The implementation of value based Management in...

Chapter-5: A Study on value based Management System of …..

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Value Based Management System in a Few Select Organizations

A major research project was carried out on 1862 large companies (all with sales

in excess of $2billion) of North America, Europe & Asia. Out of 271 that

responded to an in-depth survey of VBS practice, 117 have implemented formal

VBM system. These results are based on the response of 117 companies, which

have implemented VBM system, all of them were asked about the benefit of VBM

program in solving their problems & achieving success. These companies were

labeled the three groups “high”, “medium” and “low” success companies. In this

research project companies average annual total share holder return (TSR) for the

three year period before implementation of VBM & TSR after implementation of

VBM began, were measured.

Many large companies VBM has led to sustained increase in profit & stock prices

and created huge value for its shareholders. e.g. British Bank, Lloylds (TSB)

believe in the idea of “Managing for shareholders value, (Lloyld‟s VBM program)

than the old ways of doing things……” other successful companies such as

Cadbury Schweppes, Dow Chemicals, Siemens have credited their success to

VBM programs.

A few companies e.g. AT&T abandoned the VBM programs after 3 or 5 years

because the implementation of VBM programs was not done in proper way. These

companies seduced by the theoretical simplicity of VBM expected too much and

gave up too early in process. Fulfilling VBM into practice is far more complicated

than many of its proponents make it out to be. It requires a great deal of patience,

effort and money. It also requires fundamental changes in the company‟s culture &

therein lies the reason for most of the failure. Transforming beliefs in a large

organization is arguably the most difficult of all managerial challenges. It is not a

matter of changing a few accounting system or development & application of new

measures of economic profit. During implementation Management has to face a

strong cultural resistance to change the culture. Financial change may only be a

part of cultural change.


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This research work uncovers a striking similarity in the way that successful VBM

companies like Lloylds, Dow, and Cadbury Schweppes went about achieving the

desired cultural transformation. Their approaches shared five main elements

1. An explicit commitment to shareholder value.

2. Creating an environment receptive to the changes through intensive training.

3. Building a sense of ownership in both the company and program to reinforce

to improve performance and introduce a broad based incentive system.

4. Introducing major organizational changes that would allow all their workers to

make value oriented decisions.

5. Introducing broad and inclusive changes rather than focusing on narrowly on

financial reports and components.

These changes set up a virtuous circle of behaviors and benefits, laying a

sound foundation for sustained value creation.

1. An Explicit Commitment to Value

A company rarely embarks on a VBM program with a single-minded focus on

shareholder value. There are many other, often conflicting, corporate goals e.g. to

be the number one company in their market, to increase consumption, to increase

production etc. though the companies current position in the market is very good.

The first challenge in implementing VBM, therefore, is usually to jolt the company

out of its pre-existing mind-set as Managers are often conditioned to think big-to

strive to go global, – regardless of the consequences for value. For instance, in

case of Cadbury Schweppes is a point. Through the 1980s and early 1990s, its

expressed ambition was to catch up to Coke and Pepsi while driving toward “a

million tons of sugar consumption” in its confectionery business, Throughout the

period, even though Cadbury was one of the most admired companies in Britain,

its share price obstinately lagged behind the competition. Cadbury‟s CEO John

Sunderland 1996, one among the most successful VBM practitioners have nearly

always kicked off their programs by making public an explicit commitment to

shareholder value, in a meeting with institutional investors at which he committed

Cadbury to doubling its share price every five years (later shortened to four). An


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explicit commitment like that can serve two purposes. First, it communicates to the

outside world that the company recognizes the need to break with a prevailing

culture. Given his own adherence to volume-oriented goals when he was the leader

of one of Cadbury‟s business units, Sunderland‟s action marked just such a shift.

Second, some CEO‟s used the announcement as a way to energize internal

constituencies. In Cadbury‟s case, Sunderland felt that he needed to create a sense

of urgency among employees, many of who were too comfortable with the

company‟s paternalistic environment.

Explicit commitments to value like Cadbury‟s are a strong predictor of success in a

VBM implementation. Companies that made them were more than twice as likely

as companies that didn‟t to report that VBM was highly effective in improving

their share price performance relative to that of their peer group (see the exhibit

5.1 “The impact of Commitment”).

The majority of VBM companies in this survey, however, seemed to shy away

from making explicit commitments to shareholder value: 36% of participants

described their commitment as implicit, expressed indirectly through their actions

and decisions. A further 16% sought to cater to a variety of stakeholders –

shareholders being only one of those perhaps predictably, attitudes toward

shareholder value in the survey seemed to depend on cultural factors. European

and Asian companies were much less likely to make an explicit commitment.

Indeed, in some countries, the very term “shareholder value” is considered

politically incorrect. Such cultural differences can pose a problem for

multinationals. Asked why he was explicit about shareholder value in managing

his U.S. listed affiliate yet low-key about it in the French parent company, the

CEO of one multinational responded: “I drive differently in the U.S. than Indo in

France. I also don‟t manage in the same way”. Although this CEO was convinced

of the merits of espousing shareholder value openly, his French board members

(mostly CEOs other French companies) feared that an explicit commitment in

France would antagonize France‟s government and unions.


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Exhibit - 5.1

The Impact of Commitment

An explicit commitment to value increases the odds that a VBM program

will have a high impact on a company‟s relative share prices.

Company's Commitment to Value is Explicit

67%

17%

16%

High Medium Low

Impact of VBM Program on share price

Co m p any's Co m m itm e nt to Value is Im p lic it

30%

45%

25%

High Medium Low

Impact of VBM Program on share price


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Exhibit-5.2

THE IMPACT OF TRAINING

Successful VBM companies train almost all of their managers. They also train a

larger portion of their entire workforce than unsuccessful VBM companies do.

S uc c e s s ful VBM Co m p anie s

55%

24%

12%

9%

0.25% 26.50% 51%-75% > 75%

Percentage of Employees Trained

Uns uc c e s s ful VBM Co m p anie s

87%

7%

6%

0.25% 26.50% 51%-75%

Percentage of Employees Trained


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2. Intensive Training

As Sunderland puts it, “Managing for value is 20% about the numbers and 80%

about the people … because people create value”. Getting VBM right demands

that everyone in the company be convinced that managing for value is the right

thing to do. Accordingly, the research shows successful VBM companies invest a

great deal of time, effort, and money in training large numbers of their employees.

As the exhibit-5.2&5.3 “The Impact of Training” shows, 62% of the successful

VBM companies in the survey report training more than 75% of the unsuccessful

companies trained that great a proportion of their management staffs. These

training programs involve.

Before implementing VBM, the executive says, fewer than 5% of its people –

including those in the executive suite – could have given adequate definitions of

economic profit and cost of capital. Afterwards, he says, more than 75% of Dow‟s

employees could do so – and they also knew what the implications were for Dow‟s

success.

Most of the training was designed and led by Dow company officials – insiders

who understood their company‟s sensitivities. External consultants were engaged

only to provide senior-level training and teaching materials. In general, relying on

line managers as instructors helps make the VBM concepts credible, especially on

the shop floor, where employees tend to be suspicious of consultants and even of

in-house HR professionals.


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Exhibit-5.3

THE IMPACT OF TRAINING


15% 3%

20%

62%

0.25% 26.50% 51%-75% > 75%

Percentage of Managers Trained


30%

20%

23%

27%

0.25% 26.50% 51%-75% > 75%

Percentage of Managers Trained

b. Shaking Out the Team:

Effective VBM-training programs can – and probably should – lead to a shakeout

among senior managers. Like Dow, Cadbury believed that training should trickle

down from the top. Its training therefore began with an exhaustive evaluation of

the capabilities of Cadbury‟s top 150 managers, conducted through interviews with

external human resource consultants. This resulted in the creation of personal


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development plans for each manager focused on eight attributes, which Cadbury

refers to as “leadership imperatives”. These are: accountability, and assertiveness,

as well as the ability to motivate, to be forward thinking, to be mature, and to be

international in their outlook. In developing their personal plans, managers had to

answer questions such: Which managerial qualities do I need to hone to deliver

value? Where in the organization can I best do that? Cadbury was intent on having

a cadre of managers who were totally committed to VBM and had the necessary

leadership skills to implement it: As a result of this exercise, 50% of the 150 top

managers left the company or were assigned to new positions.

3. Building Ownership:

Successful VBM programs almost always involve increasing everyone‟s

ownership stake in the company and, therefore, in the program. Interestingly, it

was found that the size of the compensation package was not factor in determining

success, only how wide the program was in its coverage. The leading practitioners

included a far larger number of their employees in their bonus program than the

less successful companies did. (See the exhibit 5.4 “The Impact Compensation

Programs.”).


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Exhibit-5.4

THE IMPACT OF COMPENSATION PROGRAMS

Percentage of Employees in Compensation Programs

Percentage of Employees in Compensation Programs

Siemens provides a good example of the kind of changes companies need to make

to their compensation systems to successfully convert people to VBM. Before

launching the program, performance-related pay was a small proportion of total

compensation, even for the most senior executives. What‟s more, it was calculated

on the basis of a mishmash of internal measures. These were usually operating

earnings targets, which failed to account for capital employed and which varied

from one part of the organization to another. That changed in 1998, as Siemens put

Successful VBM Companies

44%

3%

53%

0.25% 26%-50% >50%

Unsuccessful VBM Companies

69%

7%

24%

0.25% 26%-50% >50%


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its VBM program into place. Today, some 60% of the remuneration for the top 500

executives at Siemens is performance related.

To calculate the performance-related pay for its top executives, Siemens makes an

estimate, based on its current share price, of just how large an improvement in

EVA(economic profit metric) investors are expecting over the next year. If the

executives deliver that number, they hit 100% of their target payout in

compensation. But the company goes even further. The 500 executives can earn

double the target compensation if the company grows faster grows faster or gains a

larger market share than a select group of its competitors. This stretch target

payout can be attained only if the EVA improvement objective is achieved first.

Siemens confines performance-related pay programs to the top management tier. A

similar program covers the next level of about 4,500 employees. In fact, one way

or another, about 15% to 20% of Siemens‟s 440,000 employees are paid largely on

the basis of EVA targets.

Other VBM practitioners prefer a more direct link to shareholder value. At

Cadbury, for instance, incentive compensation for senior executives is tied to the

company‟s attaining a target level of shareholder returns. Top managers must also

purchase Cadbury stock in proportion to their positions and salaries: The executive

team is expected to own Cadbury shares equal to four times their salary, and other

senior managers are expected to own stock worth twice their salary. All other

employees are offered share ownership schemes. The result is that today 20% of

Cadbury‟s employees own shares in the company, whereas before the company

instituted its VBM program employees had owned virtually no stock.

4. Empowering Business Units:

Typically, the leading practitioners do not see VBM as a tool exclusively for

corporate executives. In fact, they are willing to reorganize their companies

completely if that will help turn their frontline employees into strategic planners.

That was one of the main reasons Dow Chemical abandoned its matrix

organization structure. Geographically based, it had, in effect, led to the

establishment of three quasi-independent mini-Dows. Under the new structure,

these mini Dows have been replaced with 14 global units organized around

industry segments. In these are housed more than 100 “value centers” –small


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operating units each using a specific chemical process technology and focused on a

distinct product line serving a well defined market through its own distribution

channel.

When they were formed, each unit was charged with aligning its strategy within

the VBM program, so each undertook a comprehensive analysis of the

attractiveness of its business segment, and its own relative competitive position to

come up with a number of strategic options. A team of business managers,

typically the general manager and his or her key functional managers, then worked

together to produce and present to senior management an evaluation of how much

economic profit each option would create over its life.

The sort of organizational restructuring that successful VBM practitioners

implement almost always makes the company‟s cost structure immediately

transparent. Before the reforms, only 40% of Dow‟s costs were directly attributed

to the three major units; the remaining 60% had to be allocated by corporate

headquarters or treated as corporate overhead. This made performance

measurement at the business level all but meaningless and placed huge strains on

the budgeting process. But under the new global structure, 80% of Dow‟s costs

now reside directly within the global units. Since an additional 5%, covering

general and corporate governance, could immediately be allocated to corporate

headquarters, the company had to focus on allocating only the remaining 15% of

its costs, which are now genuinely shared across the various global units. Thanks

to the tighter fit between cost structure and organization – and to the onus that

VBM puts on business unit managers to develop detailed and meaningful value-

creating strategic options – Dow‟s managers now spend more time on business

issues than on the politics of budgets.


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Exhibit-5.6

THE IMPACT OF LINKING PROCESS

Successful VBM companies are more likely to integrate the entire resource-

allocation system into a single process driven by VBM.

Relationship of Budget to Strategic Planning Process

Unsuccessful VBM Companies

37%

33%

30%

Closely Integrated Loosely Inegrated Independent

Relationship of Budget to Strategic Planning Process

5. Broad Process Reforms:

Most unsuccessful VBM companies focus their programs almost entirely on

changing accounting and control systems, typically investing much of their time

and effort in developing and applying complex measures of performance. Leading

VBM practitioners take a much more comprehensive view of their companies‟


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business processes. In general, successful implementers follow four rules when

changing their systems and processes:

(i) Avoid accounting Complexity. By focusing so much attention on developing

new financial performance measures, the less successful implementers engendered

backlash among operating managers, who furiously resisted what they considered

to be the finance department‟s latest gadget. Successful companies kept the

technical aspects of VBM simple. TO derive its measure of economic profit, Dow

made very few changes to its accounting system, focusing on simplicity and ease

of use. For instance, it applied one standard tax rate across all units. Cadbury has

changed nothing at all in its accounting practices. Both companies felt that a major

overhaul of their accounting systems, which some experts advocate, would create

two sets of accounts running in parallel, potentially a very confusing situation.

They also feared that employees would view anything beyond minor tinkering as

management manipulating the numbers. That would create a credibility problem

and dilute VBM'S impact as an agent of change.

(ii) Identify value drivers. Economic profit cannot be measured directly at the

level at which the majority of employees in invert time and effect in identifying

and assessing the operational factors, or value drivers, that have the greatest

influence on the creation of economic profit. For example, value drivers for a call

center could be the length of time it takes to answer a call and the quality of the

help callers receive. In the survey, more than 93% of successful VBM companies,

but only 65% of the less successful companies, reported implementing such value

drivers.

The importance of focusing on value drivers is twofold. As intended, value drivers

focus the activities of frontline employees on value creation. But in addition, it was

found that an important side effect of the whole exercise is that it pushes the

management team to develop its strategies with much greater clarity.

(iii) Integrate budgeting with strategic planning. Successful implementers in

our study were almost twice as likely as the successful companies to tightly

integrate their budgeting with their strategic-planning systems. Cadbury is a case

in point. Before embarking on its VBM program, the company's budgeting and


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planning processes were largely independent of each other. In each case and at

different times of the year, unit managers would make an annual then give

immediate feedback specific to the plan or budget relentless push for incremental

volume and revenue. If during the year targets looked shaky, pressure immediately

came from the head office to cut costs to meet budgets. In other words, budgets

were short-item, day-to-day instruments. Meanwhile, think strategic plans,

complete with optimistic five-year hockey stick projections, gathered dust

somewhere in managers desk drawers, totally unconnected to the immediate reality

of the business.

Cadbury has replaced those processes with a series of dialogue that bring the

business unit managers together with the company's executive team several times a

year. These new sessions are a forum for developing and monitoring unit strategy

and performance. In the first year, Cadbury's executives and managers used the

sessions to discuss and agree on the unit strategies, which they formalized with a

four-year contract. Most important the corporate executives committed themselves

to budgeting the contract's required strategic expenditures for the whole four-year

period. In subsequent year, they confined themselves in the dialogue sessions to

monitoring performance, intervening only when strategies appeared to go off track

or needed to be revised in light of changes in the marketplace. (See the exhibit 5.6

"The Impact of linking Processes.")

(iv) Invest heavily in information systems. To develop an overall corporate

strategy using a VBM approach, companies must assess each unit's relative

competitive position and estimate the impact on value of each unit's strategy. That

task can put an enormous strain on a large company‟s information system. Dow,

for instance, has to generate and feed a huge amount of operational and strategic

data into separate and comparable reports at the unit level for all 100 of its value

canters. So early on in its VBM implementation, Dow decided to bite the IS bullet.

That was expensive, but it was worth it. As a senior Dow executive explains:

"Before VBM, we didn't have the data, and we couldn't even agree that we didn't

have the data. Now we can pinpoint performance-including economic value-by

product, market, and customer. It took us four years to put this system fully in

place, and it was driven entirely by VBM'S requirement to gather good data to pt


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this system fully in place, and it was driven entirely by VBM'S requirement to

gather good data to allow the analysis to take place. I can't see that it would have

been done otherwise."

It was found that many companies also use their IS investments as one way to

establish the credibility of their VBM programs. How can you ask employees to

create shareholder value without giving them the tools they need to get the job

done?

How not to do VBM

A well-known global company participating in the survey is an excellent study in

how not to implement VBM. Although it proclaimed that value creation was its

raison d'être, the company did little beyond adopting an economic profit metric as

a performance measure.

For a start, the link between employee bonuses and shareholder value was tenuous.

Although a proportion of the bonus was tied to the share price performance of the

company and to the economic profit targets of its businesses, several other factors

also played a part in determining its size. As a result, employees could a game the

system by focusing on whatever measures they favored. Training was also skimpy:

Less than 10% of all employees and less than 25% of managers were trained in

VBM concepts.

More seriously, however, the company failed to make significant changes in its

processes, budgeting and strategic-planning systems remained separate from each

other. The coming up through the system, basing funding decisions largely on the

reputation of sponsoring managers and on the perceived fit of a project with the

CEO'S vision. And for good measure, senior management interfered frequently in

the resource allocation process, suggesting that politicking and gaming were rife.

As one might expect, this company reported the survey that it took no important

actions based on VBM and that, far from having a positive impact on employees‟

behavior, its VBM program actually had a negative effect. Eventually the company

abandoned its VBM program, declaring the experiment a failure.

Creating a Virtuous Circle


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Companies that implement their VBM programs in the manner we've described

here set in motion a virtuous circle. The reforms spur them to reshuffle their

business portfolios, redefine relationship between corporate leaders and their

business units, and eventually transform their frontline employees. And as these

changes become manifest, they reinforce the program itself.

The most immediate results from a VBM program appear in the company's

business portfolio. In many cases, VBM program trigger a series of value-creating

divestments? Lloyds TSB, for instance, sold one business after another, as each

one either failed to create value or failed to convince Lloyds's senior management

team that had the potential to create sustainable value going into the future.

One of the units Lloyds sold was a bank in California back in the early 1980s,

when everyone agreed that California was a critical market because of its size and

attractive growth potential. But a VBM analysis revealed that Lloyds's California

operation had never earned an ROE of more than 8%, which represented half the

bank's cost of equity at the time, and no one, could show that prospects would soon

improve.

Within just a few years, Lloyds's divestitures had raised a total greater than the

bank's entire market capitalization before stating on VBM. Although the

divestitures left Lloyds much smaller and almost completely focused on the UK

retail market, it became one of the world‟s largest banks in items of market

capitalization, which was bank's size as revenues or assets. As Pitman puts it, "The

more businesses we sold, the more our share price went up"- and the more

fervently the company implemented its VBM program. Of course VBM companies

do not abandon acquisition as a path to growth. Lloyds for instance, went on to

acquire TSB and Scottish Widows for successful VBM implementers, resumed

only after they've cleaned up their portfolios.

A less immediate but no less powerful result of VBM is that it fundamentally

changes the relationship between a company's corporate center and its operating

units. Before embarking on a VBM program, the typical company has a large

corporate center that intervenes frequently at the operating level, creating a

command and-control relationship. As the VBM program takes hold, however the


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corporate center scales back its involvement in operating decisions, which often

entails a radical cutback in its staff. Hoya, for instance, a Japanese manufacturer of

optical glass and a VBM pioneer in Asia, has transferred a large number of

corporate-planning and HR managers to the b7siness units. The significantly

smaller corporate managers cannot intervene in the strategy development process

without consulting fully with the business unit man agars, over time a slimmed-

down center finds a new role as cheerleader and counselor. At Dow, for instance,

the corporate office is now considered less a place where investment decision in

the practice of VBM.

At all the successful VBM in the practitioners we studied the transformation of the

corporate centre was demonstrated by the way it approved unit level business

strategies. Rather than fund discrete projects as part of an annual capital approval

parade, over time the corporate centers at these companies began to approve and

fund complete at these companies begin to approve and fund complete strategies

stretching out over several years. Cadbury's four-year strategy contracts are a

striking example this shift is empowering and saves a lot of times. A business unit

manager who gets approval for a value creating stratagem who gets approval for a

value creating strategy can four on actually implementing it rather than preparing

for next year's defense of it. (See the exhibit-5.7 "A New Relationship with the

Corporate Center.")

The final benefit of a successful program is the actual conversion of frontline

employees to the concept of value. This results not so much from training

programs as from their deep involvement in the quest for value drivers, a process

that tends to bond employees with one another and with their supervisors in a

relationship similar to the one that forms between corporate headquarters and the

business units. At one diversified retailing company we studied the corporate

office kick started the search for value drivers by distributing to the units a list of

the main financial and operational rivers that retailers generally consider: sales per

square foot and inventory turnover for example. Then the managers and employees

of each realizing unit went through brainstorming sessions, from which they

emerged with their own very idiosyncratic drivers that reflected their particular

retailing formats. Coming out of this process was a set of set of firmly shared


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beliefs about what creates success in various parts of the business in both the short

and long terms and who in the organization could affect those drivers. By pushing

the philosophy of value down throughout the organization the company effectively

closed the circle that had begun with its CEO'S public commitment.

Exhibit-5.7

Relationship with the Corporate Centre


52%

42%

6%

Strategies Projects that fit with Strategy Projects

What the Corporate Centre Funds

Uns uc c e s s ful VBM Co m p anie s

17%

67%

16%

Strategies Projects that fit with Strategy Projects

What the Corporate Centre Funds

As Lloyds, Dow Chemical, and Danbury Schweppes have all found a VBM

program can have a remarkable effect on a company's share price. It cannot be

claimed, though, that if solves every problem. For instance as the sidebar "What


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VBM Does-and Doesn't-Cure" shows VBM program seem to have little or no

effect on a company's ability to innovate (although, contrary to the general

expectation, they do appear to foster collaboration). Also, successful implementers

have found that VBM programs not only raise value for investors but also raise

investors‟ expectations, making it imperative for the company to continually find

new ways of erecting value. Still, those caveats notwithstanding, the fact is that a

properly applied VBM program puts a company's profitability solidly on track. In

doing so, it provides the best of all platforms for sustained growth.

WHAT VBM DOES-AND DOESN‟T – CURE

The chart shows (Exhibit-5.8) the average responses of successful companies to

the survey of 22 questions designed to explore how effective the company‟s VBM

program was in solving particular problems and thus contributing to long-term

changes in corporate and employee behavior. As expected VBM programs had

their greatest impact on attitudes toward value. But the chart also reveals that there

are some things that VBM can‟t fix. In particular, it was found that it has relatively

little impact on promoting innovation.


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0 2 4 6 8

1

3

5

7

9

11

13

15

17

19

21

COMPANIES' VBM PROGRAM

1 2 3 4 5 6 7 8 9 10 11

12 13 14 15 16 17 18 19 20 21 22

Exhibit-5.8

Rating scale

1 VBM Highly ineffective 2 VBM Neutral 3 VBM Highly effective


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1. We could not clearly determine where value is created or destroyed in our

company.*

2. Our employees did not appreciate that capital has a cost.

3. Our Management did not focus enough on the balance sheet.

4. Our resources where not always associated towards the most productive uses.

5. Many business units were generating profits that failed to cover the cost of

capital.

6. Our managers did not act like the owners of the company.

7. Communication between the business units and the corporate center was poor.

8. Important decisions were not grounded in factual analysis.*

9. Our stock price performance was poor relative to our peer groups.

10. Strategic planning was too much of a paper exercise.

11. Our company‟s culture was too comfortable and complacent.

12. Too much politics and emotion entered our decision making.*

13. Forecasts and assumptions behind our investment decisions were often wrong.

14. Games were played during budget negations between corporate and business

units.*

15. Our business units did not collaborate of the company‟s greater good.

16. We focused too much on the short term.

17. Our employees were not entrepreneurial enough.

18. It took us too long to make and act on decisions.

19. We failed to realize the value of apparent synergies.

20. We focused too much on the long term.

21. Our Company needed to innovate more.

22. We lacked good ideas in our companies.


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*For these questions there was little statistical significance between the

respondents of the high and low success groups; for these issues VBM helped

everyone more or less equally.

(According to article published in HBR July- August, Volume No-79/7 by Philippe

Haspeslagh Tomo Noda, & Fares Boulos Reprint R0107D. The findings of this

research work is documented in the report “Getting the value, out of value based

management” available at www.hbr.org/explore)


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TQM in Indian Organizations

Many companies in India have credited TQM with quality improving their market

share and profits. For most top companies‟ customer driven quality has become a

way doing business. Most customers will no longer tolerate even average quality.

Companies today have choice but to adopt quality concept, if they want to stay in

the race, let alone be profitable. Thus the task of improving product and service

quality should be a company‟s top priority. How ever quality program must be

designed to produce measurable results. Many companies now apply the notion of

„return on quality (ROQ)‟. They make certain that the quality they offer is the

quality that customer want. This quality in term returns in the form of improved

sales and profits.

The literature on developing countries including India, Tanzania, Columbia, and

Argentina illustrates that they have introduced programs based on certain total

quality management elements like leadership styles, quality circles, and quality

control procedure underlying a collective team approach.

With the economic and commercial development of societies, Indian business

sector appears to be shifting from a product led philosophy (Inward looking view)

to a customer-oriented approach (An outward looking view), which is a more

flexible approach. The philosophy of TQM centers around the customer focused

approach along with principles of teamwork and regular, continuous improvement.

Traditionally public sector organizations in India have been operating in a less

competitive environment, protected by administered policies. Present market

driven economy is forcing public sector organizations to strive for efficiency. It is

likely that in future governmental control may be only in areas of securities and

strategic importance. In the Indian context research work has predominately been

carried out in the areas of quality assurance, productivity and control, especially in

the manufacturing sector and concept of TQM as company wide management

philosophy appears still to be in the development stage. Organization in India are

increasingly adopting the TQM process as a positive change program for

improvement through empowerment, team working and adaptation of TQM

principles to local cultural demands, to benefit them on a continuing basis.


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Concept of TQM worldwide is generally applied more in large companies than in

small and medium enterprises. In small and medium enterprises executives learn

about TQM through a variety of means including networking and forums,

benchmarking, clubs, conferences, self-study and the like. Communication

between departments is easier to implement in SMEs than in large company

counterparts. Organizational culture and business system, and members are more

often not closely integrated and flexible in SMEs.

Despite the popularity and wide spread implementation there is considerable

confusion about TQM. In the literature there is no global definition of quality the

only reason for failure of TQM is attributed to the problems encountered during

the implementation process.

The experiences of some Indian companies such as ABB. Modi Xerox, Thermax

and Infosys on TQM as a facilitator for enhancing organizational effectiveness,

seem to indicate that the successful implementation of TQM practices revolve

around three key organizational dimensions.

Organization culture is seen as an important dimension comprising key

elements such as team or collaborative working, empowerment, employee

ownership and the resultant involvement, fair reward systems, enriching work

environment rather than one where employees are stifled with a fear of insecurity

through a „hire and fire‟ policy.

Focus on customer satisfaction as a key deliverable in the TQM process has

also been highlighted.

The importance of proper procedures and systems aimed at objective unbiased

and fault-free organizational processes has also been brought out.

The study indicates key elements of TQM, relevant in Indian context these

elements can be described under four factors. And these were identified as

involvement in customer quality, tools and techniques, just and fair climate, and

empowering for development. In the Indian context 14 key sub-elements of TQM

emerged spread across, culture (5), customer quality (5) and tools and techniques

(4) (Exhibit 2)


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Factor 1: Involvement in Customer Quality.

Identifying customer needs and focusing on improving the quality of products and

reducing costs has become very necessary for organizations to stay competitive

and grow in the present liberalized economic environment „Spills over‟ as a

positive influence on external customer perceptions of an organization.

Psychological ownership (through employee involvements, initiatives through

stock options and more importantly, through fostering of a culture by the top

management that enables employees to feel and act as owners, is a significant

factor for the success of TQM.

Factor Scales: Factored Dimensions of TQM

S.No. Factor Description

1 Factor I

(Involvement in

customer quality)

Quality at customer point

Quality of finished product

Quality of work systems/ process teams

Quality of material entering the organization

Quality at vendor point

Psychological ownership & equity stake

2 Factor II

(Tools &

techniques)

Use of statistical process control charts.

Use of Pareto charts

Use of fishbone diagrams.

Participation in quality circles, quality action

teams.

3 Factor III

(Just and fair

climate)

Providing security for job

Providing a fair work climate.

4. Factor IV

(Empowering for

development)

Use of information for improvement, not

judgment.

Equating authority with responsibility

Exhibit-5.9

A plausible explanation for the featuring of „Psychological ownership‟,

cultural element with the customer quality elements may be found in the

importance attached to the right organizational culture and leadership that nurtures


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creative self- growth for improvement rather than one that creates a sense of fear

through anxiety, punishment and possibility of insecure job tenures. It is but

natural that improved customer quality initiatives depend on good employee

morale and involvement. The emergence of psychological ownership and equity

stake as key TQM sub-element in the Indian context perhaps highlights the

growing need felt by organizations especially in multinational and private sectors,

to increase employee involvement and ownership, through a participative process

and stock options. Feasible equity stake as a means to increase employee

ownership is still perhaps in a developmental stage in India. This however is likely

to become a key advantage for employee retention and morale building as

witnessed in the competitive software industry in India. Again, while the cultural

sub-element of providing psychological ownership and equity stake is seen to be a

part of Factor I comprising predominantly of customer quality elements, the

emerging competitive market scenario demands that employees be fully involved,

motivated and play the role of entrepreneurs.

Factor II: Tools and Techniques

The use of all the tools and techniques, stated in the chart, is an essential

though not sufficient requirement for implementing a TQM process throughout an

organization. While the use of quality systems, techniques and procedures

individually do not bring quality leadership; it has merit to the extent that it tries to

define a system for control though not for improvement.

Factor III: Just and Fair Climate

In has been pointed out by writers that providing of a climate which

encourages open and full flow of information and fostering of teamwork and a

spirit of understanding amongst employees, lends impetus to the success of TQM

in an organization. Deming cited earlier, stresses the importance of banishing fear

from the minds of employees, providing them a sense of ownership, Security and

focusing on measures for employee skills and performance enhancement through

positive measures such as education, training and developing pride in their work.

He reiterates that top management should provide inspiring leadership and set the

tone for increased organizational effectiveness through personal examples. A


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concern for quality cannot be attained unless management operates in a culture of

openness in which no one is afraid that trying to do the job better will lead to the

loss of one's job.

In this context, the results of the factor analysis in the case of factor III

appears, that in a fair and justified organizational climate, employees, who have a

sense of security and who are provided with a fair, trustful and transparent work

culture, work towards their own as well as the organizational well-being.

It is also necessary to adapt general TQM principles keeping in mind the

background of the organizational context in India. Each nation's unique social and

cultural ethos and background determines the organization‟s approach to quality

management practices as for example the individualistic oriented culture of the

West and the collectivistic team approach of Japan. Organizations should promote

and encourage a culture of interdependence based on mutual trust, respect and

caring amongst employees.

Factor IV: Empowering for Development

The need for promoting autonomy though employee involvement and

empowerment in organizations has been highlighted by experts. In other words,

employees need to be reassured that the culture of the organization focuses on

enabling them improve, develop and upgrade their skills and increase their self-

worth rather than being critical and derogatory of their weaknesses, if any. In

conclusion it can be said that these key sub-elements of TQM across the three

broad elements of culture, customer quality and tools and techniques dealt with in

this study influence the practice of TQM in the Indian context. Depending on the

nature and type of organizations, TQM practices could vary In terms of its level of

implementation and related results. In the Indian context, some implications for

practicing managers and organizational leaders are:

The need to constantly nurture, promote and practice a culture that is

conducive for creative, cohesive and healthy team working.

Emphasizing the right processes and issues relevant to specific work

environment by adapting them realistically, with concern and empathy for

people, rather than enforcing them.


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The need to focus on creating a value-based top driven TQM culture which

inspires employees to play an active role in the organizational development

process

It may also be pertinent to continuously assess and adapt the TQM

principles, given the diverse cultural, economic and social nature and background

of people in organizations in the Indian scenario, provide a framework within

which the maximum possible benefits could be obtained for improving

organizational effectiveness through TQM.

We can conclude that these elements are the key in ensuring the success of

TQM in as organization and that the supervisor is a huge in developing these

elements in the work place. Without these elements, the business entities cannot be

successful TQM implementers. It is very clear form the above discussion the TQM

without involving integrity, ethics and trust would be a great remiss, in-fact it

would be incomplete. Training is the key by which the organization creates a TQM

environment. Leadership and teamwork go hand in hand. Lack of communication

between departments, supervisors and employees create a burden on the whole

TQM process. Last but not the least recognition should be given to people who

contributed to the overall completion of task. Hence, lead by example, train

employees to provide a quality product, creates an environment where there is no

fear to share knowledge, and „give credit‟ where credit is due, is the motto of a

successful TQM organization.

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