m th

at regio

n to

theU

.S. d

urin

g th

e mo

nth

in q

uestio

n.

6S

ee Wo

rldT

rade\In

teractive (2

00

7).

7S

ee Wo

rldT

rade\In

teractive (2

00

9).

8See U

ST

R (2

00

8).

9 Fo

r a detail an

alysis o

f the ru

ling

, see Sch

nep

f (20

05

).

10F

or ad

ditio

nal in

form

ation

regard

ing

action

s taken

by

the U

.S. in

respo

nse to

the W

TO

rulin

g, see S

chn

epf

(20

06

).

11

See th

e latest up

date co

ntain

ed in

the W

TO

DS

26

7 o

rigin

ally p

ub

lished

in W

TO

(20

02

).

Trad

e Disp

utes in

Practice

44.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

12S

ee the latest u

pd

ate con

tained

in W

TO

(20

07

b) o

n D

S3

53

.

13F

or m

ore in

form

ation

on

child

labo

r in th

is ind

ustry

and

oth

ers, see TE

D C

ases Stu

dies (2

00

9b

).

14F

or a d

etail analy

sis of recen

t ITC

rulin

g o

n certain

oran

ge ju

ice from

Brazil, see IT

C (2

00

7).

15F

or d

etail, see WT

O (2

00

8b

).

16S

ee Hitt an

d H

oo

kw

ay (2

00

7).

17F

or d

etail, see ITC

(20

05

).

18Z

eroin

g is a p

ractice of d

etermin

ing

the d

um

pin

g m

argin

s by

inclu

din

g o

nly

tho

se imp

orted

go

od

s wh

ose

“no

rmal v

alues” are h

igh

er than

their sellin

g p

rices in an

imp

ortin

g co

un

try w

hile ex

clud

ing

tho

se go

od

s in

the o

pp

osite case. T

his p

ractice has b

een arg

ued

by

man

y as u

nfair an

d b

iased. F

or a fu

rther d

iscuss o

f

zeroin

g, see C

han

g (2

00

8).

19A

ccord

ing

Hitt an

d K

oo

kw

ay (2

00

7), a V

ietnam

ese shrim

p ex

po

rter, Can

Th

o Im

po

rt Ex

po

rt Seafo

od

Join

t Sto

ck C

o., p

aid $

68

,00

0 to

the A

lliance after g

etting

hit w

ith a 4

.57

% tariff in

20

05

. To

fend

off fu

rther

tariffs, it agreed

to p

ay th

e Allian

ce1.5

% o

f its U.S

.shrim

p sales in

20

06

. Th

e pay

ou

t was ex

pected

to rise to

3%

ov

er the en

suin

g th

ree years.

20T

he first leg

al challen

ge ag

ainst th

e Eu

rop

ean E

con

om

ic Co

mm

un

ity’s (E

EC

’s) discrim

inato

ry b

anan

a

imp

ort arran

gem

ents in

the G

AT

T d

ispu

te settlemen

t pro

ceedin

gs w

as laun

ched

by

five L

atin A

merican

ban

ana p

rod

ucin

g co

un

tries (Co

lom

bia, C

osta R

ica, Gu

atemala, N

icaragu

a, and

Ven

ezuela). T

he first G

AT

T

Pan

el repo

rt issued

in 1

99

3 w

as nev

er ado

pted

and

becam

e irrelevan

t becau

se the E

EC

had

already

decid

ed

to rep

lace the n

ation

al restriction

s by

a com

mo

n im

po

rt regim

e sho

rtly after th

e repo

rt was issu

ed.

21F

or a d

etailed d

iscussio

n o

f the early

perio

ds o

f the b

anan

a trade d

ispu

tes, see Patterso

n (2

00

1).

22F

or d

etails of th

e agreem

ent, see W

TO

(19

96

).

23T

he p

revio

us in

-qu

ota tariff w

as EU

R7

5 p

er ton

ne an

d o

ver-q

uo

ta rate was E

UR

68

0 p

er ton

ne.

24S

eeB

RID

GE

S W

eekly Tra

de N

ews D

igest (2

00

6).

25S

ee WT

O (2

00

7c).

26S

eeB

RID

GE

S W

eekly Tra

de N

ews D

igest (2

00

7).

27S

ee ICT

SD

(20

09

).

28S

ee Mercer (2

00

7).

29F

or fu

rther d

etails, see Co

un

cil of th

e EU

Gen

eral Secretariat (2

00

9) an

d also

WT

O (2

00

8a).

30T

he W

TO

case on

intern

et gam

blin

g b

rou

gh

t by

An

tigu

a and

Barb

ud

a again

st theU

.S.is an

oth

er go

od

exam

ple (D

ispu

te 20

03

DS

28

5). A

nu

mb

er of U

.S. law

mak

ers were fu

riou

s ov

er the ru

ling

again

st the

U.S

.‘s ban

nin

g o

n in

ternet g

amblin

g, ch

argin

g th

at the W

TO

’s rulin

g im

pin

ges u

pon U

.S. n

ational so

vereig

nty.

It is un

likely

that th

e U.S

. will ab

ide b

y th

e rulin

g in

the fo

reseeable fu

ture. W

ith o

nly

$2

1 m

illion

gran

ted

by

the W

TO

to each

plain

tiff to ap

ply

sanctio

ns an

nu

ally ag

ainst th

e U.S

., the tw

o w

inn

ing

, small, co

un

tries

simp

ly d

o n

ot h

ave m

uch

po

wer to

force th

e U.S

. to co

mp

ly.

Trad

e Disp

utes in

Practice

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

45

Em

plo

yee E

ngagem

ent : T

he O

nly

Way A

hea

d

Kak

oli S

en*

Ab

stract

World

wid

e Em

plo

yee E

ngag

emen

t (EE

) is on th

e declin

e today

(Bates, 2

004; R

ichm

an 2

006). R

oughly

half o

f all Am

ericans are n

ot fu

lly en

gag

ed o

r even

disen

gag

ed an

d co

st US

busin

esses US

$ 3

00 b

illion a y

ear

in lo

st pro

ductiv

ity (B

ates, 2004; Jo

hnso

n,2

004). In

India o

nly

about 3

4 %

of th

e emplo

yees are fu

lly en

gag

ed

and th

e rest either p

artially en

gag

ed o

r com

pletely

disen

gag

ed (T

he g

lobal su

rvey, 2

008). W

ith su

ch lo

w lev

els

of em

plo

yee en

gag

emen

t, man

agin

g E

mplo

yee E

ngag

emen

t should

be th

e top p

riority

for In

dian

org

anizatio

ns

today. It n

ot o

nly

mak

es busin

ess sense, it is th

e only

way

to su

stain an

d g

row

in to

day

’s chan

gin

g en

viro

nm

ent.

Build

ing an

engag

ed an

d lo

yal w

ork

force to

day

will h

elp o

rgan

izations w

eather th

e challen

ges o

f tom

orro

w.

This article seek

s to ex

plo

re Em

plo

yee en

gag

emen

t both

from

the acad

emic an

d m

anag

emen

t persp

ectives,

discu

ss the b

usin

ess sense fo

r it and o

utlin

e the im

plicatio

ns fo

r practice.

Key

Word

s : Com

mitm

ent, P

roductiv

ity, Efficacy, In

volv

emen

t and S

atisfaction.

Intro

du

ction

“Em

plo

yee E

ng

agem

ent” (E

E) is a relativ

ely n

ew H

R term

wh

ich h

as gain

ed p

rom

inen

ce since 2

00

0

onw

ards. It o

rigin

ated fro

m th

e consu

ltancies an

d su

rvey

houses (R

afferty et.al 2

005) an

d w

orld

wid

e several

research an

d co

nsu

ltancy

firms lik

e Gallu

p o

rgan

ization, D

evelo

pm

ent D

imen

sions In

ternatio

nal (D

DI), K

enex

a,

Hew

itt Asso

ciates, and M

cKin

sey h

ave co

nducted

research o

n em

plo

yee en

gag

emen

t, the reco

mm

endatio

ns o

f

which

are wid

ely u

sed b

y th

e Intern

ational B

usin

ess World

. Gallu

p h

as paten

ted its 1

2 item

measu

re of E

E, th

e

Q12 scale.

Today

it is a popular area o

f research in

academ

ia and a v

ariety o

f defin

itions are av

ailable. K

ahn (1

990)

first defin

ed en

gag

emen

t at work

as “the h

arnessin

g o

f org

anizatio

n m

embers’ selv

es to th

eir work

roles; in

eng

agem

ent, p

eop

le emp

loy

and

exp

ress them

selves p

hy

sically, cog

nitiv

ely, and

emo

tion

ally d

urin

g ro

le

perfo

rman

ces.” In o

ther w

ord

s it is sug

gested

that en

gag

emen

t mean

s to b

e psy

cho

log

ically p

resent w

hen

occu

pyin

g an

d p

erform

ing an

org

anizatio

nal ro

le. Roth

bard

(2001) also

defin

es engag

emen

t as psy

cholo

gical

presen

ce at work

but ad

ds tw

o critical co

mponen

ts i.e. attentio

n an

d ab

sorp

tion to

it. While atten

tion h

as been

referred to

as the “co

gnitiv

e availab

ility an

d th

e amount o

f time o

ne sp

ends th

inkin

g ab

out a ro

le”, abso

rptio

n

indicates “b

eing en

gro

ssed in

a role an

d refers to

the in

tensity

of o

ne’s fo

cus o

n a ro

le.” Engag

emen

t has also

been

defin

ed as em

otio

nal an

d in

tellectual co

mm

itmen

t to th

e org

anizatio

n (B

aum

ruk, 2

004; R

ichm

an, 2

006;

Shaw

, 2005) o

r the am

ount o

f discretio

nary

effort ex

hib

ited b

y em

plo

yees in

their jo

bs (F

rank et a

l., 2004).

McC

ashlan

d (1

999) d

efined

EE

as “an em

otio

nal o

utco

me to

the em

plo

yee resu

lting fro

m th

e critical com

ponen

ts

of th

e work

place”. M

iles (2001) d

escribed

it as “inten

sively

involv

ing all em

plo

yees in

hig

h en

gag

emen

t cascades

that create u

nd

erstand

ing

, dialo

gu

e, feedb

ack an

d acco

un

tability, em

po

wer p

eop

le to creativ

ely alig

n th

eir

subunits, team

s and in

div

idual jo

bs w

ith th

e majo

r transfo

rmatio

n o

f the w

hole en

terprise”.

Acco

rdin

g to

Maslach

et al. (2

001), en

gag

emen

t is characterized

by en

ergy, in

volv

emen

t, and efficacy.

Sch

aufeli

et al. (2

002) d

efine en

gag

emen

t “as a positiv

e, fulfillin

g, w

ork

-related state o

f min

d th

at is characterized

by

vig

or, d

edicatio

n, an

d ab

sorp

tion

.” Harter, S

chm

idt &

Hay

es (20

02

) describ

ed E

E as th

e ind

ivid

ual’s

involv

emen

t and satisfactio

n w

ith as w

ell as enth

usiasm

for w

ork

. Engag

ed em

plo

yees are th

us said

to h

ave

hig

h lev

els of en

ergy an

d are en

thusiastic ab

out th

eir work

and fu

lly im

mersed

in th

eir work

. Sch

aufeli et a

l.

(2002) fu

rther state th

at EE

is a “persisten

t and p

ervasiv

e affective-co

gnitiv

e state that is n

ot fo

cused

on an

y

particu

lar object, ev

ent, in

div

idual, o

r beh

avio

r”. Hen

ce it is not a m

om

entary

and sp

ecific state.

*A

sst.Pro

f. (OB

& H

RM

), Institu

te : IILM

institu

te of H

igh

er Ed

ucatio

n,O

ff.add

ress :3,L

od

hi In

stitutio

nal A

rea, Lo

dh

i Ro

ad, N

ew

Delh

i 11

00

03

, Em

ail: kak

olix

@y

aho

o.co

m

46.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Acco

rdin

g to

Gib

bons (2

006) “em

plo

yee en

gag

emen

t is a heig

hten

ed em

otio

nal an

d in

tellectual co

nnectio

n

that an

emplo

yee h

as for h

is/her jo

b, o

rgan

ization, m

anag

er, or co

-work

ers that in

turn

influ

ences h

im/h

er to

apply

additio

nal d

iscretionary

effort to

his/h

er work

”. Task

er (2004) d

efines en

gag

emen

t as a ben

eficial two-

way

relationsh

ip w

here em

plo

yees an

d em

plo

yers “g

o th

e extra m

ile” for o

ne an

oth

er. Engag

ed em

plo

yees are

indiv

iduals, co

mm

itted to

the o

rgan

ization, w

ho tak

e action to

impro

ve b

usin

ess results fo

r their o

rgan

izations

and w

ho are w

illing to

help

out co

lleagues.

Sch

mid

t (20

04

) defin

es eng

agem

ent as b

ring

ing

satisfaction

and

com

mitm

ent to

geth

er. Sch

mid

t also

men

tions th

at though b

oth

satisfaction an

d co

mm

itmen

t are key

com

ponen

ts of en

gag

emen

t, indiv

idually

none

of th

em g

uaran

tee engag

emen

t.

Ellis an

d S

oren

sen (2

007) p

rovid

e a two d

imen

sional d

efinitio

n o

f engag

emen

t accord

ing to

which

an

engag

ed em

plo

yee is o

ne “w

ho k

now

s what to

do at w

ork

and w

ants to

do th

e work

” which

mean

s the em

plo

yee

has th

e right k

now

ledge as w

ell as the attitu

de an

d w

illingness to

do th

e work

. Glo

bal H

um

an cap

ital consu

lting

firm R

ight M

anag

emen

t (2006) d

efines tru

e engag

emen

t as every

perso

n in

the o

rgan

ization u

nderstan

din

g an

d

bein

g co

mm

itted to

the su

ccess of th

e busin

ess strategy.

Meere (2

005) d

escribes th

ree levels o

f engag

emen

t:

$%

Engag

ed –

Em

plo

yees w

ho w

ork

with

passio

n an

d feel a p

rofo

und co

nnectio

n w

ith th

eir org

anizatio

n. T

hey

driv

e innovatio

n an

d m

ove th

e org

anizatio

n fo

rward

.

&%

Not E

ngag

ed –

Em

plo

yees w

ho atten

d an

d p

articipate at w

ork

but are tim

e servin

g an

d p

ut n

o p

assion o

r

energ

y in

to th

eir work

'%

Disen

gag

ed –

Em

plo

yees w

ho are u

nhap

py at w

ork

and w

ho act o

ut th

eir unhap

pin

ess at work

, and also

underm

ine th

eir colleag

ue’s w

ork

on a d

aily b

asis.

There are sev

eral defin

itions o

f Engag

emen

t found in

man

agem

ent literatu

re also. E

E h

as been

defin

ed as

“a positiv

e two w

ay relatio

nsh

ip b

etween

emplo

yee an

d th

e org

anizatio

n” w

here “b

oth

parties are aw

are of th

eir

ow

n an

d th

e oth

er’s need

s and su

pport each

oth

er to fu

lfill these n

eeds. E

ngag

ed em

plo

yees an

d th

eir org

anizatio

ns

go th

e extra m

ile and b

oth

reap m

utu

al ben

efits (Dan

iel, 2004). L

anphear (2

004) d

efines E

E as “th

e bond,

emplo

yees h

ave w

ith th

eir org

anizatio

n, w

hen

emplo

yees really

care about th

e busin

ess, they

are more lik

ely to

go th

at extra m

ile.”

Llo

yds (2

004) an

d M

acDonald

(2002) su

ggest th

at EE

dep

ends o

n o

ffering em

pow

ermen

t and th

at jobs

should

fit emplo

yees’ in

terests.

Buch

anan

(2004) su

ggests th

at there are tw

o ty

pes o

f engag

emen

t, rational an

d em

otio

nal an

d th

at the

latter is more im

portan

t in d

etermin

ing p

erform

ance.

EE

is som

etimes v

iewed

as a precu

rsor to

work

place p

roductiv

ity an

d so

metim

es as pro

duct o

f work

place

variab

les. While so

me d

efinitio

ns (M

cCash

land, 1

999; M

iles, 2001) su

ggest th

at EE

is pro

duced

by asp

ects in

the w

ork

place, th

ere are oth

ers that su

ggest E

E is so

meth

ing th

at the in

div

idual b

rings to

the w

ork

place (H

arter,

Sch

mid

t & K

eyes, 2

002; G

oddard

, 1999). E

E h

as also b

een in

terchan

geab

ly u

sed w

ith co

mm

itmen

t (McC

ashlan

d,

1999); h

ow

ever E

mplo

yee en

gag

emen

t is differen

t from

Org

anizatio

nal co

mm

itmen

t. While O

rgan

izational

Com

mitm

ent refers to

a perso

n’s attitu

de an

d attach

men

t tow

ards th

e org

anizatio

n, en

gag

emen

t is the d

egree to

which

an in

div

idual is atten

tive an

d ab

sorb

ed in

the p

erform

ance o

f his o

r her jo

b ro

les.

Wh

ile com

mitm

ent is a w

ell establish

ed co

ncep

t catego

rized as N

orm

ative, A

ffective o

r Co

ntin

uan

ce

com

mitm

ent (M

ow

day, S

teers & P

orter, 1

979) em

plo

yees can

experien

ce vary

ing d

egrees o

f engag

emen

t and

be E

ngag

ed, N

ot en

gag

ed an

d d

isengag

ed (M

eere, 2005). E

ngag

emen

t also d

iffers from

job in

volv

emen

t. While

job in

volv

emen

t is the resu

lt of a co

gnitiv

e judgm

ent ab

out th

e need

satisfyin

g ab

ilities of th

e job an

d is tied

to

Em

plo

yee E

ng

agem

ent :T

he O

nly

Way

Ah

ead

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

47

one’s self-im

age M

ay et al. (2

004), en

gag

emen

t is about h

ow

indiv

iduals em

plo

y th

emselv

es in th

e perfo

rman

ce

of th

eir job. E

ngag

emen

t may

be lo

oked

at as a precu

rsor to

job in

volv

emen

t as indiv

iduals w

ho ex

perien

ce

deep

engag

emen

t in th

eir roles co

me to

iden

tify w

ith th

eir jobs. E

ngag

emen

t thus seem

s to b

e a com

bin

ation o

f

job satisfactio

n, o

rgan

izational co

mm

itmen

t and in

tentio

n to

stay.

Th

e Bu

siness C

ase fo

r EE

Today

there are n

ew ch

allenges lik

e glo

balizatio

n o

f busin

ess, new

age tech

nolo

gy, an

increasin

gly

div

erse

work

force an

d in

creased m

arket p

ressures to

perfo

rm th

at the o

rgan

izations are face to

face with

. To rem

ain

com

petitiv

e, org

anizatio

ns w

ill need

to tap

all the talen

ts and

mo

tivatio

ns o

f all their em

plo

yees. H

ow

ever

emp

loy

ees also face an

increasin

g p

ressure to

pro

du

ce mo

re for less (C

ov

ey, 20

04

) with

fewer reso

urces

(Bu

ckin

gh

am &

Co

ffman

, 19

99

) and

un

clear exp

ectation

s in an

env

iron

men

t of lo

w m

anag

erial sup

po

rt

(Covey,2

004). T

hese d

eman

ds in

crease emplo

yee stress, resu

lting in

disen

gag

ed em

plo

yees at th

e work

place

(Cartw

right &

Hom

es, 2006; H

arter, Sch

mid

t & H

ayes, 2

002). In

such

a dynam

ic busin

ess enviro

nm

ent it is

extrem

ely essen

tial to h

ave m

ore an

d m

ore en

gag

ed em

plo

yees, th

ose w

ho b

elieve in

the o

rgan

izational g

oals

and are w

illing to

go th

e extra m

ile to ach

ieve th

e same.

It is gen

erally b

elieved

that th

ere is a con

nectio

n b

etween

emp

loy

ee eng

agem

ent an

d b

usin

ess results

(Harter

et al., 2

002). E

mplo

yee en

gag

emen

t is said to

be g

ood fo

r org

anizatio

nal su

ccess and fin

ancial p

erform

ance

(Bau

mru

k, 2

004; R

ichm

an, 2

006). E

ngag

emen

t has b

een fo

und to

be related

to jo

b p

erform

ance an

d ex

tra-role

beh

avio

r and also

positiv

ely related

to o

rgan

izational co

mm

itmen

t and n

egativ

ely related

to in

tentio

n to

quit,

(Sch

aufeli an

d B

akker, 2

004; S

onnen

tag, 2

003). E

ngag

emen

t is said to

trigger an

upw

ard sp

iral and lead

to

hig

her lev

els of self-efficacy

over tim

e (Salan

ova et a

l.2006).

Acco

rdin

g to

Bak

ker (2

008) th

ere are at least four reaso

ns w

hy en

gag

ed w

ork

ers perfo

rm b

etter than

non-

eng

aged

wo

rkers. E

ng

aged

emp

loy

ees often

exp

erience p

ositiv

e emo

tion

s, inclu

din

g h

app

iness, jo

y, and

enth

usiasm

; experien

ce better h

ealth; create th

eir ow

n jo

b an

d p

ersonal reso

urces; an

d tran

sfer their en

gag

emen

t

to o

thers. A

goal-d

irected b

ehav

ior is facilitated

when

peo

ple are en

gag

ed in

their w

ork

becau

se they

hav

e the

energ

y (can

do) an

d th

e motiv

ation (w

ant to

do) to

undertak

e action (B

akker,2

008). T

his h

elps th

em n

ot o

nly

achiev

e better p

erform

ance b

ut also

increase th

eir chan

ces for a b

etter career dev

elopm

ent.

Kah

n (1

992) p

roposed

that en

gag

emen

t leads to

both

quality

in in

div

idual o

utco

mes as w

ell as gro

wth

and

pro

ductiv

ity o

f org

anizatio

ns. E

ngag

ed em

plo

yees are lik

ely to

be m

ore attach

ed to

their o

rgan

izations an

d w

ill

hav

e a low

er tenden

cy to

leave th

eir org

anizatio

n. R

ecent research

has sh

ow

n th

at engag

ed em

plo

yees o

ften

experien

ce positiv

e emotio

ns (S

chau

feli and V

an R

hen

en, 2

006), an

d th

is may

be th

e reason w

hy th

ey are m

ore

pro

ductiv

e. Hap

py p

eople are m

ore sen

sitive to

opportu

nities at w

ork

, more o

utg

oin

g an

d h

elpfu

l to o

thers, an

d

more co

nfid

ent an

d o

ptim

istic (Cro

pan

zano an

d W

right, 2

001).

Driv

ers of E

E

While th

ere are man

y in

div

idual an

d o

rgan

izational facto

rs that d

etermin

e wheth

er and to

what ex

tent

emplo

yees b

ecom

e engag

ed, th

ere is no d

efinitiv

e all-purp

ose list o

f engag

emen

t driv

ers. While m

ost o

f the

org

anizatio

ns try

to m

anag

e emplo

yee reten

tion an

d m

otiv

ation b

y in

creasing salaries an

d b

enefits, b

y p

rovid

ing

cash in

centiv

es etc., it is importan

t to rem

ember th

at peo

ple h

ave v

ery in

div

idual m

otiv

ations, o

ften in

com

plex

com

bin

ations an

d m

otiv

ation an

d reten

tion are n

ot n

ecessarily b

est or ex

clusiv

ely m

anag

ed w

ith cash

inducem

ents.

Robin

son et al (2

004), stresses th

e importan

ce of ‘feelin

g v

alued

and in

volv

ed’ b

y an

emplo

yee as a k

ey d

river

of en

gag

emen

t. There are a n

um

ber o

f elemen

ts that h

ave a v

aryin

g in

fluen

ce on th

e exten

t to w

hich

the em

plo

yee

will feel v

alued

and

inv

olv

ed an

d h

ence en

gag

ed. F

igu

re 1 b

ased o

n a d

iagn

ostic m

od

el in R

ob

inso

n et al

(2004), illu

strates the d

rivers o

f engag

emen

t in in

creasing o

rder o

f importan

ce.

Em

plo

yee E

ng

agem

ent : T

he O

nly

Way

Ah

ead

48.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Fig

ure 1

: Robin

son et al (2

004) m

odel o

f the d

rivers o

f emplo

yee en

gag

emen

t

Pech

.R.J. (2

009) su

ggests th

at a sense o

f trust b

etween

emplo

yees an

d th

eir man

agers as w

ell as a sense o

f

perso

nal co

ntro

l are the k

ey d

etermin

ants fo

r emplo

yee en

gag

emen

t. The o

rgan

izational cu

lture m

ust co

mm

unicate

trust &

the p

rocess m

ust start fro

m th

e top o

f the o

rgan

ization.

Pritch

ard (2

008) su

ggests th

at at differen

t stages em

plo

yees d

iffer in th

eir need

s and lev

els of en

gag

emen

t

– fro

m b

eing a p

oten

tial emplo

yee to

beco

min

g an

ex-em

plo

yee, an

d ev

ery step

along th

e way.

Sriv

astava &

Bhatn

agar (2

008) o

pin

e that em

plo

yees feel en

gag

ed w

hen

they

find p

ersonal m

eanin

g an

d

motiv

ation in

their w

ork

, receive p

ositiv

e interp

ersonal su

pport, an

d fu

nctio

n in

an efficien

t work

enviro

nm

ent.

The au

thors also

suggest th

at there sh

ould

not b

e any g

ap b

etween

what w

ork

ers aspire fo

r, from

the o

rgan

ization

and

wh

at they

actually

get. T

his g

ap h

as the p

oten

tial to lead

to em

plo

yee d

iseng

agem

ent. P

sych

olo

gical

mean

ingfu

lness can

be ach

ieved

from

task ch

aracteristics that p

rovid

e challen

gin

g w

ork

, variety, allo

w th

e use

of d

ifferent sk

ills, perso

nal d

iscretion, an

d th

e opportu

nity

to m

ake im

portan

t contrib

utio

ns. Jo

bs th

at pro

vid

e

indiv

iduals w

ith th

e room

and in

centiv

e to b

ring m

ore o

f them

selves in

to th

eir work

will h

elp in

keep

ing th

em

engag

ed (K

ahn, 1

992).

Welb

ourn

e (2007) su

ggests th

at there are fiv

e key

roles th

at emplo

yees o

ccupy at w

ork

: Core jo

b h

old

er

role, en

trepren

eur o

r innovato

r role, team

mem

ber ro

le, career role an

d o

rgan

izational m

ember ro

le. Firm

s stay

ahead

of th

e com

petitio

n w

hen

they

dev

elop th

eir hum

an reso

urces in

a way

that is n

ot easily

replicab

le by th

eir

com

petitio

n. If a co

mpan

y v

alues o

nly

the co

re job ro

le and em

plo

yees en

gag

e in b

ehav

iors ex

clusiv

ely asso

ciated

with

the co

re job, th

ese jobs are v

ery easy

for th

e com

petito

rs to rep

licate.

Acco

rdin

g to

Gib

bons (2

006) th

e top d

rivers o

f emplo

yee en

gag

emen

t inclu

de tru

st and in

tegrity

for

the em

plo

yees o

n th

e part o

f the em

plo

yer, n

ature o

f the jo

b –

the ex

tent o

f emplo

yee p

articipatio

n an

d au

tonom

y;

the co

nnectio

n b

etween

indiv

idual an

d co

mpan

y p

erform

ance –

the ex

tent to

which

emplo

yees u

nderstan

d th

e

com

pan

y’s o

bjectiv

es, curren

t levels o

f perfo

rman

ce, career gro

wth

opportu

nities &

a clearly d

efined

career

path

; prid

e about th

e com

pan

y –

the ex

tent to

which

emplo

yees d

erive self-esteem

from

their w

ork

; attitudes

and p

erspectiv

es of co

work

ers tow

ards th

eir jobs an

d th

e com

pan

y; em

plo

yee d

evelo

pm

ent –

the ex

tent to

which

efforts are m

ade to

dev

elop th

e emplo

yee’s sk

ills; and p

ersonal relatio

nsh

ip w

ith o

ne’s m

anag

er – th

e

exten

t to w

hich

the em

plo

yee v

alues th

is relation

ship

. Wh

ile eng

agem

ent lev

els can v

ary acco

rdin

g to

dem

ograp

hic an

d jo

b related

factors, S

aks,M

.A. (2

006) su

ggests th

at man

y o

f the d

rivers o

f engag

emen

t will b

e

com

mon to

all org

anizatio

ns, reg

ardless o

f sector.

Kah

n (1

990) rep

orted

that in

additio

n to

mean

ingfu

l work

, peo

ple v

ary in

their en

gag

emen

t as a functio

n

of th

eir percep

tions o

f the b

enefits th

ey receiv

e from

a role, a sen

se of retu

rn o

n in

vestm

ents can

com

e from

extern

al reward

s and reco

gnitio

n.

Maslach

et al. (2001) h

ave also

suggested

that w

hile a lack

of rew

ards an

d reco

gnitio

n can

lead to

burn

out,

appro

priate reco

gnitio

n an

d rew

ard is im

portan

t for en

gag

emen

t. Kah

n (1

990) fo

und th

at supportiv

e and tru

sting

Em

plo

yee E

ng

agem

ent : T

he O

nly

Way

Ah

ead

IMPORTANCE

•T

rainin

g, d

evelo

pm

ent an

d career

•Im

med

iate man

agem

ent

•P

erform

ance an

d ap

priasal

•C

om

mu

nicatio

n

•E

qual o

pportu

nities an

d

fair treatmen

t

•P

ay an

d b

enefits

•H

ealth an

d safety

•C

oo

peratio

n

•F

amily

friendlin

es

•Jo

b satisfactio

n

Feelin

g

valu

ed an

d

involv

ed

En

gag

emen

t

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

49

interp

erson

al relation

ship

s as well as su

pp

ortiv

e man

agem

ent p

rom

oted

psy

cho

log

ical safety. Su

pp

ortiv

e

enviro

nm

ents allo

w m

embers to

experim

ent an

d to

try n

ew th

ings an

d ev

en fail w

ithout fear o

f the co

nseq

uen

ces

(Kah

n, 1

990). In

oth

er word

s, when

emplo

yees b

elieve th

at their o

rgan

ization is co

ncern

ed ab

out th

em an

d

cares about th

eir well-b

eing, th

ey are lik

ely to

respond b

y attem

ptin

g to

fulfill th

eir oblig

ations to

the o

rgan

ization

by b

ecom

ing m

ore en

gag

ed. F

irst-line su

perv

isors are also

believ

ed to

be esp

ecially im

portan

t for b

uild

ing

engag

emen

t and also

to b

e the ro

ot cau

se of em

plo

yee d

isengag

emen

t (Bates, 2

004; F

rank et al., 2

004). F

airness

and ju

stice is also o

ne o

f the w

ork

conditio

ns acco

rdin

g to

Maslach

et al. (2001) an

d p

ositiv

e percep

tions o

f

fairness can

impro

ve en

gag

emen

t.

Th

e Sta

te of E

mp

loyee E

ngagem

ent T

od

ay

Em

plo

yee E

ngag

emen

t is on th

e declin

e among em

plo

yees w

orld

wid

e today

(Bates, 2

004; R

ichm

an 2

006).

Bates (2

004) &

Johnso

n (2

004) fo

und th

at roughly

half o

f all Am

ericans are n

ot fu

lly en

gag

ed o

r even

disen

gag

ed

and co

st US

busin

esses US

$ 3

00 b

illion a y

ear in lo

st pro

ductiv

ity, while in

UK

it is US

$ 3

7.2

to 3

8.9

billio

n

annually, in

Japan

, US

$ 2

32 b

illion an

nually. T

he g

lobal su

rvey

(2008) rev

eals that o

nly

about 3

4 %

of th

e

emplo

yees in

India are fu

lly en

gag

ed an

d th

e rest either p

artially en

gag

ed o

r com

pletely

disen

gag

ed. B

ecause o

f

their b

eing clo

se to d

ecision m

akin

g, p

eople h

igher u

p in

the o

rgan

izations ran

k h

igher in

emplo

yee en

gag

emen

t,

how

ever th

ere is a dro

p in

the en

gag

emen

t level p

ast the V

ice Presid

ent lev

el. The su

rvey

also rev

eals a large

disp

arity b

etween

the en

gag

emen

t levels o

f men

and w

om

en, w

ith m

en b

eing 8

% m

ore fu

lly en

gag

ed an

d 6

%

less disen

gag

ed th

an w

om

en. A

ccord

ing to

the su

rvey, th

e top th

ree factors in

fluen

cing em

plo

yee satisfactio

n

were career d

evelo

pm

ent o

pportu

nities &

trainin

g, m

ore ch

allengin

g w

ork

and m

ore o

pportu

nities at d

oin

g

what th

e emplo

yee d

oes b

est. With

such

low

levels o

f emplo

yee en

gag

emen

t, man

agin

g E

mplo

yee E

ngag

emen

t

should

be th

e top p

riority

for o

rgan

izations to

day. It n

ot o

nly

mak

es busin

ess sense, it is th

e only

way

to su

stain

and g

row

in to

day

’s chan

gin

g en

viro

nm

ent.

Imp

licatio

ns fo

r Pra

ctice

In th

e dynam

ic busin

ess enviro

nm

ent o

f today, o

rgan

izations w

ill constan

tly n

eed to

evolv

e them

selves n

ot

only

in term

s of strateg

ic busin

ess dev

elopm

ent b

ut also

in strateg

ic hum

an d

evelo

pm

ent. O

rgan

izations to

day

need

peo

ple w

ho are n

ot ju

st com

plian

t emplo

yees w

ho d

o th

e prescrib

ed jo

bs b

ut team

mem

bers w

ho are

talented

, who are creativ

e, hav

e new

ideas an

d are co

mm

itted to

their w

ork

and th

e org

anizatio

n. O

rgan

izations

will n

eed to

focu

s on em

plo

yees’ p

erceptio

ns o

f the su

pport th

ey receiv

e from

their o

rgan

ization. O

rgan

izational

pro

gram

s and

po

licies that ad

dress em

plo

yees’ n

eeds an

d co

ncern

s and

dem

on

strate caring

and

sup

po

rtive

enviro

nm

ent are lik

ely to

motiv

ate emplo

yees to

recipro

cate with

hig

her lev

els of en

gag

emen

t.

Lin

e man

agers p

lay a m

ajor ro

le in k

eepin

g th

eir subord

inates en

gag

ed. W

hile lin

e man

agers o

r imm

ediate

bosses are th

e reason w

hy team

mem

bers th

rive in

an o

rgan

ization, th

ey are also

the p

rime reaso

n w

hy em

plo

yees

quit th

eir jobs. M

ajority

of em

plo

yees w

ant th

eir man

agers to

giv

e regular feed

back

on th

eir perfo

rman

ces,

apprise th

em o

f missio

n im

portan

ce and alig

nm

ent w

ith o

rgan

izational g

oals, d

iscuss em

ergin

g w

ork

trends,

and h

elp in

career dev

elopm

ent. M

anag

ers need

to u

nderstan

d th

e importan

ce of so

cial exch

ange fo

r emplo

yee

engag

emen

t. In p

articular, m

anag

ers will n

eed to

pro

vid

e emplo

yees w

ith reso

urces an

d b

enefits th

at will o

blig

e

them

to recip

rocate in

kin

d w

ith h

igher lev

els of en

gag

emen

t. How

ever m

anag

ers will also

need

to u

nderstan

d

that em

plo

yee en

gag

emen

t is a long-term

and o

n-g

oin

g p

rocess th

at requires co

ntin

ued

interactio

ns o

ver tim

e in

ord

er to g

enerate o

blig

ations an

d a state o

f recipro

cal interd

epen

den

ce (Cro

pan

zano an

d M

itchell, 2

005).

Em

plo

yee en

gag

emen

t should

be lo

oked

at as a bro

ad o

rgan

izational an

d cu

ltural strateg

y th

at involv

es all

levels o

f the o

rgan

ization (F

rank et a

l., 2004), a series o

f actions an

d step

s (Shaw

, 2005) th

at require th

e input

and

inv

olv

emen

t of o

rgan

ization

al mem

bers (R

ob

inso

n et a

l., 20

04

), and

con

sistent, co

ntin

uo

us, an

d clear

com

municatio

ns (K

ress, 2005). B

esides , each

emplo

yee is d

ifferent in

his n

eeds an

d asp

irations an

d “o

ne size

fits all” appro

ach w

ill not b

e effective fo

r emplo

yee en

gag

emen

t. Bearin

g th

is in m

ind o

rgan

izations sh

ould

Em

plo

yee E

ng

agem

ent :T

he O

nly

Way

Ah

ead

50.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

adap

t their p

ractices to su

it differen

t emp

loy

ee need

s and

keep

them

eng

aged

. So

me o

f the p

ractices that

org

anizatio

ns can

imp

lemen

t to in

crease emp

loy

ee eng

agem

ent am

on

g th

eir emp

loy

ees are to p

rov

ide ro

le

clarity, job v

ariety, share ch

allenges &

strategies fro

m tim

e to tim

e, enco

urag

e two w

ays co

mm

unicatio

n, p

rom

ote

an o

pen

and carin

g en

viro

nm

ent, co

mm

unicate o

pen

ly an

d clearly

about ex

pectatio

ns fro

m th

e emplo

yees, b

e

involv

ed in

the em

plo

yees d

evelo

pm

ent, celeb

rate indiv

idual, team

and o

rgan

izational su

ccesses on a su

stained

basis.

Con

clusio

n

The w

ork

force d

emograp

hics h

ave ch

anged

; peo

ple are m

ore sk

illed, m

ore k

now

ledgeab

le and m

ore m

obile

than

ever. P

eople activ

ely seek

jobs th

at would

suit th

eir perso

nality, h

elp th

em ach

ieve th

eir perso

nal an

d

pro

fessional g

oals in

life. At w

ork

emplo

yees w

ant to

be in

form

ed ab

out th

eir perfo

rman

ce. Lifetim

e emplo

ym

ent

has lo

st its mean

ing. E

mplo

yee en

gag

emen

t is the b

ypro

duct o

f our eco

nom

y’s tran

sition fro

m an

industrial

base to

a service an

d in

form

ation b

ase and en

gag

ing em

plo

yees is an

art and resp

onsib

ility o

f man

agem

ent.

While to

sustain

and g

row

in th

e multi g

row

th o

pportu

nity

mark

et of to

day, it is im

perativ

e to h

ave a d

iverse,

talented

and en

gag

ed w

ork

force, it is im

portan

t to rem

ember th

at the talen

t mark

et is also co

mpetitiv

e and th

e

traditio

nal “attract-retain

” talent m

anag

emen

t strategy h

as beco

me o

utd

ated. E

mplo

yees are lik

ely to

be m

otiv

ated

by a ran

ge o

f factors in

cludin

g n

on fin

ancial o

nes. T

his is p

articularly

true o

f really talen

ted p

eople. E

ngag

ing

talented

peo

ple th

us n

eeds to

be a to

p o

rgan

izational p

riority

becau

se they

are quite lik

ely to

find an

oth

er job if

they

do n

ot d

erive satisfactio

n, p

urp

ose an

d sen

se of self-w

orth

from

their cu

rrent jo

bs.

Em

plo

yee en

gag

emen

t is a new

model o

f social co

ntract b

etween

com

pan

ies and th

eir peo

ple. It m

eans

actively

involv

ing its o

wn p

eople in

decisio

n m

akin

g an

d ch

ange m

anag

emen

t. Each

emplo

yee n

eeds to

understan

d

and b

elieve in

the m

ission statem

ent o

f the o

rgan

ization an

d activ

ely w

ork

tow

ards its ach

ievem

ent. O

ne sh

ould

hav

e the freed

om

to ex

press an

d d

evelo

p h

is ideas at w

ork

. Em

plo

yers w

ill ben

efit by h

avin

g a flex

ible, co

mm

itted

and h

ighly

motiv

ated p

ool o

f talent w

ho h

ave a stro

ng sen

se of p

urp

ose ab

out th

eir work

.

Build

ing an

engag

ed an

d lo

yal w

ork

force to

day

will h

elp o

rgan

izations w

eather th

e challen

ges o

f tom

orro

w

(The G

lobal su

rvey,2

008). O

rgan

izations th

at actively

work

tow

ards em

plo

yee en

gag

emen

t will fare b

etter in

terms o

f perfo

rman

ce, staff retentio

n, m

otiv

ation an

d cru

cially, pro

fitability. It is im

portan

t to reg

ularly

measu

re

the m

ost lik

ely p

redicto

rs of m

otiv

ation an

d/o

r dissatisfactio

n am

ong th

e emplo

yees an

d tak

e active step

s to

dev

elop en

gag

emen

t. Org

anizatio

ns to

day

need

leaders w

ho w

ill transfo

rm th

ose w

ho fo

llow

them

thro

ugh

insp

iration o

f the m

ind, care o

f the h

eart, and ack

now

ledgem

ent o

f hum

an em

otio

ns (M

accoby,2

007).

Such

leaders w

ill dev

elop an

enviro

nm

ent o

f iden

tifyin

g th

e right talen

t, pro

vid

ing a so

lid in

ductio

n in

to

the sy

stem, d

evelo

pin

g th

eir work

force o

n an

ongoin

g b

asis; enco

urag

e open

com

municatio

n an

d creativ

ity,

focu

s on in

div

idual career d

evelo

pm

ent an

d p

rom

ote w

ork

-life balan

ce. To su

mm

arize, enhan

cing em

plo

yee

engag

emen

t is a long-term

pro

positio

n. In

div

iduals are u

nlik

ely to

beco

me en

gag

ed b

ecause th

ey are ex

pected

to. E

ngag

emen

t will o

ccur n

aturally, w

hen

the co

nditio

ns are rig

ht, w

hen

the lead

ers are insp

iring, w

hen

indiv

iduals

find th

e ideal p

lace to ap

ply

their stren

gth

s and can

actually

see their g

row

th in

the o

rgan

izational ro

le they

are

in.

Referen

ces

Bak

ker,A

.B.&

Dem

erouti E

. (2008),”T

ow

ards a m

odel o

f work

engag

emen

t”, Career D

evelo

pm

ent In

ternatio

nal,

13 (3

) pp: 2

09-2

23.

Bates.,S

.(2004) “G

etting en

gag

ed”, H

R M

agazin

e, Vol.4

9(2

) pp 4

4-5

1.

Bau

mru

k, R

. (2004), “T

he m

issing lin

k: th

e role o

f emplo

yee en

gag

emen

t in b

usin

ess success”, W

orksp

an

, Vol.

47 p

p.4

8-5

2.

Buch

anan

.,C. (2

004), “T

he th

ings th

ey d

o fo

r love” H

arva

rd B

usin

ess Review

, 82 1

2 p

p 1

9(2

)

Em

plo

yee E

ng

agem

ent :T

he O

nly

Way

Ah

ead

Vig

nan

a Jyoth

i Journ

al of M

anag

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din

g

Ath

ey. R.(2

008) It’s 2

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o y

ou k

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our talen

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al of

Busin

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y.29,4

pp: 4

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Em

plo

yee E

ng

agem

ent :T

he O

nly

Way

Ah

ead

54.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Exp

an

din

g th

e Valu

e Horizo

n o

f HR

: An

En

ab

ler an

d F

acilita

tor

to B

uild

ing C

orp

ora

te Govern

an

ce Pra

ctices

Dim

ple G

rover*

Ab

stractT

he o

ngoin

g eco

nom

ic recession h

as once ag

ain p

oin

ted its g

laring fin

gers at th

e differen

ce betw

een

the b

ook v

alue an

d th

e mark

et valu

e of th

e firms. N

o m

ore th

e focu

s of C

orp

orate G

overn

ance (C

G) lies o

n th

e

size, com

positio

n, q

ualificatio

n an

d ro

le of th

e board

. Underg

oin

g a p

aradig

m sh

ift the m

eanin

g an

d relev

ance

of C

orp

orate G

overn

ance h

as chan

ged

in th

e presen

t contex

t where in

tellectual assets are u

sed fo

r the co

mpetitiv

e

advan

tage. M

anag

ing in

tellectual assets an

d b

uild

ing th

e org

anizatio

nal cu

lture h

as alway

s been

a prero

gativ

e

of H

R. H

R w

hich

has b

een p

eripheral to

the C

G issu

es, is now

back

again

in its seat. H

avin

g a m

ore ev

olv

ing

and ch

allengin

g ro

le, HR

has to

take o

n o

nus an

d resp

onsib

ility to

act as an en

abler to

CG

. This p

aper ex

amin

es

HR

’s role an

d in

vestig

ates how

it can m

ake a m

eanin

gfu

l and m

ore strateg

ic contrib

utio

n to

corp

orate g

overn

ance

with

in o

rgan

izations. T

he p

aper also

attempts to

integ

rate HR

’s role in

build

ing g

ood co

rporate g

overn

ance

practices in

the firm

.

Key

Word

s: Hum

an R

esource, In

tellectual C

apital, C

orp

orate G

overn

ance, In

tellectual A

ssets, Com

parativ

e

Advan

tage an

d S

trategic.

Intro

du

ction

:

Eco

nom

ic freedom

has b

ecom

e a relative issu

e. An ev

iden

t to th

is is the eco

nom

ic recession. B

usin

ess

com

petitiv

eness h

as touch

ed its p

innacle b

indin

g co

untries, in

stitutio

ns, an

d p

eople. K

enich

i Ohm

ae (1990),

“Th

e natio

n –

state itself – th

at artifact of th

e eigh

teenth

and

nin

eteenth

centu

ries - has b

egu

n to

crum

ble,

battered

by a p

ent sto

rm o

f political resen

tmen

t, ethnic p

rejudice, trib

al hatred

and relig

ious an

imosity

”.

Th

e crum

blin

g o

f the eco

no

mies h

ave its u

nd

erpin

nin

g in

large co

rpo

rate sectors leav

ing

no

ston

e

untu

rned

to acco

mplish

their g

oal to

earn rev

enue ev

en at th

e cost o

f ethics an

d v

alues.H

ow

ever, th

e recent

failures o

f the g

iant fin

ancial in

stitutio

ns lik

e Leh

man

bro

thers, G

old

man

Sach

s hav

e forced

the ru

les of th

e

gam

e hav

e to b

e rewritten

, though th

ey m

ay n

ot b

e entirely

new

, yet th

eir relevan

ce has to

be estab

lished

in a

new

contex

t. One o

f the k

ey co

nstitu

ent is th

e emplo

yee –

emplo

yer relatio

nsh

ip. T

o b

ecom

e responsiv

e to

dynam

ic busin

ess enviro

nm

ent, H

R h

as taken

on th

e onus o

f accelerating g

ears emphasizin

g red

istributio

n o

f

pow

er, greater p

articipatio

n b

y in

div

iduals, an

d team

work

. To u

nderstan

d th

e relationsh

ip b

etween

HR

and

govern

ance, it is im

portan

t to u

nderstan

d th

e prin

ciples o

f govern

ance. T

raditio

nally

and h

istorically, H

R lead

ers

hav

e not tak

en u

pon an

active ro

le in term

s of reg

ulatin

g g

overn

ance issu

es, acting im

plicitly

only. E

xplicitly

they

hav

e only

work

ed in

the issu

e relating to

com

plian

ce.

Underg

oin

g a p

aradig

m sh

ift HR

M is assu

min

g m

ore d

ynam

ic role o

f integ

rating th

e busin

ess pro

cesses,

alignin

g th

em w

ith p

eople p

rocesses w

ithin

the co

mpan

y to

build

on effectiv

e org

anizatio

nal sy

stems. G

uest

(1987) d

efinin

g th

e key

characteristic o

f HR

laid em

phasis o

n in

tegratio

n. T

his in

cludes relatin

g H

RM

strategy

to co

rporate strateg

y, main

tainin

g in

ternal co

nsisten

cy in

HR

M p

ractices and th

e integ

ration o

f the em

plo

yees’

interest w

ith th

ose o

f org

anizatio

ns. T

his in

tegratio

n, id

eally sh

ould

involv

e interactio

n b

etween

micro

politics,

functio

nal flex

ibility, an

d th

e role o

f HR

M in

pursu

it of b

oth

, flexib

ility an

d in

tegratio

n. G

overn

ance, o

n th

e

oth

er han

d h

inges o

n th

e role o

f stakeh

old

ers, accountab

ility, transp

arency, an

d d

isclosu

re, equitab

leness an

d

fairness in

prin

ciple.

*A

ssistant P

rofesso

r at Jayp

ee Bu

siness S

cho

ol, N

oid

a, Em

ail: gro

verd

imp

le@red

iffmail.co

m.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

55

The p

rimary

focu

s of th

is pap

er is to ex

amin

e the ro

le ascertained

by H

R in

dev

elopin

g g

ood co

rporate

govern

ance o

f the firm

s. This lin

kag

e gets estab

lished

as HR

takes o

n th

e strategic ro

le while b

uild

ing its ed

ifice

on th

e traditio

nal H

R fu

nctio

ns.

Hu

man

Reso

urce M

an

agem

ent

“The h

um

an reso

urce o

f an o

rgan

ization co

nstitu

tes its entire w

ork

force. H

um

an R

esource d

epartm

ent

of an

org

anizatio

n is resp

onsib

le for selectin

g an

d in

ducin

g co

mpeten

t peo

ple, train

ing th

em, facilitatin

g an

d

motiv

ating to

perfo

rm at th

e hig

h lev

els of efficien

cy, and p

rovid

ing m

echan

isms to

ensu

re that th

ey m

aintain

their affiliatio

n w

ith th

e org

anizatio

n” (V

enkat et.al. ,2

006).

Cascio

(2003), d

efined

, hum

an reso

urce m

anag

emen

t “gettin

g ev

erybody fro

m th

e top o

f the o

rgan

ization

to th

e botto

m d

oin

g th

ings to

implem

ent th

e strategy o

f the b

usin

ess effectively

”. Both

the d

efinitio

ns clearly

earmark

the ro

le of h

um

an reso

urce d

epartm

ent as it en

gag

es in th

e build

ing th

e hum

an cap

ital the m

ost im

portan

t

source o

f any o

rgan

ization, th

ough C

ascio in

his d

efinitio

n lay

s emphasis o

n in

volv

ing all th

e emplo

yees acro

ss

the v

erticals.

Till recen

t past H

R d

epartm

ent w

as blam

ed to

sit in th

e AC

room

s and b

uild

ing p

olicies related

to

industrial relatio

ns an

d few

pro

cess man

agem

ent. H

ow

ever, th

e emplo

yee –

emplo

yer relatio

nsh

ip in

the recen

t

past h

as underg

one ch

ange b

ut, as g

lobalizatio

n to

ok p

lace, HR

dep

artmen

t could

not sit b

ack an

d h

ad to

assum

e

a more resp

onsib

le positio

n as retain

ing o

f the talen

ted em

plo

yees b

ecame a h

erculean

task. N

ot o

nly

that it also

had

to assist in

alignin

g th

e intern

al pro

cesses and sy

stems w

ith th

e busin

ess (corp

orate strateg

y o

f the co

mpan

y.

Lin

kin

g an

d lay

ing im

portan

ce of H

R’s d

ynam

ic role w

ith o

rgan

izational p

erform

ance, P

feffer, 1998 id

entified

a bundle o

f seven

HR

best p

ractices - self-man

aged

teams, selectiv

e hirin

g, co

mpen

sation tied

to o

rgan

izational

perfo

rman

ce, emplo

ym

ent secu

rity, info

rmatio

n sh

aring, lo

w statu

s differen

ces among em

plo

yees, an

d ex

tensiv

e

trainin

g, w

hich

stands tru

e and v

alid in

the p

resent d

ay co

ntex

t.

In resp

onse to

the d

ynam

ic enviro

nm

ent H

R d

epartm

ent n

ow

work

s in clo

se associatio

n w

ith all th

e

oth

er dep

artmen

ts with

in an

d o

utsid

e the o

rgan

izations, th

ereby assu

min

g a strateg

ic role th

us alig

nin

g itself

with

busin

ess/ corp

orate strateg

y. In sim

ple w

ord

s, it mean

s to in

tegrate d

ecisions ab

out p

eople w

ith th

e decisio

ns

of an

org

anizatio

n to

achiev

e perfo

rman

ce, thus efficien

cy. Miles an

d S

now

, 1984 d

efined

Strateg

ic Hum

an

Reso

urce M

anag

emen

t (SH

RM

) as ‘a hum

an reso

urce sy

stem th

at is tailored

to th

e dem

ands o

f the b

usin

ess

strategy’ to

‘the p

attern o

f plan

ned

hum

an reso

urce activ

ities inten

ded

to en

able an

org

anizatio

n to

achiev

e its

goals’ (W

right an

d M

cMah

an 1

992). T

hus, as ev

iden

t SH

RM

build

s a brid

ge b

etween

traditio

nal h

um

an reso

urce

man

agem

ent activ

ities with

in a firm

’s overall strateg

ic plan

nin

g an

d ex

ecutio

n.

Acco

rdin

g to

(Leg

nick

-Hall &

Leg

nick

-Hall, 1

988, “S

HR

M in

tegrates h

um

an reso

urce co

nsid

erations

with

oth

er ph

ysical, fin

ancial, an

d tech

no

log

ical resou

rces in th

e setting

of g

oals an

d so

lvin

g co

mp

lex

org

anizatio

nal p

roblem

s. SH

RM

also em

phasizes th

e implem

entatio

n o

f a set of p

olicies an

d p

ractices that w

ill

bu

ild em

plo

yee p

oo

l of sk

ills, kn

ow

ledg

e, and

abilities (Jack

on

and

Sch

ulerm

19

95

) that are relev

ant to

org

anizatio

nal g

oals. T

hus a larg

er variety

and m

ore co

mplete set o

f solu

tions fo

r solv

ing o

rgan

izational p

roblem

s

are pro

vid

ed an

d th

e likelih

ood th

at busin

ess goals o

f the o

rgan

ization w

ill be attain

ed is in

creased (M

echelin

,

1996). F

ew o

f the b

enefits b

y im

plem

entin

g S

HR

M can

be in

terms o

f (i) scannin

g th

e enviro

nm

ent an

d id

entify

ing

the ex

ternal o

pportu

nities an

d th

reats crucial to

the co

mpan

y’s su

ccess, (ii) facilitating in

build

ing o

f missio

n

and

visio

n (iii) R

ecruitin

g, retain

ing

and

mo

tivatin

g p

eop

le, (iv) en

surin

g ad

dressal o

f peo

ple d

evelo

pm

ent

issues (v

) Aw

areness reg

ardin

g th

e custo

mer (v

i) Ensu

ring h

igh p

roductiv

ity (v

ii) build

ing b

usin

ess surp

lus

thro

ugh co

mpeten

cy.

Strateg

ic HR

M an

d H

RM

functio

ns d

rive each

oth

er to attain

the effectiv

eness o

f the o

rgan

ization.

Both

, interd

epen

den

t on each

oth

er are key

to an

y o

rgan

ization. F

igure 1

dep

icts the in

terdep

enden

cy o

f vairo

us

functio

ns o

f HR

and realatio

nsh

ip b

etween

HR

Strateg

y an

d H

R F

unctio

ns.

Ex

pan

din

g th

e Valu

e Ho

rizon

of H

R

56.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

HR

an

d L

ead

ership

Bu

ildin

g:

The g

reatest com

petitiv

e advan

tage w

hich

a com

pan

y can

hav

e is thro

ugh

effective lead

ership

. In th

e presen

t contex

t, with

com

pan

ies movin

g in

differen

t countries, g

lobal lead

ership

has

beco

me an

integ

rative p

art of th

em. H

R p

lays an

importan

t role in

integ

rating th

e execu

tive d

evelo

pm

ent p

rocess

with

corp

orate strateg

y.

Man

pow

er Pla

nn

ing

:M

anpow

er plan

nin

g aim

s to m

aintain

and im

pro

ve th

e ability

of th

e org

anizatio

n to

achiev

e corp

orate o

bjectiv

es thro

ugh th

e dev

elopm

ent o

f strategies d

esigned

to en

han

ce the co

ntrib

utio

n o

f

man

pow

er at all times in

the fo

reseeable fu

ture. A

ccord

ing to

Bow

ey (1

977), “M

anpow

er plan

nin

g is a strateg

y

for m

atchin

g fu

ture m

anpow

er num

bers an

d sk

ills with

org

anisatio

nal activ

ities”.

Perfo

rman

ce Man

agem

ent:

Perfo

rman

ce Man

agem

ent is a reco

rd o

f outco

mes p

roduced

on a sp

ecified jo

b

functio

ns o

r activities d

urin

g a sp

ecified tim

e perio

d. E

valu

ating an

d m

anag

ing an

indiv

idual’s p

erform

ance is

an in

evitab

le part o

f org

anizatio

nal life. E

very

one is co

nsisten

tly ev

aluated

by h

is superio

rs, subord

inates, p

eers

and o

ther asso

ciates of th

e org

anizatio

ns. T

he feed

back

giv

en b

ecom

es importan

t in term

s of d

evelo

pin

g th

e

indiv

idual. P

erform

ance M

anag

emen

t is an in

tegral p

art of a co

mpan

y’s H

R activ

ity.

Com

peten

cy M

ap

pin

g:

Felser (2

003) d

efined

com

peten

ce as “Com

peten

ce is determ

ined

by th

e know

ledge-

based

and

netw

ork

-driv

en ab

ility o

f an acto

r and

his en

viro

nm

ent to

act alon

e or w

ith p

artners, to

satisfy

indirectly

or d

irectly ex

isting cu

stom

er requirem

ents o

ptim

ally. By th

is sustain

able ad

ded

valu

es are created in

a com

petitiv

e and su

perio

r man

ner.” T

o g

ain th

e com

petitiv

e advan

tage th

e HR

is tryin

g to

align an

indiv

idual

com

peten

cy to

the o

rgan

ization n

eeds an

d req

uirem

ents to

create the b

est fit and to

gau

ge th

e max

imum

advan

tage.

Corp

ora

te Govern

an

ce

Corp

orate g

overn

ance reg

ulates th

e ow

nersh

ip an

d co

ntro

l of o

rgan

izations (B

erle and M

eans 1

932). It

sets tone fo

r the leg

al terms an

d co

nditio

ns fo

r the allo

cation o

f pro

perty

rights am

ong stak

ehold

ers, structu

ring

their relatio

nsh

ips an

d in

fluen

cing th

eir incen

tives, an

d h

ence, w

illingness to

work

togeth

er. CG

practices are

beco

min

g a to

ol to

form

ulate n

orm

s and p

olicies to

ethically

run an

org

anizatio

n. It is b

ecom

ing m

ore an

d m

ore

interestin

g to

see the sp

ecificity o

f each p

arameter g

ainin

g fo

cus an

d atten

tion. K

eepin

g th

e OE

CD

prin

ciples as

the g

uid

ing so

urce, th

e auth

ors fo

cus an

d d

erive th

at prin

cipally

corp

orate g

overn

ance h

inges o

n th

e role o

f the

stakeh

old

ers, equitab

le and fair treatm

ent o

f all the sh

arehold

ers, accountab

ility o

f the b

oard

and tran

sparen

cy

and d

isclosu

res.

Role o

f the sta

keh

old

er :S

tan

ford

Rese

arc

h In

stitute

(SR

I, 19

63

; qu

ote

d in

Fre

em

an

, 19

84

, p.3

1)

defin

ed

stakeh

old

ers as “those g

roups w

ithout w

hose su

pport th

e org

anizatio

n w

ould

cease to e

xist”

(Fre

em

an

,

19

84

). Th

e sta

tus o

f the sta

keh

old

er is th

e m

ost d

eb

ate

d issu

e in

the literatu

re. Donald

son an

d P

reston

Ex

pan

din

g th

e Valu

e Ho

rizon

of H

R

Fig

ure 1

: Interd

epen

den

cy o

f HR

functio

ns.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

57

(1995) p

roposed

a stakeh

old

er theo

ry fo

cusin

g o

n th

ree core asp

ects – d

escriptiv

e/empirical, in

strum

ental, an

d

norm

ative b

uild

ing an

d ju

stifyin

g th

e CG

practices. T

he v

iew th

at stakeh

old

er man

agem

ent an

d th

e perfo

rman

ce

of an

org

an

izatio

n h

av

e a

stron

g c

orre

latio

n c

om

mo

nly

held

in th

e fie

ld o

f man

ag

em

en

t sciences’ b

e it

with

the acad

emician

s or w

ith th

e man

agers.

Acco

un

tab

ility:

Acco

untab

ility is d

efined

as the p

erceptio

n o

f defen

din

g o

r justify

ing o

ne’s b

ehav

ior to

an

audien

ce with

reward

or san

ction au

thority, an

d w

here rew

ards o

r sanctio

ns are p

erceived

to b

e contin

gen

t upon

audien

ce evalu

ation o

f such

conduct (B

uck

ley et al., 2

001). It fo

cuses o

n th

e ability

to acco

unt fo

r the allo

cation,

use an

d co

ntro

l, i.e. bu

dg

eting

, accou

ntin

g an

d au

ditin

g. In

a bro

ader sen

se, it is also co

ncern

ed w

ith th

e

establish

men

t, and en

forcem

ent o

f rules an

d reg

ulatio

ns o

f corp

orate g

overn

ance. S

arban

es Oxley

Law

(2002)

pro

tects investo

r’s interests b

y im

pro

vin

g th

e accuracy

and reliab

ility o

f disclo

sures. A

ccountab

ility is th

e most

fundam

ental d

uty

of a b

oard

. The b

oard

mem

bers h

ave h

igh acco

untab

ility to

build

upon th

e public tru

st. It

places h

eavy o

blig

ations o

n th

e vario

us m

embers to

preserv

e, main

tain an

d d

evelo

p th

e org

anizatio

n. T

he b

oard

reserves th

e right fo

r appoin

ting, m

onito

ring an

d ev

aluatin

g th

e perfo

rman

ce of th

e CE

O.

Tra

nsp

aren

cy a

nd

Disclo

sure :

A m

ajor resp

onsib

ility o

f the b

oard

of d

irectors is to

ensu

re shareh

old

ers and

stakeh

old

ers are pro

vid

ed w

ith h

igh q

uality

disclo

sures o

n th

e finan

cial and o

peratin

g resu

lts of th

e com

pan

y, and o

n

com

pan

y o

bjectiv

es, so th

at they

mak

e info

rmed

and accu

rate assessmen

ts of th

e pro

gress o

f the co

mpan

y. Alm

ost all

of th

e corp

orate g

overn

ance co

des aro

und th

e world

inclu

din

g th

e OE

CD

(2004) p

rincip

les, Sarb

anes O

xley

Law

(2002), co

mbin

ed co

de (2

003), an

d E

U T

ransp

arency

directiv

e (2004), em

phasize th

e importan

ce of fu

ll disclo

sure as

the v

ital basis o

f effective w

ork

ing o

f all the m

echan

isms o

f corp

orate g

overn

ance. T

he av

ailability

of in

form

ation

on

the co

mp

any

web

site or o

ther p

ub

lic sou

rces regard

ing

its po

licies brin

gs fo

rth th

e com

pan

y’s co

mm

itmen

t

tow

ards tran

sparen

cy an

d d

isclosu

res. Black

et a

l. (20

02

) fou

nd

that “th

e corp

orate tran

sparen

cy is h

igh

ly

related to

perfo

rman

ce and co

mpan

ies with

better co

rporate g

overn

ance h

ave h

igher stan

dard

s of d

isclosu

re and

transp

arency

”. Acco

rdin

g to

San

g –

Woo N

am (2

003), “In

the face o

f keen

er com

petitio

n, th

ere is pressu

re to

impro

ve th

e man

agerial tran

sparen

cy.”

Eq

uita

ble a

nd

Fairn

ess: Equitab

le and fairn

ess for an

d am

ongst all th

e shareh

old

ers ensu

re pro

tection an

d

opportu

nity

to all th

e shareh

old

ers for ‘red

ress of th

e vio

lation o

f their rig

hts’ (O

EC

D, 2

004) O

ne o

f the m

ost

imp

ortan

t pillar o

f corp

orate g

ov

ernan

ce it ensu

res a go

od

repu

tation

of th

e firms b

ut also

attracts the k

ey

investo

rs. It also h

elps b

uild

a fair cultu

re with

in th

e org

anizatio

n.

Corp

ora

te Govern

an

ce an

d H

R

Corp

orate g

overn

ance leg

ally stru

ctures stak

ehold

er relations an

d p

rioritizes th

eir interests in

fair and

equitab

le man

ner. B

oth

, intern

al and ex

ternal stak

ehold

ers hav

e an im

portan

t role in

determ

ing th

e pro

ductiv

ity

of a co

mpan

y. Intern

al stakeh

old

ers (emplo

yees) h

ave a d

irect influ

ence o

n th

e efficiency

of th

e org

anizatio

n as

they

engag

e them

selves in

vario

us p

roductio

n activ

ities on a reg

ular b

asis. Extern

al stakeh

old

ers by v

irtue o

f

their au

thority

enfo

rce an o

rgan

ization to

giv

e the b

est results in

form

of retu

rns. G

ood H

R p

ractices help

in

build

ing strateg

ies facilitating an

d en

ablin

g g

ood g

overn

ance. A

ccord

ing to

Ulrich

(1997), “In

org

anizatio

ns

where th

e HR

functio

n is o

nly

view

ed as an

overh

ead co

st and is n

ot seen

as a strategic p

artner h

elpin

g to

create

valu

e in th

e busin

ess, then

HR

system

s gen

erally d

o n

ot w

ork

as effectively

”. Cosh

and H

ughes (2

003), fo

und

that fin

d th

at ‘friendly

relations’ b

etween

man

agers an

d em

plo

yees an

d a relian

ce on em

plo

yee co

-operatio

n an

d

‘loyalty

’ are a mean

s by w

hich

efficient w

ork

org

anizatio

n is ach

ieved

. The F

igure 2

corro

borates w

ith th

e work

conducted

by (U

lrich 1

997; C

appelli an

d C

rock

er-Hefter 1

996). T

hey

found th

at research o

f HR

practices an

d

perfo

rman

ce in larg

er firms h

as show

n p

ositiv

e results. H

uselid

(1995) fo

und th

at out o

f 700 p

ublicly

traded

firms in

the U

SA

, those th

at had

implem

ented

best p

ractices in th

ese areas achiev

ed an

annual sh

arehold

er

return

of 9

.4%

versu

s 6.5

% fo

r firms u

sing few

er practices an

d h

ad m

ore th

an 5

0%

as hig

h a g

ross rate o

f return

on cap

ital The sp

ecific HR

best p

ractice areas inclu

ded

form

al and co

nsisten

t perso

nnel selectio

n, jo

b d

esign,

info

rmatio

n sh

aring, p

erform

ance ap

praisal, p

rom

otio

n sy

stems, g

rievan

ce pro

cedures, attitu

de assessm

ent an

d

Ex

pan

din

g th

e Valu

e Ho

rizon

of H

R

58.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

incen

tive sy

stems. In

an an

oth

er study C

ollin

s and C

lark (2

003), fo

und th

at hig

h tech

nolo

gy co

mpan

ies top

man

agers’ so

cial netw

ork

s acted to

med

iate relationsh

ips b

etween

hum

an reso

urce p

ractices and firm

perfo

rman

ce.

Fig

ure 2

: Interrelatio

nsh

ip b

etween

corp

orate strateg

y, HR

strategy an

d co

rporate g

overn

ance.

To w

in th

e trust o

f the v

arious stak

ehold

ers, HR

execu

tives n

eed to

build

on a cu

lture m

otiv

ating an

d en

courag

ing

open

ness to

win

the in

vesto

rs and cu

stom

ers. Not o

nly

this as em

plo

yees b

ecom

ing m

ore en

gag

ing as stak

ehold

ers.

Em

plo

yees are v

iewed

as active in

puts in

to th

e pro

ductiv

e pro

cess, capab

le of d

evelo

pm

ent, in

volv

emen

t and

info

rmed

choice.

Co

mm

un

ication

, mo

tivatio

n, lead

ership

and

a shared

or ‘m

utu

al’ visio

n o

f the o

rgan

ization

and

its

objectiv

es are therefo

re enco

urag

ed in

ord

er to d

evelo

p an

d stren

gth

en co

mm

itmen

t (Beer an

d S

pecto

r 1985).

HR

pro

fessional h

ave a m

ajor task

of b

uild

ing sy

stems an

d p

rocesses en

ablin

g an

enviro

nm

ent o

f hig

h eth

ical

standard

s. In o

rder to

achiev

e the h

ighest b

ench

mark

in term

s of ach

ievin

g b

ehav

ioral o

utco

mes o

f hig

h eth

ical

standard

s, com

pan

ies (HR

) need

to fo

llow

the leg

al com

plian

ce norm

s by fo

rmin

g p

olicies lead

ing to

the cu

lture

(good) o

f the o

rgan

ization. A

n effectiv

e outco

me o

f it is the h

igh lev

el of co

mm

itmen

t. Fig

ure 3

belo

w sh

ow

s

the relatio

nsh

ip b

etween

the p

arameter o

f HR

leadin

g to

org

anizatio

nal cu

lture h

avin

g co

mm

itmen

t as an o

utco

me.

The in

terest of th

e stakeh

old

ers are aligned

with

the o

rgan

izational cu

lture

Fig

ure 3

: Relatio

nsh

ip b

etween

param

eters of H

um

an R

esource (H

R p

lannin

g) w

ith o

rgan

izational cu

lture.

Marin

ating h

igh eth

ical standard

s and in

tegrity

of th

e org

anizatio

n d

rives th

e HR

dep

artmen

ts to en

sure

that th

e top ex

ecutiv

es of th

e com

pan

y tak

e responsib

le actions to

main

tain th

e sanctity

of th

e com

pan

y. An

attunin

g o

f the sen

ior ex

ecutiv

es will m

ake th

em m

ore acco

untab

le and th

us in

congru

ence w

ith th

e org

anizatio

nal

strategy. T

he ex

ecutiv

e man

agem

ent lead

s to en

surin

g th

at the to

p ex

ecutiv

es take actio

n in

favor o

f the co

mpan

y,

thus m

akin

g th

em resp

onsib

le and acco

untab

le. Fig

ure 4

belo

w sh

ow

s the relatio

nsh

ip b

etween

the p

arameter

of H

R in

terms o

f execu

ting th

e norm

s and reg

ulatio

ns lead

ing to

top ex

ecutiv

es accountab

ility (a k

ey q

uestio

n

in th

e presen

t day

contex

t) which

will p

ose an

outco

me o

f effectiven

ess for th

e com

pan

y.

Ex

pan

din

g th

e Valu

e Ho

rizon

of H

R

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

59

Fig

ure 4

: Relatio

nsh

ip b

etween

HR

param

eters (Norm

and reg

ulatio

n ex

ecutio

n) lead

ing to

effectiven

ess of th

e org

anizatio

n.

Tra

nsp

are

ncy

an

d d

isclo

sure

s are

the h

eart o

f an

y c

orp

ora

te g

ov

ern

an

ce issu

e. T

o c

on

trol th

e

misap

pro

priatio

ns o

f the firm

s, vario

us n

orm

s hav

e com

e into

existen

ce. The g

overn

men

ts across th

e world

hav

e built th

e best p

ractice code fo

r the co

mpan

ies and v

arious reg

ulato

ry b

odies are strictly

monito

ring th

e

com

pan

ies as well b

oo

kin

g th

em in

case no

t follo

wed

. As ev

ery H

R d

epartm

ent attem

pts to

brin

g an

op

en

cultu

re it will fu

rther lead

to d

isclosu

res and th

us tru

st as an o

utco

me. F

igure 5

show

s relationsh

ip b

etween

HR

param

eter (Open

ness) lead

ing to

CG

param

eter (accountab

ility) b

uild

ing T

rust am

ongst stak

ehold

ers.

Fig

ure 5

: Relatio

nsh

ip b

etween

HR

param

eter (Open

ness) lead

ing to

CG

param

eter.

Equitab

le and fair treatm

ent o

f the v

arious stak

ehold

ers creates valu

e for th

e firm. E

nsu

ring, in

practice,

one sh

arehold

er one v

ote it p

rotects th

e min

or in

vesto

r’s rights. A

t the sam

e time th

e emplo

yees o

f the co

mpan

y

also lo

ok fo

rward

to w

ork

ing in

the co

mpan

ies which

pro

mote a h

ealthy en

viro

nm

ent. F

igure 6

show

s relationsh

ip

betw

een H

R p

arameter (F

airness) lead

ing

to C

G p

arameter (in

vesto

r pro

tection

and

mo

tivatio

n) lead

ing

to

efficiency

of th

e org

anizatio

n

Fig

ure 6

: Relatio

nsh

ip b

etween

HR

param

eter (Fairn

ess) leadin

g to

CG

param

eter (investo

r pro

tection an

d

mo

tivatio

n)

On th

e basis o

f the ab

ove m

odels an

architectu

ral conclu

sion can

be d

rawn reg

ardin

g th

e relationsh

ip

betw

een H

R an

d C

orp

orate G

overn

ance. T

he fo

llow

ing F

igure 7

dep

icts the m

odules an

d th

eir interactio

n w

ith

oth

er parts o

f our co

ncep

t:

Fig

ure 7

: A m

odel o

f HR

as an en

abler an

d facilitato

r of co

rporate g

overn

ance

Ex

pan

din

g th

e Valu

e Ho

rizon

of H

R

E

60.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Effic

iency

Fairness

Investor

Protection

Con

clusio

n

Hu

man

Reso

urce m

anag

emen

t has b

een an

age o

ld p

hen

om

eno

n. T

raditio

nally

associated

with

main

tainin

g reco

rds an

d d

ealing w

ith trad

e unio

ns, it h

as now

underg

one a p

aradig

m sh

ift. Now

play

ing a m

ajor

role in

build

ing o

rgan

izational effectiv

eness, it h

as assum

ed strateg

ic role alig

nin

g itself w

ith th

e bro

ader p

icture

of th

e com

pan

y. Exam

inin

g th

is, Guest(1

997) p

roposed

that h

igh p

erform

ance at th

e indiv

idual lev

el — w

hich

osten

sibly

leads to

impro

ved

perfo

rman

ce at the o

rgan

izational lev

el — d

epen

ds u

pon h

igh m

otiv

ation, p

ossessio

n

of th

e necessary

skills an

d ab

ilities, and an

appro

priate ro

le and u

nderstan

din

g o

f that ro

le.

Th

e mean

ing

and

relevan

ce of co

rpo

rate go

vern

ance is also

chan

gin

g w

ith tim

es. Em

ergin

g as an

indisp

ensab

le aspect o

f man

agem

ent, strin

gen

t norm

s are bein

g fo

rmed

to reg

ulate th

e com

pan

ies. In th

e past,

the co

rporate v

alue w

as mostly

measu

red b

y th

e tangib

le assets reflected in

the b

ook v

alue o

f the co

mpan

ies

how

ever; in

the p

resent d

ay co

ntex

t the co

rporate’s u

sing in

tellectual assets fo

r their co

mpetitiv

e advan

tage to

create corp

orate v

alue. T

his h

as led th

e HR

dep

artmen

ts to act as an

enab

ler and facilitato

r of co

rporate g

overn

ance

mech

anism

s. Th

e prem

ise of th

e presen

t pap

er is to estab

lish a lin

k b

etween

HR

practices an

d co

rpo

rate

go

vern

ance.

Referen

ces

Berle, A

. and M

eans.G

(1932), T

he m

odern

corp

oratio

n an

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rivate p

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(New

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Beer, M

., Specto

r, B. (1

985), “C

orp

orate-w

ide tran

sform

ation in

hum

an reso

urce m

anag

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R.E

.,

Law

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um

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anagem

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Tren

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hallen

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arvard

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pportu

nities in

Our B

ord

erless World

, Wharto

n sch

ool o

f

pu

blish

ing

.

Ulrich

,D. (1

997), H

um

an reso

urce ch

ampio

ns: T

he n

ext ag

enda fo

r addin

g v

alue an

d d

eliverin

g resu

lts. Harv

ard

Busin

ess Sch

ool P

ress.

Ven

kat R

atnam

C.S

. and S

rivastav

a B.K

. Perso

nnel / h

um

an reso

urce m

anag

emen

t, Tata M

cGraw

hill.

62.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Serv

ice Qu

ality

an

d C

usto

mer S

atisfa

ction

: A C

ase S

tud

y in

Gen

eral In

sura

nce u

sing C

usto

mized

SE

RV

PE

RF

Instru

men

t.

Dr. L

ewly

n L

. R. R

odrig

ues 1 D

r. Gopalak

rishna B

2 D

r. K. V

. M.V

arambally

3

Ab

stract

The o

bjectiv

e of th

is study is to

investig

ate the relatio

nsh

ip b

etween

Serv

ice quality

and C

usto

mer satisfactio

n

in a serv

ice industry. T

he research

questio

n attem

pted

to an

swer in

this research

is, ‘does S

ervice q

uality

increase

Custo

mer satisfactio

n?’ W

hile th

e obvio

us an

swer is ‘y

es’ the research

findin

gs are in

dicativ

e that it n

eed n

ot

necessarily

be tru

e. Th

is stud

y in

vo

lves m

easurem

ent o

f Serv

ice qu

ality an

d C

usto

mer satisfactio

n u

sing

a

multip

le item m

etric. The p

aper h

ypoth

esizes that th

ere is a significan

t differen

ce in p

erceptio

n b

etween

Serv

ice

Quality

and C

usto

mer S

atisfaction. A

link b

etween

service q

uality

and cu

stom

er satisfaction h

as been

establish

ed

which

show

s that serv

ice quality

and cu

stom

er satisfaction are in

ter-dep

enden

t and in

ter-related. F

urth

er, the

study is in

dicativ

e that en

han

cemen

t of serv

ice quality

will h

ave a p

ositiv

e impact o

n th

e custo

mer satisfactio

n.

How

ever, b

eyond a certain

level, a g

iven

increase in

service q

uality

may

not in

crease the satisfactio

n lev

el of

custo

mers b

y a p

roportio

nal am

ount.

Key

Word

s: Serv

ice quality, C

usto

mer satisfactio

n, P

erceptio

n, E

xpectatio

n, G

eneral In

suran

ce and S

ER

VP

ER

F

Intro

du

ction

Serv

ice quality

and cu

stom

er satisfaction are o

f hig

h im

portan

ce to th

e mark

eting th

eory

and p

ractice and

it is the u

ltimate g

oal o

f all service p

rovid

ers. Com

pan

ies that h

ave co

mpetitiv

e advan

tage in

deliv

ering h

igh

Serv

ice Perfo

rman

ce (SE

RV

PE

RF

) will u

sually

achiev

e Custo

mer satisfactio

n. B

ut th

is need

not n

ecessarily b

e

true in

all the cases. T

his is b

ecause S

ervice q

uality

is characterized

by th

e ‘Custo

mer p

erceptio

n’ o

f service.

What co

unts is th

e quality

as it is perceiv

ed b

y th

e custo

mers i.e. th

e custo

mers are th

e sole ju

dge o

f quality

(Berry

1980, p

p. 2

4-8

). The earlier attem

pts in

defin

ing an

d m

easurin

g q

uality

hav

e largely

com

e from

the g

oods

sectors w

here it w

as defin

ed as ‘co

nfo

rman

ce to req

uirem

ents’. O

win

g to

its importan

ce, Perceiv

ed serv

ice

quality

is one o

f the h

ighly

deb

ated an

d research

ed to

pics in

mark

eting th

eory

across th

e world

(Buttle 1

996, p

p.

8-3

2). C

usto

mer satisfactio

n is co

nsid

ered a p

rerequisite fo

r custo

mer reten

tion an

d lo

yalty, p

rofitab

ility, mark

et

share, retu

rn o

n in

vestm

ent, etc. W

hile th

ere are several in

strum

ents (O

liver &

Sw

an 1

989, p

p. 2

1-3

5; O

liva,

Oliv

er & M

acMillan

1992, p

p. 8

3-9

5) o

f service q

uality

measu

remen

t, this research

is based

on th

e instru

men

t

dev

eloped

by S

uresh

chan

dar et al. (2

001, p

p. 1

11-2

4) (th

e nin

e-item scale).

Cu

stom

er satisfaction

and

service q

uality

remain

critical issues fo

r finan

cial service p

rov

iders th

at offer

gen

erally u

ndifferen

tiated p

roducts lik

e the in

suran

ce. The m

ajor ap

pro

ach to

differen

tiate one in

surer fro

m

anoth

er is the serv

ice pro

vid

ed b

efore an

d after th

e sale of th

e policy

(Staffo

rd &

Wells 1

996, p

p. 1

63-8

2). In

India u

ntil th

e past d

ecade, d

ifferentiatio

n b

etween

the tw

o in

suran

ce com

pan

ies was n

ot sig

nifican

t becau

se

insu

rance p

rovid

ers offered

govern

men

t man

dated

standard

ized p

roducts. A

t presen

t, becau

se of d

econtro

l over

insu

rance secto

rs, there is in

creased im

portan

ce of cu

stom

er service q

uality

and satisfactio

n d

ue to

com

petitio

ns.

Insu

rance in

du

stry u

tilizes the co

mp

laint ratio

as a measu

re of serv

ice qu

ality. Th

is ratio is th

e nu

mb

er of

com

plain

ts received

div

ided

by a m

easure o

f insu

rance b

usin

ess in fo

rce (Wells &

Staffo

rd 1

995, p

p. 4

62-7

7).

Com

plain

t ratio fails to

captu

re critical info

rmatio

n su

ch as feelin

gs an

d p

erceptio

ns o

fth

ose in

div

iduals w

ho

did

not co

mplain

. It is importan

t to n

ote th

at a non-co

mplain

ing cu

stom

er need

not n

ecessarily b

e a satisfied

1.

Pro

fessor, M

echan

ical and

Man

ufactu

ring

En

gin

eering

Dep

artmen

t,Man

ipal In

stitute o

f Tech

no

log

y, Man

ipal.,

E-m

ail : rod

rigu

sr@g

mail.co

m

2.

Facu

lty, Mech

anical an

d M

anu

facturin

g E

ng

ineerin

g D

epartm

ent, M

anip

al Institu

te of T

echn

olo

gy, M

anip

al,

E-m

ail : bg

_m

it@y

aho

o.co

m

3.

Directo

r, Man

ipal In

stitute o

f Man

agem

ent, M

anip

al, Ind

ia. E-m

ail : varam

bally

@y

aho

o.co

m

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

63

one. T

he co

mplain

t ratio is an

overall in

dicato

r of serv

ice quality

but can

not b

e an ab

solu

te measu

re. Moreo

ver,

com

pan

ies remain

unaw

are of th

e indiv

idual p

roblem

s that p

rom

pted

a particu

lar com

plain

t. This lack

of sp

ecific

know

ledge ab

out serv

ice shortfalls can

result in

com

pan

ies’ overlo

okin

g o

f the critical p

roblem

areas, and

hen

ce, this k

ind o

f metric b

ased ev

aluatio

n o

f Serv

ice quality

and C

usto

mer satisfactio

n b

ecom

es importan

t.

Th

e Metric - S

ervice q

uality

Gro

nro

os (1

984, p

p. 3

6-4

) concep

tualized

a service q

uality

model w

here h

e iden

tified th

e two v

ariables o

f

service q

uality, i.e. ex

pected

service an

d p

erceived

service. T

he ex

pected

service is b

uilt u

p th

rou

gh

the

pro

motio

nal activ

ities of th

e firm, p

ast experien

ce of th

e custo

mer, W

ord

of m

outh

com

municatio

n an

d th

e

need

s of th

e custo

mer. T

he p

erceived

service is th

e result o

f a consu

mer’s w

ord

of m

outh

com

municatio

n an

d

the n

eeds o

f the cu

stom

er. The p

erceived

service is th

e result o

f a consu

mer’s v

iew o

f a bundle o

f service

dim

ensio

ns, so

me o

f which

are technical an

d o

thers fu

nctio

nal in

natu

re. Gro

nro

os(1

984, p

p. 3

6-4

) observ

ed

that th

e discrep

ancy

betw

een ex

pectatio

ns an

d p

erceptio

ns is th

e prim

ary d

etermin

ant o

f custo

mers’ serv

ice-

quality

assessmen

t.

The S

ER

VQ

UA

L in

strum

ent (P

arasuram

an et al. 1

988, p

p. 1

2-4

0) is a 2

2-item

scale that m

easures serv

ice

qu

ality alo

ng

five facto

rs, nam

ely reliab

ility, respo

nsiv

eness, assu

rance, em

path

y an

d tan

gib

les. Th

ere is a

gen

eral agreem

ent th

at the S

ER

VQ

UA

L v

ariables are reaso

nab

ly g

oo

d p

redicto

rs of serv

ice qu

ality in

its

wholen

ess. Carefu

l scrutin

y o

f the 2

2 item

s indicates th

at the item

s at large d

eal with

the elem

ent o

f hum

an

interactio

n in

the serv

ice deliv

ery an

d th

e rest on th

e tangib

le items o

f service. In

contrast, S

ER

VP

ER

F scale

which

uses th

e percep

tion item

of S

ER

VQ

UA

L scale (C

ronin

& T

aylo

r 1992, p

p. 5

5-6

8). T

he S

ER

VQ

UA

L

instru

men

t seems to

hav

e ov

erloo

ked

som

e oth

er imp

ortan

t factors o

f service q

uality

like co

re service,

system

atization/ stan

dard

ization o

f service d

elivery

(the n

on-h

um

an elem

ent), an

d th

e social resp

onsib

ility o

f

the serv

ice org

anizatio

n. S

uresh

chan

dar et al. (2

001, p

p. 11

1-2

4)

concep

tualize serv

ice quality

by tak

ing in

to

account all th

e aspects o

f custo

mer p

erceived

service q

uality

and id

entified

follo

win

g fiv

e factors o

f service

quality

as critical from

the cu

stom

ers’ poin

t of v

iew:

1.

Core serv

ice or serv

ice pro

duct.

2.

Hum

an elem

ent o

f service d

elivery.

3.

System

atization o

f service d

elivery

: non-h

um

an elem

ent.

4.

Tan

gib

les of serv

ice.

5.

Social resp

onsib

ility.

Tab

le 1 su

mm

arizes the d

ifferent facto

rs of serv

ice quality

used

in th

is research to

measu

re service q

uality.

The o

rigin

al statemen

ts were m

odified

to m

ake th

em su

itable to

insu

rance in

dustry. T

he m

odified

, standard

ized

and v

alidated

surv

ey in

strum

ent co

nsists o

f 40 q

uestio

ns to

measu

re the p

erceptio

n ab

out serv

ices. A fiv

e poin

t

Lik

ert scale has b

een u

sed to

measu

re the lev

els of serv

ice quality.

Cu

stom

er Satisfa

ction

: Cro

nin

and T

aylo

r (1992, p

p. 5

5-6

8)

measu

red cu

stom

er satisfaction as a o

ne-item

scale that ask

s for th

e custo

mer’s o

verall feelin

g to

ward

s an o

rgan

ization. B

itner an

d H

ubert (1

994, p

p. 7

2-9

4)

used

four item

s to m

easure th

e custo

mers’ o

verall satisfactio

n w

ith th

e service p

rovid

er. Shem

well et al. (1

998);

Cro

sby &

Step

hen

s (1987); O

liver &

Sw

an (1

989); an

d O

liva (1

992) h

ave also

emphasized

the m

ulti-faceted

natu

re of cu

stom

er satisfaction an

d h

ave u

sed m

ultip

le item scales to

measu

re custo

mer satisfactio

n. H

ow

ever,

the cu

rrent tren

d is to

captu

re the satisfactio

n in

transactio

n at m

ultip

le levels in

the o

rgan

ization. B

itner an

d

Hubert (1

994) arg

ue th

at 22 item

s of S

ER

VQ

UA

L, w

hen

measu

red as a fu

nctio

n o

f multip

le experien

ces with

the firm

, may

be g

ood p

redicto

rs of o

verall serv

ice satisfaction. In

this research

, measu

remen

t of cu

stom

er

satisfaction is tak

en as m

ulti-facto

r service. C

usto

mer satisfactio

n is tak

en fo

r all the fiv

e factors o

f service

qu

ality an

d o

ne q

uestio

n in

gen

eral ov

erall service q

uality. T

he resp

on

den

ts hav

e been

asked

to g

ive th

eir

responses reg

ardin

g th

eir level o

f satisfaction o

n a fiv

e-poin

t scale from

poor to

excellen

t.

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

64.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Tab

le 1: T

he facto

rs of cu

stom

ers service q

uality

(Suresh

chan

dar et al. 2

001)

Resea

rch M

ethod

olo

gy

: This research

is partly

qualitativ

e and p

artly q

uan

titative in

natu

re. It is qualitativ

e

in th

e sense th

at it involv

es in-d

epth

interv

iew w

ith th

e frontlin

e staff, custo

mers an

d m

anag

ers of In

suran

ce

Com

pan

ies so as to

concep

tualize th

e mean

ing o

f Serv

ice quality

and C

usto

mer satisfactio

n in

the co

ntex

t of

Insu

rance in

dustry. T

he stu

dy b

ecom

es quan

titative as it seek

s relationsh

ips b

etween

variab

les of stu

dy an

d

correlates th

e research p

arameters.

This fo

cus g

roup co

nsists o

f small an

d m

ediu

m scale in

dustrial cu

stom

ers of g

eneral in

suran

ce com

pan

ies.

Ran

dom

samples o

f consu

mers w

ho h

ave reg

ular claim

s with

their in

surers w

ere the resp

onden

ts for th

is research.

The sam

ple size w

as 618 cu

stom

ers of sm

all and m

ediu

m scale in

dustrial cu

stom

ers belo

ngin

g to

11 G

eneral

Insu

rance co

mpan

ies in In

dia (4

Public In

surer an

d 7

Priv

ate Com

pan

ies). Out o

f 618 resp

onden

ts, 435 (7

0.4

%)

were fro

m G

overn

men

t Gen

eral Insu

rance co

mpan

ies and 1

88 (2

9.6

%) w

ere from

Priv

ate Com

pan

ies (Tab

le 2).

Tab

le 2: D

istributio

n o

f Resp

onden

ts

The P

erceptio

n S

atisfaction resp

onses w

ere taken

on a 5

poin

t Lik

ert scale. Assessm

ent o

f the reliab

ility

and v

alidity

of th

e scales is done fo

r the in

strum

ent. T

he reliab

ility o

f the scales (in

ternal co

nsisten

cy) w

ere

assessed u

sing th

e Cro

nbach

’s Alp

ha co

efficient, th

e valu

e bein

g 0

.7, w

hich

indicated

moderate reliab

ility. The

operatin

g elem

ents o

f service q

uality

are presen

ted in

the A

ppen

dix

(1). R

esponden

ts were fro

m th

ree differen

t

geo

grap

hical lo

cations o

f India b

elongin

g to

two secto

rs viz., P

ublic an

d P

rivate (T

able 3

).

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

65

Tab

le 3: R

egio

n-w

ise and S

ector-w

ise Distrib

utio

n o

f responden

ts

The reg

ions are selected

based

on th

e follo

win

g criteria.

$ R

egio

n A

(Mum

bai): M

ost ad

van

ced, fin

ancial cap

ital of In

dia.

& R

egio

n B

(Vad

odara): M

ost ad

van

ced In

dustrial h

ub fro

m state o

f Gujarat.

' R

egio

n C

(Udupi &

South

Can

ara): One o

f the in

dustrially

back

ward

s cities.

Tw

o H

ypoth

eses hav

e been

tested as d

efined

belo

w:

H1 :

There is n

o sig

nifican

t differen

ce in p

erceptio

n b

etween

service q

uality

and

cu

stom

er sa

tisfactio

n w

ith

respect to

indiv

idual d

imen

sions.

H2 :

There is n

o sig

nifican

t correlatio

n b

etween

service q

uality

and cu

stom

er satisfaction

dim

ensio

ns.

Resu

lts an

d D

iscussio

n: In

ord

er to test th

e first hypoth

esis (H1 ), a p

aired “t” test w

as carried o

ut to

check

for

differen

ces betw

een serv

ice quality

and cu

stom

er satisfaction p

erceptio

ns w

ith resp

ect to th

e five d

imen

sions

(Tab

le 4).

Tab

le 4: P

aired t-test

The resu

lts indicate th

at there is a sig

nifican

t differen

ce betw

een S

ervice q

uality

and C

usto

mer satisfactio

n

percep

tions w

ith resp

ect to all th

e five d

imen

sions. T

his in

dicates th

e fact that serv

ice quality

and cu

stom

er

satisfaction are in

dep

enden

t param

eters, and if th

e custo

mers p

erceive th

at Serv

ice quality

is good en

ough it

cannot b

e conclu

ded

that th

e service p

rovid

er has ach

ieved

Custo

mer satisfactio

n.

In o

rder to

test the seco

nd h

ypoth

eses (H2 ), co

rrelations b

etween

service q

uality

and cu

stom

er satisfaction

with

respect to

the fiv

e dim

ensio

ns h

ave b

een co

mputed

. The resu

lts are tabulated

in T

able 5

.

Tab

le 5: C

orrelatio

n b

etween

service q

uality

and cu

stom

er satisfaction

*C

orrelatio

n is sig

nifican

t at the lev

el 0.0

1 ( 2

-tailed).

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

66.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

The reaso

nab

ly h

igh v

alues co

rrelations (0

.544 to

0.7

44) in

dicate stro

ng relatio

nsh

ips b

etween

Serv

ice

quality

and C

usto

mer satisfactio

n d

imen

sions. C

ross tab

ulatio

n p

roced

ure w

as emplo

yed

for fu

rther an

alysis o

f

service q

uality

and

satisfaction

. It facilitates measu

remen

t of th

e relation

ship

betw

een S

ervice q

uality

and

Custo

mer satisfactio

n.

The S

ervice q

uality

data (o

rigin

ally in

five-p

oin

t scale) has b

een co

llapsed

into

a three-p

oin

t ord

inal scale

(low

, med

ium

and h

igh). T

he cro

ss-tabulatio

n o

f the fiv

e dim

ensio

ns o

f study v

erses Custo

mer satisfactio

n are

giv

en in

Tab

les 6-1

0. T

he en

try in

each cell in

dicates th

e num

ber o

f responden

ts corresp

ondin

g to

a category

of

response an

d th

e valu

es in b

rackets are th

e corresp

ondin

g p

ercentag

es (of th

e total resp

onden

ts).

Tab

le 6: C

ore S

ervice q

uality

Vs C

usto

mer S

atisfaction

Tab

le 7: H

um

an elem

ent o

f Serv

ice quality

Vs C

usto

mer S

atisfaction

Tab

le 8: N

on h

um

an S

ervice q

uality

Vs C

usto

mer S

atisfaction

Tab

le 9: T

angib

les Serv

ice Quality

Vs C

usto

mer S

atisfaction

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

67

Tab

le 10: S

ocial E

lemen

t of S

ervice q

uality

Vs C

usto

mer S

atisfaction.

The cro

ss tabulatio

n resu

lts indicate th

at on th

e overall b

asis hig

hest p

ercent o

f responden

ts expressed

averag

e

satisfaction w

ith th

e services p

rovid

ed b

y In

suran

ce com

pan

ies. A m

ajority

of resp

onden

ts felt that th

ere is

med

ium

service q

uality

in th

e insu

rance co

mpan

ies. It is also o

bserv

ed th

at increase in

service q

uality

from

med

ium

to h

igh resu

lted in

less num

ber o

f custo

mer ex

pressed

as hig

h satisfactio

n lev

el.

In o

rder to

find ag

reemen

t and d

isagreem

ent ab

out th

is opin

ion, w

e hav

e consid

ered:

$ p

oor cu

stom

er satisfaction as a lo

w lev

el of satisfactio

n;

& b

elow

averag

e, averag

e, above av

erage w

ere med

ium

satisfaction; an

d

' ex

cellent satisfactio

n as h

igh satisfactio

n.

For co

mplete ag

reemen

t, we h

ave co

nsid

ered lo

w-lo

w, m

ediu

m–m

ediu

m, an

d h

igh-h

igh serv

ice quality

and cu

stom

er satisfaction v

alues. T

he resu

lts of cro

ss-tabulatio

n p

rovid

e valu

able in

form

ation o

n th

e deg

ree of

com

plete ag

reemen

t and co

mplete d

isagreem

ent. T

he d

egree o

f ‘com

plete ag

reemen

t’ and ‘co

mplete d

isagreem

ent’

with

respect to

the p

erceptio

ns o

n S

ervice q

uality

and C

usto

mer satisfactio

n d

imen

sions are sh

ow

n in

Tab

le 11.

Tab

le 11: D

egree o

f com

plete ag

reemen

t and co

mplete d

isagreem

ent

It can b

e observ

ed fro

m T

able 1

1 th

at the v

alues fo

r com

plete ag

reemen

t betw

een S

ervice q

uality

and

Custo

mer satisfactio

n ran

ge fro

m 4

6.6

% to

68.3

% fo

r the fiv

e dim

ensio

ns. O

n th

e oth

er han

d, th

e valu

e for

com

plete d

isagreem

ent ran

ges fro

m 0

.5%

to 1

.6%

. Therefo

re, there ex

ists a dep

enden

cy b

etween

Serv

ice quality

and C

usto

mer satisfactio

n p

erceptio

ns. H

ow

ever, it is also

indicativ

e of th

e fact that an

increase S

ervice q

uality

need

not lead

to an

increase in

custo

mer satisfactio

n.

Con

clusio

n

Sin

ce last two

decad

es, particu

larly after g

lob

alization

, there h

ave b

een sco

res of research

articles on

Serv

ice quality. E

qually

good n

um

ber o

f articles is also p

resent o

n C

usto

mer satisfactio

n. In

the p

resent g

lobal

scenario

a need

has b

een id

entified

to stu

dy th

e relationsh

ip b

etween

these tw

o field

s of research

interest o

win

g

to th

e gro

win

g aw

areness th

at Serv

ice quality

alone h

as failed in

achiev

ing C

usto

mer satisfactio

n. It is in

this

contex

t the p

resent research

has m

ade a co

ntrib

utio

n.

The resu

lts of th

is research in

dicate th

at there is a sig

nifican

t differen

ce in S

ervice q

uality

and C

usto

mer

satisfaction p

erceptio

ns in

Gen

eral Insu

rance In

dustry. T

he tw

o p

arameters are in

deed

differen

t which

mean

s

that it b

ecom

es necessary

for th

e service p

rovid

ers to v

iew th

e two sep

arately. In fact, C

usto

mer satisfactio

n n

ot

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

68.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

only

dep

ends u

pon S

ervice q

uality

but also

dep

ends u

pon sev

eral oth

er variab

les. Therefo

re, quality

impro

vem

ent

initiativ

es by th

e man

agem

ent in

service in

dustry

should

not ju

st focu

s on im

pro

vin

g S

ervice q

uality

but also

focu

s on C

usto

mer satisfactio

n v

ariables w

ith a h

olistic ap

pro

ach. T

his w

ould

open

up th

e study o

f oth

er variab

les

which

would

influ

ence C

usto

mer satisfactio

n w

hich

may

inclu

de: w

ord

of m

outh

com

municatio

n, p

ast experien

ce,

perso

nal n

eeds o

n serv

ice quality

etc.

Ev

en th

ou

gh

the co

nclu

sion

arrived

thro

ug

h th

is research is p

urely

based

on

the su

rvey

con

du

cted in

Gen

eral Insu

rance In

du

stry, it can b

e gen

eralized to

a great ex

tent, as in

the p

resent w

orld

of u

ncertain

ty,

insu

rance h

as beco

me a h

ighly

service in

tensiv

e sector an

d all th

e five d

imen

sions o

f study p

lay a v

ery sig

nifican

t

role in

the su

ccess of th

is service in

dustry.

Referen

ces

Berry, L

.L. (1

980),” S

ervices M

arketin

g Is D

ifferent,” B

usin

ess, Vol. 3

0 M

ay-Ju

ne, p

p.2

4-2

8.

Bitn

er, M.J. an

d H

ub

ert, AR

. (19

94

), “En

cou

nter satisfactio

n v

ersus o

verall satisfactio

n v

ersus q

uality

: the

custo

mer’s v

oice”, in

Rust, R

.T. a

nd O

liver, R.L

. (Eds), S

ervice Quality: N

ew D

irections in

Theo

ry and P

ractice,

Sag

e Publicatio

ns, L

ondon, p

p. 7

2-9

4.

Buttle, F

. (1996), “S

ER

VQ

UA

L: rev

iew, critiq

ue, research

agen

da”, E

uro

pean

Journ

al o

f Marketin

g, V

oL

30,

pp. 8

-32.

Cro

nin

, J.J. and T

aylo

r, S.A

(1992), “M

easurin

g serv

ice quality

: a re-exam

inatio

n an

d ex

tensio

n”, Jo

urn

al o

f

Marketin

g, V

oL

56, p

p. 5

5-6

8.

Cro

sby, L

.A an

d S

tephen

s, N. (1

987), “E

ffects of relatio

nsh

ip m

arketin

g o

n satisfactio

n, reten

tion, an

d p

rices in

the life in

suran

ce industry

”, Journ

al o

f Marketin

g R

esearch

, Vol. 2

4, p

p. 4

04-1

1.

Gro

nro

os, C

. (1984), “A

service q

uality

model an

d its m

arketin

g im

plicatio

ns”, E

uro

pea

n Jo

urn

al o

f Marketin

g,

Vol. 1

8, N

o.4

, pp. 3

6-4

4.

Oliv

a, T.A

., Oliv

er, R.L

. and M

acMillan

, I.E. (1

992), “A

catastrophe m

odel fo

r dev

elopin

g serv

ice satisfaction

strategies”,

Journ

al o

f Marketin

g, V

ol. 5

6, p

p. 8

3-9

5.

Oliv

er, R.L

. and S

wan

, J.E. (1

989), “C

onsu

mer p

erceptio

ns o

f interp

ersonal eq

uity

and satisfactio

n in

transactio

ns:

a field su

rvey

appro

ach”, Jo

urn

al o

f Marketin

g, V

ol. 5

3, p

p. 2

1-3

5.

Parasu

raman

, A, Z

eitham

l, V.A

and

Berry, L

.L. (1

98

8), “S

ER

VQ

UA

L: a m

ultip

le-item scale fo

r measu

ring

consu

mer p

erceptio

ns o

f service q

uality

”, Journ

al o

f Reta

iling

, Sprin

g, p

p. 1

2-4

0.

Shem

well, D

.J., Yav

as, U. an

d B

ilgin

, Z. (1

998), “C

usto

mer-serv

ice pro

vid

er relationsh

ips: an

empirical test o

f

a model o

f service q

uality, satisfactio

n an

d relatio

nsh

ip o

riented

outco

me,” In

ternatio

nal Jo

urn

al o

f Service

Industry M

anagem

ent, V

ol. 9

, No. 2

, pp.1

55-6

8.

Staffo

rd, M

.R. &

Wells, B

.P. (1996), “T

he effect o

f dem

ograp

hic v

ariables o

n p

erceived

claims serv

ice quality,”

Journ

al o

f Insu

rance Issu

es, Vol.1

4, N

o.2

, pp.1

63-8

2.

Suresh

chan

dar, G

.S., R

ajendran

, e. and K

amalan

abhan

, T.J. (2

001), “C

usto

mer p

erceptio

ns o

f service q

uality

- a

critique”,

Tota

l Quality M

anagem

ent, V

ol. 1

2, p

p. 111

-24.

Wells, B

. P. and S

tafford

M.R

., (1995), “S

ervice Q

uality

in th

e Insu

rance In

dustry, C

onsu

mer P

erceptio

ns V

erses

Reg

ulato

ry P

erceptio

ns” Jo

urn

al o

f Insu

rance R

egula

tion, V

ol.1

3, N

o.4

, pp.4

62-4

77.

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

69

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

70.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Appen

dix

I: Cu

stom

er percep

tion

s of S

ervice qu

ality M

etric

Key

: 1=

Very

poor, 2

= P

oor, 3

= A

verag

e, 4 =

Good, an

d 5

= V

ery G

ood

1. C

ore service o

r Fea

tures th

at a

re offered

in a

service

1.

Pro

vid

ing th

e relevan

t guid

ance w

hile tak

ing th

e correct in

suran

ce policy

tow

ards an

y asset b

y th

e Policy

underw

riters

. ( i.e. Field

dev

elopm

ent o

fficer / Insu

rance co

mpan

y M

anag

ers )

2.

Em

plo

yees o

f Gen

eral Insu

rance C

om

pan

y h

ave su

fficient su

bject k

now

ledge to

deliv

er the serv

ice durin

g p

olicy

underw

riting an

d d

urin

g claim

s pro

cessing.

3.

Subject K

now

ledge, S

ervices th

at is pro

vid

ed b

y th

e Gen

eral Insu

rance S

urv

eyors’ d

urin

g claim

s pro

cessing.

4.

Officials o

f Insu

rance C

om

pan

y are ab

le to cater to

your sp

ecific info

rmatio

n o

n a reg

ular b

asis thro

ugh p

ost, telep

hone

or th

rough e-m

ail

5.

Availab

ility o

f differen

t services in

every

bran

ch / d

epartm

ent o

f the G

eneral In

suran

ce Com

pan

y.

6.

Conven

ient o

peratin

g h

ours an

d d

ays (e.g

. work

ing o

n S

aturd

ays an

d S

unday

s, exten

ded

service h

ours d

urin

g ev

enin

gs,

week

day

s, etc).

2.

Hum

an elem

ent o

f service delivery

1.

Pro

vid

ing serv

ices as pro

mised

.

2.

Effectiv

eness o

f the in

suran

ce com

pan

y em

plo

yees’ sk

ills and ab

ility fo

r respondin

g w

hen

ever a

critical incid

ent tak

es place (i.e. w

hen

a pro

blem

/ claim arise).

3.

When

ever a p

roblem

arises, the d

egree to

which

the in

suran

ce com

pan

y su

cceeds in

brin

gin

g th

e conditio

n b

ack to

norm

alcy b

y satisfy

ing th

e custo

mer.

4.

Pro

vid

ing ap

pro

priate serv

ices at the first m

eeting itself.

5.

Pro

vid

ing serv

ices like p

olicy

issue, claim

settlemen

t etc. as per th

e pro

mised

sched

ule.

6.

Apprisin

g th

e custo

mers o

f the n

ature an

d sch

edule o

f services av

ailable in

the G

eneral In

suran

ce Com

pan

y.

7.

Willin

gness to

help

custo

mers an

d th

e readin

ess to resp

ond to

custo

mers’ req

uests.

8.

Exten

t to w

hich

the feed

back

from

custo

mers are u

sed to

impro

ve serv

ice standard

s.

9.

Reg

ularly

appraisin

g th

e custo

mers ab

out in

form

ation o

n serv

ice quality

and actu

al service p

erform

ance v

ersus set

targets in

the o

rgan

ization.

10.

Em

plo

yees w

ho in

still confid

ence in

custo

mers b

y ap

pro

priate b

ehav

ior.

11.

Mak

ing cu

stom

ers feel safe and secu

re in th

eir transactio

ns.

12

.E

mp

loy

ees wh

o are co

nsisten

tly p

leasing

and

cou

rteou

s.

13

.E

mp

loy

ees wh

o h

ave th

e kn

ow

ledg

e and

com

peten

ce to an

swer cu

stom

ers’ specific q

ueries an

d req

uests.

14

.E

ffectiven

ess of cu

stom

er griev

ance h

and

ling

pro

cedu

res and

pro

cesses.

15

.G

ivin

g carin

g an

d in

div

idu

al attentio

n to

custo

mers b

y h

avin

g th

e custo

mers’ b

est interests in

min

d.

16

.E

mp

loy

ees wh

o u

nd

erstand

the n

eeds o

f their cu

stom

ers.

3.

System

atiza

tion o

f service delivery: n

on-h

um

an elem

ent o

r The p

rocess , p

roced

ures, system

s

and T

echnolo

gy th

at w

ould

make a

service contin

uous o

ne.

1.

Hav

ing

a hig

hly

stand

ardized

and

simp

lified d

elivery

pro

cess so th

at services are d

elivered

with

ou

t any

hassles o

r excessiv

e bu

reaucracy

2.

Hav

ing

a hig

hly

simp

lified an

d stru

ctured

deliv

ery p

rocess so

that th

e time tak

en fo

r service d

elivery

is

min

imu

m.

3.

Enhan

cemen

t of tech

nolo

gical cap

ability

(e.g. co

mputerizatio

n, n

etwork

ing o

f operatio

ns, etc.) to

serve cu

stom

ers

mo

re effectively.

4.

Deg

ree to w

hich

the p

roced

ures an

d p

rocesses are fo

ol - p

roo

f.

5.

Ad

equ

ate perso

nn

el are availab

le for cu

stom

er service.

6.

Ad

equ

ate and

necessary

facilities for g

oo

d cu

stom

er service.

4.

Tangib

les of service: M

an m

ade p

hysica

l enviro

nm

ent

1.

Th

e amb

ient co

nd

ition

s such

as temp

erature, v

entilatio

n, n

oise an

d o

do

ur p

revailin

g in

the G

eneral In

suran

ce

Co

mp

any..

2.

Ex

tent o

f the p

hy

sical layo

ut o

f equ

ipm

ent an

d o

ther fu

rnish

ing

s bein

g co

mfo

rtable fo

r custo

mers to

interact

with

emp

loy

ees.

3.

Hav

ing

ho

usek

eepin

g as a p

riority

and

of th

e hig

hest o

rder in

the o

rgan

ization

4.

Visu

ally ap

pealin

g sig

ns, sy

mb

ols, ad

vertisem

ent b

oard

s, pam

ph

lets and

oth

er artifacts in th

e Gen

eral Insu

rance

Co

mp

any.

5.

Em

plo

yees w

ho

hav

e a neat an

d p

rofessio

nal ap

pearan

ce.

6.

Visu

ally ap

pealin

g serv

ice materials su

ch as p

olicy

cop

y an

d o

ther d

ocu

men

ts.

5.

Socia

l responsib

ility

1.

‘Serv

ice transcen

den

ce’ mak

ing

custo

mers realize th

eir un

exp

ressed n

eeds b

y g

ivin

g m

ore th

an w

hat th

ey ex

pect.

2.

Giv

ing

qu

ality serv

ice at a reason

able co

st.

3.

Hav

ing

bran

ch lo

cation

s in m

ost p

laces con

ven

ient to

all section

s of th

e society

(e.g. v

illages, d

ow

nto

wn

areas,

etc.)

4.

A so

cial respo

nsib

ility ch

aracterized b

y d

eservin

g serv

ice and

pro

du

ct to p

eop

le belo

ng

ing

to all strata o

f the

society.

5.

A sen

se of p

ub

lic respo

nsib

ility am

on

g em

plo

yees (in

terms o

f bein

g p

un

ctual, reg

ular, sin

cere and

with

ou

t

go

ing

on

strike).

6.

Ex

tent to

wh

ich th

e insu

rance co

mp

any

pro

mo

tes corp

orate b

usin

ess ethics th

rou

gh

its services.

Serv

ice Qu

ality an

d C

usto

mer S

atisfaction

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

71

Wh

y sh

ou

ld w

e Stu

dy H

um

an

Reso

urces M

an

agem

ent?

S. R

. Tulasi *

Ab

stract

The au

thor faced

a query

while teach

ing “H

um

an R

esources M

anag

emen

t” as to w

hy th

is subject n

eeds to

be stu

died

. The co

mm

on p

erceptio

n is th

at this fu

nctio

n is least resp

ected am

ongst all in

an O

rgan

ization. T

his

poser m

ade th

e auth

or to

thin

k ab

out th

e evolu

tion o

f HR

over th

e decad

es and h

ow

it failed to

move w

ith th

e

chan

gin

g tim

es. In fact H

R is n

ow

at crossro

ads an

d g

ropin

g fo

r directio

n.

The au

thor traced

the ev

olu

tion o

f HR

from

its “Perso

nnel” ro

ots to

the cu

rrent d

ay “ B

usin

ess Partn

er “

scenario

and ex

plain

ed th

e parad

oxical co

nflicts in

the H

R ro

le “expected

” by o

ther fu

nctio

nal co

lleagues an

d

the “d

esired” ro

le by H

R itself. T

he au

thor is co

nvin

ced th

at HR

has a m

eanin

gfu

l and p

ractical role to

perfo

rm

and it alo

ne is eq

uip

ped

to d

o so

. He h

ad en

unciated

and elab

orated

this u

niq

ue ro

le for H

R in

the article.

Tow

ards th

e conclu

sion, th

e auth

or ex

plain

ed th

e qualities, th

e studen

ts of H

RM

will n

eed to

equip

them

selves

with

, in o

rder to

succeed

in th

e “HR

” pro

fession.

Intro

du

ction

“Why sh

ould

we stu

dy th

e Hum

an R

esources M

anag

emen

t?”. This q

uestio

n to

ok m

e by su

rprise w

hen

I

had

com

pleted

my first m

odule w

hile teach

ing “H

um

an R

esources M

anag

emen

t” and p

rodded

my n

ew stu

den

ts

at Vig

nan

a Jyoth

i to ask

questio

ns an

d seek

clarifications. It sh

ould

n’t h

ave.

When

we o

pen

the d

aily ed

ition o

f “Eco

nom

ic Tim

es”, it is most lik

ely th

at we co

me acro

ss a bone tick

ling

jok

e on

Hu

man

Reso

urces fu

nctio

n in

its centre p

ages. M

ore o

ften th

an n

ot, it co

uld

equ

ally b

e a tho

ug

ht

pro

vokin

g in

sight in

to cu

rrent m

anag

emen

t affairs which

is besid

es the p

oin

t.

There is lik

ewise, n

o d

earth o

f chain

mails o

n in

ternet in

ridicu

ling th

e min

dless ad

heren

ce to ru

les and

practices b

y H

R p

ractitioners in

Industry.

And th

e most v

isible im

pressio

n o

f a HR

execu

tive in

the m

inds o

f buddin

g em

plo

yees is th

at of a fello

w

with

a cynical sm

ile on h

is lips w

hile h

andin

g o

ver th

e pin

k slip

s.

Why sh

ould

we th

erefore stu

dy th

is subject w

hich

is but a b

utt o

f ridicu

le !

I hav

e tried, in

the in

terven

ing fifteen

min

utes b

efore th

e nex

t session co

mm

enced

, to ex

plain

the p

ositiv

e

aspects o

f “Hum

an R

esources M

anag

emen

t” and d

ispel th

e impressio

n th

at HR

is an ev

il force o

ut to

ruin

an

Org

anizatio

n. B

ut th

is query

from

a young m

anag

emen

t studen

t did

distu

rb m

e and sev

eral thoughts cro

ssed m

y

min

d w

hich

found ex

pressio

n su

bseq

uen

tly in

this article.

Ob

jectives o

f Hu

man

Reso

urces M

an

agem

ent

What cam

e instan

tly to

my m

ind w

as the p

oser b

y D

ave U

lrich, “ S

hould

we d

o aw

ay w

ith H

R !” in

his

semin

al book “H

R C

ham

pio

ns” an

d h

is observ

ation th

at it is a silly q

uestio

n an

d a sen

seless deb

ate. He g

oes o

n

to ad

d –

“Of co

urse w

e should

do aw

ay w

ith H

R if it fails to

add v

alue”. H

e furth

er suggests th

at a more u

seful

questio

n to

ask w

ould

be “ H

ow

can H

R create v

alue an

d d

eliver resu

lts !”Let u

s exam

ine th

e purp

ose an

d

relevan

ce of H

R an

d h

ow

it can ad

d v

alue to

an O

rgan

ization. S

ubseq

uen

tly w

e will try

and ex

plo

re the ap

pro

priate

com

peten

cies the stu

den

ts of th

is course w

ould

need

to acq

uire if th

ey w

ere desiro

us to

mak

e HR

as a career.

*V

ice Presid

ent ( H

R ) –

Retired

, ITC

Lim

ited, P

aperb

oard

s & S

pecialty

Pap

ers Div

ision

, Hy

derab

ad, E

mail –

srtulasi@

yah

oo

.com

72.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Wh

at d

o H

R p

eop

le norm

ally

do ?

Staffin

g, co

mpen

sation, b

enefits, co

mm

unicatio

n, train

ing an

d d

evelo

pm

ent, o

rgan

ization d

esign, so

on

and so

forth

. HR

peo

ple co

me to

their jo

bs w

ith a set o

f skills th

at enab

le them

perfo

rm th

ese activities. M

any

man

agem

ents ex

pect th

em to

focu

s on th

ese adm

inistrativ

e and tran

sactional activ

ities and H

R w

ork

is thus

pattern

ed in

bureau

cratic way

s. We h

ave th

erefore seen

that th

e HR

modules b

eing tau

ght at B

usin

ess schools

focu

s on th

e “science” o

f Hum

an R

esources fu

nctio

n co

upled

with

info

rmatio

n o

n statu

tory

and o

ther reg

ulato

ry

system

s so as to

understan

d th

e “Industrial relatio

ns” asp

ect of H

R.

These m

odules, are n

o d

oubt, im

portan

t but a g

reater emphasis p

erhap

s need

s to b

e accord

ed to

the “art”

of H

R w

hich

is closely

link

ed “h

um

an relatio

ns” an

d o

f cou

rse the strateg

ic HR

. Ho

w d

id th

e fun

ction

of

“Hum

an R

esources” ev

olv

e ! HR

functio

n to

day

is the p

roduct o

f its past. Its h

istory

starts in th

e late nin

eteenth

centu

ry w

ith a “w

elfare” role w

hich

was esp

ecially co

nnected

with

the p

rotectio

n o

f the ex

plo

ited lab

our seg

men

t.

Em

plo

ym

ent o

f “Welfare o

fficers” was fo

und to

be essen

tial both

from

legal req

uirem

ents an

d m

oral o

blig

ation

to p

rotect an

d im

pro

ve th

e lot o

f the em

plo

yees. In

this ro

le, HR

( then

know

n as “P

ersonnel” ) co

uld

just aid

the

pro

ductio

n b

y lim

iting ab

sence o

f emplo

yees, d

eal with

their g

rievan

ces and p

unish

the u

nru

ly b

ehav

ior.

Post w

orld

war, trad

e unio

n m

ovem

ents b

ecame a g

lobal p

hen

om

enon an

d lo

ng term

agreem

ents to

resolv

e

the em

plo

ym

ent related

issues su

ch as jo

b d

escriptio

ns, w

ork

hours, fair w

ages etc assu

med

importan

ce in

Industrial relatio

ns field

. Perso

nnel d

epartm

ents b

ecame d

om

inated

by th

ose w

ith sk

ills and ex

pertise to

carry

out su

ch activ

ities. The to

ugh m

inded

indiv

iduals th

at thriv

ed in

this en

viro

nm

ent b

enefited

from

the p

ow

er of

trade u

nio

ns ; it ju

stified th

eir importan

ce. Sev

eral Man

agers in

line fu

nctio

ns d

etested th

e industrial relatio

ns

wo

rk an

d n

eeded

the su

pp

ort fro

m th

eir “Perso

nn

el” colleag

ues if o

nly

to act as referees b

etween

warrin

g

parties.

Anoth

er contrib

utio

n o

f the P

ersonnel fu

nctio

n w

as that o

f pro

vid

ing an

efficient ad

min

istrative serv

ice

with

in o

f course clearly

defin

ed ru

les and p

roced

ures. T

his ro

le may

hav

e help

ed to

boost th

e self servin

g eg

o o

f

the H

R p

rofessio

nals as p

ow

er is just n

ot p

erceived

but d

emonstrated

in an

adm

inistrativ

e role.

Recru

itmen

t was a h

igh v

olu

me activ

ity an

d in

ductio

n/ jo

b related

trainin

g w

ere linked

tasks. A

noth

er

dim

ensio

n w

hich

was p

arallel with

these d

evelo

pm

ents w

as the g

row

th in

legal reg

ulatio

ns an

d co

mplian

ce

which

beau

tifully

fitted w

ith th

e auth

oritativ

e role th

at came to

be p

ersonified

by a P

ersonnel m

anag

er. In

short, a “p

rescriptiv

e” appro

ach to

peo

ple m

anag

emen

t.

It was a tim

e of co

mplian

ce to ru

les and reg

ulatio

ns. N

o w

onder, In

dustrial relatio

ns an

d ad

min

istrative

com

plian

ce represen

ted th

e essence o

f Peo

ple m

anag

emen

t durin

g th

is era.The o

bitu

ary o

f the H

R fu

nctio

n w

as

written

man

y a tim

e since P

eter Dru

cker fam

ously

questio

ned

the ro

le, the co

ntrib

utio

n an

d th

e futu

re existen

ce

of th

ese “Perso

nnel” d

epartm

ents 5

0 y

ears ago.

Imp

act o

f Lib

eraliza

tion

an

d G

lob

aliza

tion

Glo

balizatio

n d

om

inated

the co

mpetitiv

e horizo

n, w

orld

over in

the sev

entees o

f the last cen

tury. S

everal

glo

bal ev

ents su

ch as G

AT

T ag

reemen

t bro

ke th

e hith

er to b

uilt artificial trad

e barriers an

d w

orld

shru

nk in

to

a glo

bal v

illage. G

lobalised

, inten

se com

petitio

n h

as push

ed O

rgan

izations to

be b

oth

effective an

d efficien

t.

Priv

ate sector co

mpan

ies hav

e had

to resp

ond to

stock

mark

et dem

ands fo

r a quick

er return

on in

vestm

ents.

Those in

the p

ublic secto

r hav

e had

to co

pe w

ith sim

ilarly im

patien

t Govern

men

t requirem

ents fo

r cost red

uctio

n

and im

pro

ved

efficiencies. S

udden

ly all th

e org

anizatio

ns w

ere forced

to fo

cus o

n cap

ability

build

ing in

ord

er

to su

rviv

e in th

is bord

er less world

.

Firm

s hav

e started ask

ing th

emselv

es –

What cap

abilities ex

ist with

in th

e firm ?

What cap

abilities are req

uired

for th

e futu

re success o

f the firm

?

Wh

y sh

ou

ld w

e Stu

dy

Hu

man

Reso

urces M

anag

emen

t?

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

73

How

can w

e align cap

abilities w

ith B

usin

ess Strateg

ies ?

How

can w

e desig

n H

R p

ractices to create th

e need

ed cap

abilities ?

The tran

sform

ation o

f a “Perso

nnel” fu

nctio

n to

a “Hum

an R

esources” fu

nctio

n w

as so su

dden

but so

smo

oth

that it ap

peared

to h

ave tak

en p

lace almo

st ov

ernig

ht. S

everal n

ew H

R p

hrases su

ch as C

han

ge

Man

agem

ent, T

ransfo

rmatio

n, R

eeng

ineerin

g, C

ultu

re chan

ge, R

e inv

entio

n, F

lexib

ility, Ag

ility cam

e in to

circulatio

n. H

R p

rofessio

nal fo

und a n

ew ro

le in th

at he w

as expected

to ch

ampio

n th

is chan

ge p

rocess.

A D

ifficult T

ran

sform

atio

n In

deed

!

HR

functio

naries w

ere told

to fo

llow

Dav

e Ulrich

’s supposed

mag

ical recipe o

f partn

ering w

ith th

e Busin

ess

to ach

ieve b

oard

room

presen

ce and su

ccess.HR

had

to fin

d a n

eat balan

ce betw

een its still v

aluab

le day

to d

ay

operatio

nal ro

le and th

e ‘big

pictu

re’ transfo

rmatio

nal in

itiatives an

d th

e two in

reality can

’t be n

eatly seg

men

ted.

The d

ifficulty

seemed

to stem

from

an u

ncertain

ity o

ver w

hat ro

le it should

play.

HR

M is n

ow

pro

ved

to b

e not a sin

gle, u

nified

concep

t but a v

aried ap

pro

ach to

peo

ple m

anag

emen

t.

There is a w

ide v

ariety o

f concep

tions o

f HR

’s role. It m

ay b

e a perm

anen

t adviso

r to th

e line m

anag

emen

t. It

may

be a g

uard

ian o

f policies an

d p

ractices. It may

be a lead

er creating ch

ange o

r a represen

tative o

f emplo

yees’

view

s.These ro

les are partly

driv

en b

y a ran

ge o

f expectatio

ns fro

m a v

ariety o

f stake h

old

ers – sen

ior m

anag

emen

t,

line m

anag

ers, emplo

yees –

who in

evitab

ly try

to in

fluen

ce what th

e functio

n sh

ould

be d

oin

g an

d h

ow

it should

be d

oin

g it.

Post 9

0’s, as a resu

lt of g

lobalizatio

n, ch

angin

g in

dustrial scen

ario led

to a stead

y d

ecline in

trade u

nio

ns’

importan

ce and th

e long term

agreem

ents w

ere no lo

nger th

e ‘feared d

ragons’ w

hich

how

ever sh

ould

not b

e

constru

ed as red

undan

cy o

f IR asp

ect of th

e HR

functio

n. In

creasingly

line m

anag

ers were en

trusted

with

the

job o

f man

agin

g p

eople. L

ong term

agreem

ents b

ecame th

e prim

e responsib

ility o

f line m

anag

emen

t in m

any

org

anizatio

ns, w

ith facilitatio

n, o

f course fro

m th

e HR

functio

n w

ho w

ere now

expected

to p

erform

strategic

roles.H

R critics w

ere concern

ed th

at “Perso

nnel” m

anag

ers who w

ere “servan

ts of p

ow

er” are ill equip

ped

and

ill positio

ned

to d

on th

is new

role.

Ch

allen

ges in

this T

ran

sition

!

Mism

atched

expectatio

ns o

ccur w

hen

percep

tions o

f line m

anag

ers and H

R p

rofessio

nals

diffe

r. Th

e

balan

ce betw

een w

hat th

e line m

anag

er should

do an

d w

hat P

ersonnel sh

ould

do is as o

ld as th

e functio

n itself.

The n

ew ro

le which

HR

had

now

donned

is in fact to

ugher as it req

uired

HR

to w

ork

as a facilitator fo

r the

line cu

stom

er as regard

s the issu

es related w

ith u

nio

nized

emplo

yee categ

ory

and fo

cus o

n cap

ability

build

ing

at mid

dle an

d sen

ior m

anag

emen

t levels.

Hy

po

thesis

Old

style P

ersonnel to

transfo

rm in

to n

ew w

ave H

R req

uired

–

a tactician to

beco

me a strateg

ist,

a fire fighter to

beco

me risk

man

ager,

a police o

fficer to b

ecom

e an ad

viso

r and

a contro

ller to b

ecom

e a facilitator.

In reality, th

is adju

stmen

t is not as straig

ht fo

rward

as it mig

ht seem

and certain

ly n

ot as b

lack an

d w

hite. A

n

area of d

ebate, an

d p

erhap

s more co

nten

tious o

r at least not so

clear cut, is th

e deg

ree of o

peratio

nal su

pport H

R

Wh

y sh

ou

ld w

e Stu

dy

Hu

man

Reso

urces M

anag

emen

t?

74.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

giv

es to lin

e man

agem

ent. H

R’s ex

pertise is really

in its tech

nical p

rofessio

nalism

and th

is is what lin

e man

agers

wan

t from

HR

. Th

ey w

ou

ld n

eed p

rofessio

nal sk

ills in recru

itmen

t, emp

loy

ee relation

s and

trainin

g &

dev

elopm

ent. S

ure, th

ey w

elcom

e HR

to b

ecom

e busin

ess savy b

ut th

ey d

o n

ot w

ant H

R so

much

in th

e clouds

that it can

’t contrib

ute to

the d

ay to

day

operatio

nal b

usin

ess. But H

R p

erceives th

at such

an ap

pro

ach d

raws H

R

back

in to

the reactiv

e, firefightin

g ro

le it has b

een try

ing to

escape fro

m !

Em

plo

yees are n

ot m

achin

es. They

hav

e min

ds o

f their o

wn. T

hey

can leav

e the co

mpan

y, go o

n strik

e,

speed

up o

r slow

dow

n p

roductio

n, d

ecide to

stay in

bed

a day

longer after illn

ess, so o

n an

d so

forth

. They

need

to b

e man

aged

differen

tly. HR

has th

e skill set to

understan

d w

hat m

otiv

ates and d

emotiv

ates emplo

yees. B

ut in

its desire to

get clo

ser to “b

usin

ess” and to

shed

the im

age o

f a “welfare” fu

nctio

n, H

R h

as put m

ore d

istance

betw

een itself an

d p

eople. H

R h

ad n

ot learn

t to p

lay m

ultip

le roles ex

pected

of th

em in

the ch

anged

scenario

.

And n

ot all lin

e man

agers accep

ted th

at peo

ple m

anag

emen

t was n

ow

an im

portan

t com

ponen

t of th

eir job.

They

wan

ted to

concen

trate on th

e technical asp

ects of th

eir work

and p

eople m

anag

emen

t was o

ften reg

arded

as a burd

en. S

om

e of th

e difficu

lties stemm

ed fro

m th

e effects of d

ow

nsizin

g w

hich

resulted

in larg

e span

of

contro

l. Lin

e man

agers m

ay h

ave also

experien

ced lack

of sk

ills to p

erform

the p

eople m

anag

emen

t tasks ev

en

if they

had

time at th

eir disp

osal. T

hus co

mbin

ation o

f disp

ositio

n, sk

ills ( or lack

of ), tim

e and m

anag

emen

t

pressu

re contin

ue to

inhib

it line m

anag

ers from

takin

g o

n th

e tasks fro

m H

R an

d lim

it their p

articipatio

n in

HR

policy

mak

ing.

We h

ave d

iscussed

these issu

es in lig

ht o

f the ch

allenges in

the tran

sition. It is h

ow

ever n

ot to

be co

nstru

ed

that th

e move h

ad failed

and b

een g

iven

up. It is tru

e that L

ine M

anag

ers are mak

ing m

ore an

d m

ore p

eople

decisio

ns w

hile th

e HR

staff is beco

min

g m

ore in

volv

ed in

bro

ader o

rgan

izational issu

es albeit at a p

ace slow

er

than

required

.

As reg

ards b

usin

ess strategic p

artnersh

ip is co

ncern

ed, th

ere is consid

erable d

istance to

be co

vered

for H

R

to b

ecom

e a strategic p

artner at all lev

els. To d

o so

, HR

need

s to b

uild

its ow

n in

ternal co

mpeten

cies to d

eal with

org

anizatio

nal issu

es, edu

cate itself on

the v

ision

and

missio

n o

f the O

rgan

ization

, and

find

way

s to o

ffer

creative an

d in

novativ

e solu

tions to

Org

anizatio

n w

ide issu

es.

Meth

od

olo

gy

What is th

e valu

e HR

adds to

an O

rgan

ization !

HR

practices w

ill need

to b

e integ

rated an

d fo

cused

on v

alue ad

ded

agen

das su

ch as in

tangib

les, custo

mer

connectio

n, o

rgan

ization cap

abilities, an

d in

div

idual ab

ilities. HR

transfo

rmatio

n m

ust b

e more th

an rh

etoric; it

must sh

ape b

ehav

ior an

d create an

d en

sure stak

ehold

er valu

e. Sen

din

g o

ne o

r two H

R p

rofessio

nals to

a semin

ar

does n

ot tran

sform

the H

R d

epartm

ent. O

ften, p

eople retu

rn fro

m train

ing w

ith g

reat ideas b

ut are g

reeted w

ith

little opportu

nity

to ap

ply

them

. Tran

sform

ation req

uires w

hole n

ew ag

endas, th

oughts, an

d p

rocesses acro

ss

the en

tire dep

artmen

t, not ju

st on th

e part o

f a few in

div

iduals. F

inally, g

ainin

g cred

ibility

and accep

tance b

y

man

agem

ent o

r emplo

yees is n

ot tran

sform

ation. D

oin

g so

may

be a g

ood step

pin

g-sto

ne to

futu

re work

, but

real transfo

rmatio

n m

ust tu

rn rela

tion

ship

s into

results an

d also

create valu

e for cu

stom

ers, shareh

old

ers,

man

agers, an

d em

plo

yees.

Prem

ise of H

R V

alu

e

Sin

ce valu

e is defin

ed b

y th

e receiver, n

ot th

e giv

er, any v

alue p

ropositio

n b

egin

s with

a focu

s on receiv

ers,

not g

ivers. F

or H

R p

rofessio

nals, th

e valu

e prem

ise mean

s that rath

er than

imposin

g th

eir beliefs, g

oals, an

d

actions o

n o

thers, th

ey first n

eed to

be o

pen

to w

hat o

thers w

ant.T

his fu

ndam

ental p

rincip

le is too o

ften o

verlo

oked

.

Often

, HR

pro

fessionals h

ave b

eliefs, goals, an

d actio

ns th

at translate in

to th

ings th

at they

wan

t to h

ave th

em

hap

pen

in th

eir org

anizatio

n—

so th

ey g

o straig

ht fo

r their d

esired resu

lts, with

out p

ayin

g en

ough atten

tion to

the p

erspectiv

es of o

thers. In

fluen

ce with

impact o

ccurs w

hen

HR

pro

fessionals start w

ith th

e beliefs an

d g

oals

of th

e receivers.

Wh

y sh

ou

ld w

e stud

y H

um

an R

esou

rces Man

agem

ent?

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

75

$ W

ho are th

e key

stakeh

old

ers I must serv

e?

& W

hat are th

e goals an

d v

alues o

f the receiv

ing stak

ehold

ers?

' W

hat is im

portan

t to th

em? W

hat d

o th

ey w

ant?

When

these req

uirem

ents are fu

lly u

ndersto

od, th

en th

e HR

pro

fessional can

show

how

an in

vestm

ent in

an H

R

practice w

ill help

the stak

ehold

er gain

valu

e as defin

ed b

y th

at stakeh

old

er.

Resu

lts

To

an em

plo

yee w

orried

abo

ut g

etting

laid o

ff, HR

pro

fession

als sho

uld

dem

on

strate that b

eing

mo

re

pro

ductiv

e will h

elp th

e emplo

yee stay

emplo

yed

. To a lin

e man

ager w

orried

about reach

ing strateg

ic goals, H

R

pro

fessionals n

eed to

show

how

investm

ent in

HR

work

will h

elp d

eliver b

usin

ess results. W

ith cu

stom

ers, HR

pro

fessionals n

eed to

remem

ber th

at their in

terest in cu

stom

ers must create v

alue in

the p

roducts o

r services

custo

mers receiv

e. Fo

r shareh

old

ers wh

o are w

orried

abo

ut su

stained

return

s and

gro

wth

, HR

mu

st create

org

anizatio

ns th

at deliv

er results to

day

and in

tangib

les that g

ive o

wners co

nfid

ence th

at results w

ill be d

elivered

in th

e futu

re.

HR

pro

fessionals n

eed a p

erspectiv

e that is co

mpatib

le with

and d

istinct fro

m o

ther b

usin

ess persp

ectives.

That is, th

ey m

ust b

e able to

understan

d an

d v

alue th

e finan

ce and sales p

erspectiv

es, but th

ey m

ust also

add

their o

wn p

oin

t of v

iew. W

ithout su

ch a u

niq

ue an

d p

ow

erful p

erspectiv

e, they

are redundan

t and fail in

their

aspiratio

ns as fu

ll busin

ess contrib

uto

rs. For ex

ample, an

HR

persp

ective th

at is both

uniq

ue an

d p

ow

erful is

one th

at establish

es the lin

kag

es betw

een em

plo

yee co

mm

itmen

t, custo

mer attitu

des, an

d in

vesto

r return

s.

Th

is un

iqu

e view

dem

on

strates a po

werfu

l con

nectio

n b

etween

wh

at is carried o

ut b

y m

anag

ers and

emplo

yees in

side th

e firm an

d w

hat h

appen

s with

custo

mers an

d in

vesto

rs on th

e outsid

e.

With

a uniq

ue an

d p

ow

erful p

erspectiv

e of th

eir ow

n, H

R p

rofessio

nals w

ill see aspects o

f the b

usin

ess

enviro

nm

ent th

at go b

eyond w

hat o

ther b

usin

ess discip

lines b

ring an

d th

at add su

bstan

tially to

busin

ess.

Such

a uniq

ue p

erspectiv

e could

be d

evelo

ped

if HR

were to

address th

e follo

win

g q

uestio

ns:

$W

hat are th

e org

anizatio

nal cap

abilities th

at my co

mpan

y m

ust h

ave to

createp

rod

ucts a

nd

serv

ices th

at

result in

our cu

stom

ers’ takin

g m

oney

out o

f their w

allets and p

uttin

g it in

to o

urs in

stead o

f giv

ing it to

our

com

petito

rs?

&W

hat em

plo

yee ab

ilities do o

ur p

eople n

eed so

that th

ey can

understan

d an

d resp

ond to

short-term

and lo

ng-

term m

arket d

eman

ds?

'H

ow

do w

e invest in

HR

practices th

at deliv

er busin

ess results?

(H

ow

do w

e org

anize H

R activ

ities to d

eliver m

axim

um

valu

e?

When

HR

pro

fessionals resp

ond to

these q

uestio

ns, th

ey w

ill know

why o

thers w

ould

ben

efit by listen

ing

to th

em, b

ecause th

ey w

ill be d

eliverin

g real v

alue—

and th

ey w

ill know

what th

at valu

e is. When

HR

pro

fessionals

beg

in w

ith th

e receiver in

min

d, th

ey can

more q

uick

ly em

erge as fu

ll strategic co

ntrib

uto

rs; add g

reater valu

e

for k

ey stak

eho

lders (cu

stom

ers, inv

estors, lin

e man

agers, an

d em

plo

yees); en

han

ce bu

siness p

rod

uctiv

ity;

achiev

e measu

rable an

d v

aluab

le results; create su

stainab

le com

petitiv

e advan

tage; an

d h

ave m

ore fu

n in

their

careers.

Con

clusio

n

How

can H

R p

rofessio

nals d

evelo

p th

is uniq

ue p

erspectiv

e !

It would

be an

interestin

g p

ropositio

n if o

ne w

ere to arg

ue th

at hum

ans are n

ot th

e asset. Relatio

nsh

ips w

ith

hu

man

s are the tru

e asset, and

relation

ship

s cann

ot b

e con

trolled

bu

t neg

otiated

and

reneg

otiated

and

then

reneg

otiated

. Relatio

nsh

ips req

uire care, n

urtu

ring

, and

need

to b

e con

stantly

mo

nito

red h

ow

well b

eing

main

tained

. When

relationsh

ips are o

ptim

ized, th

e Org

anizatio

n ex

perien

ces “superio

r” beh

avio

rs as a result.

Wh

y sh

ou

ld w

e Stu

dy

Hu

man

Reso

urces M

anag

emen

t?

76.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

This m

ay b

e translated

into

loyalty, en

gag

emen

t, trust, an

d m

ore. S

uch

“ superio

r” beh

avio

rs translate in

to

impro

ved

teamw

ork

, alignm

ent to

ward

s the O

rgan

izational g

oals, h

elpin

g an

oth

er team m

ember w

hen

it’s not

part o

f the jo

b, an

d m

any m

ore.

Wh

o’s In

Ch

arg

e Of O

ptim

izing H

um

an

Rela

tion

ship

s?

It’s interestin

g to

note th

at, although th

ere is consid

erable su

pport fo

r the n

otio

n th

at relationsh

ips are an

org

anizatio

n’s tru

e asset, in m

ost co

mpan

ies, no o

ne d

epartm

ent, p

erson, o

r gro

up ten

ds to

be h

eld acco

untab

le

for th

e total stak

eho

lder relatio

nsh

ip strateg

y. Fin

ance is in

charg

e of relatio

nsh

ips w

ith sh

areho

lders an

d

poten

tial investo

rs; mark

eting an

d sales are in

charg

e of relatio

nsh

ips w

ith cu

stom

ers; line m

anag

ers and H

RM

are in ch

arge o

f relationsh

ips w

ith em

plo

yees; p

urch

asing an

d m

anufactu

ring are in

charg

e of relatio

nsh

ips w

ith

ven

dors, an

d th

e list goes o

n. B

ut n

o o

ne g

roup is in

charg

e of assu

ring th

at there is o

ne co

heren

t stakeh

old

er

strategy fo

r a busin

ess. Thus, th

e true asset –

hum

an relatio

nsh

ips –

is often

mism

anag

ed. H

RM

dep

artmen

t

could

be in

the p

erfect positio

n to

fill this v

oid

and tak

e on th

e role o

f RE

AL

hum

an relatio

nsh

ip strateg

y !

As th

e functio

n in

charg

e of lead

ership

and m

anag

emen

t dev

elopm

ent, H

RM

can im

pact th

e decisio

ns

leaders m

ake ab

out h

um

ans. T

his ab

ility to

man

age “h

um

an relatio

nsh

ips” is th

e key

to d

evelo

pm

ent o

f uniq

ue

HR

persp

ective in

an O

rgan

ization

. Relatio

nsh

ip m

anag

emen

t is an o

pp

ortu

nity

that can

be seized

by

HR

execu

tives w

ho are tru

ly strateg

ic and w

ho u

nderstan

d w

hat is n

eeded

for th

eir busin

esses to su

cceed to

day

and

remain

com

petitiv

e as the b

usin

ess landscap

e contin

ues to

evolv

e and ch

ange.

For a m

om

ent o

ne sh

ould

not co

nclu

de th

at HR

should

assum

e the ro

le of a su

per fu

nctio

n to

dictate

to

oth

er functio

ns as to

how

to co

nduct th

eir peo

ple relatio

nsh

ips. It is a lo

t subtler a ro

le that n

eeds m

aturity

to

perfo

rm. F

or th

e sake o

f clarity, let us say, H

R sh

ould

beco

me th

e eyes an

d ears o

f the O

rgan

ization an

d m

ore so

the C

EO

, as regard

s hum

an relatio

nsh

ips are co

ncern

ed an

d en

sure th

at suitab

le pro

active m

easures are tak

en

thro

ugh C

EO

and th

e functio

nal h

eads.

Reco

mm

end

atio

ns

What are th

e uniq

ue co

mpeten

cies that H

R P

rofessio

nals w

ill need

to acq

uire to

successfu

lly m

anag

e this

“Relatio

nsh

ip M

anag

emen

t” ! While m

anag

erial com

peten

cies such

as Custo

mer F

ocu

s, Pro

blem

Solv

ing an

d

decisio

n m

akin

g sk

ills, Presen

tation S

kills, In

tegrity, In

telligen

ce, Energ

y, Flex

ibility, V

ision, P

olitical A

waren

ess

are a must fo

r any su

ccessful fu

nctio

nary

in an

Org

anizatio

n, certain

Com

peten

cies as detailed

belo

w are a m

ust

for a H

R P

rofessio

nal in

ord

er to m

anag

e the ‘R

elationsh

ip M

anag

emen

t”Relatio

nsh

ip F

ocu

sed:

appro

achab

le;

relates easily to

div

erse gro

ups an

d in

div

iduals; b

uild

s trust an

d d

evelo

ps relatio

nsh

ips.

Resu

lt focu

sed: A

HR

Pro

fessional tru

ly b

elieves in

the ad

age “ H

ow

wonderfu

l any task

can b

e accom

plish

ed

if one w

ere not co

ncern

ed ab

out w

ho g

ets the cred

it”

Activ

e Listen

ing: ab

ility to

abso

rb an

d tran

slate oth

ers’ statemen

ts into

objectiv

e responses an

d actio

ns; ab

ility

to g

ive an

d receiv

e feedback

in an

appro

priate m

anner. C

om

posu

re and P

rofessio

nalism

: ability

to m

aintain

pro

fessional d

emean

or in

difficu

lt or stressfu

l situatio

ns; p

atience w

ith cu

stom

ers; ability

to d

iffuse an

ger an

d

deal w

ith d

ifficult cu

stom

ers.

Ch

an

ge M

an

agem

ent: A

structu

red ap

pro

ach to

chan

ge in

indiv

iduals, team

s, org

anizatio

ns an

d so

cieties that

enab

les the tran

sition fro

m a cu

rrent state to

a desired

futu

re state.

Interp

erson

al S

kills : O

ne sh

ould

consid

er and resp

ond ap

pro

priately

to th

e need

s, feelings &

capab

ilities of

differen

t peo

ple in

differen

t situatio

ns; sh

ould

be tactfu

l, com

passio

nate an

d sen

sitive, an

d treat o

thers w

ith

respect.

Wh

y sh

ou

ld w

e stud

y H

um

an R

esou

rces Man

agem

ent?

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

77

Wh

y sh

ou

ld w

e stud

y H

um

an R

esou

rces Man

agem

ent?

Com

mu

nica

tion

Sk

ills:This is n

ot ab

out ju

st the ab

ility to

speak

English

languag

e. One sh

ould

be ab

le to

express h

imself / h

erself clearly an

d ad

equately

in a v

ariety o

f com

municatio

n settin

gs an

d sty

les; should

get th

e

messag

e across th

at will h

ave d

esired effect. E

qually

importan

t is the ab

ility to

understan

d th

e unsp

oken

word

along w

ith th

e spoken

.

If the H

R p

rofessio

nals su

cceed in

dev

elopin

g th

ese com

peten

cies which

help

them

beco

me ch

ange cataly

sts

and p

rovid

e them

an ed

ge to

play

the n

eeded

critical role in

partn

ering w

ith b

usin

ess leaders to

build

org

anizatio

n

capab

ility, respect fo

r HR

fun

ction

will g

et accord

ed u

nask

ed. Is it really

po

ssible fo

r HR

Pro

fession

als to

dev

elop su

ch q

ualities th

at they

aim at su

per o

rdin

ate goals su

ch as co

mm

on g

ood o

f the p

eople an

d o

rgan

ization

above self in

terests ! Yes, it is p

ossib

le if they

were to

realize that su

ch su

per o

rdin

ate goals are in

fact in th

eir

self interest.

Ad

ditio

nal R

ead

ings

Reilly, P

eter Andrew

, (2006) S

trateg

ic HR

–B

uild

ing th

e capability to

deliver, G

ow

er Publish

ing L

td.,

Ulrich

, Dav

e and B

rock

ban

k, W

ayne, (2

005) T

he H

R V

alu

e pro

positio

n, H

arvard

Busin

ess Sch

ool P

ress, Bosto

n,

Massach

usetts,

Ulrich

, Dav

e (1996) “H

um

an R

esource C

ham

pio

ns”

- The n

ext agen

da fo

r addin

g va

lue a

nd d

elivering resu

lts

Harw

ard B

usin

ess Sch

ool P

ress,

Welb

ourn

e, Theresa (2

003) “S

trategic H

um

an R

esources M

anag

emen

t”, What is it-really,

78.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Ch

an

gin

g G

end

er Role A

ttitud

es an

d F

am

ily P

urch

ase

Decisio

ns

Pin

ni V

asanth

a Lak

shm

i *

Ab

stract

Majo

r shifts in

the lifesty

les and ro

le structu

re of th

e family

hav

e pro

mpted

researchers to

reexam

ine

decisio

n m

akin

g p

ractices of th

e househ

old

. One o

f the v

ariables th

at retained

the in

terest of research

ers for its

pred

ictability

of relativ

e influ

ence w

as gen

der-ro

le (or g

end

er-role) attitu

des. T

his stu

dy

inv

estigated

the

congru

ence b

etween

family

’s gen

der-ro

le attitude an

d ro

le beh

avio

rs in th

e areas of fam

ily p

urch

ase decisio

ns

of d

urab

le goods. F

indin

gs w

ere based

on th

e data co

llected fro

m 2

17 fam

ilies residin

g in

Chen

nai city

who

hav

e recently

purch

ased an

y o

f the th

ree durab

le pro

ducts n

amely

-air conditio

ner, p

ersonal co

mputer an

d car.

Based

on th

e gen

der ro

le attitude th

ey p

ossessed

, responden

ts were classified

into

traditio

nal an

d m

odern

families.

Th

e com

pariso

n o

f gen

der ro

le mo

dern

and

gen

der ro

le traditio

nal fam

ily m

emb

ers reveals d

ifferences in

percep

tion o

f family

purch

ase decisio

n in

fluen

ce.

Key

Word

s: Gen

der-ro

le, Chen

nai, T

raditio

nal, M

odern

, Durab

le and P

urch

ase Influ

ence.

Intro

du

ction

Th

e traditio

nal d

emarcatio

n b

etween

the cu

lturally

prescrib

ed ro

les of m

en an

d w

om

en is b

ecom

ing

increasin

gly

obscu

re both

at the so

cietal and d

om

estic levels. A

com

mon o

bserv

ation is th

at there is co

nsid

erable

movem

ent in

the p

erceptio

ns o

f men

and w

om

en to

ward

more eg

alitarian v

iews in

determ

inin

g th

eir roles. T

he

evolv

ing statu

s of w

om

en fu

eled b

y th

eir increasin

g ed

ucatio

n an

d o

ccupatio

nal attain

men

t coupled

with

the

femin

ist movem

ent h

as been

regard

ed as th

e majo

r force u

nderly

ing th

is chan

ge in

gen

der-ro

le attitudes.(E

ricksen

,

Yan

cy, and E

ricksen

1979; R

oper an

d L

abeff 1

977) W

hile th

ech

anges in

gen

der-ro

le attitudes o

f men

and

wom

en are tak

ing p

lace perv

asively, th

ey d

o n

ot o

ccur sim

ultan

eously

across th

e whole p

opulatio

n. T

he v

aryin

g

deg

rees of g

ender-ro

le attitudes (o

n th

e modern

-traditio

nal co

ntin

uum

) held

by p

eople h

ave b

een h

ypoth

esized

as a causal facto

r underly

ing d

ifferent p

atterns o

f family

role b

ehav

iors. A

ccord

ing to

Qualls (1

987), g

ender-

role attitu

des reflect th

e societal n

orm

s and ex

pectatio

ns b

y w

hich

family

mem

bers d

etermin

e the rew

ards an

d

costs asso

ciated w

ith th

eir actions. (B

lood W

olfe 1

960) p

roposed

long ag

o th

at the cu

ltural n

orm

s and ex

pectatio

ns

hav

e a direct im

pact o

n th

e family

decisio

n in

fluen

ce structu

re. Most fam

ily research

ers giv

e creden

ce to th

e

relation

ship

betw

een g

end

er-role attitu

de an

d ro

le beh

avio

r. A g

eneral b

elief is that eg

alitarian g

end

er-role

attitu

des fo

ster a

co

mm

itmen

t to m

ore

eq

ual sh

arin

g o

f ho

use

ho

ld d

ecisio

n in

fluen

ces a

nd

fam

ily

responsib

ilities.(Scan

zoni 1

977, 1

979; M

ortim

er, Hall, an

d H

ill 1978; B

ird, an

d S

cruggs 1

984).

Litera

ture R

eview

Gen

derR

ole A

ttitud

es & P

rod

uct P

urch

ase D

ecision

s: Gen

der-ro

le attitudes are co

mm

only

know

n as sex

-

role attitu

des. S

tudies relatin

g g

ender-ro

le attitudes o

f husb

and an

d w

ife to th

e influ

ence p

attern in

durab

le

purch

ase decisio

ns are scan

ty an

d th

eir findin

gs are so

mew

hat m

ixed

. The stu

dy b

y G

reen an

d C

unnin

gham

(1975)

which

exam

ined

the n

um

ber o

f sub d

ecisions m

ade b

y each

spouse in

five p

roduct/serv

ice purch

ase situatio

ns,

reported

that h

usb

ands o

f liberal w

ives ten

ded

to m

ake few

er decisio

ns th

an h

usb

ands o

f conserv

ative an

d

moderate g

ender-ro

le wiv

es regard

ing th

e purch

ase of m

ajor ap

plian

ces, auto

mobile, an

d v

acation. H

ow

ever,

the th

ree gen

der-ro

le gro

ups o

f wiv

es did

not sh

ow

a significan

t differen

ce in th

e num

ber o

f sub d

ecisions th

ey

had

influ

ence o

ver ex

cept fo

r the au

tom

obile p

urch

ase. Lib

eral wiv

es reported

to m

ake sig

nifican

tly m

ore su

b

decisio

ns relatin

g to

the au

tom

obile p

urch

ase than

moderates o

r traditio

nals.

*S

enio

r Lectu

rer, St.Jo

seph

’s Co

llege o

f En

gin

eering

, Dep

artmen

t of M

anag

emen

t Stu

dies, O

ldM

amallap

uram

Ro

ad, Jep

piaar N

agar,

Ch

enn

ai-11

9. E

mail: sv

asanth

a99

@g

mail.co

m.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

79

Acco

rdin

g to

Qualls (1

982),

gen

der-ro

le traditio

nal h

usb

ands, m

uch

more so

than

their g

ender-ro

le modern

cou

nterp

arts, perceiv

ed as d

om

inatin

g p

urch

ase decisio

ns reg

ardin

g v

acation

s, auto

mo

biles, h

ou

sing

, and

insu

rance. 6 In

contrast, g

ender-ro

le orien

tation o

f wiv

es did

not sh

ow

any sig

nifican

t relationsh

ip to

the p

erceived

influ

ence p

attern. T

he ev

iden

ce found b

y S

chan

inger, B

uss, an

d G

rover ap

pears m

ore u

neq

uiv

ocal. In

their

findin

gs, g

ender-ro

le modern

families sh

ow

ed less h

usb

and’s an

d m

ore jo

int an

d w

ife’s influ

ence o

ver th

ree of

the fiv

e aspects o

f the last d

urab

le purch

ase (who d

ecided

initially

to b

uy, w

hen

to b

uy, an

d w

here to

buy).

Furth

er, it was o

bserv

ed th

at wiv

es’ gen

der-ro

le attitudes w

ere more stro

ngly

related to

decisio

n m

akin

g in

fluen

ce

than

husb

ands’. 7 A

study b

y Q

ualls (1

987) in

vestig

ated th

e effect of g

ender-ro

le attitudes o

n fo

ur fam

ily d

ecision

mak

ing v

ariables sp

ecified in

a theo

retical netw

ork

, among w

hich

was h

ouseh

old

decisio

n o

utco

me m

easured

as husb

and- o

r wife-d

om

inan

t in a h

ypoth

etical househ

old

purch

ase situatio

n.

Gen

der-ro

le attitud

es of h

usb

and

s and

wiv

es were n

ot ex

amin

ed sep

arately in

this stu

dy. R

ather each

spouse’s sco

res on fiv

e dim

ensio

ns o

f Scan

zoni’s (1

977) g

ender-ro

le attitude m

easurem

ent w

ere used

as indicato

rs

of h

ouseh

old

gen

der-ro

le orien

tation. T

he stu

dy fo

und th

at househ

old

gen

der-ro

le orien

tation affected

the co

uple’s

perceiv

ed in

fluen

ce structu

re and

mo

de o

f con

flict resolu

tion

, bu

t did

no

t hav

e a direct effect o

n d

ecision

ou

tcom

e.

In su

mm

ary, the literatu

re review

suggests th

at the stren

gth

of th

e relationsh

ip b

etween

gen

der-ro

le attitude

and ro

le beh

avio

rs in fam

ily ten

d to

vary

across d

ifferent fam

ily task

s as well as b

etween

husb

ands an

d w

ives.

A stu

dy b

y S

piro

(1987) w

hich

found a relatio

nsh

ip b

etween

the trad

itional fam

ily id

eolo

gy an

d th

e type o

f

influ

ence strateg

y each

spouse u

sed in

a join

t decisio

n m

akin

g situ

ation ad

ds a n

ew d

imen

sion to

the stu

dy o

f

gen

der-ro

le attitudes.

One can

also n

otice in

the ex

isting literatu

re that th

e relationsh

ip b

etween

gen

der-ro

le attitude an

d d

ecision

influ

ence p

attern h

as been

exam

ined

largely

with

biv

ariate analy

ses, or at b

est, in a co

ntex

t of reg

ression

analy

sis inco

rporatin

g o

ther h

ypoth

esized d

etermin

ants o

f role stru

cture. W

hat is co

nsp

icuously

missin

g is an

attempt to

investig

ate simultan

eously

the in

terrelationsh

ip b

etween

gen

der-ro

le attitudes o

f husb

and an

d w

ife

as well as th

e effect of each

spouse’s g

ender-ro

le attitude o

n ro

le structu

ring b

ehav

ior in

several h

ouseh

old

decisio

n areas. M

arriage is a co

mparativ

ely stab

le relationsh

ip, an

d it in

volv

es a great d

eal of in

strum

ental an

d

emotio

nal in

terdep

enden

ce betw

een th

e spouses.

There is ev

iden

ce that th

e spouses in

fluen

ce each o

ther in

shap

ing th

e preferen

ces and b

eliefs of th

e oth

er.

For in

stance, C

ronkite(1

977) fo

und in

both

cross-sectio

nal an

d o

ver-tim

e analy

sis that each

partn

er’s beliefs in

innate g

ender-ro

les (i.e., men

are born

with

more d

rive to

be am

bitio

us an

d su

ccessful th

an w

om

en, an

d w

om

en

by n

ature are h

appiest w

hen

mak

ing a h

om

e and carin

g fo

r child

ren) d

irectly in

fluen

ce the o

ther’s. S

amsin

ar,

Zaw

awi, Y

ee, Basu

and H

amzah

(2004) in

vestig

ated th

e effects of g

ender ro

le orien

tation o

n ro

le structu

re in

family

decisio

n m

akin

g in

Malay

sia and fo

und th

at wiv

es with

hig

her lev

els of ed

ucatio

n h

ad m

ore m

odern

gen

der ro

le orien

tation an

d th

e effect of g

ender ro

le orien

tation o

n w

ives’ relativ

e influ

ence w

as found fo

r the

purch

ase of fu

rnitu

re, electrical applian

ces and g

roceries.

The co

ngru

ence b

etween

gen

der-ro

le attitude an

d p

urch

ase role b

ehav

iors in

family

life is the to

pic o

f investig

ation

in th

is study.

Meth

od

olo

gy o

f Stu

dy

The stu

dy w

as conducted

in C

hen

nai city. T

he d

ata for th

e study w

as collected

thro

ugh p

ersonal in

terview

s

con

du

cted b

etween

Ap

ril 20

08

and

Octo

ber 2

00

8, th

rou

gh

a structu

red, n

on

-disg

uised

qu

estion

naire. T

he

questio

nnaire u

sed fo

r the su

rvey

was d

ivid

ed in

to th

ree parts. T

he first p

art of th

e questio

nnaire in

cluded

the

perso

nal d

etails of th

e family, th

e second p

art related to

the m

easurem

ent o

f gen

der-ro

le attitudes an

d th

e third

part o

f the q

uestio

nnaire in

cluded

questio

ns relatin

g to

purch

ase influ

ence o

f vario

us fam

ily m

embers in

each

of th

e durab

le pro

ducts.

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

80.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Th

e Sam

ple

: A n

on-p

robab

ility co

nven

ience sam

ple w

as adopted

. The sam

ple co

nsisted

of 2

17 fam

ilies who

had

recently

purch

ased an

y o

f the th

ree durab

le pro

ducts n

amely

-Air C

onditio

ner, P

ersonal C

om

puter an

d C

ar.

These p

roducts w

ere chosen

for th

e study as th

ey are v

ery ex

pen

sive d

urab

le pro

ducts g

enerally

consu

med

by

the en

tire family

hen

ce the in

volv

emen

t of all th

e family

mem

bers w

ill be h

igh in

the p

urch

ase of th

ese pro

ducts.

Sin

ce the stu

dy co

ncern

ed th

e differen

t roles p

layed

by v

arious fam

ily m

embers, th

e family

was co

nsid

ered as

the b

asic samplin

g u

nit.

While selectin

g th

e sample item

s, care was tak

en to

ensu

re that th

e families selected

represen

ted d

ifferent

inco

me an

d ag

e gro

ups, p

rofessio

ns, jo

int an

d n

uclear stru

ctures, th

ose w

ith sin

gle earn

ing m

embers as w

ell as

double-in

com

e families. F

or th

e purp

ose o

f the su

rvey, a fam

ily w

as defin

ed as co

nsistin

g o

f husb

and, w

ife and

child

ren.

Sam

ple C

hara

cteristics: The av

erage ag

e of th

e husb

and w

as around 4

8 y

ears while th

at of th

e wife w

as 42

years. M

ajority

of th

e couples w

ere grad

uates. 5

4%

of th

e responden

t families w

ere double-in

com

e families

wh

ile 46

% o

f the fam

ilies were w

ith sin

gle earn

ing

mem

ber. T

he av

erage m

on

thly

family

inco

me w

as Rs

48,0

00. M

ost o

f the fam

ilies were n

uclear fam

ilies with

1-2

child

ren.

An

aly

sis & In

terpreta

tion

The an

alysis w

as carried o

ut in

two step

s. In th

e first step, attitu

de to

ward

s role o

f wom

en in

the so

ciety

was ex

amin

ed an

d in

the seco

nd step

, impact o

f gen

der-ro

le attitude o

n p

urch

ase decisio

n m

akin

g in

families

was stu

died

.

Gen

der R

ole A

ttitud

e in F

am

ilies an

d A

ttitud

e Assessm

ent: In

ord

er to ex

amin

e the attitu

de o

f responden

t

families to

ward

s the ro

le of w

om

en in

the so

ciety, they

were ask

ed to

indicate th

eir level o

f agreem

ent/d

isagreem

ent

with

each o

f the 5

2 statem

ents o

n a fiv

e-po

int L

ikert scale (5

=S

tron

gly

Ag

ree, 4=

Ag

ree, 3=

No

t certain o

r

undecid

ed, 2

=D

isagree, 1

=S

trongly

Disag

ree). These statem

ents b

ased o

n six

them

es: Trad

itional ro

les; vocatio

nal,

educatio

nal, an

d in

tellectual ro

les; freedom

, indep

enden

ce, and statu

s of w

om

en; m

arital relations an

d o

blig

ations;

Div

ision o

f househ

old

tasks, an

d attitu

de to

ward

s child

care; and p

olitical an

d lead

ership

roles w

ere taken

from

a scale dev

eloped

by D

.Israel and Jay

aseelan C

lemen

t Sudhah

ar.(2005)

Facto

r Analy

sis was ap

plied

to resp

onses o

f 217 resp

onden

ts to su

mm

arize their g

ender ro

le attitudes.

Measu

res of S

ample A

deq

uacy

(MS

A) su

ch as co

rrelation m

atrix, B

arlett’s test of sp

hericity

and K

MO

valu

e

(0.8

90) sh

ow

ed th

at data w

ere fit for facto

r analy

sis. Prin

cipal C

om

ponen

t Analy

sis was u

sed fo

r extractin

g

factors an

d th

e num

ber o

f factors to

be retain

ed w

as based

on laten

t root criterio

n, v

ariance ex

plain

ed an

d S

cree

Plo

t analy

sis. Initially

the so

lutio

n g

ave ten

factors w

hich

explain

ed 7

6.5

0%

of th

e total v

ariance.

But scree p

lot an

alysis su

ggested

that few

er factors w

ould

be m

eanin

gfu

l as overlap

pin

g o

f factors w

as hig

h

when

ten facto

rs were ex

tracted. T

herefo

re, factor an

alysis w

as run ag

ain to

giv

e eight facto

rs. Alth

ough v

ariance

fell to 6

9.0

6%

, the facto

rs were seen

to b

e more sig

nifican

t. The resu

lts were o

btain

ed th

rough o

rthogonal ro

tations

with

Varim

ax an

d all facto

r load

ings g

reater than

0.4

0 w

ere retained

. The n

ames o

f the facto

rs, the statem

ent lab

els

and facto

r load

ings are su

mm

arized in

Tab

le 1

Facto

r An

aly

sis Resu

lts: Facto

r analy

sis by P

rincip

al Com

ponen

t meth

od red

uced

the fifty

two v

ariables in

to

eight p

redom

inan

t factors fo

r gen

der ro

le attitude. In

this ju

nctu

re it is essential to

classify fam

ilies based

on

their p

erceptio

ns ab

ou

t eigh

t pred

om

inan

t factors. K

-Mean

s Clu

ster analy

sis is exp

loited

in th

is con

text to

iden

tify th

e existen

ce of h

eterogen

eous g

roups o

f consu

mers. T

he fo

llow

ing are th

e results o

f K-M

eans clu

ster

analy

sis

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

81

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

Tab

le 1: F

actor A

naly

sis Resu

lts

82.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

83

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

84.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Tab

le 2: R

esults o

f K-M

eans C

luster A

naly

sis

Usin

g K

-mean

s Clu

ster Analy

sis (Tab

le. 2) th

e responden

ts hav

e been

gro

uped

into

two clu

sters based

on th

e

eight g

ender ro

le attitude facto

rs. The first clu

ster ranks first in

four facto

rs such

as conserv

atism, su

bm

issiven

ess,

con

ditio

nin

g an

d o

rtho

do

xy

wh

ile it rank

s secon

d in

factors su

ch as eq

uality, freed

om

, revo

lutio

n an

d

empow

ermen

t hen

ce this clu

ster can b

e categorized

as traditio

nal fam

ily. The seco

nd clu

ster ranks first in

four

factors su

ch as eq

uality, freed

om

, revolu

tion an

d em

pow

ermen

t and is ran

ked

second in

the rem

ainin

g fo

ur

factors su

ch as co

nserv

atism, su

bm

issiven

ess, conditio

nin

g an

d o

rthodoxy. H

ence th

is cluster can

be su

itably

labeled

as modern

family.

Tab

le 3: N

um

ber o

f Cases in

each C

luster

More n

um

ber o

f responden

ts falls in th

e first cluster o

f traditio

nal fam

ilies. (Tab

le. 3)

Tab

le 4: A

NO

VA

(Analy

sis of V

ariance)

The fin

al cluster cen

ters Tab

le. 4 sh

ow

s that th

e two clu

sters differ in

mean

valu

e of all th

e eight facto

rs. The

AN

OV

A tab

le indicates th

at the d

ifference ex

ists among th

e two clu

sters in th

e mean

valu

es are significan

tly

differen

t. The sig

nifican

t valu

e for all th

e eight facto

rs is less than

0.0

5. T

his m

eans th

at all the eig

ht facto

rs

hav

e significan

t contrib

utio

n o

n d

ivid

ing th

e families in

to tw

o seg

men

ts based

on g

ender ro

le attitude.

Rela

tion

ship

betw

een G

end

er role a

ttitud

e segm

ents a

nd

Dem

ogra

ph

ic Varia

bles

It is necessary

to an

alyse th

e factors th

at determ

ine g

end

er role attitu

de b

ased seg

men

tation

. First

dem

ograp

hic v

ariables are co

nsid

ered. T

he d

emograp

hic v

ariables u

sed in

the stu

dy are ag

e, educatio

n, fam

ily

inco

me, n

um

ber o

f years b

een m

arried, n

um

ber o

f child

ren, n

um

ber o

f dep

enden

ts and fam

ily life cy

cle stage.

The ch

i-square an

alysis w

as done to

find o

ut w

heth

er the d

emograp

hic v

ariables h

ave im

pact o

ver g

ender ro

le

attitud

e.

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

85

Fro

m T

able. 5

it is clear that ag

e, educatio

n, fam

ily in

com

e, num

ber o

f years b

een m

arried, n

um

ber o

f child

ren,

and fam

ily lifecy

cle stage h

ave sig

nifican

t associatio

n w

ith g

ender ro

le attitude seg

men

ts.

Tab

le 6: P

ercentag

e of In

fluen

ce of v

arious fam

ily m

embers in

Purch

ase Decisio

n M

akin

g

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

86.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

87

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

Inferen

ces from

Tab

le 6

Air-C

on

ditio

ner

:Jo

int d

ecision o

f husb

and an

d w

ife was p

redom

inan

t in case o

f traditio

nal fam

ilies in m

ost

of th

e stages o

f purch

ase decisio

n m

akin

g p

rocess w

hereas in

case of m

odern

families, h

usb

and d

om

inatio

n w

as

more o

bserv

ed.

Perso

nal C

om

pu

ter:

Though jo

int d

ecision o

f husb

and an

d w

ife was m

ore v

isible, ch

ildren

’s influ

ence w

as

more p

rom

inen

t in term

s of in

itiating th

e idea o

f purch

ase, decid

ing o

n th

e style/ty

pe as w

ell as the b

rand o

f the

com

puter. T

he ro

le of th

e wife w

as passiv

e in m

ost o

f the p

urch

ase decisio

n stag

es in b

oth

traditio

nal as w

ell as

modern

families.

Car:

The in

fluen

ce of all th

e family

mem

bers th

at is husb

and, w

ife and ch

ildren

altogeth

er was q

uite h

igh in

case of car p

urch

ase.

All th

e three p

rod

ucts:

The in

fluen

ce of w

ife and ch

ildren

was n

eglig

ible in

terms o

f decid

ing th

e mode o

f

pay

men

t for th

e purch

ase. Join

t decisio

n o

f husb

and an

d w

ife was p

rom

inen

t in trad

itional fam

ilies whereas th

e

entire fam

ily w

ent an

d m

ade th

e purch

ase especially

in case o

f Perso

nal C

om

puter an

d car in

modern

families.

Tab

le 7: C

hi-sq

uare A

naly

sis (Trad

itional an

d M

odern

Fam

ilies)

88.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

In case o

f air conditio

ner, th

e two ty

pes o

f families d

id n

ot d

iffer statistically reg

ardin

g d

ecision o

n size w

hile in

case of p

ersonal co

mputer b

oth

traditio

nal an

d m

odern

families d

id n

ot d

iffer statistically w

ith resp

ect to in

itiating

the id

ea of p

urch

ase. Decisio

n reg

ardin

g tim

ing o

f purch

ase decisio

n as w

ell as who actu

ally w

ent to

the sh

ow

room

and p

laced th

e purch

ase ord

er show

ed n

o sig

nifican

t differen

ce betw

een trad

itional an

d m

odern

families in

car

purch

ase. In all o

ther p

urch

ase decisio

ns all th

e three d

urab

le pro

ducts sh

ow

ed statistically

significan

t differen

ces

betw

een trad

itional an

d m

odern

families (C

hi-sq

uare v

alues w

ere significan

t). Hen

ce, the n

ull h

ypoth

esis that

traditio

nal an

d m

odern

families d

o n

ot d

iffer in m

akin

g p

roduct p

urch

ase decisio

ns is rejected

for all th

e three

durab

le goods u

nder stu

dy.

Con

clusio

n

There is an

increasin

g tren

d o

f egalitarian

ism in

Chen

nai fam

ilies. The co

mpariso

n o

f gen

der-ro

le modern

and g

ender-ro

le traditio

nal su

ggests th

at a family

mem

ber’s g

ender-ro

le orien

tation affects th

e deg

ree to w

hich

families in

teract and th

e perceiv

ed p

attern o

f influ

ence fo

r vario

us fam

ily d

ecisions. T

he ten

den

cy is fo

r gen

der-

role m

odern

family

mem

bers to

perceiv

e a more eg

alitarian d

istributio

n o

f family

decisio

n in

fluen

ce and th

us

increased

interactio

n b

etween

family

mem

bers. M

od

ern fam

ilies are clearly ex

hib

iting

the in

fluen

ce of th

e

entire fam

ily i.e. h

usb

and, w

ife and ch

ildren

in th

e purch

ase of d

urab

le goods esp

ecially th

at of p

ersonal co

mputer

and car. C

hild

ren are p

layin

g an

importan

t role in

family

purch

ase decisio

ns. N

o m

ore th

e family

purch

ase

decisio

ns are d

om

inated

by h

usb

and an

d w

ife only. A

lternativ

ely, gen

der-ro

le traditio

nal o

riented

family

mem

bers

are show

ing jo

int p

urch

ase decisio

n m

akin

g o

f husb

and an

d w

ife. Its no m

ore h

usb

and d

om

inated

purch

ase

decisio

ns.

Referen

ces

Bird

, Glo

ria W., G

erald A

. Bird

, and M

arguerite S

cruggs 1

984, “D

etermin

ants o

f Fam

ily T

ask S

harin

g: A

Stu

dy

of H

usb

ands an

d W

ives,” Jo

urn

al o

f Marria

ge a

nd th

e Fam

ily, 46 (M

ay), p

p. 4

35-3

55.

Blo

od, R

.O. an

d D

.M. W

olfe 1

960, H

usb

ands a

nd W

ives: The D

ynam

ics of M

arried

Livin

g, G

lenco

e, IL: T

he

Free P

ress.

Cro

nkite, R

uth

C. 1

977, ‘T

he d

etermin

ants o

f Spouses’ N

orm

ative P

references fo

r Fam

ily R

oles,” Jo

urn

al o

f

Marria

ge a

nd th

e Fam

ly, 39, p

p. 5

75-5

85.

Erick

sen, J., W

. Yan

cy, and E

. Erik

sen 1

979, “T

he D

ivisio

n o

f Fam

ily R

oles,” Jo

urn

al o

f Marria

ge a

nd th

e

Fam

ily, 41 (M

ay), p

p. 3

01-3

13.

Green

, R.T

. and

I.C.M

. Cu

nn

ing

ham

19

75

, “Fem

inin

e Ro

le Percep

tion

and

Fam

ily P

urch

asing

Decisio

ns,”

Journ

al o

f Marketin

g R

esearch

, 12, p

p. 3

25-3

32.

Hall, J.T

.R. an

d R

. Hill 1

97

8, “H

usb

and

s’ Occu

patio

nal A

ttribu

tes as Co

nstrain

ts on

Wiv

es’ Em

plo

ym

ent,”

Socio

logy o

f Work a

nd O

ccupatio

ns, 5

(August), p

p. 2

85-3

13

Israel, D. an

d Jay

aseelan C

lemen

t Sudhah

ar 2005, “S

RO

Measu

remen

t and S

cale dev

elopm

ent in

assessing

spousal d

om

inan

ce on p

urch

ase decisio

n m

akin

g in

India,” P

restige Jo

urn

al o

f Managem

ent a

nd R

esearch

,

Octo

ber, V

ol.9

, No.2

, pp.2

65-2

78.

Qualls, W

illiam J. 1

982, “C

han

gin

g S

ex R

oles, Its Im

pact U

pon F

amily

Decisio

n M

akin

g,” A

dva

nces in

Consu

mer

Resea

rch, V

ol. 9

, ed. M

itchell, A

., Ann A

rbor,

MI: A

ssociatio

n o

f Consu

mer R

esearch, p

p. 2

67-2

70.

Qualls 1

987, “H

ouseh

old

Decisio

n B

ehav

ior: T

he Im

pact o

f Husb

ands’ an

d W

ives’ S

ex-ro

le Orien

tation,” Jo

urn

al

of C

onsu

mer R

esearch, 1

4 (S

eptem

ber), p

p. 2

64-2

79.

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

89

Roper, S

. and E

. Lab

eff 1977, “S

ex R

oles an

d F

emin

ism R

evisited

: An In

tergen

erational A

ttitude C

om

pariso

n,”

Journ

al o

f Marria

ge a

nd th

e Fam

ily, 39, p

p. 1

13-1

19.

Scan

zoni 1

977, “S

ex R

oles, E

conom

ic Facto

rs, and M

arital Solid

arity in

Black

and W

hite F

amilies,” Jo

urn

al o

f

Marria

ge a

nd th

e Fam

ily, 39 (F

ebru

ary), p

p. 1

30-1

44

Scan

zoni 1

979, “S

ex R

ole In

fluen

ces on M

arried W

om

en’s S

tatus A

ttainm

ent,” Jo

urn

al o

f Marria

ge a

nd th

e

Fam

ily, 41 (N

ovem

ber), p

p. 7

93-8

00; M

ortim

er,

Sch

anin

ger, C

M., W

.C B

uss, an

d R

. Gro

ver 1

982, “T

he E

ffect of th

e Sex

Roles o

n F

amily

Eco

nom

ic Han

dlin

g

and D

ecision In

fluen

ce,” An A

ssessmen

t (Marketin

g T

hought a

nd P

ractice, ed

. Walk

er, B., C

hicag

o: A

merica

n

Marketin

g A

ssocia

tion, p

p. 4

3-5

7.

Spiro

, Rosan

n 1

983, “P

ersuasio

n in

Fam

ily D

ecision M

akin

g,” Jo

urn

al o

f Consu

mer R

esearch

, 9 M

arch, p

p.

39

3-4

02

.

Sam

sinar M

d.S

idin

, Dah

lia Zaw

awi, W

on

gfo

on

g Y

ee, Ru

han

a Basu

and

Zalfa L

aili Ham

zah (2

00

4), “T

he

Effects O

f Sex

Role O

rientatio

n O

n F

amily

Purch

ase Decisio

n M

akin

g In

Malay

sia,” Journ

al o

f Consu

mer

Marketin

g, V

ol. 2

1 N

o 6

,Oct ,p

p.3

81-3

90

Ch

ang

e Gen

der-R

ole attitu

des an

d fam

ily p

urch

ase decisio

ns

90.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Dep

osits R

epayab

le By B

an

ks th

rou

gh

Eq

uated

Mon

thly

Insta

llmen

ts :A

Pro

posa

l for a

n In

novativ

e

Pro

du

ct an

d its P

oten

tiality

Stu

dy

Vip

in D

esai *

Ab

stract

Wh

en a p

erson

retires, the first th

ing

that h

e loses is a reg

ular so

urce o

f inco

me. T

he in

terest on

the

accum

ulated

funds g

enerally

refuses to

pro

mise th

e same stan

dard

of liv

ing as b

efore. T

he ev

er rising in

flation

and

rising

med

ical bill ad

d fu

el to th

e fire. Rev

erse Mo

rtgag

e loan

schem

e was in

trod

uced

to h

elp sen

ior

citizens b

y o

ffering reg

ular m

onth

ly cash

flow

s again

st ow

n h

om

e allow

ed to

be self-u

sed d

urin

g life tim

e .The

loan

would

be reco

vered

by th

e ban

k fro

m th

e sale-pro

ceeds o

f the h

ouse after h

is death

when

the h

ouse w

ould

no lo

nger b

e usefu

l to th

e ow

ner. B

ut a larg

e num

ber o

f senio

r citizens n

ot h

avin

g o

wn h

ouse can

not av

ail the

aforesaid

loan

. In th

is article the au

thor h

as floated

an id

ea to h

elp th

is class. A h

om

eless senio

r citizen d

epen

ds

only

on th

e limited

interest in

com

e with

out to

uch

ing th

e prin

cipal am

ount an

y tim

e durin

g th

e whole life. B

ut

this p

rincip

al amount, to

o, w

ould

no lo

nger b

e usefu

l to h

im after h

is death

. A d

eposit sch

eme can

be d

evised

which

consid

ers rational d

isbursem

ent o

f prin

cipal am

ount b

eing p

aid in

terms o

f regular m

onth

ly in

stallmen

ts

along w

ith p

aym

ents o

f month

ly in

terest. With

findin

gs o

f a sample su

rvey

of 2

00 sen

ior citizen

s undertak

en at

Vad

odara in

Gujarat, th

e auth

or co

nten

ds to

establish

that if p

roperly

desig

ned

the sch

eme w

ith its b

asic reasonin

g

can co

nvin

ce sufficien

t num

ber o

f peo

ple to

accept th

e same w

ithout g

etting affected

by so

cio-eco

nom

ic issues

like trad

itional m

entality

to leav

e a legacy, d

isinclin

ation o

f sons/d

aughters to

ward

s the sch

eme etc. T

he n

um

ber

of p

eople accep

ting th

e schem

e can m

akes v

iable p

ropositio

n to

hav

e the sch

eme accep

ted b

y th

e ban

kers, to

o.

The p

roduct can

beco

me an

additio

nal so

cial welfare to

ol .It can

also o

ffer a good av

enue fo

r busin

ess for

the In

dian

and fo

reign b

anks o

peratin

g in

India

Key

Word

s : Sen

ior C

itizens, S

ource o

f Inco

me, S

tandard

of L

ivin

g, In

terest, Use o

f Prin

cipal A

mount A

fter

Death

, Socio

-Eco

nom

ic Issues.

Intro

du

ction

The p

roposed

dep

osit sch

eme is b

ased o

n th

e popular co

ncep

t of an

nuity. T

he term

Annuity

is used

to

describ

e a series of p

eriodic flo

ws o

f equal am

ounts w

hich

can b

e either receip

ts or P

aym

ents. S

uch

flow

s will

be in

form

of receip

ts com

ing to

the d

eposito

rs as repay

men

t of th

eir dep

osits w

ith in

terest so far as th

e pro

posed

dep

osit sch

eme is co

ncern

ed. If y

ou h

ave a certain

amount o

f money

and y

ou w

ant to

place it in

a ban

k, y

ou

hav

e only

one o

ptio

n to

get reg

ular p

eriodic in

com

e: place th

e money

for a certain

perio

d u

nder a fix

ed d

eposit

schem

e of a b

ank an

d g

et regular in

terest every

month

.At th

e end o

f the ch

osen

perio

d th

e prin

cipal am

ount w

ill

remain

intact .Y

ou can

again

renew

the d

eposit an

d co

ntin

ue to

get in

terest leavin

g th

e prin

cipal am

ount in

tact.

This can

hap

pen

till the en

d o

f your life tim

e but iro

nically

the fact rem

ains th

at you w

ill nev

er be ab

le to u

se the

prin

cipal am

ount w

hich

after your d

eath w

ould

go in

to th

e han

ds o

f your leg

al heirs. Y

ou d

o n

ot u

se the p

rincip

al

amount b

ecause th

at will red

uce y

our d

eposit am

ount an

d y

ou w

ill get lesser reg

ular in

com

e that is in

terest. Is

it po

ssible to

use th

e prin

cipal am

ou

nt ev

en d

urin

g th

e life time w

itho

ut sacrificin

g th

e interest o

therw

ise

receivab

le ? The p

roposed

schem

e com

es with

an affirm

ative an

swer. A

s know

n to

every

one, th

e Equated

Month

ly In

stallmen

t (EM

I) in th

e contex

t of an

y b

ank lo

an reco

vers fro

m y

ou n

ot o

nly

the in

terest part o

f the

loan

but also

the p

rincip

al amount o

n p

ro-rata b

asis over a p

eriod o

f time leav

ing zero

balan

ce at the en

d o

f the

perio

d. H

ere in th

e contex

t of p

roposed

dep

osit sch

eme y

ou are reco

verin

g n

ot o

nly

the in

terest from

the b

ank

*S

r.Facu

lty M

emb

er (Ban

kin

g &

Fin

ance), IN

C V

ado

dara E

-mail: v

ipin

desai2

00

2@

yah

oo

.co.in

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

91

but also

a part o

f the p

rincip

al amount o

f dep

osit ev

ery m

onth

. This m

eans h

igher liq

uid

ity in

your h

ands. O

f

course, at th

e end o

f the life y

ou w

ill hav

e zero b

alance in

your d

eposit acco

unt .B

ut d

oes it m

atter? To fin

d an

answ

er to th

is questio

n first it w

ould

be in

teresting to

com

pare th

e pro

posed

dep

osit sch

eme w

ith th

e Rev

erse

Mortg

age L

oan

Sch

eme as th

ere are certain co

mm

onalities.

Com

pariso

n w

ith th

e Rev

erse Mortg

age L

oan

Sch

eme

The R

everse M

ortg

age lo

an sch

eme in

troduced

by m

any b

anks fo

llow

ing th

e pro

clamatio

n o

f the g

overn

men

t

in th

e 2007-B

udget o

f its desire to

hav

e the sch

eme tak

en u

p b

y th

e Indian

ban

ks .A

s we k

now

now

, the R

everse

Mortg

age L

oan

Sch

eme is a lo

an ag

ainst o

wn h

ouse g

iven

to a sen

ior citizen

. He can

contin

ue to

occu

py th

e

house th

rough o

ut h

is life and u

se the b

orro

wed

money

com

ing h

is way

from

the b

anks in

form

of reg

ular

month

ly cash

flow

s for m

aintain

ing h

is standard

of liv

ing w

ithout b

oth

eration o

f repay

ing th

e loan

or in

terest

any tim

e durin

g h

is life time. T

he b

ank w

ill recover th

e loan

with

interest o

nly

after his d

eath o

r the d

eath o

f the

last surv

ivin

g sp

ou

se by

selling

the h

ou

se .Th

is is a bro

ad id

ea abo

ut th

e Rev

erse Mo

rtgag

e Lo

an sch

eme

(Ruparelia M

.V.2

008). T

he accep

tance o

f the lo

an sch

eme larg

ely d

epen

ds u

pon w

heth

er a perso

n p

ossesses

emotio

nal attach

men

t with

the h

om

e and th

e kid

s and w

heth

er he h

as the trad

itional In

dian

men

tality to

leave a

legacy

beh

ind h

im fo

r the k

ids. If th

ere is no su

ch attach

men

t and th

e men

tality, it would

also m

atter wheth

er the

kid

s would

com

e in th

e way

of m

akin

g a d

ecision to

take th

e loan

by m

ortg

agin

g th

e house. A

gain

, we h

ave to

see as to w

hat ex

tent th

e fast erosio

n in

the so

cial valu

es and h

ow

the k

ids are treatin

g th

e paren

ts in th

e modern

times h

ave a ch

angin

g im

pact o

n th

e traditio

nal m

entality. S

ince th

e acceptan

ce of th

e pro

posed

dep

osit sch

eme

is also lik

ely to

be in

fluen

ced b

y alm

ost sim

ilar factors a co

mpariso

n o

f both

pro

ducts h

as been

consid

ered as

usefu

l to clear th

ese poin

ts. It may

not b

e out o

f place to

men

tion h

ere that th

e findin

gs fro

m su

rvey

on p

oten

tiality

study o

f the R

everse M

ortg

age L

oan

Sch

eme w

ere quite in

favour o

f success o

f the sch

eme in

form

of v

iable

num

ber o

f peo

ple lik

ely to

accept th

e same. T

here m

ay b

e som

e additio

nal featu

res com

ing to

fore o

nce w

e start

thin

kin

g m

ore ab

out th

e pro

posed

dep

osit sch

eme .W

e will h

ave to

take an

overall v

iew . B

ut b

efore w

e talk

about th

e oth

er implicatio

ns let u

s start first with

the co

mpariso

n.

Both

the sch

emes are b

asically aim

ed at en

han

cing th

e purch

asing p

ow

er of a sen

ior citizen

with

the u

se of

som

e asset on th

e prem

ise that th

e asset in each

case is no lo

nger u

seful to

him

after his d

eath an

d an

y ad

ditio

nal

liquid

ity th

at can b

e gen

erated d

urin

g o

ne’s life tim

e is certainly

ben

eficial.

The ap

preh

ended

obstacles in

acceptab

ility o

f the R

everse M

ortg

age L

oan

Sch

eme are d

iscussed

above

While so

me o

f the o

bstacles ap

ply

also to

the p

roposed

dep

osit sch

eme, w

heth

er the d

egree o

f attachm

ent to

hom

e is equal to

the attach

men

t to o

ther o

wn assets lik

e ban

k d

eposit is a q

uestio

n. T

he au

thor feels th

at the

Indian

s’ emotio

nal attach

men

t to h

om

e may

be g

reater than

the attach

men

t to an

y o

ther asset. If th

is sounds tru

e,

the th

ings g

o m

ore in

favour o

f the d

eposit sch

eme g

etting accep

ted b

y m

any p

eople in

cludin

g ev

en th

e hom

e-

ow

ners w

ho m

ight reject th

e reverse M

ortg

age L

oan

Sch

eme d

ue to

their stro

ng em

otio

nal attach

men

t to h

om

e.

Anoth

er obstacle w

hich

was ap

preh

ended

in resp

ect of R

everse M

ortg

age L

oan

Sch

eme w

as: what w

ould

hap

pen

, if the sen

ior citizen

outliv

es the lo

an p

eriod. A

lthough, th

e schem

e pro

mised

to allo

w th

e senio

r citizen

to co

ntin

ue to

occu

py th

e house till d

eath o

f both

the sp

ouses, th

e month

ly reg

ular in

flow

would

be d

iscontin

ued

This featu

re is also ap

plicab

le in case o

f the p

roposed

dep

osit sch

eme. W

e shall d

iscuss th

is later when

we

critically an

alyze all th

e features o

f the sch

eme. O

ne rem

arkab

le feature w

hich

can also

be d

rawn fro

m th

e

com

pariso

n is th

at a perso

n is n

ot av

erse to th

e Rev

erse Mortg

age lo

an S

chem

e but h

e cannot accep

t it simply

becau

se he d

oes n

ot h

ave an

y h

om

e of h

is ow

n .T

his in

div

idual h

avin

g so

me am

ount o

f savin

gs w

ill hav

e no

difficu

lty in

readily

availin

g th

e pro

posed

dep

osit sch

eme.

Both

the sch

emes g

enerally

com

e with

out th

e obstacles d

iscussed

above to

the sen

ior citizen

s who are

unm

arried, d

ivorcees / m

arried b

ut h

avin

g n

o issu

e, hav

ing m

ale/female k

ids n

ot n

eedin

g/in

terested in

paren

ts’

pro

perty

.This is so

becau

se of irrelev

ance o

f the issu

es pertain

ing to

attachm

ent to

hom

e or o

ther assets after

death

, leavin

g a leg

acy fo

r the k

ids o

r likely

interferen

ce of th

e kid

s.(Mad

hu. T

2009).

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

92.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Com

pariso

n w

ith E

xistin

g P

ensio

n S

chem

es

None o

f the ex

isting p

ensio

n sch

emes h

ave th

e features m

atchin

g w

ith th

e pro

posed

dep

osit sch

eme. It can

be

explain

ed as u

nder rep

resentativ

ely.

1.

Jeevan

Surak

sha (L

akhotia &

Subash

Lak

hotia) P

ensio

n co

ntin

ues to

the leg

al heirs. H

ence it d

oes n

ot

repay

prin

ciple lik

e EM

I.

2.

ICIC

I Pru

forev

er Life: T

he m

axim

um

entry

level ag

e is 55.T

he p

urch

ase price is retu

rnab

le to th

e legal

heir. H

ence it d

oes n

ot rep

ay p

rincip

le in E

MI.

3.

UT

I Retirem

ent B

enefit P

lan is a m

utu

al fund sch

eme an

d d

oes n

ot m

atch w

ith th

e features o

f the p

roposed

dep

osit sch

eme. T

he m

axim

um

entry

level ag

e is 58.

4.

Jeevan

Dhara an

d Jeev

an A

ksh

ay (L

IC): T

he co

rpus is p

assed o

n to

the n

om

inee after d

eath. H

ence it, to

o,

does n

ot rep

ay p

rincip

le like E

MI.

5.

Koth

ari Pio

neer’s P

ensio

n P

lan: T

he co

rpus is k

ept in

tact. Hen

ce it does n

ot en

tail EM

I-based

pay

men

t.

Th

e Ad

van

tages o

f the P

rop

osed

Dep

osit S

chem

e

It would

be u

seful to

enum

erate the lik

ely b

enefits th

at can b

e deriv

ed fro

m th

e schem

e. These can

be

enlisted

as under w

ith little rep

etition to

hav

e full list o

f ben

efits presen

ted at o

ne g

o.

1.

The sch

eme w

ill enhan

ce the p

urch

asing p

ow

er of th

e senio

r citizen to

com

bat th

e ever risin

g in

flation w

ith

no m

atchin

g in

crease in th

e interest rates.

2.

The sch

eme w

ill instill a sen

se of secu

rity as fin

ancial secu

rity h

as a consid

erable b

earing o

n th

e overall

security

concern

s.

3.

The h

om

eless peo

ple w

ho co

uld

not accep

t the R

everse M

ortg

age lo

an sch

eme w

ould

find an

alternativ

e

solu

tion av

ailable.

4.

Th

e peo

ple w

ho

may

no

t accept th

e Rev

erse Mo

rtgag

e loan

Sch

eme b

ecause o

f the stro

ng

traditio

nal

attachm

ent to

ow

n h

om

e may

not h

ave p

roblem

to accep

t this sch

eme as th

e oth

er assets like d

eposits m

ay

not fall in

the categ

ory

of th

e same d

egree o

f strong em

otio

nal attach

men

t as in th

e case of h

om

e.

5.

Som

e peo

ple m

ay n

ot accep

t the R

everse m

ortg

age lo

an sch

eme d

ue to

the stro

ng em

otio

nal attach

men

t

with

ow

n h

om

e .How

ever so

me o

f them

may

not b

e able to

actually

stay in

their o

wn h

om

e .They

may

hav

e

to co

mpulso

rily stay

togeth

er with

the k

ids settled

at som

e oth

er place b

ecause m

aintain

ing tw

o estab

lishm

ents

may

not b

e possib

le for th

e kid

s. These sen

ior citizen

s may

hav

e a strong feelin

g to

go b

ack to

their o

rigin

al

place w

here th

ey liv

ed th

roughout th

eir life if som

e alternativ

e source o

f inco

me is av

ailable. T

he p

roposed

dep

osit sch

eme o

ffersth

is.

6.

The ab

ove ad

van

tage is also

applicab

le to h

om

eless peo

ple stay

ing elsew

here w

ith th

e kid

s .Alth

ough th

ey

cannot d

ream o

f stayin

g in

an o

wn h

ouse at o

rigin

al place b

ut can

at least fulfill th

e dream

to stay

at ‘ow

n’

tow

n (m

ay b

e in a ren

ted h

ouse) w

ith th

e help

of ad

ditio

nal liq

uid

ity co

min

g th

eir way

thro

ugh th

e dep

osit

schem

e.

7.

The class co

mprisin

g o

f unm

arried p

eople, p

eople w

ith n

o issu

e, peo

ple w

ith issu

e but k

ids n

ot in

terested /

need

ing an

yth

ing fro

m p

arents, w

ill find n

o p

roblem

in accep

ting th

e schem

e unless th

ere are som

e oth

er

reasons d

iscussed

later on.

8.

The p

eople w

ho d

o n

ot w

ant to

pass o

n an

yth

ing to

the k

ids b

ecause o

f lattter’s ill treatmen

t may

accept th

e

schem

e with

no p

roblem

.

9.

The p

eople can

get ad

ditio

nal liq

uid

ity to

the ex

tent ran

gin

g fro

m 1

5%

to 6

1%

dep

endin

g u

pon th

eir estimated

residual life sp

an as ex

plain

ed in

Appen

dix

1 to

this article w

hich

is based

on p

resum

ptio

n o

f interest rate o

f

10

%p

.a.

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

93

10

.D

espite th

e socio

-econom

ic obstacles in

the R

everse M

ortg

age L

oan

Sch

eme, th

e surv

ey cam

e out w

ith

viab

le num

ber o

f peo

ple in

its favour. T

he o

bstacles h

avin

gco

mm

on

ality

with

the p

rop

ose

d d

ep

osit

schem

e cannot d

eter the sam

e from

hav

ing

equally

viab

le num

ber o

r even

larger th

an th

at.

Lik

ely E

ffects of O

utliv

ing o

n A

dop

ting th

e Pro

posed

Dep

osit S

chem

e an

d th

e Pro

posed

Solu

tion

s

The calcu

lations in

the tab

le appearin

g at A

ppen

dix

I is based

on th

e dep

osit term

chosen

by an

indiv

idual.

This ch

oice w

ill dep

end o

n th

e expected

residual life sp

an in

each case. T

he sen

ior citizen

s in th

e age g

roup o

f

80-9

0 y

ears may

choose a 5

years term

. The p

eople in

the 7

5-8

0 y

ears-age-g

roup m

ay ch

oose a 1

0 y

ears term.

Those in

the ag

e gro

up o

f 70-7

5 y

ears may

go fo

r 15 y

ears term. T

he p

eople in

the still lo

wer ag

e gro

up m

ay g

o

for a term

of 2

0 y

ears or m

ore .L

onger th

e term, lesser w

ill be th

e amount o

f EM

I. Of co

urse, w

hatev

er term is

chosen

, the E

MI w

ill alway

s be b

igger th

an m

ere interest

Life ex

pectan

cy o

f an In

dian

citizen w

as just o

ver 4

0 y

ears in 1

947 .T

oday

it is 64 y

ears .But th

is is a

gen

eral averag

e .A p

articular in

div

idual m

ay liv

e more th

an th

at. If the assessm

ent fo

r the ex

pected

residual

life-span

differs w

hen

it com

es to reality

and th

e perso

n o

utliv

es the d

eposit term

, he w

ould

be left w

ith zero

balan

ce of d

eposit b

efore d

eath an

d th

e EM

Is would

stop co

min

g h

is way. T

he sim

ilar pro

blem

can b

e visu

alized

in resp

ect of R

everse m

ortg

age sch

eme, to

o. B

ut lo

okin

g to

the p

opularity

of th

e said sch

eme in

the w

estern

countries it ap

pears th

at the carefu

l choice o

f the term

and so

me ad

ditio

nal p

rotectiv

e measu

res can elim

inate

the p

roblem

in resp

ect of th

e dep

osit sch

eme, to

o.

The p

ossib

le solu

tion to

this p

roblem

in resp

ect of th

e pro

posed

dep

osit sch

eme can

also b

e addin

g so

me

reasonab

le cush

ion to

one’s ex

pected

mortality

level an

d p

lacing th

e dep

osit fo

r a little longer p

eriod .H

ere,

month

ly an

nuity

may

go little lo

wer th

an th

e one sh

ow

n in

the tab

le. Again

, it is certain th

at it will b

e alway

s

more th

an m

ere interest.

The ch

oice o

f the term

can b

e mad

e only

after seekin

g o

pin

ion o

f the m

edical ex

perts. E

ven

the m

edical

advice m

ay n

ot b

e 100%

accurate. T

he risk

of su

rviv

ing can

be m

itigated

by m

akin

g it a su

bject m

atter of

insu

rance .T

he in

suran

ce com

pan

y can

play

a vital ro

le to o

ffer a fool-p

roof p

rotectio

n. It can

beco

me a v

iable

insu

rance p

roduct co

nsid

ering th

at Insu

rance co

. may

hav

e to p

ay in

few p

articular cases as ag

ainst larg

e no. o

f

cases which

will fall in

the zo

ne o

f averag

e longev

ity p

eriod.

If the g

overn

men

t can see th

e schem

e as an effectiv

e social secu

rity m

easure, it can

play

a constru

ctive ro

le

in resp

ect of th

e last two su

ggestio

ns. T

he g

overn

men

t can also

consid

er how

the in

terest rates can b

e pro

tected

to en

sure o

nly

positiv

e and n

o n

egativ

e impact o

f the in

terest rate fluctu

ations o

n th

e amount o

f EM

I.

Th

e Need

an

d O

bjectiv

es

Alth

ough th

e likely

ben

efits of th

e schem

e are discu

ssed at len

gth

, how

the p

eople w

ould

weig

h th

em in

the co

ntex

t of th

e perceiv

ed p

roblem

s was co

nsid

ered a su

bject –

matter o

f a surv

ey. The su

ccess or failu

re of th

e

schem

e in em

ergin

g as accep

table d

epen

ds u

pon th

e size and scale o

f the p

roblem

s. The b

est way

to ascertain

the sam

e was to

go to

the sen

ior citizen

s, ask th

em an

d fin

d th

e facts. The su

rvey

was co

nducted

with

the

follo

win

g o

bjectiv

es.

1.

To estim

ate the m

agnitu

de o

f the sen

ior citizen

s to w

hom

the sch

eme can

be p

rima facie b

eneficial.

2.

To carv

e out th

e percen

tage o

f the p

eople (o

ut o

f the lik

ely b

eneficiaries) w

ho m

ay actu

ally o

pt fo

r the

schem

e with

out an

y self-g

enerated

or ex

ternal o

bstacles.

3.

To d

erive co

nclu

sion ab

out th

e poten

tiality o

f the sch

eme.

4.

To p

ut fo

rth ratio

nal reco

mm

endatio

ns.

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

94.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Th

e Meth

od

olo

gy a

nd

Lim

itatio

ns o

f the su

rvey

1.

A q

uestio

nn

aire based

samp

le surv

ey o

f 20

0 sen

ior citizen

s in V

ado

dara , G

ujarat after g

etting

the

questio

nnaire v

alidated

by first co

nductin

g a p

ilot su

rvey

of 2

5 sen

ior citizen

s belo

ngin

g to

differen

t socio

-

econom

ic class.

2.

Sin

ce the targ

et locatio

n o

f the su

rvey

was city

of V

adodara, th

e Vad

odara-sp

ecific features m

ay, to an

exten

t, dilu

te the o

bjectiv

ity o

f the fin

din

gs.

3.

To m

inim

ize the im

pact o

f the ab

ove m

entio

ned

limitatio

n th

e samples w

ere chosen

from

differen

t localities

in p

roportio

n to

their relativ

e weig

htag

e in th

e total o

pulatio

n o

f Vad

odara. T

his w

as aimed

at min

imizin

g

at least any area-sp

ecific impact o

n th

e findin

gs.

Fin

din

gs

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

95

Chart -1

.2 4

% sen

ior citizen

s :unm

arried

Sta

tus R

egard

ing K

ids

1. B

AS

IC IN

FO

RM

AT

ION

Chart -1

.1

Sta

tus o

f Savin

gs

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

Out o

f the ab

ove referred

balan

ce 49%

peo

ple so

me p

eople m

ay b

e presen

tly at

Chart -2

.2

Sin

ce the p

roposed

schem

e is basically

2. N

EE

D ID

EN

TIF

ICA

TIO

N

Chart -2

.1

Presen

t Reso

urces P

ositio

n

Desire to

up

gra

de L

ivin

g S

tan

dard

96.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

3 . O

BS

TA

CL

ES

IN D

EC

ISIO

N M

AK

ING

Chart - 3

.1

Chart -2

.3

Socio

-Eco

nom

ic Need

:Hom

e-com

ing

Men

tality

to L

eave L

egacyV

ignan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

97

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

Chart - 3

.3

Chart - 3

.4

Lik

elihood

of K

id’s In

terferend

ce

Wh

o a

re Th

ey?

Chart - 3

.2

Perceiv

ed C

om

plica

tion

98.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Con

clusio

n

The b

asic Sco

pe o

f the S

chem

e

1.

The g

roups co

ntain

ing alm

ost co

nfirm

ed tak

ers form

total o

f 23 %

portio

n o

f the w

hole targ

et gro

up, w

hich

is not a n

eglig

ible fig

ure to

start with

.

2.

There is a sco

pe to

mark

et this sch

eme in

India co

nsid

ering th

e viab

ility em

anatin

g fro

m th

e mag

nitu

de o

f

the p

oten

tial optees.

The S

cope in

Futu

re

1.

There is a g

roup o

f peo

ple w

ho n

eed ad

ditio

nal fu

nd in

flow

but d

o n

ot o

pt n

ow

becau

se of reaso

ns lik

e

desire to

leave a leg

acy, no risk

men

tality o

r anticip

ated d

isinclin

ation fro

m k

ids etc. T

he n

eedy p

eople

hav

ing k

ids b

ut ill-treated

are likely

to h

ave a seco

nd th

ought an

d b

ecom

e strong co

nten

ders o

f the sch

eme.

This is a class w

hich

offers h

idden

poten

tial in th

e med

ium

to lo

ng ru

n.

2.

It is a hum

an ten

den

cy n

ot to

accept an

y n

ew th

ing im

med

iately b

ut to

chan

ge th

e min

d set o

ver a p

eriod

of tim

e after watch

ing o

thers en

joyin

g fru

its of th

at thin

g

Reco

mm

end

atio

ns a

nd

Su

ggestio

ns

The p

roposed

dep

osit S

chem

e offers su

fficient sco

pe in

India fo

r the p

resent to

be tak

en u

p as a v

iable

pro

duct b

y th

e ban

ks ,w

hich

can see en

larged

scope in

med

ium

to lo

ng term

.For th

is creation o

f sufficien

t

awaren

ess among th

e peo

ple an

d fin

e tunin

g th

e terms o

f the sch

eme to

suit b

oth

the en

ds are th

e majo

r

initiativ

es required

to b

e taken

by th

e govern

men

t and b

anks.

The p

roposed

schem

e should

be seen

as an im

portan

t social secu

rity m

easure an

d w

hen

it is a matter o

f

strikin

g a b

alance b

etween

feasibility

/viab

ility an

d so

cial security, th

e go

vern

men

t sho

uld

take n

ecessary

supportiv

e and m

otiv

ational m

easures lik

e insu

ring th

e risk asto

timin

g o

f death

in a sp

ecific time-slo

t to en

sure

additio

nal p

rotectio

n in

case of d

eposito

r outliv

ing th

e dep

osit term

.

The S

enio

r Citizen

s’ foru

ms in

India can

play

a constru

ctive ro

le in creatin

g aw

areness am

ong th

e peo

ple

about th

e ben

efits of th

e schem

e as also arran

gin

g fo

r som

e med

ical consu

ltancy

services to

help

the sen

ior

citizens ch

oose a rig

ht term

and ad

equate cu

shio

n. T

hey

can also

follo

w u

p w

ith th

e govern

men

t for relev

ant

issues lik

e insu

rance an

d in

terest rates.

Referen

ces

Govern

men

t Web

site, view

ed 1

st March

2007

<http

://ww

w.cb

ec.gov.in

/budget0

708/sp

eech-e.h

tm>

Ind

ian

Ban

ks’ A

ssocia

tion

offic

ial w

eb

site p

ag

e o

f sup

po

rt serv

ices, v

iew

ed

20

th F

eb

ruary

, 20

09

<h

ttp:w

ww

.iba.o

rg.in

/Mo

n_

Inc_

Dep

_d

isc_in

ter.asp>

Lak

hotia &

Subhash

Lak

hotia “Jeev

an S

urak

sha-P

ersonal P

ensio

n S

chem

e” Wed

nesd

ay, 04 D

ecember , 2

002,

18:1

6 L

ast Updated

: Wed

nesd

ay, 14 M

ay , 2

003, 2

0:1

8 , v

iewed

25

th Feb

ruary

2009 <

http

://sify.com

/finan

ce/

tax/fu

llstory.p

hp

?id=

12

19

07

21

>

Mad

hu T

, “Sunset F

unds - A

regular in

com

e on y

our retirem

ent, an

d m

ore tax

savin

gs, v

iewed

25

th Feb

ruary

20

09

http

://ww

w.o

utlo

ok

mo

ney.co

m/o

lmn

ew/article.asp

x?sid

=6

&cid

=3

0&

articleid=

70

5>

Official w

ebp

age o

f LIC

: Sch

eme D

etails on

Jeevan

Ak

shay

–III, v

iewed

28

th Feb

ruary

20

09

< h

ttp://

ww

w.licin

dia.co

m/p

ensio

n_

plan

s_0

02

_featu

res.htm

>

Official w

ebpag

e of L

IC: S

chem

e Details o

n Jeev

an N

ew Jeev

an D

hara-I, v

iewed

28

th Feb

ruary

2009 <

http

://

ww

w.licin

dia.co

m/p

ensio

n_

plan

s_0

04

_featu

res.htm

>

Ru

pare

lia,M

.V., “

Rev

erse

Mo

rtgag

e L

oan

by

M.V

.Ru

pare

lia”, v

iew

ed

1st F

eb

ruary

20

08

< h

ttp://

mvru

p.red

iffiland. co

m/scrip

ts/ xan

adu_diary

_view

.php?p

ostId

=1187852589>

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

99

Dep

osits R

epay

able b

y B

ank

s thro

ug

h E

qu

ated M

on

thly

Installm

ents

100.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Resista

nce o

ver S

hift S

ystem

R. K

rishnav

eni1 an

d R

avi C

hin

nath

ambi

2

(Th

is case exp

lains in

detail th

e wo

rk en

viro

nm

ent p

revalen

t in h

ealth care serv

ices. Th

e natu

re of w

ork

ing

is well

bro

ug

ht o

ut. D

ue to

env

iron

men

tal and

bu

siness ch

ang

es, the related

measu

re un

dertak

en b

y th

e man

agem

ent lead

s to

resistance am

on

g th

e emp

loy

ees.)

Back

gro

un

d

Boss B

ack-O

ffice Serv

ices Pvt. L

td is a 1

00%

export o

riented

unit estab

lished

in th

e year 1

998 at C

oim

bato

re

by

two

academ

icians w

ho

turn

ed o

ut to

be en

trepren

eurs after d

ecades o

f teachin

g in

a Go

vern

men

t aided

colleg

e in C

oim

bato

re. The co

mpan

y w

as started w

ith th

ree emplo

yees w

ith an

aim o

f offerin

g IT

Dev

elopm

ent

& C

onsu

ltancy. W

ithin

one y

ear the co

mpan

y d

iversified

into

offerin

g b

ack o

ffice services to

health

care facilities

prim

arily in

the U

nited

States, an

d later it started

exten

din

g th

e services to

Australia an

d C

anad

a. When

the

recession in

US

hit th

e IT in

dustry

in 2

001, th

e org

anizatio

n ceased

to o

ffer IT d

evelo

pm

ent an

d C

onsu

lting b

ut

contin

ued

to d

evelo

p k

iosk

applicatio

n fo

r dom

estic mark

et, especially

the G

overn

men

t enterp

rises. The u

nclear

focu

s of G

overn

men

t officials an

d d

elayed

pay

men

ts mad

e the activ

ity fin

ancially

unfeasib

le. How

ever th

e

focu

s on th

e health

care services (tran

scriptio

n) g

ained

strength

year after y

ear.

The tran

scriptio

n is o

ne o

f the b

ack o

ffice services ren

dered

to th

e health

care facilities in th

e 1U

S. T

he

docto

rs must m

aintain

a detailed

med

ical report / reco

rd o

f every

visit o

f each p

atient d

ue to

the fo

llow

ing

reason

s:

1.

as a legal req

uirem

ent

2.

to claim

money

from

the in

suran

ce com

pan

y fo

r the treatm

ent o

r consu

ltation g

iven

for fu

ture referen

ce

pu

rpo

se

3.

info

rmatio

n to

be p

assed o

n to

the referred

do

ctor in

need

y cases reg

ardin

g th

e treatmen

t giv

en to

the

referred p

atient

4.

to safeg

uard

him

self / herself fro

m an

y leg

al suits

5.

To m

ake th

e patien

t info

rmatio

n av

ailable electro

nically

as per F

ederal G

overn

men

t’s Health

care policy.

The co

mpan

y h

as over 1

00 p

eople w

ork

ing fo

r them

both

in-h

ouse an

d fro

m-h

ouse. W

hen

the co

mpan

y

div

ersified in

to h

ealthcare B

PO

, there w

as a pro

liferation o

f similar co

mpan

ies all around C

oim

bato

re and th

e

skilled

man

pow

er had

too m

any ch

oices to

choose fro

m. T

o g

ain co

mpetitiv

e advan

tage an

d attract talen

ted

man

pow

er, the co

mpan

y to

ok a p

olicy

decisio

n an

d an

nounced

the fo

llow

ing as U

niq

ue sellin

g p

ropositio

n

(US

Ps) to

attract the h

um

an reso

urces.

1.

Only

Gen

eral shift (R

egular w

ork

ing h

ours as in

ban

ks, co

lleges etc)

2.

Flex

ible w

ork

ing h

ours to

suit th

e married

wom

en an

d to

-be-m

oth

ers.

3.

Split sh

ift (Anoth

er flexib

le optio

n th

at allow

s staff to w

ork

few h

ours in

the m

orn

ing an

d th

e remain

ing

hours in

the ev

enin

g w

ith a larg

e break

in b

etween

)

4.

Subsid

ized lu

nch

etc

These m

easures m

ade B

oss B

ack-O

ffice Serv

ices the b

est place fo

r the h

um

an reso

urces to

work

with

while m

ost o

f the co

mpan

ies insisted

on 2

-shifts, if n

ot 3

-shifts.

1. P

rofesso

r, PS

G In

stitute o

f Man

agem

ent, C

oim

bato

re. E-m

ail : rmk

rishn

aven

i@g

mail.co

m

2. S

tud

ent, E

xecu

tive M

BA

pro

gram

, PS

G In

stitute o

f Man

agem

ent, C

oim

bato

re. E-m

ail : cravi@

seyy

on

e.co.in

Case S

tud

y

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

101

Resistan

ce ov

er Sh

ift Sy

stem

Th

e com

pan

y o

ffered free train

ing

with

perfo

rman

ce-link

ed in

centiv

e. Wh

ile man

y co

mp

anies o

ffered

trainin

g b

y g

etting m

oney

from

the p

oten

tial candid

ates, Boss B

ack-O

ffice Serv

ices and a few

com

pan

ies offer

free trainin

g to

all the selected

candid

ates. Additio

nally, d

urin

g th

e trainin

g p

rogram

me th

e trainees are p

aid

attractive p

erform

ance-b

ased stip

end. A

s a result th

e org

anizatio

n in

vests h

eavily

on each

indiv

idual to

mak

e

them

a good tran

scriptio

nist. In

turn

, all the train

ees are expected

to sig

n an

agreem

ent to

stay w

ith th

e com

pan

y

for a m

inim

um

perio

d o

f 2 y

ears. Every

candid

ate must u

nderg

o a 6

-month

long, stren

uous train

ing p

rogram

me

with

very

hig

h p

erform

ance targ

ets. Can

did

ates who co

uld

not w

ithstan

d th

e pressu

re to m

eet the h

igh stan

dard

s

dro

pped

out an

d o

nly

around 6

0%

of th

e trainees u

sed to

get in

to th

e pro

ductio

n. S

ince b

oth

the w

hole-tim

e,

founder D

irectors w

ere academ

icians, th

eir flair for teach

ing m

ade th

e com

pan

y k

now

n fo

r the b

est trainin

g

among th

e host o

f com

pan

ies located

in an

d aro

und C

oim

bato

re. One o

f them

prim

arily to

ok ch

arge o

f the

trainin

g an

d th

e oth

er directly

man

aged

the O

peratio

ns an

d H

R

The p

er perso

n p

roductiv

ity u

sed to

be v

ery h

igh as a resu

lt of g

ood train

ing. W

ithin

6 m

onth

s of ex

perien

ce,

the tran

scriptio

nists u

sed to

type 6

00 lin

es per d

ay w

ith an

accuracy

rangin

g fro

m 8

0%

to 9

0%

. As th

e salary w

as

also lin

ked

with

the p

roductiv

ity an

d th

ere was n

o tim

e restrictions, staff u

sed to

spen

d lo

nger h

ours, as h

igh as

12 h

ours in

the co

mpan

y to

type m

ore. S

om

e of th

em earn

ed in

centiv

e equal to

50%

of th

eir salary o

r more. A

lso

work

ing at B

oss B

ack-O

ffice Serv

ices was fu

n an

d th

ere used

to b

e a lot o

f parties an

d celeb

rations. A

ll the

staffs used

to tak

e interest in

all the g

et togeth

er and o

ther activ

ities in w

hich

they

actively

particip

ated.

Few

years after th

e establish

men

t, wh

en th

e streng

th in

creased co

nsid

erably, sep

arate man

agers w

ere

emplo

yed

to tak

e care of T

rainin

g an

d O

peratio

ns w

ho rep

orted

to th

e Directo

rs directly.

Cu

rrent situ

atio

n

After th

e entry

of m

any A

merican

com

pan

ies, the B

oss B

ack-o

ffice Serv

ices started facin

g relativ

ely h

igh

attrition rate. T

his w

as becau

se the salary

offered

was relativ

ely a b

it hig

her b

y th

e Am

erican co

mpan

ies but th

e

wo

rkin

g co

nd

ition

s were also

a bit strin

gen

t. An

oth

er trou

bleso

me tren

d faced

by

Bo

ss was th

e per-p

erson

pro

ductiv

ity w

as also red

uced

to 4

50 lin

es per d

ay w

ith av

erage accu

racy aro

und 7

5 p

ercent. T

he lo

wer p

roductiv

ity

ultim

ately b

rought d

ow

n earn

ing p

er seat and also

loyalty

was fo

und to

be w

anin

g o

ut. T

he em

plo

yees w

ho left

the co

mpan

y q

uoted

longer-w

ork

ing h

ours as th

e prim

ary reaso

n. T

he ru

pee ap

preciatio

n ag

ainst th

e dollar w

as

also an

oth

er concern

that h

ad d

irectly affected

the p

rofit m

argin

of th

e com

pan

y. The situ

ation seem

s to b

e more

or less th

e same in

oth

er Coim

bato

re-based

com

pan

ies as well.

IssuesIn

this cu

rrent scen

ario, th

ere is an in

creased p

ressure fo

r the co

mpan

y to

impro

ve th

e per-seat earn

ings.

The to

p m

anag

emen

t, in o

ne o

f the b

oard

meetin

gs, d

iscussed

the n

eed fo

r brin

gin

g in

shift sy

stem as o

ne o

f the

measu

res inten

ded

at impro

vin

g th

e earnin

gs, w

hich

incid

entally

help

s in o

ther w

ays as w

ell. When

the b

oard

wan

ted to

know

how

it the sh

ift system

is goin

g to

help

, Directo

r (Operatio

ns) m

entio

ned

that th

e shift sy

stem

would

be b

eneficial in

the fo

llow

ing w

ays.

1.

The reso

urces are p

ut in

to efficien

t utilizatio

n.

2.

Mak

e the staff co

mplete th

e work

with

out w

asting an

ytim

e with

in th

e stipulated

time o

f say 7

or 8

hours

instead

of ex

tendin

g it to

10 o

r more h

ours.

3.

With

100 m

achin

es, instead

of 1

00 staff w

ork

ing in

gen

eral shift, b

y m

ovin

g to

shift sy

stem, 2

00 staff can

work

and th

ere is no n

eed fo

r expan

sion o

f infrastru

cture

when

the can

did

ates recruited

on th

e campus

join

the train

ing p

rogram

me d

urin

gth

e ensu

ing su

mm

er and th

ereafter.

4.

The p

roductiv

ity p

er mach

ine w

ould

be m

ore.

5.

Ultim

ately it resu

lts in in

creased earn

ings p

er mach

ine. E

ach m

achin

e in g

eneral sh

ift yield

s on an

averag

e

500 lin

es but in

the sh

ift system

(two sh

ifts), it is expected

to y

ield 8

00 lin

es.

102.

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ecember 2

009.

6.

Th

ere will b

e an in

crease in th

e ov

erall pro

du

ctivity

by

abo

ut 6

0%

, wh

ich is ex

pected

to resu

lt in an

increase o

f 40%

in th

e overall b

illing. 5

5%

of th

is differen

ce in b

illing g

ets directly

added

to th

e pro

fit

marg

in. (T

here is n

o tax

for 1

00%

EO

Us in

India till 2

009)

7.

The co

ncern

expressed

by th

e staff in th

e exit in

terview

about lo

ng w

ork

hours co

uld

also b

e addressed

.

8.

The staff sh

all go b

ack h

om

e much

early an

d h

ave b

etter work

-life balan

ce.

9.

Red

uces th

e fatigue o

f staff

10

.F

ocu

sed an

d co

ncen

trated w

ork

results in

better q

uality

11

.S

taffs are hard

pressed

for tim

e and h

ence th

ere will b

e less intern

al politics.

Actio

ns In

itiated

The O

peratio

ns M

anag

er was en

trusted

with

the resp

onsib

ility o

f intro

ducin

g th

e shift sy

stem. H

e was also

pro

mised

an attractiv

e cash in

centiv

e upon im

plem

entatio

n. H

e was in

structed

to co

me o

ut w

ith reco

mm

endatio

ns

and a d

etailed p

lan an

d m

ake a p

resentatio

n to

the D

irector o

n th

e first Monday

of M

arch 2

008 at 5

PM

. The

Directo

r (Operatio

ns) in

itiated th

e initial ro

und o

f discu

ssion w

ith th

e team lead

ers along w

ith th

e Operatio

ns

Man

ager. T

here seem

ed to

be a b

it of en

thusiasm

among th

e team lead

ers. It was su

ggested

that th

e team d

iscuss

the p

lan w

ith th

e indiv

idual m

embers. A

fter discu

ssions an

d d

eliberatio

ns, th

e issues raised

by th

e team m

embers

must b

e bro

ught u

p fo

r follo

w-u

p d

iscussio

n.

In th

e mean

time few

concessio

ns w

ere also sim

ultan

eously

announced

. A red

uctio

n in

the m

onth

ly targ

ets to

accom

modate th

e reduced

time an

d a few

oth

er welfare m

easures. T

he O

peratio

ns m

anag

er had

4 o

r 5 ro

unds o

f

discu

ssion w

ith th

e team lead

ers and th

e team o

ver a p

eriod o

f two-w

eeks.

It was clo

se to 5

p.m

. on M

arch 3

, 2008, M

onday

; the D

irector (O

peratio

ns) w

as lookin

g fo

r the O

peratio

ns

Man

agers th

rough th

e glass w

indow

in h

is cabin

. He w

as found to

be in

volv

ed in

an activ

e discu

ssion w

ith a

gro

up o

f staff even

after five p

ast five. T

he D

irector tu

rned

his atten

tion w

hen

the V

oice o

ver th

e Intern

et

Pro

toco

l (VO

IP) p

hone ch

uck

led. W

hen

he w

as talkin

g to

the clien

t on th

e oth

er end o

f the g

lobe, h

e could

hear

foot step

s appro

achin

g h

is door. A

s he k

ept o

n talk

ing, h

e could

see him

standin

g w

ith h

is should

ers stoopin

g

dow

n, ey

es with

out an

y u

sual g

littering an

d lip

s dry. W

hen

he sw

itched

-off th

e speak

er phone, T

he O

M said

to

him

, “Sir! I’m

extrem

ely so

rry. I could

not co

nvin

ce or m

otiv

ate the staff to

fall in lin

e with

our id

ea.” Even

after

the an

nouncem

ent o

f concessio

ns h

e was u

nab

le to co

nvin

ce the staff to

move to

shift o

peratio

ns an

d w

as forced

to p

ostp

one th

e decisio

n o

n acco

unt o

f heav

y o

ppositio

n b

y th

e mem

bers o

f the staff an

d ev

en th

ere was an

indicatio

n th

at som

e of th

e key

peo

ple m

ight leav

e.

Resista

nce

He listed

out v

arious reaso

ns th

at mad

e them

resist: The m

ain asp

ect for resistan

ce among th

e emplo

yees

was d

ue to

the fo

llow

ing reaso

ns. M

any o

f them

who m

ay h

ave to

work

in th

e afternoon sh

ift would

be fo

rced

to g

o late an

d p

arents n

ever lik

ed it, as m

ost o

f the staffs are u

nm

arried g

irls. They

preferred

neith

er to b

e

dro

pped

by call tax

ies. Staff w

ho m

ay h

ave to

com

e in th

e morn

ing said

that th

ey h

ave d

ifficulty

leavin

g h

om

e

so early

and also

som

e of th

em said

they

hav

e health

pro

blem

s like asth

ma, allerg

ies etc. Som

e oth

ers feared th

at

their p

roductiv

ity w

ould

com

e dow

n as a resu

lt of restricted

work

ing h

ours an

d h

ence th

eir ability

to earn

more

salary an

d in

centiv

e.

Man

y m

arried w

om

en fo

und g

eneral w

ork

ing h

ours co

mfo

rtable as th

ey can

take care o

f their ch

ildren

/

diseased

in-law

s. Som

e feared th

at their g

row

th m

ay b

e ham

pered

as they

could

not sp

end ex

tra time to

learn.

While o

thers felt th

at they

may

be fo

rced to

learn ab

out n

ew clien

ts to g

et sufficien

t pro

ductiv

ity.

After listen

ing to

him

keen

ly, the O

peratio

ns D

irector to

ok a d

eep b

reath, clo

sed h

is eyes in

deep

thin

kin

g

for a few

mom

ents an

d said

to h

im firm

ly, “Let m

e try!”

Resistan

ce ov

er Sh

ift Sy

stem

Vig

nan

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i Journ

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emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

103

104.

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nan

a Jyoth

i Journ

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anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

Vig

nan

a Jyoth

i Journ

al of M

anag

emen

t / Vol. I. Issu

e. I. / July.-D

ecember 2

009.

105