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Structure Choices in an Emerging Market: The Case of Thailand

Vijay K. Seth

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Reward and Compensation Challenges

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Vinnie Jauhari & Kamlesh Misra Irfan A. Rizvi Atmanand Attahir

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Management & Change The Journal of the institute for Integrated

Learning

in Management

JANUARY-JUNE 2000

NUMBER 1

VOLUME 4

(fILM), New Delhi

ARTICLES Capital Structure Choices in an Emerging Capital Market: The Case of Thailand

J

I. M. Pandey,

y. Chotigeat

& Manoj K. Ranjit

33

The Relevance of Indian Public Sector Enterprises in a Liberalized Regime

Bhaskar

Technology and Labour and Prospect

Vijay K. Seth

61

Sami A. Khan

91

in Retrospect

Reward and Compensation Issues and Challenges

Strategy:

Workers' Management and Turnaround of Sick Enterprises: Experience of an . Indian Organization Organizational Restructuring Era of Information Technology Management Performance Managing Initiatives

in the

Styles and Financial of Organizations Change in the Oil Industry: and Challenges

Majumdar

1

Surya Mookherjee

119

Vinnie Jauhari & Kamlesh Misra

145

Irfan A. Rizvi

163

Atmanand

185

Attahir B.Yusuf

209

COMMUNICATION '.

Privatizing State Enterprises: A Strategic Management Perspective BOOK REVIEWS Economy

and Business

Environment

221

Sununua Scn: Trade and Dependence: Essays on the Indian I':(onomy. Reviewed by M. S. Verma.

Amiya Kumar Bag.chi: Economy and Organization: Indian Instillllions Under the Neo/iberal Regime.

r 2

f ,

Capital Structure Choices in an Emerging Capital Market

cifically, the determinants of capital structure choice in practice have been adequately studied for firms in developed capital markets (Paul, 1982; Myers, 1984; Titman and Wessels, 1988; Brealey, et. al., 1985; Dominque and Marksimovic, 1996). However, only a few studies for firms in developing capital markets have been undertaken, for instance, Tee (1928) for Malaysian listed firms and Pandey (1981 and 1985) for firms in India.

Therefore, to fill this void, firms listed on the Stock Exchange of Thailand (SET), representing firms in the emerging capital market were selected for this study.

Furthem10re, Thailand had one of the fastest growing economies in the Pacific Rim until the recent crisis of July 1997. Thai fim1s definitely contributed to such success; they were sufficiently competitive to meet product and service demands domestically and intemationally. Thus, of pertinent interest is a study of the trends and patterns of Thai firms' capital structure over the period of the country's liberalization policy and economic success (i.e., from 1990 to 1995), including the attributes of their determinants as well as the general practices of their chief financial officers (CFOs). This study was divided into two periods, the "pre" financial liberalization period of 1990-1992 and the "post" liberalization period of 19931995, in order to draw inferences about the impact of the changes of the Thai financial environment on the firms' capital structure choice.

The paper is organized into five parts. Part one provides the introduction about the capital structure choices. Part two provides data description of the listed Thai firms as well as the questionnaire survey of their CFOs, followed by the discussion of methodology (Part three). Part four presents reports and analyses the empirical results of the study. Part five, the concluding part, gives the summary and conclusions of the study.

ij

DATA AND METHODOLOGY Capital Structure Patterns and Determinants The time series data used in this study were the financial data collected from 221 Thai manufacturing firms listed on SET under 13 industrial sectors from 1990 to 1995 (Table-I). The period covered is divided into two sub-peliods, viz., 1990-1992, prior to financial liberalization, and 19931995, after the liberalization.

To provide a descriptive

picture of the capital structural pattems

i

of l,

,

Management

& Change, Volume4. Number 1 (January-June

2000)

t"

Pandey, Chotigeat and Ranjit

3

the Thai manufacturing companies during the entire period and the subperiods, time series of mean, median, 1st:quartile, 3rd-quartile, maximum, and minimum values of three debt ratios viz. (i) debt-equity ratio (D/E); (ii) total debt-to-total net assets (D/A) ratio; and (iii) long-term debt-to-shortterm debt ratio (LTD/STD) were computed and analyzed. The hypothesis that the population means of the two sub-periods are equal, i.e. AVG 9092 equals to AVG 93-95, was tested.

The industry-wise analysis of debt ratios is also included. The classification of industries is as per the Stock Exchange of Thailand classification. It is hypothesized that the nature of the industry should have significant impact on the capital structure decision of the companies. ANOV A (analysis of variance) is applied to test the null hypothesis of no difference between the means of the debt-to-assets ratios of the various industries. In short, this technique examines the variability of the observation within each group (measured by the within-group mean square) as well as the variability between the group means (measured by the between-group mean square).

Furthermore, the capital structure choice of the Thai listed manufacturing companies in relation to such attributes as assets, growth, size, profitability, default risk, intangibles (uniqueness), and volatility were studied.

The methodology in this study was mainly based on the framework used in Titman and Wessel (1988).

THAI FIRMS' CAPITAL STRUCTURE POLICIES To understand the attitudes of managers, viz., the chief financial officers (CFOs) vis-a-vis capital structure policies of the Thai listed companies, a questionnaire-based survey, similar to Pinegar and Wilbrich (1989), was also conducted. The questionnaire contained objective type questions (mostly multiple-choice) and related to the financing policies and choices.

The questionnaires were sent to CFOs of 223 manufacturing films. Despite several reminders, the response rate was very poor; only 14 companies responded. Each answer has been weighted on a 5-point scale. The choice of "most important" answer is given a weight of five (5), and of "least important" a weight of one (1). A weighted average score of each answer is calculated for the purpose of ranking. The results of the survey as reported here are meant merely to provide a general idea of the thinking of some of the CFOs on their companies' financing policies and pracManagement & Change. Volumc4. Number I (January-June

2000)

r=4

Capital Structure

Choices in an Emerging Capital Market

tices and no attempt is made to arrive at any generalized conclusion.

EMPIRICAL RESULTS Capital Structure Patterns: An Aggregate Analysis Both debt-equity ratio and debt-to-assets ratio indicate that debt has been an important source of financing assets of the Thai manufacturing com-. panies during the period of 1990-1995 (Table-2). Debt finances more than half of the total assets. The debt-to-assets ratio results are virtually the same on the basis of mean and median values. The first quartile value of 0.41 and the third quartile value of 0.64 suggest that in general 50 percent of the sample companies have their total assets financed within the range of 41 percent to 64 percent through debt financing during the 1990-95 period.

The mean DIE ratio ranged between 1.45 to 2.29. There are large variations in the debt-equity ratios of the Thai companies although this range has been narrowing down over years. The pattern of movement in both debt-equity ratio and debt-to-assets ratio show that the Thai listed manufacturing firms started using more equity in the post-financialliberalization. The two-tailed probability tests indicate that there are significant differences in the mean values of the debt-equity and debt-to-assets ratios during the pre-financial liberalization period (1990-1992) and during the post-financial liberalization period (1993-95). It may be reasoned that major changes in the Thai financial systems, especially the coming of the Stock Exchange Commission Act and the setting up of the credit rating agency, seem to have significant impact on the capital structure practices of the Thai manufacturing companies Our results reveal that listed Thai manufacturing companies were using more short-term debt than long-term debt over the last six-year period from 1990-19951• It is noted that 50 percent of the listed Thai manufacturing companies had no long-term debt or had long-term debt less than one tenth of the short-term debt. Furthermore, the first and the third quartile values of 0.00 (Q1) and 0.33 (Q3) suggest that, in general, 50 percent of the sample companies had share of long-term debt below 33 percent of shortterm debt, and 75 percent of the sample companies had share of longterm debt less than 35 percent of the short-term debt. In short, the results manifest that the Thai listed manufacturing companies employed very Management & Change, Volume 4, Number 1(January-June 2000)

Pandey, Chotigeat and Ranjit

5

high amount of short-term loans in their capital structure. It can be observed from the two-tailed probability test that there has been no significant difference in the long-term debt to short-term debt composition of the Thai listed manufacturing companies during the pre-fmancialliberalization period (1990-1992) and during the post-fmancialliberalization period 199395.

Debt constitutes the major source of financing for manufacturing industries in Thailand. All of them have had debt-to-asset ratio of more than 40 percent in most years of the study. However, there exist differences in the use of debt among different industries. ANOV A test confirms that there are significant inter-industry variations in the average debt-toassets ratios (Tables 3 and 4).

The debt level of chemical, electrical products and computers, electronic, packaging and agribusiness industries has been declining. On the contrary, the debt-to-assets ratios of machinery equipment, and building and furnishing have been increasing during the study period. The textile industry has the lowest amount of debt among all industries.

CAPITAL STRUCTURE DETERMINANTS Structure of assets It is argued that the type of assets structure (tangible and intangible assets) owned by a firm affects its capital structure choice. In accordance with the trade-off model of capital structure, firms with (tangible) assets that can be used as collateral are expected to issue more debt (Myers, 1984; Titman and Wessels, 1988). Thus the firm's debt level and assets that can be used as collateral should have a positive relationship. Fixed assets-tototal assets ratio is used as the proxy for the collateral assets.

Our results show a significantly positive correlation between fixed-tototal assets ratio and debt-to-assets ratio for the aggregate of Thai listed manufacturing companies (Table-5). However, at the individual industry level, only three (chemicals and plastics, machinery, and packaging) industries have statistically significant relationship between fixed-to-total assets ratio and debt-to-assets ratio. Similarly, only six industries (agribusiness, building and furnishing material, chemicals and plastics, household goods, textiles, clothing and footwear) pass the 5 percent-significant test of the correlation between the firm's fixed assets-to-assets ratio and long-term debt-to-assets ratio. The correlation between debt-to-assets ratio and fixed Management & Change, Volume4, Number 1 (January-June 2000)

6

Capital Structure Choices in an Emerging Capital Market

assets-to-assets ratio is less significant in comparison to the long-term debtto-fixed assets ratio. It can be inferred from the results that the short-term debt is less fastened to fixed assets of the Thai manufacturing firms.

Growth

A fast growing film needs more funds. The greater the future need for the funds, the more likely that the firm will retain earnings or issue debt.

Further, when firms with growth opportunities issue more debt, it helps to resolve the agency problem. A firm is expected to rely on debt financing to maintain its debt ratio as its equity increases due to the large retention of earnings. Thus, the firm's debt level and growth rate are expected to have a positive relationship. The two measures of growth used in the study were annual sales growth and capital employed.

The results reveal that in most industries, there is a positive relationship between the firm's debt level and its growth rate (Table-6). Three industries (food and beverages, household goods, and pulp and paper) do not have any significant relationship between sales growth and debt ratio.

Four (electric products and computers, electric components, food and beverages, machinery equipment, and vehicles and parts) industries do not have any significant relationship and one (food) has a negative relationship between capital employed growth and debt ratio. The increase of debt with growth in sales and capital employed may signal that there is a shortage of internal funds to keep pace with increasing demand of funds of the growing Thai firms. Furthermore, as shown earlier, Thai manufacturing firms are using considerable amount of short-term debt for their growth.

Size

A large, well-established firm has easy access to capital markets, while a small or a new firm does not. The easy accessibility to capital markets provides greater flexibility to large firms to raise funds on short notice. The large firms tend to become diversified and less prone to bankruptcy, so they may be highly levered. They can afford to have a higher debt than the small firms do, as well as have higher debt rating in the market. The size of a finn is also a proxy of its relative risk. Size can be measured in many ways. We have used three different measures of size in this study: total sales, the book value of assets, and capital employed (long-term debt Management & Change. Volume4, Number 1(January-June 2000)

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Pandey, Chotigeat and Ranjit

7

plus equity).

The results obtained ate strongly in favour of the hypothesis that debt ratio has a positive relationship with size, no matter what indicator is used to measure the size of the firm: assets, or sales, or capital employed (Table7). Except for the pulp and paper industry, all other industries showed a strong significant positive relationship in all the three tests. Our results confirm the hypothesis that the large or diversified firms have better and easier access to capital market, perhaps due to high credit ratings for their debt issues.

Profitability The pecking order hypothesis implies that firms prefer raising capital, first from retained earnings, second from debt, and third from issuing new equity (Myers, 1984). This behaviour may be due to the high costs of issuing new equity and the problem of under-valuation. Thus, the past profitability of a firm, and hence the amount of earnings available to be retained should be an important determinant of capital structure. A negative relationship between the firm's debt level and its profitability can be expected. Two measures of profitability, PBIT-to-total assets and return on equity (ROE) were used in the study.

The pecking order theory of financing is confirmed in the Thai context. The aggregate of all the industries as well as five individual industries showed strong negative relationship between profitability (ROE) and debt-equity ratio (Table-8). Five industries showed weak negative relationship. Our results also show a very strong correlation between the shorttern1 debt-to-equity and total debt-to-total equity with the return on equity.

It is important to note that, in aggregate, the Thai manufacturing companies' retum on equity and debt-to-equity ratio is significantly negatively cOlTelated. It is implied that the high debt-to-equity ratios have an adverse impact on the profitability of the Thai manufacturing companies.

Companies with higher debt-to-equity ratios have less retum on equity. It can be inferred that debt capacities of the Thai manufacturing companies are not used pragmatically.

The conelation between the profitability measured as PBIT -to-total assets ratio and the corporate debt is less significant and has much smaller conelation coefficient (-0.07 to -0.30). However, in general, our findings Management & Change, Volume 4, N umber I (.Ianuary-.Iune 2000)

8

Capital Structure

Choices in an Emerging Capital Market

show a negative relationship between the fim1's debt level and its profitability for the Thai listed manufacturing companies as a whole. Thus, the pecking order theory is confirmed. In terms of specific industries, there is inconsistency in the results.

Default risk Debt increases risk due to the legal obligation of the fixed interest payments. If a firm fails to meet its debt obligations, it will suffer from financial distress and the lenders may ultimately force a legal action. The coverage ratios (interest coverage and debt-service coverage) were used to measure a firm's default risk. Low coverage ratio with high debt level indicates the high default risk of debt financing. Thus, the relationship between the firm's debt level and default risk should be negative.

Twelve of thirteen industries showed negative relationship between interest coverage ratio and debt-to-asset ratio (see Table-9). Inter-se, eight industries showed strong negative relationship. Three others showed weak negative relationship. The aggregate of all companies showed a significant negative relationship between interest coverage ratio and debt-to-asset ratio. • Although results are in favour of the hypothesis that default risk (interest coverage ratio) and debt level has negative relationship, in aggregate, statistically, it is a very feeble relationship. Interest coverage ratio and debtequity ratio showed similar results with less significant level. Similarly, our results show that the firm's debt level has a negative relationship with the debt service coverage ratio (Table-l 0).

In summary, the aggregate of Thai manufacturing listed companies as well as most manufacturing industries confirms the hypothesis of a negative relationship between the firm's debt level and its coverage ratios (either interest coverage or debt service ratios). However, the number of the sectors falling under each level of relationship varies in different tests depending on the proxies of the two variables, which are used in the measurement.

Intangibles Finns can create uniqueness-intangible assets-through specialization in R&D effOlis, marketing, etc. Uniqueness may result into specialized skills of workers and suppliers, and supply of unique products or services to Management & Change. Volume 4. Number I (January-June 2000)

Pandey, Chotigeat and Ranjit 9

customers. A fIrm's R&D expenditure, selling and advertising expenses as well as the rate at which employees voluntarily leave their jobs reflect its intangibles, and these variables may be used as proxy for the fIrm's uniqueness or intangible assets (Titman and Wessels, 1988). A fIrm that accumulates more intangible assets may have low collateral value. Thus, uniqueness may be negatively related to the debt ratio. In this study, sales and administration expenses-to-sales ratio has been used as a proxy for uniqueness since separate data for R&D, advertising and selling and marketing expenses are not available for the Thai companies.

For the Thai listed manufacturing companies as a whole, the results showed a weak positive relationship between selling expenses (proxy for intangible) and debt (Table-II). For specifIc industries, eight industries showed negative relationship of which two industries (packaging, and building and furnishing material) showed moderately negative relationship, while six industries have weak negative relationship. From the results we can infer that, in general, Thai packaging and building and furnishing material industries are manufacturing unique products.

Volatility The volatility of a fIrm's operations (sales or operating income) indicates its operating risk. If the fIrm's volatility is high, it will have a high risk.

In other words, a negative relationship between the fIrm's debt level and volatility is expected. Titman and Wessels (1988) emphasize that the standard deviation of the percentage change in operating income is an appropriate indicator of volatility since it cannot be directly affected by the fIrm's debt. We consider sales variability to be a more fundamental and pertinent measure of a film's operating risk. Therefore, in this study, the standard deviation of the percentage change in sales has been taken as a measure of volatility and correlated with average debt-equity ratio and average debt-asset ratio for the period of 1990-1995.

The results obtained do not confIrm the hypothesis that volatility and debt level are negatively correlated (Table-12). The earnings volatility and debt-equity ratio and earnings volatility and debt-asset ratio relationship in 9 out of 13 industries show very weak negative relationship. The relationship is positive in the remaining four industries.

Management & Change, Volume4, Number 1 (January-June 2000)

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10

Capital Structure Choices in an Emerging Capital Market

MANAGERIAL CHOICES

PERCEPTIONS

ON CAPITAL STRUCTURE

The CFOs of the Thai manufacturing companies prefer to raise funds first by retained earnings and/or straight debt and then by external common equity (Table-l3). Most managers put retained earnings as their first option for raising finances. Convertible preferred stock is the least prefelTed fmancing option of the Thai companies. The three top ranked guiding principles, in order of preferences, in making financial decisions are: ensuring long-term survival of the fm, maximizing the fm's fmancial flexibility and maintaining fmancial independence. The principles like ensuring predictable source of funds, ensuring comparability with other firms in the industry or obtaining high-debt rating are considered of less importance by the Thai CFO. It is noteworthy that maximizing the market prices of the securities is the least important consideration in making financing decisions.

The view of the CFOs on the importance of capital structure is assessed by examining their choice of acti0n on undertaking a new growth opportunity. Four available alternatives are: (i) forgo the growth opportunity, (ii) deviate from the target capital structure, (iii) cut dividend, or (iv) sell-off other assets. The CFOs would not let the opportunity go. Eleven out of 14 respondents would not hesitate in deviating from the target capital structure or financial hierarchy to siege the growth opportunity. Among variables that affect the financial decisions, the projected cash flow of the assets to be financed, debt covenants, and the avoidance of dilution effects on shareholders' claims have been accorded the first, second and third ranks, respectively, by the Thai CFOs. It seems that they evaluate investment and financing decisions simultaneously. External factors such as the pricing of outstanding securities and personal tax rate of the firm's debtholders and equity-holders are of the least importance to the corporate financing decisions.

Low financial risk, flexibility in the financing decisions and less issuing cost are the three most important relevant debt characteristics of concern to the Thai CFOs. The flexibility in adjusting the covenants and the length of the term of loan are of less consequence to them.

The Thai CFOs are generally positively inclined towards borrowing.

It is considered essential for the future growth and value enhancement of the finTI. The Thai CFOs do not believe that debt would help the firm avoid the share under-valuation problem. However, they are very relucManagement & Change, Volume4, Number I (January-June

2000)

Pandey, Chotigeat and Ranjit

11

tant to the public offering of debt instruments. The major reasons are that public offering often takes a longer time as compared to private placement and a longer legal process is involved. In making project financing decisions, Thai CFOs are much more concerned about internal factors relating to the project (cost of debt, risk prevailing on the project and expected rate of return) than external factors (industly's or other similar firms' practices).

The Thai CFOs consider their experience as the most important basis for devising a capital structure decision procedure. Consultation from financial institutions and reference from the finn's specific procedure are also often used. They give low consideration to the industry standards and to the advice of outside professional consultants in designing their capital structure policy.

The macro economic environment is cited as an important reason for significant changes in the firm's capital structure. Changes in the firm's financial policies and credibility are equally important.

SUMMARY AND CONCLUSIONS In general, Thai manufacturing industries have been financing more than half of their total assets through debt during 1990-95. Half of the companies have no long-term debt or have less than one tenth of their shortterm debt. Moreover, around one-fourth of the sample companies have no long-term debt at all in their capital structure during the period 1990 to 1995. This situation has improved recently-the share of the long-term debt to short-telID debt has gone down from 40 percent in 1990 to 24 percent in 1994. Thai firms, in spite of financial liberalization, are still not very enthusiastic about the public offering of debt or equity. It is hoped that the financial improvements including deregulation, the establishment of a credit rating agency and other developments would result in financial restructuring with greater equity orientation in the future. Debt-equity ratios of Thai companies have marginally declined during the study period of 1990-95. The debt level of Thai companies was higher in the pre-financialliberalization period of 1990-92 than the post-financial liberalization period of 1993-95. Thai listed manufacturing companies are exposed to high degree of operating leverage as well as financial leverage, and there are no signs of change after the financial liberalization in 1992.

The measures of leverage (capital structure) were correlated to the Management & Change, Volume 4, Number I (January-June 2000)

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Capital Structure

Choices in an Emerging

Capital Market

firm's assets structure, size, and business risk, growth, profitability, uniqueness and default risk. Table-14 provides a summary of the results and also explains the capital structure model validated by the findings.

Results show a positive relationship between debt and tangible assets, debt and growth, and debt and size, respectively, in nine, twelve and all thirteen sectors of the Thai manufacturing sectors. A negative relationship is found between debt and profitability, debt and interest coverage, and debt and the firm's uniqueness, respectively, in ten, thirteen and eight sectors. The significant positive relationship between debt ratio and tangible assets proves the cost-benefit trade-off model. A positive relationship between the firm's debt and its growth rate found in our study is consistent with the agency model. The results also revealed a strong positive relationship between long-term debt ratio and the firm size while the 5horttem1 debt ratio is negatively related to size. These [mdings validate the view that small films have a negative incentive in using long-telm debt; and that they want to retain flexibility by borrowing on short-term basis. Also, the small size films do not want to bear the high transaction cost of issuing long-term debt. A negative relationship between debt and profitability (PBIT/T A or ROE) supports the pecking order and information asymmetry hypotheses. The generally negative relationship between debt and interest coverage and debt and debt service coverage points to the fact that high level of debt leads to financial distress that the smaller firms like to avoid. The negative relationship between debt and the firm's uniqueness is consistent with the stakeholder model; that is, the firm with unique products will avoid a conflict with customers by borrowing less. It is also consistent with the trade-off model. Our results showed a negative, but weak relationship between debt ratio and volatility. Thus, this result does not lend support to the agency or trade-off model.

Thai managers prefer to finance their assets first by retained earnings and/or straight debt (mostly private placement), and then by external common equity. They are reluctant in making a public offering of debt or equity. Besides, they also show a tendency to resort to more "traditional" instruments, than more "complex" instruments such as convertible debt or convertible preferred stock. This may imply that they consider the Thai capital market as inefficient and slow, thus, making a public issue a cumbersome task. It is hoped that the recent developments, e.g., financial deregulation, the establishment of a credit rating agency, and the capital market reforms will result in financial restructuring with a greater equity orientation.

Management

& Change. Volume 4. Number I (January-June

2000)

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For financing decisions, Thai managers consider the long-term survival of the finn as a prime objective, followed by maintaining the liquidity of the firm. They worry less for the external considerations while making financial decisions. The pricing of securities and personal tax rate of firm's debt- and equity-holders are the least important variables in their capital structure decisions. Thai managers' strong faith in the growth prospect, competitiveness of their firms and weak attitude towards capital structure decisions make them to go for loans, particularly short-term loans. Most of the companies make their financing decisions primarily based on their . . prevIous expenence.

In conclusion, given the greater risk of the short-term loans and anticipated growth of the manufacturing industries, the companies need to go for better utilization of debt and increase more equity in their capital structure. Moreover, since the study has revealed a lack of managers' confidence in Thai capital market, the deregulation of financial sector needs further push to aid in the greater infOlmation flow disclosure as well as educating investors about new financing instruments and enhancement of the existing instruments.

NOTE 1.

The subsequent economic crisis ofthe Thai economy revealed that the country had raised substantial amount of the short-tem1 foreign borrowings.

REFERENCES Brealey, R. A., S. C. Myers and Marcus (1995) Fundamentals of Corporate Finance. New York: McGraw-Hili Inc. Domingue-Kunt, A. and V. Marksimovic (1996) "Stock Market Development and Corporate Finance Decisions," Finance and Development, 47-49.

Modigliani, F. and M. H. Miller (1958) "The Cost of Capital, Corporation Finance and the Theory of Investment," American Economic Review, xlviii (3), 261-297.

Myers, S. C. (1984) "The Capital Structure Puzzle," Journal of Finance, xxxix, 575-592.

Pandey, 1. M. (1985) "The Financial Leverage in India: A Study," Indian Management, 21-34.

Pandey, 1. M. (1981) The Capital Structure and the Cost of Capital. New Delhi: Vikas Publishing House Private Ltd. Paul, M. (1982) "The Choice between Equity and Debt: An Empirical Study," Management & Change, Volume 4, Number I (January-June 2000)

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14

Capital Structure Choices in an Emerging Capital Market

Journal of Finance, xxxvii: 121-144.

Pinegar, 1. M. and L. Wilbrich (1989) "What Managers Think of Capital Stmcture Theory: A Survey," Financial Management, 18(4).

Taggart, A., Jf. (1977) "A Model of Corporate Financing Decisions," Journal of Finance, xxxii: 1467-484.

Tee, Leong Chong (1998) "Capital Stmcture Patterns of Malaysian Listed Firms," Working Paper, 1997-98, Faculty of Economics and Management, University Putra Malaysia.

Titman, S. and R. Wessels (1998) Journal of Finance, xliii: 1-19.

I. M. Pandey, Ph. D., is Professor at Indian Institute of Management (lIM-A), . Vastrapur, Ahmedabad-380 015, India. He has also taught in USA, UK, France, Vietnam and Bangkok. His research interests are focussed on strategic financial management, financial decision-making processes, venture capital and Asian financial markets. Dr. Pandey is the author of ten books, six research monographs and more than 100 articles and management cases. He is on the editorial board of eight academic journals. He was Dean (1991-94), Chairman of Fellow Programme in Management (1988-1990) and Chairn1an of Finance & Accounting Area (1982-1983 & 1986-1988) at lIM-A and held a number of academic positions at other institutions. He also served as member of the Capital Advisory Committee, Government ofIndia and was member on the Board of National Institute of Bank Management, Pune, India. He is currently on the Boards of Ahmedabad Stock Exchange and IDBl's Western Region Advisory Committee.

T. Chotigeat, Ph. D., is Professor ofInternational Finance and Trade in the College of Business Administration of Nicholls State University in Louisiana, USA. He has taught in the Maxwell Graduate School, S1. Syracuse University. He has served as a visiting Professor at Asian Institute of technology, Thailand, and has consulted for a number of institutions in USA and Southeast Asia. He has authored two books and over 60 journal articles. His current research interests are bank portfolio management and Asian financial markets.

Manoj K. Ranjit is Project Manager at Dutch Mill Company Limited in Thailand. He holds a BE in Electrical Engineering from Maulana Azad College of Technology, Bhopal, India and an MBA in Management of Technology from Asian Institute of Technology, Bangkok, Thailand.

.'

I

I

,

Management & Change, Volume 4, Number I (January-June 2000)

-_.~

Table-l Thai Listed Manufacturing Industries (Year 1995)

Industry Group 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

Agribusiness Building and Furnishing Material Chemicals and Plastics Electrical Products and Computers Electronic Components Food and Beverages Household Goods Machinery and Equipment Packaging Printing and Publishing Pulp and Paper Textiles, Clothing and Footwear Vehicles and Parts Total

Number of Companies 30

33 15 15 10

29 11

6 16 9 5 32 10 221

Mean, Median

Debt-to-Equity

Debt-to-Total

Number Mean Median 1 quartile 3 quartile Max. • Min.

Table-2 Values for the Period

1990-1995

1994

1995

1990-92

1993-95

1990-95

218 1.65 1.04 0.66 1.80 39.40 0.013

219 1.45 0.97 0.59 1.55 15.02 0.041

220 1.65 1.11 0.67 1.73 39.16 0.077

210 2.054 1.38 0.73 2.13 33.97 0.037

220 1.594 1.12 0.73 1.75 15.53 0.060

220 1.75 1.27 0.80 2.07 10.38 0.085

217 0.51 0.51 0.40 0.64 1.19 0.01

219 0.49 0.49 0.37 0.61 1.10 0.04

219 0.52 0.53 0.40 0.64 1.45 0.07

209 0.53 0.55 0.41 0.65 0.97 0.04

219 0.51 0.52 0.41 0.62 1.15 0.06

219 0.52 0.53 0.42 0.64 0.97 0.08

1990

1991

1992

1993

170 2.29 1.13 0.53 2.19 51.56 0.001

197 1.62 1.20 0.62 1.85 16.30 0.035

210 1.70 1.14 0.67 1.85 33.97 0.01

1% 0.52 0.54 0.38 '0.65 0.94 0.03

209 0.52 0.53 0.40 0.65 0.97 0,01

Ratio

Number Mean Median 1 quartile 3 quartile Max. Min. Total

and Quartile

Assets Ratio 170 0.52 0.53 0.35 0.69 1.05 0.00

.",;~-~

-~-~

~--~

Table-2 Contd ...

1990

1991

1992

1993

2(f}

217 0.32 0.07 0.00 0.29 10.52 0.00

1994

1995

1990-92

1993-95

1990-95

Long-Term Debt-to-Short- Term Debt Ratio Number Mean Median 1 quartile 3 quartile Max. Min.

170 0.40 0.06 0.00 0.34 19.11 0.00

1% 0.32 0.07 0.00 0.33 4.01 0.00

0.31 0.07 0.00 0.25 7.79 0.00

219 0.24 0.06 0.00 0.27 2.97 0.00

219 0.35 0.08 0.00 0.33 4.35 0.00

2(f}

0.34 0.10 0.01 0.33 8.41 0.00

219 0.30 0.10 0.02 0.33 5.28 0.00

219 0.32 0.12 0.03 0.33 4.55 0.00

-l

Table-J T -Tests of Paired Samples of DIE, DIA and L TD/STD Ratios DIE ratio Correlation

Pairs

Variable

2-tail Sig.

AVE 1990-92 0.19

210

Mean

SD

2.0537

3.184

1.5741

1.847

SE of Mean 0.22

0.01

AVE 1993-95 Paired Differences Mean

SD

0.4796

3.36

SE of Mean 0.23

t-value

df

2-tail Sig.

2.07

209

0.04

D/A ratio Variable

Pairs

Correlation

209

0.611

2-tail Sig.

AVE 1990-92

'

__

.~

__

~

__

~_'_~'"

_

,

I

--:_.

~~~

SD

SE of Mean

0.7537

0.185

0.013

0.5066

0.173

0.012

__

......I..-...-_~._

0.000

AVE 1993-95

__

Mean

~_~

~~

__

~

__ ----..L..-..o

~~

Table-3 Contd ...

Paired

Differences

Mean

SD

SE of Mean

t-value

df

.0241

0.158

0.011

2.20

208

2-tail

Sig.

0.029

LID/SID Variable

Pairs

Correlation

2-tail Sig.

AVE 1990-92 209

0.6

Mean

SD

OJ

0.8

0.1

OJ

0.6

0.1

SE of Mean

0

AVE 1993-95 Paired Differences Mean

SD

0.0426

0.67

SE oJ Mean 0

t-value

df

2-tail Sig.

0.93

208

0.4

Table-4 D/A Ratio, 1990-1995 t

Industry

group

1 Agribusiness 2 Building

and Furnishing

3 Chemicals

and Plastics

4 Electrical

Products

5 Electronic 6 Food

7 Household

Goods

8 Machinery

Equipment

9 Packaging

and Computers

Components

and Beverages

material

No of firms Mean No of firms Mean No of firms Mean No of firms Mean No of firms Mean No of firms Mean No of firms Mean No of firms Mean No of firms Mean

1990

1991

1992

1993

1994

1995

23 0.56 Tl 0.47 9 0.59 10 0.69 5 0.55 24 0.57 9 0.55 2 0.43 15 0.52

30 0.51 29 0.52 11 0.56 11 0.65 6 0.62 27 0.51 11 0.58 3 0.51 17 0.45

30 0.44 31 0.56 13 0.51 12 0.63 8 0.59 27 0.52 11 0.53 5 0.50 17 0.47

30 0.45 33 0.56 15 0.47 14 0.55 7 0.45 28 0.57 11 0.55 6 0.56 17 0.46

30 0.43 33 0.59 15 0.45 14 0.55 9 0.48 29 0.54 11 0.53 6 0.53 17 0.45

30 0.51 33 0.57 14 0.44 14 0.62 9 0.45 29 0.56 11 0.52 6 0.48 17 0.47

.

Table-4

I

Contd ...

Industry group 11

Printing and Publishing

12

Pulp and Paper

13

Textiles, Clothing and Footwear

14

Vehicles and Parts

No of Mean No of Mean No of Mean No of Mean

firms firms firms firms

1990

1991

1992

1993

1994

9 0.47 2 0.25 28 0.46 5 0.56

9 0.40 3 0.39 29 0.47 9 0.61

9 0.47 5 0.69 30 0.47 10 0.63

9 0.39 5 0.69 30 0.47 10 0.58

9 0.40 5 0.55 30 0.46 10 0.48

F

F-Prob.

ANOVA Source of Variation

SS

df

MS

Between Groups Within Groups

0.160556 0.276895

12 65

0.01338 0.00426

Total

0.437451

77

3.140817

0.00144

1995 9 0.47 5 0.58 30 0.49 10 0.53

Table-5 Debt Ratios and Collateral

Total Debt-to- Total Asset Co-efficient Significance Data Size

Industry Group Aggregate Agribusiness Building And Furni~hing Material Chemicals And Plastics Electrical Products And Computers Electronic Components Food And Beverages Household Goods Machinery Equipment Packaging Printing And Publishing Pulp And Paper Textiles, Clothing And Footwear Vehicles And Parts Notes:

IL

.__

.. _ ..

~_~

*

Significant

~

Assets

~

at 10%;

~._~

**

0.06 0.02 0.02 0.24 -0.19 -0.18 0.10 0.10 0.65 0.42 0.02 0.32 -0.09 -0.05

** **

*** ***

Significant at 5%;

. ~

.029 .786 .801 .036 .101 .238 .192 506 .000 .000 .892 .124 .242 .740

***

1229 173 186 78 75 45 164 45 28 100 54 25 177 55

Long-term Coefficient 0.37 0.22 0.56 0.65 0.24 0.09 -0.0 1 0.96 0.37 0.48 0.07 0.42 0.32 -0.0 1

*** ** *** *** * *** *** * ***

Debt-to-Total Significance .000 .019 .000 .000 .092 .617 .891 .000 .106 .000 .718 .093 .003 .942

Asset Data Size 805 117 141 54 52 37 109 63 20 70 31 17 81 32

Significant at 1%.

.__

~

._. __

'~

~_

.. _.~

_

..

~-~

~

-I

Growth

Industry

Group

Co-efficient

Aggregate Agribusiness Building and Furnishing Material Chemicals and Plastics Electrical Products and Computer Electronic Components Food and Beverages Household Goods Machinery Equipment Packaging Printing and Publishing Pulp and Paper Textiles, Clothing and Footwear Vehicles and Parts Notes:

*

Significant

at 10%;

**

0.50 0.26 0.57 0.75 0.61 0.67 0.07 0.10 0.57 0.32 0.36 -0.30 0.34 0.68

Growth in Sales Significance

*** *** *** *** *** ***

Data Size

.000 .002 .000 .000 .000 .000 .414 .486 .006 .003 .014 .195 .000 .000

*** *** ** *** ***

Significant at 5%;

Table-6 and Debt Level

***

Significant at 1%.

1007 143 153 63 61 36 135 54 22 83 45 20 147 45

Growth in Capital Employed Coefficient Significance Data Size 0.65 0.22 0.83 0.57 0.08 0.24 -0.37 0.82 0.18 0.66 0.39 0.93 0.59 -0.04

*** *** *** *** *** *** *** *** *** ***

.000 .007 .000 .000 .546 .160 .000

1011 143 153 63 61 36 135

.vvv

AAA

CA ......•

.435 .000 .008 .000 .000 .800

22 83 45 20 147 45

Table-7 Size and Debt

Industry

Co-efficient

Group

Aggregate Agribusiness Building and Furnishing Material Chemicals and Plastics Electrical Products and Computers Electronic Components Food and Beverages Household Goods Machinery Equipment Packaging Printing and Publishing Pulp and Paper Textiles, Clothing and Footwear Vehicles and Parts Notes:

*

Significant

at 10%;

**

0.98 0.98 0.99 0.96 0.96 0.95 0.94 0.28 0.94 0.95 0.97 0.97 0.95 0.93

Assets Significance

*** *** *** *** *** *** *** ** *** *** *** *** ***

Significant at 5%;

Coefficient

.000 .000 .000 .000 .000 .000 .000 .023 .000 .000 .000 000 .000 .000

***

Significant

Level

0.83 0.75 0.92 0.91 0.94 0.95 0.68 0.83 0.48 0.58 0.53 0.31 0.58 0.82

*** *** *** *** *** *** *** *** *** *** *** *** ***

Sales Significance

Co-efficient

.000 .000 .000 .000 .000 .000 .000 .000 .010 .000 .000 .134 .000 .000

0.95 0.90 0.98 091 0.75 0.73 0.72 0.65 0.68 0.87 0.89 0.92 0.84 0.52

Capital Employed Significance Data Size

*** *** *** *** *** *** *** *** *** *** *** *** *** ***

.000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000 .000

1216 173 186 78 75 44 164 64 28 100 54 25 177 55

at 1%.

.1

ProfitablIity

Aggregate Agribusiness Building & Furnishing Mat. Chemicals and Plastics Electrical & Computers Electronic Components Food and Beverages Household Goods Machinery Equipment Packaging Printing and Publishing Pulp and Paper Textiles, Clothing & Footwear Vehicles and Parts Significant

Debt Level

STD/Equity Debt-to-Assets Debt-to-Equity Co-efficient Significance Data Co-efficient Significance Data Co-efficient Significance Size Size

Industry Group

Notes:

Table-8 (ROE) and

at 10%;

**

-0.97 -0.28 -0.89 -0.08 0.24 -0.46 -1.00 0.15 -0.95 0.43 -0.20 -0.23 -0.06 -0.12

*** *** *** ** *** *** *** ***

Significant at 5%;

.000 .000 .000 .490 .036 .002 .000 .248 .000 .000 .155 .275 .409 .375

***=

1226 173 186 78 75 44 164 64 28 100 54 25 177 55

-0.54 -0.35 -0.07 0.04 0.46 -0.20 -0.88 0.02 -0.72 0.06 -0.05 -0.14 0.03 -0.43

Significant at 1%.

*** *** *** *** ***

**

.000 .000 .425 .764 .001 .240 .000 .885 .000 .641 .773 .584 .781 .014

807 117 142 54 52 36 109 63 28 70 31 17 81 32

-0.98 *** -0.25 *** -0.90 *** -0.11 0.06 -0.49 *** -LOO •••••• 0.07 -0.95 0.15 -0.38 -0.23 -0.08 -0.06

*** ***

.000 .001 .000 .323 .619 .001 .000 .602 .000 .124 .005 .264 .280 .672

Data Size 1226 173 186 78 75 44 i64 64 28 100 54 25 177 55

Coverage

Table-9 Ratio and Debt Level

-Industry

Group

Co-efficient

Aggregate Agribusiness Building and Furnishing Material Chemicals and Plastics Electrical Products and Computers Electronic Components Food and Beverages Household Goods Machinery Equipment Packaging Printing and Publishing Pulp and Paper Textiles, Clothing and Footwear Vehicles and Parts Notes:

t

-0.10 -0.30 -0.23 0.19 -0.35 -0.58 -0.16 -0.17 -0.39 -0.30 -0.32 0.00 -0.52 -0.10

*** *** *** * *** *** ** * *** ** ***

Debt-to-Asset Significance

Data Size

Co-efficient

.000 .000 .001 .098 .002 .000 .036 .277 .069 .003 .019 1.000 .000 .457

1217 173 186 78 75 43 162 45 23 100 54 22 177 55

-0.01 -0.05 -0.04 0.03 -0.20 -0.27 -0.01 0.06 -0.10 -0.05 -0.27 0.05 -0.37 -0.04

* Significant at 10%; ** Significant at 5%; *** Significant at 1%.

_~

,_~_.

~

~

~~

._ ..

* *

** ***

Debt-t(}-Equity Significance Data Size .780 .490 .621 .821 .079 .083 .880 .657 .638 .593 .047 .839 .000 .770

1217 173 186 78 75 43 162 64 23 100 54 .22 177 55

4

IQ

Table-IO Debt Service Ratio and Debt Level

Industry Group

Aggregate Agribusiness Building & Furnishing Mat. Chemicals and Plastics Electrical & Computers Electronic Components Food and Beverages Household Goods .Machinery Equipment Packaging Printing and Publishing Pulp and Paper Textiles, Clothing & Footwear Vehicles and Parts Notes:

Debt-to-Equity Debt-to-Assets Co-efficient Significance Data Co-efficient Significance Size -0.29 -0.62 -0.62 -0.27 -0.64 -0.62 -0.68 -0.17 -0.77 -0.53 -0.67 -0.63 -0.66 -0.83

*** *** *** ** *** *** *** *** *** *** *** *** ***

.000 .000 .000 .016 .000 .000 .000 .252 .000 .000 .000 .001 .000 .000

1230 173 186 78 75 45 164 45 28 100 54 25 177 55

-0.03 -0.12 -0.08 -0.07 -0.43 -0.26 -0.10 -0.33 -0.36 -0,11 -0.59 -0.27 -0.49 -0.49

* Significant at 10%; ** Significant at 5%; *** Significant at 1%.

*** * *** * *** *** ***

.225 .125 .255 .555 .000 .084 .196 .008 .060 .258 .000 .195 .000 .000

Data Co-efficient Size 1230 173 186 78 75 45 164 64 28 100 54 25 177 55

-0.14 -0.01 -0.09 -0.18 -0.19 -0.29 -0.18 -0.07 -0.46 -0.27 -0.31 -0.35 -0.20 -0.45

LTD/Equity Significance

***

* * ** ** * * ***

.000 .903 .301 .189 .169 .080 .062 .606 .014 .025 .085 .167 .074 .010

Data Size 808 117 142 54 52 37 109 63 28 70 31 17 81 32

I

Managers'

Table-13 Views on Financing

Practices Financing preferences Retained earnings Straight debt External common equity Financing principles Ensuring long-term survival Maximising financial flexibility Maintaining financial independence Growth opportunity Deviate from target capital structure Se 11 off other assets Cut dividend Financing determinants Expected cash flow Debt covenants Equity ownership dilution

Practices Mean

4.2

4.2 2.7

Impact of debt financing Potential future growth Increase in the firm value Impact on EPS

,)

4.6

4.4 3.8

2 3

3.6 2.4 2.4

1 2 2

4.4

1

3.8 3.6

2 3

Debt preference Conmlercial bank for term loan Short-term bank borrowing Debt issue Debt characteristics Low financial risk Flexible Low rssuing costs

Rank

I 2 3

4.4 4.1

I 2

4.0

4,2

I

3,8 3.6

2 3

r-------- -

Table- I3 contd ...

Practices

Mean

Rank

Raising funds from capital market Takes long time Long legal procedure Internal policy

4.0 3.5 3.4

2

Factors in project financing Cost of debt Project risk Expected return

4.4 4.1 4.0

2

3.8 3.5

I 2

2.9

3

Financing decision procedure Past experience Firm specific Consultation from financial institutions Capital structure changes Government policy changes Firm's financial policy changes Changes in firm's credibility

1 3

1 3

1 2

3

Table-14 Determinants

Exogenous

Variables

of Leverage:

Observed

Summary

Relationship

of Findings Capital Structure. Model

1. Assets Structure

Positive: significant

Trade-off

model

2. Growth

Positive: generally significant

Agency model

3. Size

Positive: significant

Trade-off model: transaction costs of using L TO; adverse incentive costs of LTO

4. Profitability

Negative:

generally significant

Pecking order/information asymmetry

5. Default risk (I nterest Coverage & Debt-Service Coverage)

Negative:

generally significant

Tradc-off model: insolvency & financial distress; agency model

6. Intangible (Uniqueness)

Negative:

weak/moderate

Agcncy model; product market Illodel

7. Volatility

Negative:

weak/moderate

Agency

& trade-off

model

THE RELEVANCE OF INDIAN PUBLIC SECTOR ENTERPRISES IN A LIBERALIZED REGIME

Bhaskar Majumdar The state in India had to accept the role of an entrepreneur following the Second World .War, the Independence Movement and the Partition. In all accepted mixed capitalist economic structure, the task of the state was supposed to he achieved hy the public sector. Following the Nehru-Mahalanohis model, the Public Sector Enterprises (PSEs) were assigned the task of allaining the "commanding height" of the economy via controlling capital goods industries. However, this strategy failed. The industrial policy of the Government of India gradually shifted from the pre-I966 "command and control" to the post- I966 liberal regime. In I 99 I, the Government of India declared the New Economic Policy (NEP) that confirmed the continuation of the liberal regime. In this context, this paper opines that the' role of the state in India has become more important, since a liberal internationally competitive regime requires a better guidance by the state. This paper centres around the central role of public enterprises in Indian economy and argues that capitalist industrialization in a liberal economy is not necessarily stateindependent. Rather, the state can be a positive and vital force for ensuring capitalist industrialization. The relevance of PSEs for India's industrialization should be seen in this context.

INTRODUCTION

T

he post-Second World War world is compartmentalized into a dominant group of a few industrialized countries and a dependent group of many non-industrialized or industrializing countries. The industtialized countties are often bracketed as Developed Market Economies (DMEs), understood as an analytical category to denote generally the countries who reaped the benefits of the First Industrial Revolution. The non-industrialized or industrializing countries are often bracketed as the Third World Countries (TWCs), also understood as an analytical category of countries in Asia (excluding Japan), Africa and Latin America. These The author has benefited much from the comments and suggestions from an anonymous referee on the earlier draft of the paper. The author alone is responsible for the views expressed here.

Management & Change. Volume 4, Number 1 (January-June 2000) Leaming in Management. All Rights Reserved.

(g 2000 Institute for Integrated

34

The Relevance

of Indian Public Sector Enterprises

are specifically the countries who were decolonized or who got independence after the Second World War. These TWCs are extremely heterogeneous within themselves by economic-political-cultural dimensions (Rangel, 1986: 42). The TWCs are characterized by an imbalanced industrial structure which either they inherited as a colonial legacy, or developed later by unplanned or uncoordinated processes of development. If the structural imbalance of these TWCs, perpetuated in an international setting that is adverse to them, impedes the process of independent industrialization, policies have to be formulated by a competent authority to remove these hurdles. This is the c.ontext which makes the role of the state relevant, particularly in post-Second World War scenario in the newly independent or decolonized countries bracketed as the TWCs. It is often alleged that India was largely delinked from the global economy during the first one and a half decades of her development planning, i.e., 1951-1966, because of her reliance on inward-looking policies based on quantitative restrictions on imports (Bhagwati and Desai, 1970: 122; Nayar, 1997: 18). Since June 1991, India has markedly accelerated its movement towards an open outward-oriented trade policy. The present economic orientation reflects a recognition that previous policies with a highly protectionist trading regime and widespread regulatory controls, had contributed greatly to the economic crisis of the early 1990 (GATT, 1993, Vol. 1: 1). The Government of India (GO!) accepted the ideology of the Bretton Woods Institutions, namely the World Bank and the International Monetary Fund (IMF), as reflected in India's acceptance of Structural Adjustment Programme (SAP). The New Economic Policy (NEP), 1991, declared by the GO! was an attempt to execute the policy of Open Door Industrialization (ODI) following SAP. This paper attempts to focus on the relevance of the PSEs in this liberal economic framework.

This paper is structured into five sections. In Section I, a conceptual framework on the role of the state in an economy is presented. In Section II is presented shifting policy paradigms of post-independence India's industrialization. Section III analyzes the growth and development of Public Sector Enterprises (PSEs) during both pre- and post-NEP periods. Section IV explains the relevance ofPSEs in a liberalized regime. Finally, Section V gives tentative conclusions.

Management

-_._--_._-_._

....

_ ..... _._-_

.....

_._

....__

& Change. Volume 4, Number

I (January-June

2000)

._...__ ... _---~..--~~~~~~~~~~~~~~~~~~~~~~~-~

Majumdar

35

THE STATE AND THE ECONOMY: A CONCEPTUAL FRAMEWORK We assume that the objective of a national economy is to raise the standard of living of people constituting a society. If this process of uplift is understood to be attained through industrialization, then the corresponding programme of action has to rest on provision, in sequence, of basic minimum necessities for survival, consumer goods for comfort and consumer luxuries.

Industrialization thus has to incorporate a time-phased ordering of consumer goods consistent with capital goods-cum-technology ordering, each of which has to be planned in an ascending order-from low-tech highsocial value oriented to high-tech high-social value oriented commodities.

Selection of this commodity basket in a time-phasing sequence needs planning by the state. But this invites problems, as planning for industrialization aims to wipe out pre-plan uncoordinated economic principles and social setup in favour of formation of new ones (Gurley, 1975: 455-471).

We consider the state, in a society passing through capitalist transition, as a decision-making authority trying in principle, to ensure mutuality of interests of antagonistic social groups and individuals. Alternative interpretations of this concept are available elsewhere (Kurien, 1987: AN26; Bardhan, 1984: 32-39; Patnaik, 1984: 1251-1260; Alvi, 1982: 289307; World Bank, 1997: 20). State is then the visible hand which directs the course of development of the economy. In the global context, the use of power by the nation states of the Third World is conditioned by the hegemonic control--basically by possession of technology-of industrialized countries (Bienefeld, 1982: 8).

Whether or not a nation state works under global compulsions, it has to shoulder the responsibilities for coordinated development. Individuals in isolation may not have the willingness or realization or ability to accept this task. Also, while the entrepreneurs at home, individually or collectively, are eager to appropriate the surplus generated in the domain of commodity production, they, in their collectivity, are indifferent, often incapable, to generate, organize and maintain a coordinated system of production. It is known that behind production and trade lies ownership over resources.

This ownership confers the owners the legal right to exclude the nonowners from the process of utilization and appropriation of resources.

State is the institution which recognizes and rationalizes this social relation using the plant of private property (Cahan, 1994-95: 403; Whynes and Bowles, 1981: 33,35). In reality, thus, it is the state which initially accepts Management & Change, Volume 4, Number I (January-June

2000)

36

The Relevance

of Indian Public Sector Enterprises

the market principle viz., inclusion of people with power at the cost of exclusion of papers or what we call "state-recognition of market power."

But then, for the market to exist, expand and ensure macro-economic growth, the state has to ensure its own command.' If market power is recognized and accepted in principle by the state by guaranteeing security of private property, then accumulation by the powerful becomes a logical corollary. The existence of the powerful, keeping the corollary in mind, is conditional upon state action via expansion of market or inclusion of more people in production and exchange. This may, however, invite new contradictions, unless the exclusion principle is accepted by people outside jobs, because the process of capitalist industrialization is by nature based on the principle of exclusion and exit.

SHIFTING POLICY PARADIGMS INDIA'S INDUSTRIALIZATION

OF POST-INDEPENDENCE

The state in the post-independence Indian economy had to be involved in the process of industrialization since (i) The war and the Partition had put numerous responsibilities on the state. The newly independent state had to change the purpose, structure and modus operandi of its activities; (ii) The economic and social fabric then facing the government after the partition had to be kept intact, in other words, to be saved from further disintegration. The state had to get involved in investment and production activities to maintain a united union; (iii) The inherent contradictions in (i) and (ii) given above, viz., aspiring. for relevant radical structural changes while maintaining status quo in the economic and social fabric, or property structure, led the government to declare the public sector as a guarantor for ensuring "social" lines of advance. In fact, a mixed economy emerges often as a desire to preserve the status quo (Peston, 1980: 23).

The state came to be represented in India's attempts for industrialization through the public sector enterprises. The economic structure was accepted to be mixed capitalist by co-existence of both public and private sectors.

The public sector moves with two wings, one comprising enterprises under state control, the other comprising an administrative section. We concentrate on the section comprising enterprises.

Management

& Change,

Volume 4, Number

I (January-June

2000)

Majumdar

QUANTITATIVE

RESTRICTIONS

37

(QRs) REGIME, 1947-1966

The state participation in industrialization begins with the state control over industries by policy declarations and their execution by Acts. In marked contrast to the colonial state, in post-1947 India the state has played an active role in seeking to secure India's "industrial transformation" in a number of ways. This state intervention always had the aim of securing capitalist development in India (Byres, 1982: 147). We may observe this state control in terms of industrial policies declared by the GOI. The first Industrial Policy Resolution (IPR) announced by the GOI on 6th April, 1948 emphasized on securing a continuous increase in production and its equitable distribution and suggested that the state must playa progressive role in industrial development. The 1948 IPR was a stopgap measure just after war and partition and was discontinued when the IPR 1956 was floated that coincided with India's Second Five-Year Plan, 1956-61, popularly known as Mahalanobis plan. In the context of identification of constraints by Mahalanobis and hence in keeping with the priorities suggested by him for the Second Plan, the IPR 1956 emphasized on development of heavy industries and machine making industries, particularly via Public Sector Enterprises (PSEs). In this required transformation of the economy, the state was supposed to playa crucial role (GOI, 1952: 32; Singh, 1986: 6). The Second Plan, following Mahalanobis, confirmed that the responsibility for new developments in the basic and capital goods industries must be with the state. In view of Mahalanobis, "the heavy machinery industry should be in the public sector... Government should have complete control over the heavy machinery industry so as to be able to fix prices to suit national needs" (Bose and Mukherjee, 1985: .

116-117). Also, that the public sector must grow not only absolutely but also relatively to the private sector (GOI, 1956: 23). It was the IPR 1956 that came to be the executive arm of Mahalanobis logic of economic development and which shaped India's Industrial sector up to the 1970s.

POST QRs-REGIME,

1966-1980

It came to be realized since the mid-1960s that "while Mahalanobis had expected the learning effect to gradually diminish the cost of production of capital goods, this did not happen"(Chakravarty, 1987: 17). The expected increase in consumer goods output also did not materialize. This was Management

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The Relevance of Indian Public Sector Enterprises

the period when the economy also experienced exogenous shocks (Chakravarty, 1987: 17). The QRs regime, thus, came to be replaced graduaIIy since mid-1960s to enable the economy to be internationally competitive.

The post-QRs regime, 1966-80, brought forth a number ofIndustrial Policy statements, e.g., (i) the Industrial Policy Statement 1970, that gave birth to the "Joint Sector" foIlowing the Industrial Licensing Policy Inquiry Committee (ILPIC) prescription; (ii) the Industrial Policy Statement 1973 which accepted the definition of large industrial houses as suggested by the Monopolies and Restrictive Trade Practices Act (MRTPA); (iii) the Industrial Policy Statement 1977, which emphasized the growing role of the public sector and use of the Foreign Exchange Regulation Act (FERA) in case of foreign coIIaboration; and (iv) the Industrial Policy Statement 1980, which emphasized on regulation of growth of monopolies and concentration of economic power.

BEGINNING

OF THE LIBERALIZATION

REGIME,

1980s

The state apparently abandoned the "command and control" principles since the 1980s when (i) "the rate of saving in the private sector had reached respectable levels compared to the rate of saving in the public sector (Raj, 1986: 26-27); (ii) the limitations of "socialist treatment" of apparently or reaIly sick private enterprises in public units were understood, (iii) the generation of "rental incomes" for private entrepreneurs flowing from public enterprises came to be questioned by the people; and (i v) the "government monopoly" only by possession of resources came to be questioned (Raj, 1986: 27). With a view to ensuring economies of scale in some key industries, the Gal decided to open up, to the larger enterprises in the private sector, even industries hitherto reserved for the public sector (Raj, 1986: 27). It came to be argued that even after the three decades of planning, Indian industries "continued to suffer from their inability to manufacture their own machinery and equipment" and thus continued to face "formidable barriers to the successful traversing of the capitalist path" (Byres, 1982: 151-152).

The 1980s brought about the liberalization regime for India's industrialization. In 1981, "the system of automatic expansion of capacity , by 25 percent in five years was introduced ... while licenses were liberaIly issued for starting new industries" (UNIDO, 1990: 10). Another effort Management

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was made in 1986, to be effective during the Seventh Five-Year Plan, 1985-90, "under which industrial enterprises operating at 80 percent of capacity and above can have their licenses re-endorsed on the basis of the highest levels of production in the previous five years plus onethird thereof' (UNIDO, 1990: 110). With a view to ensuring economies of scale and the creation of additional capacity with low capital outlay, a scheme was introduced whereby applications from new firms in 84 selected industries, encompassing petrochemicals, heavy commercial vehicles, passenger cars and two-wheelers, mini-steel, etc., were allowed "capacity expansion." Industrial licensing in the steel sector got substantially modified in 1988, allowing existing enterprises in this sector to expand capacity upto 150 percent, subject to a maximum of 250,000 tonnes by modernization and the replacement of equipment. The sponge iron industry had also been de licensed (UNIDO, 1990: 111).

In addition to capacity-led expansion in production possibilities, the scheme of delicensing was extended in March 1986 to MRTP/FERA companies to enable them to locate in centrally declared backward areas (UNlDO, 1990: Ill). Unlike the previously practised "socialist treatment" in public sector clinics, the treatment of sick units came to be entrusted with the Board for Industrial and Financial Reconstruction (BIFR), set up in May 1987.

The Narasimham Committee of 1983-84 recommended a reduction of bureaucratic controls, and this was indeed done throughout the 1980s (Tandon, 1997: 3199). The role of the state for India's industrialization at this stage became more paradoxical than what it was during the first three decades of planning. In view of the GOI, "forms of Regulation and Control are to be diversified-with a shift away from State ownership and directional policy measures to promotional measures and the construction of a flexible and sensitive incentive structure" (UNIDO, 1990: 113). At the same time, the GO! says that "the competitive market forces is (sic!) not at the 'expense' of the state" (UNIDO, 1990: 113). The public sector reform at this stage indicated privatization, disinvestment in shares in PSEs and occasional exit of manpower. Many of these measures either did not succeed or showed the dilemma of the government regarding "state participation in production" or the "dual character of the state" itself where the government works as its supreme agency.

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The Relevance

LIBERALIZATION

of Indian Public Sector Enterprises

IN INDIA'S NEW ECONOMIC

POLICY,

1991

The liberalization regime for the economy of India was sharpened in the 1990s when the GOI declared the New Economic Policy (NEP) in 1991. The NEP, 1991, found "little reason for the interference of Government ... in the import of technology by Indian firms" (GOI, 1991: 4). This policy aims at free play of market forces (GOI, 1991: 5), since the purpose of the Government was "to unshackle the industrial economy from the cobwebs of unnecessary bureaucratic control" (GOI, 1991: 6). At the same time, the GOI pledges to keep intact the prevailing socio-cultural fabric of the country when in its Eighth Five Year Plan, 1991-97, the Government declares that "it is a plan for managing .., the transition from centrally planned economy to market-led economy without tearing our soclO-cultural fabric" (GOI, 1992: 1). The Government argued that "the new emphasis on the liberalization of macroeconomic and industrial policies represents both a contribution and a departure from the policy orientation of the first three decades of independent India .... The new industrial policy should not be seen as a policy of 'laissez-faire' in which the government is content to dismantle existing controls and let the market forces have their full impact" (UNIDO, 1990: 113).

In the beginning of the 1990s, the GOI started believing that the Indian industrial economy has developed a wide, diversified and increasingly competitive base. The NEP, 1991, "removed all manufacturing industries from the Public Sector Reserved List except those related to defense and allied industries" (GOI, 1991: 1-2). In 1956 IPR, 17 areas have been reserved for investment by the public sector. Following NEP 1991, only 8 areas will continue to be so reserved (GOI, 1991: 1). These eight areas are related with arms, defence, atomic energy, coal and lignite, mineral oils, mining, minerals specified in the Schedule of the Atomic Energy Order 1953, railway transport (GOI, 1992-97, Vol. II: 108). The NEP 1991, "abolished all industrial licensing irrespective of the level of investment, except for certain industries related to security and strategic concerns, social reasons, concerns related to safety, and overriding environmental issues, and manufacture of products of a hazardous nature .... Henceforth, industries will also be free to expand according to their market needs without the necessity of obtaining prior expansion or capacity clearences from the Government" (GOI, 1991: 2). The policy continues that "with the abolition of industrial capacity licensing, firms will now be free to Management

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manufacture any article according to market-demands (except for those subjectto compulsory licensing)" (GOI, 1991: 2). For foreign participation in production and investment, the NEP assures that "in future, there will be no phased manufacturing programme attempting to force the pace of indigenization in manufacturing (GOI, 1991: 3). The Government announced that the large business houses would now be "at par with all the others' in not requiring prior approvals for investment decisions from the Government, except for those industries included in the compulsory licensing list" (Gal, 1991: 4). The NEP 1991, claimed that "there is little reason for the interference of Government, inherently involving delays and hampering business decisionmaking, in the import of technology by Indian firms' (Gal, 1991: 4).

Also that "automatic permission will be given for foreign technology agreements in high priority industries" and that "no permission will be necessary for hiring foreign technicians, foreign testing of indigenously developed technologies" (Gal, 1991: 9). In view of the Government, these measures recognize increased competence of Indian firms that enable them to participate in the emerging challenges that are being thrown up by today's increasingly interdependent industrial world" (Gal, 1991: 4). The Eighth Five-Year Plan, 1992-97, in keeping pace with NEP 1991, suggests that "a liberal policy towards the entry and expansion of firms is a necessary condition for inducing competition and enhancing the efficiency of resource base" (Gal, 1992, Vol. I: 87).

POST-NEP LIBERALIZATION SECTOR DURING 1990s

IN INDIA'S

INDUSTRIAL

For ensuring and enhancing competitiveness 9f the home firms in 199293, "the capital market was freed from Government control and the Office of the Controller of Capital Issues was abolished. Foreign Exchange Regulation Act was amended and investment restrictions on FERA companies were substantially removed. Foreign investment was further liberalized by removing the conditionality of dividend balancing for the nonconsumer goods" (GOI, 1992-93: 121). Also, the private sector was invited to "invest . in oil exploration and refining which is otherwise reserved for the public sector" (Gal, 1992-93: 122). In fact, following NEP 1991, licensing requirements in more industrial sectors were removed, the areas reserved

exclusively for public sector were reduced, the conditions of entry for large scale units in export oriented sectors were relaxed (GOI, 1993Management

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The Relevance

of Indian Public Sector Enterprises

94: 93). For example, (i) since March 26, 1993, the 13 minerals, eadier reserved for the public sector, were opened for the private sector (GOI, 1993-94: 93); (ii) industrial licensing for almost all bulk drugs was abolished in 1994-95 (GOI, 1994-95: 104); (iii) the number of industries reserved for the public sector came down to six, viz., defence products, atomic energy, coal and lignite, mineral oils, railway transport, minerals specified in the schedule to the Atomic Energy Order 1953, from a total of 17 enlisted in 1956 IPR; private participation in some of these six industries is also permitted on a case by case basis (GOI, 1995-96: 113); (iv) the number of items, in respect of which industrial licensing remains binding, got reduced to 15 (GOI, 1995-96: 113); (v) Disinvestment Commission was set up for identifying PSEs for equity disinvestment (GOI, 199697: 111); and (vi) Foreign Investment Promotion Board (FIPB) was entrusted with making rules and regulations relating to foreign investment, etc.

(GOI, .1996-97: 11). To be brief, since July 1991, the major reforms the Indian industries experienced include "wide-scale reduction in the scope of industrial licensing, simplification of procedural rules and regulations, reduction of areas reserved exclusively for the public sector, disinvestment of equity of select public sector undertakings, enhancing the limits of foreign equity participation in domestic industrial undertakings, liberalization of trade and exchange rate policies, rationalization and reduction of customs and excise duties and personal and corporate income tax, etc." (GOI, 1996-97: 109). This liberalized industrial policy regime during the 1990s hardly qualifies for absence of state intervention for industrialization.

The questions that remain are about the types of changes needed tor efficient state intervention for industrialization.

GROWTH AND ENTERPRISES

DEVELOPMENT

OF

PUBLIC

SECTOR

"As a matter of history all the mixed economies so far in the advanced industrial world have emerged as modified capitalism" (Peston, 1980: 20). Capital and labour in such mixed economies are free to move; in fact, capital remains for the most part in private hands. The reason why these economies are called mixed may be that "both their private and public sectors are quite large" (Peston, 1980: 19). We need to be selective in narrating the growth and development of the PSEs in the Indian economy since their introduction during the post-independence period. We concentrate Management

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on the number of enterprises, the level of investment in these enterprises, the share of these enterprises in national output, the pattern of investment within these enterprises, capacity utilization, sales and profit. We know that there are broader indicators for evaluation of these enterprises like employment, regional development, social and territorial secutiry, etc.

Since these broader indicators are not very relevant in case of the nonPSEs, we confine ourselves to the selected conventional indicators.

Investment in PSEs in post-independence Indian economy increased remarkably during the first two decades of planning from a very low base at Rs. 29 crore in 1951 to reach Rs. 6,237 crore in 1974. From a high base thus in 1974, it had a big boost during the Fifth Plan (197479) increasing by two and a half times. During the decade from mid1970s to mid-1980s, that coincides with the Fifth Plan and the Sixth Plan (1980-85), investment in PSEs increased by seven times. The increase in investment between the terminal years, 1974 and 1985, was monotonic.

If investment in PSEs in 1990, i.e., the end of the Seventh Plan (198590) is compared with that in 1974, the increase in investment was sixteen times higher. During the 1990s, this investment increased monotonically to be marginally less than double in 1997 relative to that in 1990. The high base of investment in PSEs by 1990, i.e., over four decades of development may be seen as a natural reason for its slower increase during 1990s. A similar picture emerges in the case of number of enterprises in India's public sector. From a low number at five in 1951 it reached 122 in 1974 and got doubled in number in 1990 relative to that in 1974.

The number ofPSEs in 1990 showed the peak of India's post-independence mixed capitalist development. During 1990s, the number remained more or less unchanged, implying increased investment in PSEs per unit during 1990s. In fact, during the whole period since their emergence there occurred increasing investment intensity in the PSEs (Table-I).

In national output, some of the enterprises in public sector contributed very little during the first two decades of planning, some contributed moderately and some contributed highly. Coal comes in the first category, petroleum second and lignite third. In 1968-69, coal contributed less than one- fifth of total output produced in PSEs which increased to 98 percent in 1996-97. The reason is 1969 nationalization of coal mines in India.

For petroleum it was an increase from 50 percent in 1968-69 to 96 percent in 1996-97. The backdrop is the 1973 oil crisis and nationalization of oil TNCs. For lignite, the PSEs contributed cent percent of national

l~

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The Relevance of Indian Public Sector Enterprises

Growth

of Investment

Table-l in Public Sector Enterprises

in India,

1951-97

Date/Year

Total Investment (Rs. Cr.)

Number of Enterprises

Investment Per Enterprise (Rs. Cr.)

01.04.H51 01.04.1956 01.04.1961 31.03.1966 01.04.1974 31.03.1979 01.04.1980 01.04.1985 31.03.1990 01.04.1992 31.03.1993 31.03.1994 31.03.1995 31.03.1996 31.03.1997

29 81 948 2410 6237 15534 18150 42673 99329 135445 147587 164960 173292 177599 193121

5 21 47 73 122 169 179 215 244 246 245 246 245 243 242

5.80 3.85 20.17 33.01 51.12 91.91 101.39 198.49 407.08 550.59 602.39 670.56 707.31 730.86 798.02

Source:

GOI, 1996-97:

7.

output during both the years, 1968-69 and 1996-97.

Regarding other commodities, for example, steel, the contribution of public enterprises got reduced from 56 percent in 1968-69 to 37 percent in 1996-97. For primary lead also, it declined from cent percent to twothird of national level of the product. For nitrogenous fertilizer it was a decline from 71 percent in 1968-69 to 32 percent in 1996-97. For aluminium and copper the contribution ofPSEs in national output became significant in 1996-97, being respectively 57 percent and 60 percent (Table2).

Capacities are instal1ed in enterprises for their long-term optimum utilization. What we find regarding PSEs in the Indian economy is that 59 percent of public enterprises recorded capacity utilization of more than 75 percent in 1996-97 while 15 percent of public enterprises recorded capacity utilization between 50 percent and 75 percent. Thus, 26 percent of PSEs recorded capacity utilization of less than 50 percent (GO!, 199697, Vol. I: 10).

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Table-2 Contribution of Public Sector Enterprises in National Production (Percentage Share, Product-wise), 1968-69 and 1996-97

1968-69

1996-97

17.66 100.00 50.83

97.88 100.00 95.95

55.68

37.50

Non-Ferrous Metals: Aluminium Copper PrimalY Lead Zinc

0.00 0.00 100.00 80.60

56.71 66.17 63.66 79.11

Fertilizers: Nitrogeneous Phosphatic

71.23 24.86

31. 79 24.37

Item

II

III

IV

Source

Fuel: Coal Lignite Petroleum Basic Metal Industries: Finisht j Steel

GOI, 1996-97:

10.

We can now see the pattern of investment within PSEs. It is the enterprises producing and selling goods that commanded more than twothird of the total investment in all PSEs during 1990s while enterprises rendering services contributed less than one-third. Within the former cognate group, it is power (electricity) followed by steel, petroleum, coal and lignite that commanded most of the investment. For example, in 1990, these cognate groups captured half of the total investment in PSEs or more than two-third of investment in enterprises producing goods. In 1997, the investment share of these cognate groups came to be more or less the same as percentage of total investment in PSEs but slightly higher as percentage of investment in enterprises producing goods. For enterprises rendering services, it is the financial services that commanded most of investment in such enterprises (Table-3).

Management

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Share of Industries Enterprises, 1990-97 Cognate

Table-3 in Total Investment (Percentage Share,

Group 31.03.90

in All Public Sector Cognate Group Wise)

Percentage Share as on 31.03.94 31.03.95 31.03.97

Enterprises Producing/ Selling Goods: Steel Coal & Lignite Power Petroleum

72.55 8.36 12.08 17.37 10.07

71.10 12.64 10.03 18.83 11.44

70.31 12.83 9.55 18.53 11.77

67.53 13.50 8.09 17.74 11.58

Enterprises rending services: Financial Services

21.18 9.71

28.18 11.81

28.63 11.43

30.41 13,47

6.27

0.72

1.06

2.06

n

under ill Enterprise construction

99329.30164959.87 (100.00) (100.00)

Total

Source: GOI, 1995-96: 7; GOI, 1996-97:

172437.70193121.59 (100.00) (100.00)

8.

As a whole, post-NEP performance of the public sector showed improvement. Share of public sector in Gross Domestic Product (GDP) rose during the 1990s (Table-4). This is despite the fact that this sector

Share

of Public

Table-4 Sector in Gross Domestic Share in GDP), 1980-81

Year 1970- 71 1980-81 1990-91 1991-91 1992-93 1993-94 Source: CMIE, 1996: 171.

Product

At Current Prices % Share Rs. Cr. 5,494 24,171 1,25,690 1,50,581 1,72,137 1,99,358

12.73 17.77 23.47 24.41 24.41 24.89

(percentage

= 100 At Constant Prices % Share Rs. Cr. 12,469 27.171 50,334 53,743 55,595 58,860

12.30 17.77 20.95 22.28 21.89 22.31

experienced rapid fall in tariffs, abolition of quantitative restrictions and increasing domestic competition during the 1990s (Nagaraj, 1997: 2875).

Among conventional indicators of performance of PSEs, one indicator is growth of sales relative to capital employed. During 1987-94, the percentage of sales to capital employed declined monotonically from 146.0 to 99.0.

This percentage had some improvement during 1994-97. The percentage of sales to capital employed in enterprises producing and selling goods reflected the same pattern while the percentage of sales for enterprises producing services declined monotonically during 1987-91 and had a fluctuating tendency during 1991-97 (Table-5). The other conventional indicator is profit and profitability. The percentage of gross profit to capital employed was more than 10 for any year during 1987-97, while the percentage of net profit to capital employed varied between 2 and 5 during the same period. The absolute net profit of PSEs is a subtraction of loss of lossmaking enterprises from profit of profit-making enterprises. The number of enterprises making loss was large enough but less than their sisters making profits, so that net profit remained positive during 1987-97. This net profit in fact rose monotonically during 1990-97, reaching in 1997 a figure around five times of what it was in 1990 (Table-6).

Table-S Percentage of Sales to Capital Employed in Public Sector Enterprises, 1987-97 Year

Manufacturing Enterprises

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 Source:

153.38 150.94 140.08 131.86 125.95 123.68 118.09 142.96 156.09 150.30 GOI,

1996-97:

Service En terprises 129.55 106.55 91.11 82.77 87.85 69.31 63.59 70.67 84.50 80.05

Total

146.12 137.72 125.14 116.25 113.47 105.11 98.88 115.33 130.45 125.42

1.

..

-

-

__

.-.

._-

-

50

The Relevance of Indian Public Sector Enterprises

enterprises through price push or by Government through imposition of higher administered price, it may show a path of public enterprises-led inflation.

At times, the managers in PSEs face the problem of showing quick profits. The failure to do so becomes synonymous with non-viability of the plant and thus its shift to another location. To check this possibility of shifting capital and even "capital flight," these managers may be prone to show high profits by quick extraction of minerals and metals or producmg goods for that section of people which reveals ready demand. The exhaustibility of some of these natural products like coal and petrol, the possibilities of technological substitution of minerals, etc., the question of perpetuation of inequality within the economy thus remain ignored.

Suggestions often come for following a middle path, e.g., that the financial performance of public enterprises has to be consistent with non-financial returns, such as employment generation, self-reliance, balanced regional development, which are some of the stated objectives of public enterprises (Sarma, 1995: 310). It is, however, not clear why public enterprises should at all be evaluated by the same indicators as are taken for evaluation of private onoes,when private goals are totally different from public goals (Rudra, 1992: 1628).

RELEV ANCE

OF PUBLIC

SECTOR

ENTEPRISES

IN A

LIBERALIZED REGIME A liberalized regime advocates the greatest possible use of markets and the forces of competition to coordinate economic activity. It allows to the state only those activities which the market cannot perform ... or those which are necessary to establish the framework within which the private enterprise economy and markets can operate efficiently ... (Pearce, 1986: 120). In essence, it means optimization of individual goals to the virtual exclusion of collective authority. It resembles laissez{aire. The legitimacy of public intervention in private economic activity raises the legitimacy of the mixed economy itself as an economic structure. The mixed economy is subject to attack on all sides because it supposedly lacks a logical foundation and a consistent justification. Its interventionary controls, and attempts to influence the distribution are anathema to the apologists for laissez}aire (Peston, 1980: 21). However, the apparent inability of a free market economy in the 20th century to achieve many important Management

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social goals such as full employment and stable growth has led to an abandonment of laissez faire economic policy (Pearce, 1986: 236). In principle, economic transactions that follow private optimization goals are likely to have public consequences which may be a sufficient reason for state intervention. The post-depression functions of the state in the context of liberalization is thought in terms of provision of public goods where the private enterprises are not interested and establishment of the legal framework which the private enterprises need but can not be entrusted to establish.

The relevance of state-led industrialization, the state being represented by the PSEs in the industrial sector, that was attempted in India up to 1966, rested on the following arguments: (i) In the early stage of development for the newly independent and partitioned India, the state had to capture the "commanding heights" of the economy. It was the state that could be competent enough to explore new investment opportunities, make lump sum investment and search for markets outside the country by trade-cum-diplomatic relations. (ii) Given the initial resource constraint, development via heavy industrialization strategy, especially the capital-intensive sector including infrastructure, had to be accomplished by the state. The large outlays required for such investment was beyond the capacity of private enterprises; also such capital-intensive industries and industries in infrastructure having long gestation lag, no immediate profits and low stream of future profits, couJd be of no interest to the private entrepreneurs. Stateowned and controlled infrastructure thus was planned to support private enterprises, often by providing state-subsidized inputs (Nayar, 1997: 30). (iii) For social consensus and political support, the state had to have socioeconomic political goals like investment in social sector, in addition to directly productive investment channels and opportunities.

The liberalization regime in Indian economy does not in principle ignore the positive role of the PSEs in India's industrialization. In the framework of the New Economic Policy, public sector industry has an important role as an autonomous, competitive and efficient sector, to provide essential infrastlUcture goods and services, development of natural Management & Change, Volume 4, Number 1 (January-June

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The Relevance of Indian Public Sector Enterprises

resources and areas of strategic concern (GOI, 1992-97, Vol. II: 111).

For ensuring a more positive and productive role of the PSEs, the Planning Commission of India has initiated reforms in public enterprises which involves modernization, rationalization of capacity, product-mix changes, selective exit and privatization (GOI, 1992-97, Vol. II: 111). The objective is to make the PSEs viable, efficient and competitive. The Ninth Planning Commission stresses on technology and institutions to make public enterprises reform a success. In the changing economic environment, technology will be a major tool to improve competitiveness and efficiency of public enterprises. Their capability to develop and use technology effectively or to integrate technology in their corporate strategies (expansion, diversification, marketing, etc.) is weak now. The new reform initiative needs to address this through building active linkages among R&D laboratories, educational institutions and public enterprises. This is vital in the emerging interdependent and globalizing economic environment (GOI, 1992-97, Vol. II: 111-112). As a part of liberalization presently many regulations (price, distribution, investment and import controls) are being dismantled. This liberalization not only calls for restructuring of enterprises but also of the Government in the governance of industrial growth and management or inter-face with the enterprises. A new institutional capability is needed in Government that is responsive to environmental change a long with professionalism that can facilitate operation of market force ... (GOI, 1992-97, Vol. II: 112).

In practice, however, the government has started allowing private initiatives to dominate the space of investment allocation. For example, public sector investment projected as a percentage of total investment came down to 45.2 in the 8th Plan (1992-97), from 57.6 in the 5th Plan (1974-79),52.9 in the 6th (1980-85), and 47.8 in the 7th Plan (198590) (GOI, 1992-97, Vol. I: 44). The Government believes that'private sector initiative can reduce the need for public sector investment (GOI, 1992-97, Vol. I: 46). The changed attitude of the Government ofIndia is a reflection of the global changes since the 1970s when the governments across countries have privatized state-owned enterprises, put public services out of tender, deregulated utilities and other industries, slimmed their bureaucracies, and struggled to cut taxes and public spending (The Economist, 1999: 77).

As a reflection, in the Union Budget 1998-99, disinvestment in Public Sector Enterprises namely GAIL, VSNL, CONCOR and laC was Managemcnt

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announced. To underscore the government's commitment to privatization, the Budget 1998-99 also indicated that in the majority of cases, Government shareholding in Public Sector Enterprises will be brought down to 25 percent. However, the government will continue to retain majority holding in PSEs involving strategic considerations (GOI, 1998-99: 103). The recent economic reforms by the government includes delicensing of coal and lignite, petroleum (other than crude) and its distillation products and bulk drugs, delicensing of sugar, dereservation of coal and lignite and mineral oils (GOI, 1998-99: 8). Also, the Indian Electricity Act 1910 and Electricity (Supply) Act 1948 have been amended to provide for private investment in power transmission (GOI, 1998-99: 8). The economic reforms also include measures that seek to promote private initiatives for export promotion and other key objectives (GOI, 1998-99: 8). In fact, through a series of statements on Industrial Policy, the private sector has been permitted to produce in key areas like oil exploration, power generation, telecom services, etc. This inclusion of the private sector does not necessarily involve retreat of the state in absolute terms, though, in relative terms it amounts to a retreat (Reddy, 1999: 2992). The Sick Industrial Companies Act (SICA) has been amended to bring public enterprises within its jurisdiction. The retreat of public enterprises may be guessed from the possibility of exit of public enterprises in terms of closure or the possibility of exit of people engaged in these enterprises. The coexistence of dismantling of industrial licensing and liberalization of international trade processes is accepted as the example of retreat of a regulatory state (Reddy, 1999: 2992). Beedham also finds that: Globally, the recent advances in technology are not only making the movement of physical objects, of money and of ideas far easier and cheaper than it has ever been before, but are doing it in ways that governments find it hard to interfere with .... The huge growth in the absolute amount of global wealth and trade since the 1950s, the involvement in trade of a much bigger part of the world and above all the revolution that the late 20th century electronics has caused in the movement of information and money have genuinely altered the world and, in the process, have arguably trimmed the power of the state (Beedham, 1999: 38).

The trimming of power in no case implies that the state has lost its authority to function as a separate entity in the global economy. Historically for the late starters on the path of industrialization the state has played a central role. The non-institutional nature of credit markets, the problems of failure in markets for products, the segmented and fragmented markets Management

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for. inputs all show the necessity of an active state. "Even in late stages of industrialization, the success story of Japan underlines the imperative of state leadership in restructuring the economy in pace with the rapidly changing technological frontier, in raising and re-allocating massive amounts of long-term industrial finance and in underwriting the risks of innovations" (Bardhan, 1985: 37). The open world has not affected the prime power of the state within its borders, namely the power to tax its citizens and the power to spend their money (Beedham, 1999: 38). India is alleged to be an overdeveloped state, perhaps following the need of the colonial administration that often overshadows the society and social needs. In the light of experiences of firms in centrally controlled economies, the World Bank concludes that "governments that enforce financial discipline and foster competition will stimulate restructuring in enterprises, regardless of ownership." The Bank at the same time says that "many firms get stuck in the early stages. Most adjustments have involved downsizingof output, employment, and assets. Managers have been survival-oriented; like turnaround managers everywhere, they have focused on sustaimng current cash flow" (World Bank, 1996: 47). Regarding PSEs' reforms in China in the recent past, China has not taken ... dramatic steps to end the flow of subsidies to state-owned firms; in fact, in China the frequency with which the government has announced new state enterprises refonTI programmes suggests how difficult reform really is (World Bank, 1996: 46-47). In the context of economic liberalization initiated globally, it seems a necessity in India to rethink the areas where the state can shoulder responsibilities and the areas where the initiatives can be left to the individuals. In fact, as a practising entrepreneur, the state has to retreat in some areas such as markets for pure commercial goods and services, and has to work both as a regulator and facilitator in public goods. For example, if infrastructure continues to impede a higher as well as sustainable growth path and if the infrastructure sector itself suffers from resource constraint, the government will need to promote greater private sector participation in infrastructure (Asian Development Bank, 1999: 136). Similarly, if capital-cum-credit market in India is ill-informed to give adequate and correct information to the investors and is too weak to compete with Multinational Banks (MNBs) who enter in addition to the other types of inflow following financial liberalization then the state

will be the appropriate institution that can develop this market vis-a-vis global formation.

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It is not only because of market imperfection but also for underdevelopment of markets that the state has to be an activist. The information problems related to development of markets in the economies like India "go beyond those addressed by well-functioning institutions to protect property rights" (World Bank, 1997: 72). A state that functions well through PSEs can promote the information network also when it involves in-house R&D, its commercial use and collaboration with foreign firms and countries. A well functioning network of PSEs also promotes competitive environment within the economy. In addition to all these, the major investment decisions have to be shouldered by the state and executed through the PSEs. "Post-war Japan's development of its steel, coal, machinery, and ship-building industries illustrates this rationale" (World Bank, 1997: 72). The point is to improve the performance of the PSEs and not the withdrawal of the PSEs from the core areas of the economy.

One major reason why the fundamentals of an economy like India remain strong is strong state intervention through the PSEs in India's industrial sector. There is no reason why the withdrawal or reducing presence of the PSEs should be suggested in India's industrial sector for positive and increasing presence of the private enterprises. There is no crowding out of investment when the industrial sector itself is still in a rising stage, along with low credit-deposit ratios in the financial sector. There is also no reason why private and public enterprises should be compared by the same yardstick when private goals and public purposes are different.

It seems that with economic liberalization, many of the regulations have become obsolete or anti-productive. If they really are, those regulations are to be abandoned. Lesser bureaucratization does not require reducing role of the PSEs nor withdrawal of the state from the industrial sector.

What is needed is prudent regulation by the state.

TENT ATIVE CONCLUSIONS The state in India had to accept the role of an entrepreneur following the Second World War, the Independence Movement and the Partition.

In an accepted mixed capitalist economic structure, the task of the state was supposed to be achieved by the public sector. The PSEs were assigned the task of attaining the commanding heights of the economy via controlling capital goods industries. The stategy failed. A shift from QRs regime to OD! regime led to a shift from semi-autarky to dependency. The question Management

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56 The Relevance of Indian Public Sector Enterprises on exclusion of people in the whole process remained unanswered.

The fact is that from the very selection of enterprises to their location and functioning, a complex matrix of interests works that often obstructs the perfonnance of the PSEs. There are political managers and bureaurats-. converted rent-seekers in this nexus. In addition, there are powerful trade unions in PSEs, who effectively negotiate for increasing wages. The enterprise: managers, some of whom enjoy the confidence of the political bosses, accept a high-cost enterprise by taking shelter under administered price.

While there is only one objective for the private enterprises, namely profit maximization, the PSEs have multiple objectives some of which are not explicit. In such a political-economic environment, it becomes confusing to evaluate the PSEs without evaluating the sources where they originate from and who they really serve.

Some of the tentative suggestions for the improved functioning of the PSEs in Indian economy, understood to be proactive rather than reactive, and absolute inter-temporal rather than relative in a static frame, are the following: (i) Gradual imposition of budget constraints and hence reducing subsidies; (ii) Gradual commercialization, that is, market-orientation and competitiveness; (iii) Credible threat of denationalization and privatization; (vi) Political non-intervention in any of the functions from the location of the plant to the appointment of top management; (v) Accountability of these enterprises to the Parliament and transparency in operations; (vi) Non-use of administered price to convert loss into profits; (vii) Different sets of rules regarding infrastructure and other products within the PSEs. The role of the state in the TWCs has become more important in the 1990s, since a liberal internationally competitive regime requires a bl;;:tterguidance by the State. To be a better guide, the State has to acquir,e more power. The exercise of this State power has to be internally legitimized and externally shock-proof. The internal legitimacy of State functioning has to be ensured by consensus expressed by people. Independent industrialization in India linked with the global order is a corollary.

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ABBREVIATIONS CMIE DMEs FERA FIPB GATT

GO! IFIs ILPIC IPR MRTP Act NEP ODI PSEs QRs SAP TNCs TWCs UNIDO US

57

USED Centre for Monitoring Indian Economy Developed Market Economies Foreign Exchange Regulation Act Foreign Investment Promotion Board General Agreement on Tariffs and Trade Government of India International Financial Institutions Industrial Licensing Policy Inquiry Committee Industrial Policy Resolution Monopolies and Restrictive Trade Practices Act New Economic Policy Open -Door -Industrializa tion Public Sector Enterprises Quantitative Restrictions Structural Adjustment Programme Transnational Corporations Third World Countries United Nations Industrial Development Organization United States

REFERENCES Alvi, Hamza (1982) "State and Class Under Peripheral Capitalism," in H. Alvi and T. Shanin (eds.) Introduction to the Sociology of Developing Societies.

MacMillan.

Asian Development Bank (1999) Asian Development Outlook. Ox.fordUniversity Press.

Bagchi, A. K. (1986) "Public Sector Industry and Self-Reliance in India," in D. K. Bose (ed.) Review of the Indian Planning Process. Calcutta: State Publishing Society.

Bardhan, P. (1984) The Political Economy of Development in India. Delhi: Oxford University Press.

Beedham, Brian (1999) "The New Geopolitics," The Economist, July 31-Aug. 6, London.

Bhagwati, J. and P. Desai (1970) India, Planningfor Industrialization. London: Oxford University Press.

Bienefeld, M. A. (1982) "The International Context for National Development Management

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The Relevance of Indian Public Sector Enterprises

Strategies: Constraints and Opportunities in a Changing World," in M. Bienefeld and M. Godfrey (eds.) The Struggle for Development, National Srategies in an International Context. New York: John Wiley and Sons Ltd. Bose, P. K. and M. Mukherjee (eds.) (1985) P. C. Mahalanobis: Papers on Planning. Calcutta: Statistical Publishing Society.

Byres, T. 1. (1982) "India: Capitalist Industrialization or Structural Stasis?" in M. Bienefeld and M. Godfrey (eds.). op. cit.

Cahan, L. A. (1994-95) "The Concept of Property in Marx's Theory of History: A Defense of the Autonomy of the Socio-Economic Base," Science and Society, 58(4) Winter.

Chakravarty, Sukhamoy (1987) Development Planning: The [ndian Experience.

Oxford: Clarendon Press.

--( 1997) Writings on Development. Delhi: Oxford University Press.

GATT (1993) Foreign Trade Policy, India. Vol. I. Geneva.

Government of India (1952) First Five Year Plan, 1951-56. New Delhi: Planning Commission.

--(1956) Second Five Year Plan, 1956-57. New Delhi: Planning Commission.

-(1952) Fifth Five Year Plan, 1992-97, Vol. I. New Delhi: Planning Commission.

-( 1991) india's New Economic Policies. New Delhi: Ministry of External Affairs.

--(1993) Economic Survey, 1992-93. New Delhi: Ministry of Finance.

--( 1994) Economic Survey. 1993-94. New Delhi: Ministry of Finance.

--( 1995) Economic Survey. 1994-95. New Delhi: Ministry of Finance.

--( 1996) Ecol1omic Survey. 1995-96. New Delhi: Ministry of Finance.

--(1997) ECOl1omic Survey. 1996-97. New Delhi: Ministry of Finance.

--( 1997) Public Entelprises Survey, 1996-97, Vol. I. New Delhi: Ministry of Industry, Department of Public Enterprises.

Gurley, 1. (1975) "Rural Development in China between 1948-1972 and the Lessons to be learned from It," World Development, 3(7&8), July-Aug. Kurien, C. T. (1987) "State and Market in Economic Process, Some Basic Issues," Economic and Political Weekly, xxii, Annual No., May. Nagaraj, R. (1997) "What has Happened since 1991? Assessment of Indian Economic Reforms," Economic and Political Weekly, xxxii (44 & 45), November.

Nayar, B. R. (1997) "Nationalist Planning for Autarky and State Hegemony: Development Strategy Under Nehru," indian Economic Review, xxxii (I).

Patnaik, P. (1984) "Market Question and Capitalist Development in India," Economic and Political Weekly, xix, Annual No., August.

Pearce, David, W. (1986) The Dictionary of Modern Economies. London: Macmillan.

Peston, Maurice (1980) The Nature and Significance of the Mixed Economy. in Lord Roll Ipsden (ed.) The Mixed Economy. London: MacMillan Press.

Raj, K. N. (1986) New Economic Policy (Y. T. Krishnamachari Lecture). Delhi: Oxford University Press.

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Rangel, Carlos (1986) Third World Ideology and Western Reality. New Brunswick, USA: Transactions Books.

Reddy, Y. V. (1999) "State and Market, Altering the Boundaries and Emerging New Balances," Economic and Political Weekly, xxxiv (42 and 43), Oct. Rudra, Ashok (1992) "Privatization and Deregulation," Economic and Political Weekly, xxvii (30), July.

Sam1a, Atul (1995) "Performance of Public Enterplises in India," in Dilip Mookerjee (ed.) Indian Industry. Policies and Pelformance. Delhi: Oxford University Press.

Singh, Manmohan (1986) The Quest for Equity in Development (R. R. Kale Memorial Lecture). New Delhi: Orient Longman Ltd. Tandon, Pankaj (1997) "Efficiency of Privatized Films, Evidence and Implications," Economic and Political Weekly, xxxii (50), December.

The Economist (1999) April 10-16, London.

United Nations Industrial Development Organization (UNIDO) (1990) India, New Dimensions of Industrial Growth. Vienna: Basil Blackwell Ltd. Whynes, David K. and Roger A. Bowles (1981) The Economic TheOlY of the State. Oxford: Martin Robertson.

World Bank (1996) World Development Report. Oxford University Press.

World Bank (1997) World Development Report. Oxford University Press.

Bhaskar Majumdar, Ph. D., is Reader, G. B. Pant Social Science Institute, Allahabad-211019. He has published a good number ofresearch papers injoumals of repute. His current research interests include third world industrialization, political economy of globalization, trade and industrialization, India's current economic reforms, and economic theory.

Management

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Volume 4, Number 1 (January-June

2000)

TECHNOLOGY PROSPECT

AND LABOUR

IN RETROSPECT

AND

Vijay K. Seth The relationship between technology and labour has been of great concern amongst social scientists. /n this paper, an attempt has been made to explore theoretical and emprical foundations of different schools of thought that have idelllified various kinds of relationships between technology and labour. While analyzing this relationship in historical perspective it becomes apparent that difFerent schools of thought emerged at different stages of the evolution of technology. Therefore, differences amongst them can largely be attributed to changes in the relationship between technology and labour that have occurred at different stages of maturity and complexity 6f technology.

INTRODUCTION ii0 take revenge for the theft of fire from heaven, Zeus helped in

T .~

the creation of a woman out of earth called Pandora (all gifted).

When Eplmetheus, brother of Prometheus, marned her he accepted from Zeus a wedding gift, a box known as the Pandora's Box; which contained all human miseries. The inquisitive Pandora opened that box from which all miseries escaped and spread over the earth and only hope remained in the box. This ancient myth has made apparent to human beings that they are destined to learn and let their learning guide their fate. It is their accumulated stock of knowledge and learning translated in the form of technology which has sustained hope from antiquity up to now. The moral of this myth should not be lost by the scholars who need the warmth of the fire of knowledge for their survival.

It is the fire, when harnessed in the form of inanimate power which became the prime mover of the industrial revolution. Therefore, the process of transformation of the tool-making ape into a man can be viewed as increases in the number of material objects and material forces, more potent and more accurate than human muscles, that he could use to comple;>

Management & Change, Volume 4, Number I (January-June 2000) @, 2000 Institute for Integrated Learning in Management.

All Rights

Reserved.

,

62 Technology and Labour in Retrospect and Prospect

ment his effort. Human effort is nothing but labour, hence technology has transformed and has been transformed by labour.

Economists have a long tradition of academic interest in understanding the relationship between technology and labour. In mainstream economics, largely based on the neoclassical framework, technology is defined in terms of factor proportions. Therefore, each change in technology results in factor demand. How far technological change affects factor demand depends on the nature of technological change, i.e., whether technological change is embodied or disembodied, neutral or biased. Hence, one of the important debates which has occupied substantial space in academic writing regarding the relationship between technological change and labour, deals with the implication of the choice of technique on labour absorption, i.e., the possibilities of factor substitution. This debate found implicit and explicit expression in concepts like appropriate technology, intermediate technology, best-practice technology, middle-level technology and technological dualism.

Parallel to this debate in the mainstream literature of economics, there exists an alternative pool of knowledge based on the ideas of classical economists and further developed by Marxian economists. This view highlights the relationship between ownership of the means of production, nature of technological change and organization of work. Therefore, they study the relationship between technological change and labour with the help of ideas like surplus value, labour surplus and labour process. Recently, a new dimension has been added to these ongoing debates after the fall in the popularity of Fordist methods of production and rise of Toyotoism. This shift has been accompanied by the use of micro-electronics and information technology in the process of production. These changes in the manufacturing practices have resulted in flexible manufacturing accompanied by the desire to achieve labour market flexibility. This new reality has affected the thinking of mainstream economists as well as that of Marxian economists.

This paper attempts to understand fundamental premises on which these different theories are based to draw some important lessons for the policy makers who are dealing with various aspects of labour. For the sake of analysis, the paper has been divided into four sections. Each section deals with a specific theme regarding the relationship between technology and labour. The first section deals with the themes relating to the various implication of choice of technique on labour. Section two explains the isManagement

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sues associated with the relationship between technological change, creation of surplus value and surplus labour, and labour process. In section three the emphasis is on understanding of the relationship between flexible manufacturing and information technology and labour. Finally, in section four, main lessons from these debates are presented to make the policy makers aware about the different relationships which exist between technological change and labour.

CHOICE

OF TECHNIQUE

AND LABOUR

ABSORPTION

In most parts of the developing world, employment generation and the consequential wage payments is perhaps the only alternative to reduce poverty and to achieve re-distribution of income. Therefore, the objective of maximization of labour absorption in the manufacturing sector raises a fundamental conflict between the objectives of growth maximization and employment maximization. The choice available to any economy in this regard is not very simple because the decisions involve not only the employment of more workers with the existing state of technology but also the adoption of new technology and machines which may not lead to an increase in the employment of labour.

If we assume that an economy produces single output and its technology is consistent with neo-classical production conditions then there will be no conflict between current output and current employment maximization. In this kind of production conditions, output is maximized when productivity of the scarce factor is maximized. Therefore, as long as the marginal contribution of labour is positive, each increase in employment of labour is compatible with increase in production (Stewart and Streeten, 1971).

The conflict between the objective of output maximization and employment maximization emerges because in the real world each economy produces a variety of products, where each product has its own production function and therefore, its own factor requirements. This heterogeneity in products and technologies to produce them involves different choices in terms of product-mix and industry-mix to achieve alternative objectives (Stewart, 1977; and Stewart and James, 1982). If one also allows for technological change in each product and process, then employment growth mayor may 110tbe accompanied by growth in output. How far technological changes can affect labour absorption, depends on the nature Management

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66 Technology and Labour in Retrospect and Prospect

Most empirical studies have shown that the idea of fixed factor proportions is not supported by evidence. The studies on industrial sectors of different economies have shown that there exist different factor proportions in each industry in the developed and developing economies because prevailing capital-labour ratios in developing economies are usually a third of the capital-labour ratios observed in the case of developed economies (Robinson and Kidron, 1970). It is believed that these gaps in capital intensities between developed and developing economies may further widen if these measures are adjusted with the rates of utilization of capacity (Winston, 1974; and Seth, 1999).

The empirical measures of elasticity of substitution between capital and labour have also established that there do exist possibilities of substitution between factors in the developing economies, contrary to the view held by the exponents of the idea of fixed factor proportions (White, 1978).

The concept of technological dualism accepts that in the case of developing economies, the possibilities of ex ante substitution do exist; they do not exist ex post. Ex ante substitution takes place due to changes in factor proportions occurring through choices made regarding factor-mix, product~mix and size of the plant, whereas ex post substitution takes place through choices regarding crew-size and level of utilization of plant (Winston, 1974). The division of elasticity of substitution into ex ante and ex post categories suggests that even ex post factor substitution can occur in developing economies by varying the rate of utilization of plant. Hence, non-zero elasticities of substitution between capital and labour can be observed in the case of developing countries (Bruton, 1972; Diaz Alejandro, 1972; Lipsey, 1982; Seth and Bhasin, 1977).

The existing literature which deals with the relationship between labour absorption and technology has established a very strong relationship between them. However, empirical studies on labour absorption have observed that along with technological factors like capital intensity, economies of scale and size, possibilities of factor substitution, other factors like factor prices, market fundamentals, and labour market regulations also play important roles in affecting the absorption of labour (Hamermesh, 1993; Seth and Seth, 1994).

TECHNOLOGY

AND LABOUR PROCESS

The other important theme which deals with the relationship between techManagement

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Seth 67 nology and labour has originated from the debate on (a) whether average skill requirement is increasing with technological change, and (b) whether teclmology empowers workers or acts as an instrument of control over them.

Historical analysis of the power that owners of capital enjoy in bringing about technological change has been of great interest among classical as well as Marxian scholars. These economists viewed technological change as an instrument which provides immense power to the owners of capital. This power is used to reorganize production in-such a way that it increases control of capital over labour.

Smith observed the increasing division of labour along with the introduction of technology of mass production. He observed that there exists a strong association between material culture attained by a society and the degree to which their people have divided up their labour. The division of labour is a particular form of differentiation of the productive process, just as differentiation of productive function is a particular kind of cooperation. Social cooperation emerges when workers work collectively to complete a task; whereas differentiation of function occurs when those workers who cooperate perform qualitatively different jobs to complete a task.

"Thus if you and I are both pushing a wagon we are cooperating, but there is no differentiation of functions. If, on the other hand, you push while I drive the horses then clearly different functions are involved." Hence, division of labour is a specific form of functional division of tasks. In short, division of labour leads to specialization. The greater the degree of specialization, the more dexterous the worker becomes in his job.

It should be noted, however, that despite the fact that Smith eulogized the advantages of division of labour, he was aware that the productive advantages of the division of labour are only one side of the coin. He knew that, as division of labour advances, it divides tasks into several jobs where each individual worker concentrates on a nalTOWdomain. Therefore, the more the division of labour progresses, the more it expands the productive capabilities, but cOlTespondingly the job contents become more restricted.

Thus, the process of division of labour leads us to a paradoxical situation where increasing specialization which augments tIle wealth of a nation also has a tendency to make each specialist less and less able to appreciate that part of the wealth which is being created beyond the boundaries of his ever shrinking job content. The consequence of this process is that as people become wealthier in absolute terms they become relatively poor Management

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68 Technology and Labour in Retrospect and Prospect in relation to the totality of the material culture.

The ideas of Smith were further developed by Marx in his writings.

Marx was a serious student of technology and a keen observer of the socioeconomic consequences of technological change. He believed that through technology man establishes his relationship with the external and material world. However, while acting in the material world man transforms it for his own use and also in the process, inevitably, engages in an act of selftransfonnation and self-realization. "By thus acting on external world and .changing it, he at the same time changes his own nature" (Marx, 1959, Vol. 1: 198). The focus of Marx's work is on the relationship between technology and labour in the capitalist mode of production. Marx attached great importance to the instruments of production in understanding the nature of any society. He writes "Relics of by-gone instruments of labour possess the same importance for the investigation of extinct economical forms of society, as fossil bears for the extinct species of animals. The instruments of labour not only supply standards of the degree of development which human labour has attained but they are also indicators of the social conditions under which that labour is carried on" (Marx, 1959, Vol. 1: 200).

According to Marx, the capitalist production relations originated when growing profit making opportunities facilitated expansion in the size of the production unit which eventually led to changes in this production relationship. In the new production relations, fundamental to the understanding of association between technology and labour is the mutual interdependence between labour and owners of capital, in which labour is placed in an institutionally subordinate position. Since owners of capital enjoy a dominant position, they are able to either impose technological change or reorganize the work in such a way that it maximizes surplus value.

Marxian analysis on the relationship between technology and labour is quite complex. His analysis on the labour process is given in his concepts of absolute and relative surplus value. Marx explains the process of appropriation of absolute surplus value in the context of the objective conditions of production which owners of capital inherited from the earlier mode of production. Therefore, absolute surplus value is generated when owners of capital extend the length of the working day while the working class still maintains some control over the actual process of production.

The manufacturing system which was dominant during the early stages of industrialization depended on a high degree of work specialization in comparison to craft-based methods of production, where a craftsman performed Management

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a whole range of operations in the production of a single product. The manufacturing system broke down the task into a series of discrete steps and assigned each step to a separate worker. In spite of division of labour, the system of production in the initial stages relied on human skills and capabilities (Marx, 1959, Vol. 1: 604). Therefore production could be increased only by longer hours of work, because a ceiling on productivity growth continued to be imposed by limitations of human strength, speed and accuracy.

However, when working class resistance started against lengthening of working hours, competition among the owners of capital forced them to the extraction of relative surplus value. This required the historical transformation of the labour process from its inherited past into the specific capitalist mode of production where capital exercised domination through machinery. In his analysis, the machino-facture emerges when subjective and capricious elements are removed from the production system by using the knowledge of science. Science cannot be incorporated into technologies dominated by large-scale human intervention, because human action involves subjective as well as capricious elements and human beings depend more on the will of their own and therefore are not reliable and controllable inputs. To overcome these constraints on the maximization of productive efficiency, machinery was created which did not depend on human skills. When this stage has been reached technology becomes, for the first time, capable of indefinite improvement (Rosenberg, 1976).

Marx explains the relationship between technology and labour process in terms of extraction of relative surplus value through continuous revolutionization of the methods of production. The ever increasing use of mechanization makes it possible to make technical calculations without the help of experienced craftsmen and division of labour further reduces the knowledge content of the workman. These together result in reducing the importance of craftsmen in the process of production. Division of work into small segments reduces the time for the training of a worker on the job which helps in further reducing the power of the workers over the production process, because workers can be substituted very fast. Use of machinery also creates less jobs which helps in the creation of a reserve army of labour which exerts discipline on workers. Babbage (1971) makes this process of subordination of labour to capital more obvious when he writes "when capital enlists science in her service, the refractory hand of labour will always be taught society (sic!), which represents a typical exManagement

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70 Technology and Labour in Retrospect and Prospect ample of how power and knowledge have combined throughout history to discipline and render subjects docile" (Babbage, 1971: 368-369).

A systematic analysis of the relationship between technology, ownership of capital and labour process is available in the work of Bravem1an (1974). His work initiated a lively debate among contemporary Marxian social scientists. His work is related to the transformations that have occurred in the labour process and technology in the era of monopoly capital, a stage in the historical evolution of capitalism, defined and articulated in the study of Baran and Sweezy (1966). According to Braverman (1974), classical economists initiated the study of the problems associated with capitalist relations of production and their approach was further developed by Andrew Ure and Charles Babbage. "Between these men and (the) next step, the comprehensive formulations of management theory in the late nineteenth and early twentieth centuries, there lies a big gap of more than half a century, during which there was an enormous growth in the size of enterprises, the beginning of monopolistic organisations in industry and systematic application of science to production" (Braverman, 1974). The objective of the work of Braverman was to study the impact of these changes on the labour process.

His ideas are based on the premise that the objective of capitalist production is to maximize profit. This creates a fundamental conflict of interest between labour and owners of capital. In order to maximize the potential of labour, owners of capital have to control the process of production because workers cannot be relied upon to work in the interest of owners of capital. He writes, "workers who are controlled by general order and discipline are not adequately controlled because they retain their grip on actual processes of labour. ... To change this situation, control over processes of labour must pass into the hands of management" (Braverman, 1974: 53). Therefore, in the capitalist mode of production, technological change and scientific advances are used to subjugate the labour process in the hands of owners of capital or their representatives, the managers. To achieve control over the labour process, owners of capital adopt the use of machinery, automation and employ the methods of scientific management to reorganize the work process to achieve their objectives.

The founding father of scientific management, Fredrick Winslow Taylor took the idea of division of labour evolved by classical economists to its logically stretchable level. He believed that complex manual operations could everywhere be subdivided into simple routine operations and further this Management

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Seth 71 subdivision of task can be done scientifically by precise measurement of every movement involved and thus eliminating all inessential components of tasks (Taylor, 1947). Taylor's approach originated in response to the problems arising from setting piece-rates. Taylor evolved the system that could set pay rates objectively on the basis of precisely measured tasks, thereby eliminating shirking by workers as well as conflict over pay ratesetting (Taylor, 1919). Taylorism also advocated the increasing of industrial efficiency by achieving a complete separation of conception (the knowledge content of the job) from execution (exercise of manual labour) in accomplishment of the task. The separation between conception and execution can be affected (a) by reducing the knowledge content of the job by breaking down and fragmenting the task requiring little mental ability, leading to progressive de-skilling and degradation of work; and (b) to take away from the shopfloor, functions of planning and decision-making, and assigning them to expanding ranks of management.

While writing about the extreme form of division of labour in modem factories, Braverman (1974) mentions "we have much studied and perfected of late, the great civilised innovation of division of labour, only we give it a false name. It is not truly speaking the labour that is divided but man broken into small fragments and crumbs of life, so that all the little pieces of intelligence that is life in a man is not enough to make a pin or a nail, but exhausts itself in making the point of a pin or a head of a nail" (Breverman, 1974: 78-79). Hence, in the capitalist labour process, the collective body of workers perform simple tasks and "its very brain has been removed from the body, having been appropriated by management as a means of controlling the labour process" (Braverman, 1989: 35-47).

According to Braverman (1974), a significant change in the degradation of work occurs when owners of capital use machinery, automation and scientific knowledge to control the labour process. He adds that "the evolution of machinery from its primitive forms ... to these modem complexes ... can be described as an increase in human control over action of tools" (Braverman, 1974: 192-193). Therefore, the human understanding of nature gets manifested as civilization progresses in the increasing of control by humans over process of production by means of machines.

Braverman (1974) believes that the control of man over labour process acquires definitive form in the social setting in which machinery is being developed and used. He describes that in the capitalist system "machinery comes into this world not as a servant of humanity but as the inManagement

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72 Technology and Labour in Retrospect and Prospect

strument of those to whom the accumulation of capital gives ownership of the machines. The capacity of humans to control the labour process through machinery is seized upon by management from the beginning of capitalism as the prime means whereby production may be controlled not by the direct producer but by the owners and representatives of capital" (Braverman, 1974: 193). This suggests that the moment machinery is employed in the production process the worker is deprived of making even the point of a pin or the head of a nail because machinery makes it possible to transform the great coil of wire into millions of pins. Braverman (1989) argues that "now go back and read Adam Smith's argument having to do with the dexterity gained of a hand over and over again so on ..

You will notice that this modem technology has made complete hash of these arguments." Hence, in the capitalist mode of production, application of science, use of machinery and methods of scientific management are collectively used by the owners of capital, "like a rider who uses reins, bridle, spans, carrot, whip and training from the birth to impose his will" (Bravennan, 1989: 67-68).

A detailed presentation, given above, about Braverman's analysis suggests that scientific management is a pivotal feature of his description of the degradation of work in the twentieth century. He has tried to unveil the socio-economic interests that remain hidden behind technological changes. He provides a mode of evaluation of modem enterprises which in their quest for higher productivity, efficiency and profits use a: unique combination of modem science, technology and Taylorism to control workers by deskilling them. The analysis of Braverman regarding this unique relationship between ownership of capital, Taylorism and the nature of technological change generated widespread reaction among the scholars.

There are some scholars who broadly agree with the basic premise of his work but think either his approach needs further refinement or a new approach to establish the essentials of his ideas (Friedmen, 1977; Burawoy, 1979; Edwards, 1979; Zimbalist, 1979; Littler, 1982; Wood, 1982; Littler and Salaman, 1984; Knight et al., 1985; Knight and Willmott, 1990; Armstrong, 1988; Watson, 1986; and Thompson, 1989). It is difficult to elaborate the arguments of these scholars in detail here due to paucity of space. However, we are presenting here only those arguments that are directly related to his views on the relationship between technology and

labour.

Most scholars have criticized the basic assumption of his analysis that Management & Change, Volume 4, Number J (January-June 2000)

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the accumulation of capital necessitated management's control over the labour process and that Taylorism offered the most appropriate strategy to achieve this objective. This premise of Braverman has been questioned by some of the scholars because it has been observed that in the real world there are several options available to the management to establish control over the labour process without resorting to deskilling (Friedman, 1977).

Some other scholars argue that his analysis presents a scenario which creates an image that workers passively accepted the deskilling of their jobs without any resistance. The empirical work which has emerged within the labour process approach has observed a variety of forms assumed by the labour process and labour control depending upon the extent of labour resistance and its capacity to modify management strategies through participation in the contest for control (Friedman, 1977; Edwards, 1979; Zimbalist, 1979; Cornfield, 1987; Willis, 1988).

It is also being argued that Braverman's approach denies autonomous influence of technology, at an analytical level, ignoring that a given technological configuration may influence decisions of management due to the presence of rigidities and indivisibilities inherent in the equipment, and the extent of learning by doing achieved by the management regarding equipment (Child, 1985). Some scholars believe that Bravenrtan has followed mechanistic and economistic determinism in lieu of technological determinism by suggesting that if a technology is being designed and used within' a capitalist mode of production, it is necessarily impregnated with all capitalist values. This view cannot be accepted a priori because the innovation process is not entirely shaped by non-technical factors. It is because design choices and further refinements in the technology are constrained by the existing technology (Clark et al., 1988; Mclaughlin and Clark, 1994).

There are other scholars who point out that Braverman gives undue importance to Taylorism in his analysis and ignores several innovations in management thinking and methods which emerged in response to the growing unpopularity of Taylorism. The Human Relations School which developed in the early 1930s challenged many of the basic assumptions on which Taylorism is based (Mayo, 1949; Herzberg, 1966; Maslow, 1954; McGregor, 1960). After World War II, job redesign approach appeared, developed by neo-human relations approach, (Littler, 1982) and quality of

work life movement (Littler and Salaman, 1984) further developed management thinking based on premises totally at variance with Taylorism.

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Moreover, in terms of concrete instances of technology, its particular organizational form is determined by social formation in which technology is being developed. "Capital is never born by immaculate conception and hence there is no such thing as normal capital" (Sayer, 1986: 44). Therefore, particular organizational forms such as Taylorism are not universal stages through which all industrial enterprises pass. "In the case of Taylorism in the USA, peculiarities of the American labour market at the tum of the century with their exceptionally high rates of labour turnover (100-300 percent per year) made deskilling and extreme task specialization attractive to capital. (Sayer, 1986). Similarly, the scope of the Fordist organization and the pursuit of economies of scale in the mid-century was much greater in the enormous American market than in the much smaller Japanese market. However, for Braverman, other management theorists are essentially ideologists, since the changes which they prescribe such as job redesign, job enrichment, job rotation, etc., are cosmetic and function simply to "habituate the workers to deskilled jobs." He writes, "the successors of Taylor are to be found in engineering work designs and top management; the successors of Mayo are the maintenance crew of human machinery" (Braverman, 1974: 87).

It is also a historical fact that Taylorism was a short-lived phenomenon which died in the economic depression of the 1930s. Other technological developments that culminated in the year just before World War I turned out to be of greater importance with the birth of continuous-flowproduction which facilitated the machine paced work. The innovation of the modem assembly line at Ford's Highland Park plant in 1914 created a new organization of work. For the first time, work in the form of subassembly was brought to the worker at fixed work stations by a conveyor while components were stock-piled at the station. Unproductive movements around the production area were eliminated; the speed of work of assem. bly was now determined by a mechanical conveyor rather than by a foreman. The famous 5-a-day efficiency wage, also introduced by Ford in 1914 drastically reduced employee turnover and ensured the compliance and docility of the workforce. It was the assembly line that thus set the pattern for the next stage of the industrial revolution by a system of management that was more bureaucratic rather than scientific. Therefore, in retrospect, Fordism turned out to be a more appropriate label for modem

mass production methods rather than Taylorism. The belief of some of the historians of technological change in the dominance of Fordist methods of Management

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production and organization of work during the era of monopoly capital rather than in Taylorism merits attention.

As technology progressed, the division of labour on the assembly line was refined and workers were either assisted or replaced by ever more sophisticated tools and machinery. The increasing capital intensity of the technology, growing size of plants meant that a declining proportion of production workers could meet society's needs for mass-produced standardized goods. In the post-war period, a unique symbiosis emerged between the Fordist method of mass-production of standardized goods and the Keynesian prescription of the maintenance of near full employment situation to create mass-consumption (aggregate demand). The symbiotic relationship between the technology of mass-production and policy regime to create mass-consumption resulted in a period of continuous business boom and economic prosperity. The apparent triumph of Fordist bureaucratic management and mass production technology was not only based on rising real incomes for most of the workers, defined job classifications, pay scales, internal job ladders and career prospect long-term incentives for the working class. Formalized grievance procedures provided protection against arbitrary decisions by management. Seniority offered a degree of protection from lay-offs for older workers having firm-specific human capital. Large-scale production based on relatively stable labour force largely depended on the efficiency enhancing properties of implicit employment contracts. Economics of scale led to the dominance of a few firms in most industries resulting in the birth of monopoly capital. Price competition was largely avoided to maintain oligopolistic rent above normal return on capital. These economic rents were shared with the organized working class.

However, by the 1960s, alternatives to the Fordist methods ofproduction began to emerge. The economic miracle experienced by Italy in the export of textiles and furniture, distinguished by quality and designs, created a transition in the production system. Moreover, the methods of leanproduction developed by Japanese enterprises started assenting their supremacy by the 1970s. The final blow to the Fordist method of production was affected by the recession of the 1980s. The recession resulted in over-capacity in several key industries. In their efforts to maintain market shares when demands were falling for their products, firms followed the policies of product differentiation which reduced the size of production runs.

The necessity to produce a variety of products in small batches also reManagement

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duced the advantages of economies of scale and dedicated machines and equipment. These developments destroyed the basis of the economic rationale of Fordism.

FLEXIBILITY

AND LABOUR

Since the last two decades there have emerged a number of innovations in technology and organization of work, based on information technology and systematic automation including flexible manufacturing and computer integrated production. Developments in micro-electronics have created a new generation of computer numerical-controlled machines equipped with their own microprocessor-based controls, which have facilitated programming at the machine and offer far greater flexibility compared to the earlier machines. Accompanied by these developments there have been advances in industrial robotics. Such manufacturing systems have the advantage that they help in producing a variety of products with minor plant adjustments, Moreover such systems of production reduce the need for direct labour on the shopfloor.

The new technology has also affected work by eliminating conventional drawing boards and other drawing equipment and introducing in their place computer-aided design (CAD) systems. The CAD system contains input devices for information, a central processing and magnetic disk for storing information and a visual display screen. The application software enables different drafting and detailing operations to be controlled through computers.

These new developments have been described differently by different sets of scholars. Some scholars describe it as Post-Fordism or NeoFordism, Toyotoism or Ohnoism (after the inventor of Toyota's kanban system). Some other scholars describe it as flexible specialization (Piore and Sabel, 1984) or flexible accumulation (Harvey, 1989). Whatever name may be given to these changes, the core argument of these scholars is the idea of flexibility. Flexibility is required in production, design, inter-firm relations, labour market and labour processes. Here, we intend'to focus on only those aspects of the flexibility debate that have a bearing on the labour market, labour processes or organization of work.

In comparison to the nineteenth century craft workers, the Fordist method of production organized work in such a way that it limited the participation of individual workers in decision-making and reduced the Management

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Seth 77 knowledge content of jobs. The negative social and health implications of the Fordist model of work have long been accepted; work plan alienation became the rallying call of a new generation of post-1945 cities. The FordFlu was described as an illness brought on by the unique combination of heavy workloads and limited control over the pace and rhythm of work (Karesek and Theizelle, 1990). The new ways of work organization based on flexibility promise to reverse this trend. They are also seen as a form of organization of labour which will give workers more control over their work environment and will enhance their quality of life (Womack et al., 1990).

Flexibility in the production process can be achieved by using traditional labour-market segmentation. The labour market is segmented into primary and secondary labour markets. Primary market corresponding to the Fordist sector, consists of strategic production workers, managers and professionals whereas, the secondary market consists of low wage earners, with lower fringe benefits, poor working conditions, short-term and flexible labour contracts with high incidence of hire and fire. Atkinson (1985) observed that the pursuit of flexibility has resulted in horizontal segmentation of workforce. Since firms want to evolve a workforce which can quickly respond to unforeseen market fluctuations, development of new products and introduction of new technology, a new form of labour market segmentation has been created between the functionally flexible core labour force and the numerically flexible peripheral labour force (Atkinson, 1984: 14).

Functional flexibility is defined as the ability of the firm to adjust and deploy the skills of its manpower to match the changes occuring in the workload, production methods and product changes. Functional flexibility needs skilled and ,flexible workers to perform non-routine work associated with product and process innovation to cater to niche markets and to achieve economies of scope. This suggests that functional flexibility has strong linkages with the operational environment of the firm. Functional flexibility is essentially required to achieve economies of scope and to facilitate the speed of technological change and changes in the organization of production. To achieve functional flexibility a firm needs manpower with dual-skilling, cross-skilling and multi-skilling, i.e., polyvalent workers.

Therefore, functional flexibility necessitates hiring of workers who are competent in their skills with long-term employment contracts so that firms can add on skills through training and re-training to make them polyvalent, Management & Change. Volume 4, Number 1 (January-June 2000)

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versatile and more valuable assets. Increasing instability in the demand for products due to rapid changes in tastes and variety in consumers' demand also necessitates the achievement of flexibility on the extensive margin, identified as a process by which firms adjust their labour force in response to fluctuations in demand and output (Hart, 1987). This flexibility is defined as numerical flexibility (Atkinson, 1984, 1985) or external flexibility.

It should be noted that Pollart (1988,1991) and Curry (1993), define these flexibilities as flexibility in work (i.e. functional flexibility) and employment flexibility (numerical flexibility). In their approach too, flexibility in work refers to flexibility within the firm. Flexible technologies enable a more rapid transfer of machines and processes between production functions which need a workforce with flexibility. The examples that are being provided to explain the nature of flexibility in work are said to be a method of organization of work at the Third Italy, the Salzburg region in Austria, Bden-Wurtonberg area in Germany, Silicon Valley in California (USA)" Route 128 near Boston and the film industry in Los Angeles.

On the other hand, flexibility in employment is essentially a labour mar .. ket concept. As markets experience fluctuations and business cycles, man-. agements of firms need to adjust their manpower in accordance with fluc.tuations in output. It has been pointed out that employment flexibility has been practised by firms throughout the history of market economies, but its incidence has increased with the innovations in production process based on micro-electronics and information technology. Numerical flexibility is achieved through workers hired at less than standard wages, longer hours of work, lower amounts of fringe benefits and for smaller durations. These workers have been termed as "the dark side of flexible production" (Harrison, 1994 and Gringeri, 1994). These characteristics of numerical flexibility suggest that it leads to both cyclical and functional unemployment. Therefore, numerical flexibility increases insecurity among peripheral workers because it directly affects their income and employment security.

It should be noted that numerical flexibility directly attacks all the labour market institutions, which were evolved during the Fordist-Keynesian era, like employment security, minimum wage legislations and strong unions ..

It is because the practice of numerical flexibility cannot be achieved without changing labour market regulations to equip the firms to have freedom to hire and fire and to enter into flexible contracts with workers. This also suggests that the flexibility paradigm is not compatible with a Keynesian Management

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policy regime. This is also an historical fact that the economies that have provided the firms freedom to use numerical flexibility have discarded most of the labour market regulations that were introduced during the period when they were working under the Fordist-Keynesian policy regime by adopting structural adjustment programmes. One of the most important components of the structural adjustment programmes is the de-regulation of the labour market.

The flexibility paradigm claims that it is attempting to reinvent an entirely new craft form of production system which went into oblivion in the 19th century due to the emergence of a hegemony of the methods of massproduction (Pi ore and Sabel, 1984: 5). However, it has been observed that complexes like Third Italy do not reflect the Utopia of craft methods of production. These complexes are agglomerations of small firms which are a.ttempting to exist under very hostile market conditions. These firms are practising employment flexibility, and labour segmentation with very large income differentials. Craft paradigm exists in a very limited number of firms, whereas in a large number of firms workers do not possess powers enjoyed by the trained craftsmen. The workers are actually working in the informal and casual cottage industry through the putting-out system practised during the stage of proto-industrialization. Therefore, their working conditions are the worst in the market economies (Murray, 1987: 92 and Amin, 1989).

Scholars also suggest that inclusion of the Silicon Valley complex in the flexible craft category of production is misplaced. This is because such complexes are innovation-driven rather than flexibility-driven and their strategic advantage lies in their capability of introducing new products and processes rapidly and efficiently.

The replacement of standardized, one-product-fit-all, high volume production systems by market niches, mass customization and the need for rapid product innovations requires complete flexibility for proper coordination between markets and production systems. The relative growth of small firms can be attributed largely to this trend and as a consequence of restructuring on the part of big firms to adopt methods of "lean production systems" (Malecki and Todtling, 1994). Lean production systems require a tightly controlled availability of a stream of inputs according to the specification of production of a variety of products, in the right quantity, quality and at the right time (Just-in-Time). Some of these inputs are made available internally depending on the core competencies of the firm.

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80 Technology and Labour in Retrospect and Prospect Others are acquired through strategic outsourcing leading to a vertical disintegration of firms (Quinn and Hilman, 1994). Vertical disintegration results in forming inter-firm networks for outsourcing of inputs. As a consequence of the process of vertical disintegration, more jobs are created in the relatively smaller firms which leads to the growth of small and informal sectors in each industry. In these smaller and informal businesses workers generally have to work for longer hours for less wages, inferior working conditions and reduced employment security. Hence, the segmentation of workers into core and peripheral workers which initially develops within the large organization gets extended to other smaller firms. Therefore, there emerges a mass casualization and marginalization of the working classes.

Automation in the production process involving the use of computer aided design (CAD), computer aided manufacturing (CAM), CIE ClM, CNC machines, robotics and integrated inflexible manufacturing systems systematically affect worker and labour process by destroying craft knowledge and separating task skills of execution from those of conception (Wood, 1982). CNC were projected as a step towards the automated factory. According to the predictions made by the trade and business publications, these tireless machines, driven not by recalcitrant machinists, but by automatic instructions would solve problems of productivity and trade unions.

Braverman who studied the implications of CNCs on labour process ob.served that these machines have decomposed the job of a machinist into two parts. One part consisted the job of part-programming (of the machining instruction from drawing into instruction of computer), limited in the technical knowledge; the other job of machining tasks was virtually stripped of all their knowledge content. He concedes that the decomposition of jobs is not embodied in the NC technology because there can emerge "unity of this process in the hands of skilled machinists becaus~~ knowledge of metal cutting practices which are required for programming is already mastered by the machinist (Braverman, 1976: 199). The unity of the process is broken down to fragments and the jobs are cheapened by the profit maximizing behaviour of the owners of capital.

The study of the role of management's influence on the design of machines, in historical persp~ctive, suggests that systematic attempts have been made to design machines and tools which can marginalize the control of the machinist over the production process and minimize the need for highly skilled labour. The' design of CNC machines is based on an

.

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The installation of information technology takes the form of computer based information systems. These systems are installed to reduce complexity, unpredictability and inconsistency to achieve formalization, standardization, rationalization and routinization of information flows. This process helps in objectifying the subjective knowledge of workers and institutionalizes it in the organization. Therefore, with the introduction of the information system, the computer languages and symbols start mediating in the process of interaction within an organization. Hence, computer based information systems began to determine the content of dialogue and nature of relationship between workers and the rest of the organization.

Information systems make work intangible and its control over the labour process invisible because it can operate from a distance. It is this capacity of the system to control the worker from a distance which has facilitated the possibility of home-working, te1e-working, etc. (Curry, 1993: 101). Information systems also have to compress time and space and they have the capability to directly affect the system of work (Zuboff, 1982, 1982a). By making the procedures and action transparent, it distorts the operation of social r~lationship in the organization, viz. the loss of supervisory status and power, dissolution of work groups, inability on the part of workers to cover up for their mistakes and the possibility of helping their colleagues (Crozier, 1983: 92).

Inter- and intra-organizational computer networks that make it possible to transfer rapidly information and data bases, along with the facilities of teleconferencing have facilitated collaboration and cooperation among dispersed workers. This development has eliminated the need for co-location of workers working on the same task on a project. The possibilities of remote workstations and home working have increased the independence of workers. These developments have provided workers choices regarding flexi-time and flexi-work schedules to complete their work (Olsan, 1983).

However, it has been noticed that each of these flexibilities assume exploitative characters and can be used to impose greater control over Management

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82 Technology and Labour in Retrospect and Prospect workers. The new information technology has been able to create inanimate supervisors which have the capacity to supervise work from a distance, without getting emotionally involved in the personal needs and problems of the workers. The workstations scattered in space, far removed from each other, reduce workers' solidarity and dissolve shared work experiences. Telecommunicating reduces office and work station costs of the employers and shift them on to the employees. Increased dependence on electronic communication also results in certain psychological costs caused by the neglect of subjectivity in human communication (Child, 1985; and Kiesler, 1988).

Unlike earlier technological innovations, micro-electronics based automation has a capacity, on one hand, to eliminate certain jobs and on the other, to create new categories of workers. Computerization has helped in the simultaneous automation of production as well as management information systems (MIS). The concurrent automation of both the systems has facilitated in the elimination of several operations by programming them into computers by using thinking machines. These developments have provided preconditions for the elimination of some of the jobs. Moreover, in the micro-electronics based innovations, development of information systems is an integral part of automation. It not only affects the nature of manual work, but goes beyond this, affecting the organization of work itself.

Accessibility of information, cutting across several specialized skills necessitates redemarcation between traditionally well-described jobs. However, it should be noted that the acquisition of computer skills neither alw~ys results in job upgradation, nor does it always get translated into higher earnings for the workers.

CONCLUSIONS Here, an attempt was made to study the theoretical and empirical basis of different schools of thought, which have expressed in their own way the relationship between technology and labour. The study dealt with the relationship between technology and labour as described by the mainstream economists who have been influenced by the neo-classical economists, the classical economists, including the Marxian description and the thoughts of the scholars who have studied the relationship in the context of the flexibility paradigm.

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Seth 83 The mainstream economists viewed technologies as the combinations of different factor proportions which in tum determine demand for different factors, including demand for labour. Therefore, they studied the relationship between technology and labour essentially as the problem of choice of technique. Hence, in their analyses factor biases embodied in the technology are more relevant. Since technologies are either capitalsaving or labour-saving, elasticity of substitution between factors of production assumes greater importance in their analyses.

The essential argument of their approach is that if one uses labourintensive technology in the process of production, one may maximize current employment but at the cost of reduced productivity, efficiency and future employment potential. On the other hand, if one makes a choice in favour of capital intensive technology, it will increase productivity, efficiency and quality of the products with better rates of labour absorption in the future at the cost of higher rates of current unemployment. Therefore, according to these economists, while making a choice between different technologies one must visualize the trade-off involved between current and future rates of growth of output and employment.

Marx studied the relationship between technology and labour in the context of the quest of owners of capital to maximize surplus value. It is while maximizing surplus value that capitalists in the earlier phase of industrialization maximized absolute surplus value by using division of labour and extended working hours of the working classes. However, when workers' resistance against long working hours began, ownership of capital adopted the route of mechanization and automation to maximize relative surplus value.

Braverman studies the relationship between monopoly capital, technology and labour process, by accepting that the objective of the owners of capital during this stage of capitalist growth, is not only to maximize surplus value but also to control the labour process. These twin objectives according to him were achieved by evolving a symbiotic relationship between technology and Taylorism. Technological improvements were made to reduce the monopoly of craftsmen over the process of production and Taylorism was used to organize the process of production in such a way which facilitated the division of each task into jobs with less and less knowledge content. This process further disarmed the working classes by making it possible to substitute workers faster with reduced training periods.

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84 Technology and Labour in Retrospect and Prospect However, several scholars have contested the belief of Braverman on the uniqueTelationship between technology and Taylorism in the stage of monopoly capital. In fact some of the scholars believe that for a very long period (since World War I upto the 1980s) and over a vast space, it was Fordism which evolved a unique relationship between technology of mass production of standardized products and labour at the microlevel, along with macro-regulatory framework based on Keynesian prescriptions to achieve mass consumption which created continuous prosperity for the owners of capital and better working conditions for the working classes.

The emergence of stagflation which affected most of the developed market economies after the 1980s resulting in shrinking of markets, decline in the era of mass consumption of standardized products which paved the way for fragmented niche markets, eroded the basic structure on which the Fordist methods of production were based. Crises faced by the Fordist methods of production and emergence of flexible manufacturing has cre .. ated the need for flexible labour markets. The emerging relationship be. tween flexible manufacturing and labour market flexibility has caused several types of consequences for the working class.

The analysis of the nature of technological change under the flexibility paradigm shows that it results in simultaneous and continuous process of de.. skilling, re-skilling, multi-skilling and birth of new and death of old occupations.

It is because of the simultaneity and continuity of these processes that one can observe co-existence of de-skilling and re-skilling, and conflict and cooperation in the labour process. This is very much akin to the "continuous gale of the process of creative destruction."

The analysis of the relationship between technology and labour in the historical perspective clearly shows that to explain this relationship different schools of thought emerged because of differences in (a) the stage of development of industrial technology when the scholars were analyzing this relationship; (b) the questions that were posed by the scholars; and (c) finally what aspect of social reality they wanted to explain by analyzing the relationship between technology and labour. It is quite apparent that each school of thought is based on strong theoretical and empirical foundations and hence does represent certain aspects of social reality. However, acceptance of a certain school of thought by some of the scholars might be a matter of faith and for others still it may need empirical validation.

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and Labour in Retrospect and Prospect

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Vijay K. Seth, Ph. D. is Reader at Faculty of Management Studies, University of Delhi, Delhi-II 0 007. He had his doctorate from the Delhi School of Economics. He has authored more than 30 research papers, which have appeared in different national and international journals and four books in the area of his special interest. His forthcoming book is titled, Technology, Labour and Labour Market.

Management

& Change. Volume 4, Number

I (January-June

2000)

REW ARD AND COMPENSATION STRATEGY: ISSUES AND CHALLENGES

Sami A. Khan

The procurement, development and retaining of employees have never been so important than today in most of the organizations worldwide. Companies are relentlessly searching for ways to retain their core employees. Understanding the interlinkages between peljormance management strategy, training and development strategy. compensation strategy. and deployment of employees has become very vital for attracting, motivating and retaining good employees. In this era of restructuring and downsizing, much needs to be done by the employers to motivate their employees. The companies who are restructuring themselves are finding it difficult to keep up the morale of their employees. In many cases. the huge incentive and performance related pay systems have failed, and the psychological contract between employees and employers is under the process of redefinition. To sustain the motivational level of employees. organizations must demonstrate to them a close link between performance and rewards. This is the rationale which is advocated for the Lise of merit pay. But in spite of its attractiveness. the PRP and ESOP sometimes bring about results precisely the opposite from the desired ones.

The role of HR manager has to be a facilitator's one to encourage line managers in creating such an environment. The communication level between the different st'akeholders is also required to be high to dispel any misunderstanding and then a right kind of performance based work culture can be nurtured.

INTRODUCTION

1f

he decade of the 90s will be known for mergers, acquisitions, restructuring and downsizing in business history. Companies . started looking beyond the internal boundaries for repositioning themselves to face the eventuality of the new, complex and fast-changing business scenario. Though this was a difficult proposition for them as the rules ofthe game were changing very fast, some ofthem grabbed this opportunity nicely and became winners whereas some lagged behind. Gary Hamel reManagement & Change. Volume 4. Number I (January-June 2000) ~ 2000 Institute for Integrated Learning in Management. All Rights Reserved.

92 Reward and Compensation

Strategy: Issues and Challenges

marks that, "simply catching up to where others have been is necessary to stay in the game, but the winners will be those companies who have the ability to invent fundamentally new games." He is of the view that whatever any organization needs to know to create the future, it can. Microsoft knew what it wanted as did CNN. He poses a question: Why was it CNN rather than the BBC that created the global news network?!

In fact, the success of the company depended on its adaptability, re~ponsiveness and the extent of new learning. A business strategy with a facilitating structure, system and processes acquired more attention in the firms at the tail end of the twentieth century. The people management function also gained more status in the last decade, though now it is under much pressure to deliver results serving the business strategy of the firm. Much have been written about business strategy and its importance in creating competitive advantage. Anderson (1997) prescribes in this regard that a complete business strategy should have three key components: (i) an operating strategy (ii) a financial strategy, and (iii) a people strategy. He suggests that the HR and the corporation's management group should engage themselves in the strategic management process which links business strategy, organizational capability and people strategies. Discussing his experiences at Amoco Corporation, he avers that the HR function has developed a "Renewal Star" framework (Figure-I) which is the focus of the corporate-wide change process. The people and reward strategies are important ingredients of this change process at Amoco.

LINKAGES BETWEEN THE BUSINESS STRATEGY WARD AND COMPENSATION STRATEGY

AND RE-

The procurement, utilization, development and retention of employees have never been so important in most of the organizations worldwide. Companies are relentlessly searching for ways to retain their core employees. Adoption of merit payor performance-related pay, employee stock option plans (ESOP), gain-sharing and profit-sharing plans are very common practices being used to lure the core workers in recent times. The shift from "compliance" to "commitment" has forced managers to regularly search for newer ways of providing motivational inputs to reinforce self-regulated behaviour among employees in the organization. In fact, the reward and compensation strategy has become one of the important parts ofHR strategy. Ina country like India, it assumes a central focus of the HR strategy (Figure-2). In India, the Management

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Figu re-I: Amoco Renewal Star: Integrating

• Mission, Vision, Values, Goals and Strategies • Strategy Reformulation

• Amoco Performance Management Process • Amoco Management Learning Center • Recruiting • Career Management • Diversity

• • • •

Recognition and Reward Amoco Performan.ce Share Variable Pay Gainsharing

Source:

Based

on Anderson

Plan

(\ 997: 20).

Activities

• • • •

Business Units Decentralization Delegation of Authority Corporate Centers Study

• • • • •

Cost Management Management Principles Task Force Assessment Process (Surveys) Continuous Improvement: Project Spring Business Process Reengineering Continuous Improvement!

Employee Involvement Quality Customer Focus

94 Reward and Compensation

Strategy: Issues and Challenges

aggregate wage bill of 100 large companies having a turnover of more than Rs. 300 crore in 1998-99 has increased by 13.2 percent from Rs. 8,344 crore in 1997-98 to Rs. 9,447 crore. Even companies like Tata Steel, TELCO, Grasim, Associated Cement, Reliance, Mahindra & Mahindra, Century Textiles, Voltas, and Eveready among others have failed to check the rise in their wage cost.2 Figure-2: Relationship Between Business Strategy and Compensation.

Strategy Business Strategy

~ Deployment

<

St'"t~ ~

HRStrategy

>

"II

Performance

Reward & . ~ilt,gy comp,n'inst,ateg,lC(, Training & Development Strategy Competitive Advantage

To understand the interlinkages between the performance appraising strategy, training and development strategy, compensation strategy, and deployment strategy is very vital for HR managers for attracting, motivating and retaining good employees. This has been stressed by the proponents of both schools ofHR strategy, i.e., hard approach (Michigan School) and soft approach (Harvard School).3 Beaty and Schneier (1997) using Treacy and Wiersema's (1995) model suggest HR executives to align their compensation strategy with the organization's primary strategic path to competitive advantage. These paths may be: (i) operational excellence, (ii) product leadership, and/or (iii) customer intimacy (Table-1).

An operational excellence strategy following firm is a low price provider. It builds operational systems that contiimally reduce cost while offerManagement

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j

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Table-l Strategic Choice of the Firm and its Relationship with Reward, Performance, and Development Strategies

HR Strategies

Operational Excellence

Product Leadership

Customer Intimacy

Work D~sign

• Centralized/Controlled • Strict policies/procedures

• Coordinated • Teams (cross functional)

• Autonomy • Know the customers' needs

• Total cost productivity • Errors • Waste • Abandoned calls • Lost customers/accounts • Net sales head count • Times/deadlines met

• % Sales from new products

• Customer guarantees • Customer retention rate • No. of referrals from current customers

Rewards

• Team productivity awards • Profit sharing tied to performance criteria • Skill-based pay

• Team innovation awards • Competency-based pay

• • • •

Development

• Strong orientation on expectations, rules • Predictable career ladder

• Employees responsible for learning • Mandatory Competency growth • Feedback on professional competency growth

• Oriented toward long-term focus with customer • Not a lot of leaders • Acts as a consultant to customer/partner

Performance

Measures

Source: Adapted

from Beatty and Schneier (1997: 32)

(e.g., lastJ years) • Margin • Sales growth • Customer growth • Industry accolades/recognition • Copyrights • Patents

Individual awards System awards Nonfinancial awards "Fee for Service" awards

96 Reward and Compensation

Strategy: Issues and Challenges

ing a quality product which adds greater value to its customers than the competitors' products. The right kind of behaviour can be reinforced using gain sharing plan of compensation in this kind of scenario (Stack, 1992; Becker and Huselid, 1997). A firm with an operational excellence strategy focuses on short-term production objectives, avoids waste, and is concerned more about the quantity. Some of the examples include: Federal Express, Dell, and Nucor (Beatty and Schneier, 1997).

An organization pursuing product leadership strategy puts primacy on innovation, has long-term focus, is antibureaucratic, is driven by learning, has high tolerance for ambiguity and offers a greater degree of risk-taking to its employees. These firms provide their employees with cross-functional collaboration and encourage a high degree of creative behaviour and entrepreneurial mindset. Companies like Sony, Glaxo, Merck, 3M and Intel among others are true product leaders in this regard. Whereas, firms such as Four Seasons, Airborne, Roadway, Home Depot, and Cott following a customer intimacy strategy focus on providing unique customer solutions and treat it as the source of their competitive advantage. In these organizations, reward management plays a critical role and focuses more on the primary contact of employees with customers to reinforce employee networking, communication and relationship-building with the customer to enhance the degree of customization (Beaty and Schneier, 1997).

The relationship between the strategic choices and reward and compensation strategy of a firm is quite evident from Table-I. But it depends to a large extent on the history, culture, mindset of the workforce, and ownership of the firm to adopt a mix of reward strategy which facilitates the right kind of learning inculcating the right kind of behaviour among its employees. Beaty and Schneier (1997) advocate that besides HR's role in executing the business strategy, the role of managing a cultural transformation by shaping the mindset and behaviour that impact on the firm's operational and financial outcomes is very important for HR managers. The reward strategy adopted to reinforce the right kind of mindset and behaviour among people is the most lethal weapon in the hands of HR managers in this regard. In fact, for retaining good people, the compensation decisions have become very strategic in the present scenario. "Compensation strategy has become central to many companies' businesses and they are concerned less about acquiring physical resources and more about how their human resources can efficiently exploit them," is the view expressed by Richard Walker, who has recently written a report on "Motivating and Rewarding Managers" for the Management

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2000)

I _E"'''.

ii. __

'm.••.••• "•• ,,__

J

Khan 97

EIU, a sister company of The Economist. Albert Knab, head of compensation and benefits at the Stuttgart offices of Daimler Chrysler, a company which is going through a cultural change, also opines that "compensation policy is central to supporting the company culture" (The Econolllist, 1999).

But the adoption of compensation and reward strategy poses certain fundamental questions which are supposed to be answered before going for its execution. The traditional job evaluation method is becoming irrelevant and most of the companies are adopting skill or competency based compensation plans these days. They are identifying compensable skill and competency blocks and adopting mechanisms to certify these blocks and translate them into pay packages. Some of the objectives of these plans as enunciated by Lawler (1994) are as follows: To signal the employees that continuous learning is valued and is a key to the organization's success; To provide employees an incentive or reward to acquire additional skills and competencies which are relevant in the company; To remove job barriers to encourage flexibility or multi skilling; To establish a workable, agreed-upon pay structure; To explain/reduce disputes in terms of skill differences; and To ensure that the pay arrangement supports other human resource programmes such as training and career planning.

DESIGNING

RELEVANT SKILLS AND COMPETENCIES

In traditional job evaluation methods, the jobs are valued in terms oftheir relative worth and their contribution to the overall organizational goals. Apart from grading, ranking, factor comparison, and point methods, the Hay method is widely used in organizations. More than 5,000 employers use it worldwide, and 130 out of the 500 largest US corporations have been using this method for long. This method uses a combination of both factor and point methods of evaluation. Hay chart lays emphasis on three key areas of a job know how, problem solving and accountability factors inherent in a job.

Many companies have redefined their old Hay-charts to suit the demands of the emergent business scenario. Hallmark is one of the good examples in this regard. When Hallmark Cards realized that the original Hay factors were no longer adequately reflected in what they wanted to value in their work and business strategy, they changed its structure to infuse the elements ofteamManagement

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98 Reward and Compensation

Strategy: Issues and Challenges

involvement, leadership and cross-functional Newman, 1996).

expertise (Milkovich and

Table-2 Revised Hay Factors at Hallmark Cards

ORIGINAL FACTORS

PROPOSED FACTORS

Know-how Functional expertise Managerial skills Human Relations

1. Capacity

2.

Problem solving Environment Challenge

2. Improvement Context Challenge

3.

Accountability Freedom to act Impact of end results Magnitude

3. Scope Empowerment Impact of end results Reach

1.

Business system Integrating resources Teaming skills opportunities

Source: Adopted from Milkovich and Newman (1996: 141).

Companies who are adopting cultural change to meet the needs of the market place in the new business scenario are also adopting a competency framework linking it with an open and honest performance management system and gradually moving towards the paying for performance plan.

They are paying their people for acquiring relevant competency which is also referred by specialists as DNA 4 of the organization. This DNA gives life to the firm and helps it in developing relevant organizational capability.

Glaxo Wellcome, UK (GWUK) which employs 1500 employees and is valued at over ÂŁ30 billion is the leading pharmaceutical company which had successfully adopted this kind of competency framework. GWUK assessing its employees around these competencies gave the right kind of reinforcement, that was needed in certain areas of operations. The company adopted BPR in the year 1994-95 which led to the alignment of a number of human resource strategies. The business imperative for change arose from Management

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Khan 99

the employees' needs at all levels to respond much more flexibly and quickly to the changing business reality. At GWUK, a reward and development strategy was adopted to drive this change and to acquire organizational capability for delivering the highest level of competence. GWUK adopted a competency framework and defined competency as "what you know, what you do and how you do it which, when applied by an individual or a team, leads to proactive outcomes for GWUK." The company identified 20 core competencies which were needed to be acquired by everyone across the business regardless of their individual roles and functions. It also adopted a performance management system to help employees to "build up a picture" of what they should achieve which also acted as a "development checklist" for employees and managers to identify the gap which can be bridged by experiential learning. The performance management system was "feedbackrich" with the intention of supporting the strong communication culture of the organization. The important thing to observe here was that the pay review was not kept directly connected to the developmental needs of the employees. In fact, assessment of performance and competence contributed towards the determination of pay but the performance appraisal system was successfully positioned as first and foremost an ongoing development and monitoring tool. The managers at Glaxo Wellcome also believed that nothing fails quite as badly as a failed reward scheme and they continued to learn about the differential competencies of the high performers. These steps contributed to -agreat extent in achieving success at GWUK (Stredwick, 1997).

The interventions experienced at Glaxo can be benchmarked and replicated elsewhere to put in place the right kind of competencies and capabilities required by individuals, teams, and organization as a whole.

STRATEGIC

COMPENSATION

ISSUES

Some of the basic questions which are to be addressed at the time of adopting a reward and compensation strategy by the compensation specialists today, are: i) Whether pay is going to be job-based or skill/competency-based; ii) In the case of pay for performance, whether it will be individual or team-based; iii) The extent of equity and market positioning of the firm; whether the finn is trying to be a market leader, a laggard or in-between these two situations, benchmarking from the market and adopting it with some Management

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100 Reward and Compensation Strategy: Issues and Challenges

time difference; Table-3 Core Competency Framework at GWUK COMPETENCIES

DIMENSIONS 1. Personal Qualities

2. Planning to Achieve

3. Business and Customer Focus

4. Supportive Leadership 5. Working With Others

• •

Personal accountability Personal organization Self-development • Creativity and innovation • Flexibility • Continuous improvement Gathering, analyzing and interpreting data to produce information • Problem solving and decision making • Establishing a plan • Implementing and monitoring achievement • Company environment • Business environment • Customer focus • Effective leadership • Empowering • Team-working, managing conflict and being supportive • Developing colleagues Giving and receiving feedback • Networking and building relationships Communication

Source: Based on Stredwick (1997: 30).

iv) The degree of standardization of the package across the functions and levels; v) The balance between base pay, added pay, deferred payment, longterm and short-term benefits, and services; and vi) The degree of involvement of the line managers in the designing and implementing of the reward strategy.

Lawler (1984) prescribes nine fundamental strategic issues to be conManagement

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2000)

~~~

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---------------------------------------

,

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Khan 101 sidered carefully at the time of designing the compensation strategy given in Table-4. He talks about the basis of pay, mode of pay for performance, extent of internal and external equities, degree of centralization of the reward strategy, degree of hierarchy in reward, reward mix, process issues regarding compensation decision-making, and modes and channels of its communication, and congruency of the reward system. In the present situation, when the pay variance is becoming wider, equity is a tricky issue though a good number of companies are benchmarking and market pricing their key jobs.

Issues such as the extent of centralization and hierarchy of reward are of grave importance and it depends to a great extent on the culture, history and vision of the company while deciding these issues. It is evident from the experiences of many successful companies that a reward system is highly circumstantial. Some times, firms lose their focus because of the lack of congruence in their reward strategy and its non-alignment across the organization. These are the issues which can motivate or demotivate employees, help retain or force people to quit. Therefore, firms should be very careful while designing the reward and compensation strategy and more importantly in implementing it to give the right kind of signal to employees.

Strategic 1.

2.

3.

4.

5.

6.

7.

8.

9.

Table-4 Issues in the Design of Compensation

Systems

The Basis for Rewards Pay for Performance Market Position Internal-External Pay Comparison-Orientation Centralized-Decentralized Reward Strategy Degree of Hierarchy Reward Mix Process Issues: â&#x20AC;˘ Communication Policy â&#x20AC;˘ Decision-making Practices Reward System Congruence

Source: Based on Beaumont (1996: 104) who adapted from Lawler (1984: 131-46).

Gomez-Mejia and Welboume (1996) also identify issues which are strategic and need to be considered while designing compensation programmes.

They categorize them into three following categories: Management

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~

_

102 Reward and Compensation

Strategy: Issues and Challenges

a) the criteria or bases for determining pay levels; b) the design of the compensation system; and c) the administrative framework.

These issues are to be dealt with cautiously and in line with the business strategy while adopting them. Gomez-Mejia and Welboume (1996) also classify them as mechanistic and organic compensation strategies depending on the nature of these issues and orientation of the firm. They are of the view that the organic compensation strategy where emphasis is more on skill, performance, risk taking, and qualitative aspect of performance are practised by the firms which have dynamic growth whereas the mechanistic and bureaucratic organizations which are relatively old and matured, and looking for maintaining their current market share pursue mechanistic compensation strategy in most of the cases (Gomez-Mejia and We1boume, 1996).

Table-S Strategic Compensation

MECHANISTIC COMPENSATION STRATEGY Basis for Pay Job Seniority Emphasis Individual Appraisals Short-telm Orientation Risk Aversion Corporate & Division Performance Internal >External Equity Hierarchical Emphasis Quantitative Performance Measures Design Issues Pay Level> Market Fixed Pay> Incentives Frequent Bonuses Reliance on Intrinsic Rewards Administrative Framework Centralized Secrecy Policies No Participation Bureaucratic Policies

Management

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Volume 4, Number

Patterns

ORGANIC COMPENSATION STRATEGY

Skills Performance Emphasis Group and Individual Appraisals Long-Term Orientation .

Risk Taking Division Performance External >Internal Equity Egalitarian Emphasis Qualitative Performance Measures Pay Level < Market Incentives >Fixed Pay Deferred Income Reliance on Extrinsic Rewards Decentralized Open Communication PaI1icipation Flexible Policies

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WHAT MOTIVATES EMPLOYEES? In this era of restructuring and downsizing, much needs to be done by the employers to motivate their employees. The companies who are restructuring themselves are finding it difficult to keep up the morale of their employees. In many cases, the huge incentive and performance-related pay system has failed. The psychological contract between the employees and employers is under the process of redefinition.

In such a scenario, where the firms are looking for knowledge management and adapting themselves to behave like a learning organization, the availability of self-regulated, committed and motivated employees gives them a competitive edge over others. Lester Thurow (1999) proclaims that "the dominant competitive weapon of the twenty-first century will be the education and skills of the workforce." Companies are offering an array of benefits to motivate their workers. Some of the present practices are: overtime and holidays; retirement plans and insurance benefits; general and special fringe benefits; tax-advantage programmes; vacation and sick leaves; employee services/assistance; special work-related expenditure plan; educational expenditure plans; etc.

Attracting, developing and retaining employees are posing a challenge to employers. They are looking more concerned now. It is more evident in those sectors where turnover of employees is very high, e.g., software, where the attrition rate is more than 25 percent. Milkovich and Newman (1996) find that employers generally look concerned for four types of behaviour of their employees: i) How do we get good .employment prospects to join our -company? ii) How do we retain these good employees once they join? iii) How do we get employees to develop skills for current and future jobs? iv) How do we get employees to perform well on their current job?

But the concern of the employers is not being seen translated most of the time due to the lack of the will on their part to understand what motivates the employees despite the fact that a number of motivational theories right from the content to the process theories are there to explain the behaviour of employees. It is well understood that motivation is the inner feeling and drive of the person which force him/her to behave in a certain way. In this regard, the Vroom's Expectancy Theory of motivation is worth mentioning

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104 Reward and Compensation

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which helps managers to understand the behaviour of the people in a better way. Vroom (1964) identifies three factors which constitutes motivation.

These are: expectancy, instrumentality, and valence.

Figure 3: Vroom's Efforts ____ ~I~ /1

t

Level of Performanc~

Expectancy

Theory

hi â&#x20AC;˘.â&#x20AC;˘......

1'---Result _

I

Motivation

I~I

Reward

1-<-----

M=ExVxI [Where M = Motivation, E = Expectancy, V = Valence, and I = Instrumentality].

In this theory of motivation, the three important factors play critical roles and there is a linkage among them which is required to be established and managed while designing compensation and reward plans.

The first and foremost important factor is the valence, i.e., the attractiveness of the reward. The HR and line managers have to act judiciously in choosing the reward mix which can attract employees across the organization. It is a difficult task and it depends to a great extent on the perception of the individuals whether a reward is a reward. A decentralized approach empowering line managers to have more discretion in deciding the reward mix can play an important role in maintaining the higher level of valence among employees. Otherwise, a reward will not be a reward. In fact, some kind of perception of management strategies is also required to play up the importance of the reward in such a scenario. It is the person not the job who is going to be paid in the present time. Though firms are intensively trying to adopt creative compensation strategies, what it depends on is how you sell your reward.

The relationship in this regard is also important. Managers who regard themselves more as valuable individuals like stars and less as members of a team have to change their attitudes. It is not possible to rely on mere money to recruit and motivate people. Dave Beirne, a silicon valley headhunter says grandly that "I never sold compensation, I sold psychic reward" (The Economist, 1999).

The second important factor is the instrumentality factor inherent in a Management

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Khan 105 motivational design. It is the belief among employees that if they work hard and perform, their performance will be rewarded accordingly. HR managers are supposed to create a well-defined performance appraisal system which appreciates and rewards performers. The message has to reach the employees that the performance appraisal system is objective, open, and bias-free. Unless the employees feel so, it will be difficult to motivate them. Rewarding employees for their performance is a reinforcing exercise and it gives a message to the people that the system cares for the performers and rewards them. Line managers are also required to be objective, honest and bias-free in implementing appraisal systems and reassuring the employees in regard to pay for performance.

Communication methods adopted by the organization also playa critical role in reaffirming the faith of employees in ajust and objective reward strategy.

The third and the most important element of motivation identified by Vroom is expectancy. Expectancy is the employee's faith and belief in his or her ability to perform the required task. To inculcate this feeling among employees, the HR and line managers have to play an active role in providing learning opportunities for the growth and development of the workforce. It also requires to create an environment based on trust and empathy helping the workers to learn the required skills to perform better. Mentoring, coaching and counselling interventions also play an important role in increasing the confidence level of employees and helping them to have more experimentation. An environment needs to be created where mistakes are tolerated and new learning is encouraged through experimentation. In an age oflearning organizations, inculcating this kind of behaviour among employees is very much required.

Therefore, any compensation strategy is required to be highly linked with the performance strategy and the training and development strategy of the firm. In a true sense, the objective of the performance management system should be a developmental one which is better than an evaluative one since it will help employees in instilling faith in themselves and extend the sense of ownership in them.

TOTAL REWARD SYSTEM Reward is a wider term and it includes a non-compensation dimension apart from the compensation one. All rewards that can be classified as monetary Management

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payments and in-kind payments comprise the compensation component of a reward. All other rewards constitute the non-compensation system.

Henderson (1997) describes a non-compensation system as situation- related rewards not included in the compensation package. There are an infinite number of components which relate to the work situation and to the physical and psychological well-being of each worker. Any activity which has an impact on the intellectual, emotional, and physical well-being of the employees and is not specifically covered by the compensation system can be termed as non-compensation system (Henderson, 1997).

Table-6 Components of a Total Reward System

1.

2.

3.

4.

Wages, cormnissions and bonuses Vacations, health insurance Friendly work place Stable, consistent position and rewards Respect, prominence due to work Opportunity to experience different things Right amount of work (not. too much, not too little) Is work valued by society?

Ability to influence others; control own destiny Chance to get ahead Receive information helping to improve performance Hazard free Formal and informal training to learn new knowledge/skills/abilities

Compensation Benefits Social interaction Security

5. StatuslRecognition 6. Work variety 7.

Workload

8.

9.

Work importance Authority/ControVAutonomy

10. Advancement 11. Feedback 12. Work conditions 13. Development opportunity

Source: Based on Milkovich and Newman (1996:305) Henderson

(1997) identifies some of the dimensions

tion system as follows: Enhancing the dignity and satisfaction Enhancing

Management

physiological

ofnon-compensa-

from the work performed;

health, intellectual

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.-Khan 107 turity of the empluyees; Promoting constructive social relationships at workplace â&#x20AC;˘ Designingjobs that require adequate attention and effort; Allocating sufficient resources to perform work assignments; Granting employees sufficient control over the job to meet personal demands; and Offering a supportive leadership environment to the employees.

Milkovich and Newman (1996) also categorizes the reward system consisting of both compensation and non-compensation dimensions into 13 categories as given in Table-6. Barring the first two, all are non-compensation components. Some of the factors such as friendly workplace, stable, consistent position and rewards, respect, workload, work importance, autonomy, advancement, element of feedback, work conditions and learning opportunities are worth mentioning in this regard. In today's organizations which are becoming more flexible, flat, networked, diverse and global, these kinds of reward inputs will surely playa facilitating role in helping them in achieving competitive advantage for excellence.

PERFORMANCE

RELATED PAY (PRP)

Companies world over are adopting different strategies to motivate their workers to contribute more. They are recognizing the worth and value of their skills and competencies. To reinforce positive behaviours in employees, to learn relevant skills and competency and to use them while at work, many companies in the decade of 90s adopted merit payor performancerelated pay. Most of the specialists agree that performance based pay results in a better individual and organizational performance (Milkovich and Newman, 1996; Cooke, 1994; Heneman, 1992). In a study, 663 companies reported an increase in their earning by $2.34 for every $1 spent on performance-based pay. Likewise, one study of841 union and non-union companies found gainsharing and profit sharing plans increased individual and team performance by 18 to 20 percent (Cooke, 1994).

But there are a number of questions which are required to be answered before adopting a PRP. Schuler and Huber (1990: 308) present ten difficult questions and suggest organizations find answers to these before implementing a PRP system. These are: Is pay valued by employees?

What is the objective ofPRP? Management

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Are values of the organization conducive to PRP? What steps would be taken to ensure that employees and management are committed to the system?

Can performance be accurately measured? If not, what type of an appraisal system will be used?

How frequently will performance be measured or evaluated?

What level of aggregation (individual, group or organization) will be used to distribute rewards?

How will pay be tied to perf0J!TIance (e.g. merit increase, bonus, commission, incentive)?

Does the organization have sufficient financial resources to make performance-based pay meaningful?

What steps will be taken to control and monitor the system?

To sustain the motivational level of employees, organizations must cl.emon strate to them a close link between performance and rewards. This is the rationale which is advocated for the use of merit pay. However, inspite of its attractiveness, the PRP sometimes brings about results precisely the opposite from the desired one. Common among them are dissatisfaction, discouragement, and decreased performance (Campbell, Campbell and Chia, 1998; Gomez-Mejia and Balkin, 1992; Hughes, 1986; and Kanter, 1987).

Whatsoever the critics ofPRP say, one thing is clear that organizations are devising reward strategy in such a way that they can reward the efforts and contribution of the performers. More companies are adopting bonus plans or gainsharing plans based on specific performance goals. In this kind of scenario, nobody is guaranteed an annual pay increase. The "entitlement era" is going to be over and one has to earn the increase by giving a purposeful contribution in that regard. In fact, in recent times, the across-the-boardpay increase is becoming less prevalent and the existing situation is forcing employees to give their best. But PRP will be a failure if it cannot be fair and consistent in measuring performance. To negate this, employees are required to be involved in the designing, developing and operation ofPRP. It should be able to create a work culture conducive to an objective and fair appraisal system and its appreciation by its stakeholders also. The involvement ofline managers and key managers in designing and developing the PRP is very much required. They also need more power and discretion to reward the subordinates to reinforce the designed objectives being pursued by the PRP. The role of the HR manager has to be a facilitator's one to encourage line managers in creating such an environment. The communication level beManagement

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i Khan 109 tween the different stakeholders is required to be high to dispel any misunderstanding and then a right kind of performance based work culture can be nurtured.

Employee

Stock Ownership

Plan (ESOP)

Though there are a number of approaches to provide incentives, merit pay, gain sharing and bonuses, nothing has proved to be more successful than employee stock ownership plans (ESOP) in recent times. This is the maximum that an employee can think of, i.e., his or her share in the stock of the company. For the last two decades or so it has been making waves in the US wage market. Past surveys have also indicated that the companies providing ESOPs are 1.5 times more profitable than the conventionally-owned company (Marsh and McAllister, 1981): ESOP is a means for employees to buy stock in the firm. These stocks are sold to employees in lieu of their payor pay increases. Sometime, they simply pledge to buy stock as a way of helping the company pay-off a debt (Werther and Davis, 1996). For providing ownership to the employees, the employer creates a trust known as employee stock bonus trust (ESOT) and contributes stock to it. It is a tax-exempt employee trust in US. ESOPs can be enjoyed in two ways: (i) stock bonus ESOP, where employer contributes to ESOT but he cannot use it as a mechanism for obtaining funds, and (ii) a leveraged ESOP, where employer uses the tax benefit granted to an ESOT and obtains fund for various purposes (Henderson, 1997).

The magic wand, stock option has churned out many billionaires in US, and America today has more of them relative to size of the workforce than it had even in the early years of the century. Many of them are e-founders, creators of Silicon Valley's successes. A recent survey of350 large American Companies by William M. Mercer, a consultancy firm, found that the chief executives' median total compensation was $8.6 m. A majorpercentage of this package came through stock options. Walt Disney head, Michael Eisner earned $ 576 m. in the year 1998 which. was roughly equal to the GDP of the Seychelles and much of it was acquired through realising vast option gains. Likewise, Mel Karwazain, head of CBS, a network television company got $ 200 m. In the same period, he took only $ 9.8 m. in the form of salary and bonuses and the rest came in stock options. Ira Kay, director of human capital g~owth at Watson Wyatt, a New York based consultancy firm, thinks that the prevalence of stock options in US and its relative abManagement & Change, Volume 4, Number I

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sence elsewhere is one of the main reasons for the Americans' superior economic performance. Options provide the motivation to run companies better (The Economist, 1999). But now the stock option plan is also reaching to the other side of the world. A country like Japan, where the salary spread is more evens because the Japanese believe that employees should share profits equally in the interest of group harmony, is also experiencing change in this regard. About 150 out of 3,000 listed companies in Japan introduced share options for their employees last year (Management Today, 1999).

In India too, a good number of companies ranging from public sectors to private sectors to MNCs have taken lead in offering stock options to their employees. Notable among them are: Oil and Natural Gas Commission (ONGC), Infosys, Wipr06, Satyam Computers, Sonata Software, Aditi Software7, Proctor & GambleS, Mastek, Cadence Design, GE, and Hughes Softwares. The multinational corporations are finding themselves at a disadvantageous position because of the Reserve Bank ofIndia guidelines as employees are not allowed to hold foreign stocks directly. However, MNCs have found a solution to it and the shares are being held on their behalf which can be given in rupees equivalent when employees want it. The other bigger problem employees are facing is the higher rate of income tax, and the phenomenon of double taxation. Under the current Indian rules, an employee is liable to pay a 33 percent income tax on the difference between the granted price and the market price of the share which has a very discouraging impact on the attitude of employees. Again, if the employee sells the shares, he is liable to pay capital gain tax on the difference between the exercise price of the option and the sale price. It is proving to be a significant hindrance in enjoying the benefits of ESOP. Presently, the matter is pending before the court (Outlook, 2000).

Some of the Indian companies, who have recently introduced stock option plans, are: Kinetic Motors Ltd.9, Jindal Polyester'O, Birla Sun Life AMC (BSLAMC) I I , Kothari Pioneers, Pharmacia & Upjohnl2, McDonaldu, Enron, Intel, Gray Cell, Mind Tree'\ Zee Telefilms'5, Dabur'6, SRFI7, Max India1s, Zip Telecom'9, NIIT20 and Information Technology (India) Ltd. (ITIL)21.

But stock option plans at times prove to be a stumbling block also as it was observed in the case of Daimler-Benz and Chrysler merger.22 One should also be very careful that rewarding individuals may not hurt those who perform well in teams. The greatest risk in this regard is the widening Management

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Khan 111

gap of pay and benefits between the senior managers and the rest. Unfortunately, very few employers think like B. Ramlinga Raju, chairman, Satyam group.n The group has adopted recently an employee venture capital scheme in addition to the stock option scheme, which encourages people to come out with their ideas. Commenting on the scheme, Raju says that "it is to encourage creative ideas thereby creating opportunities for individuals with bright ideas" (The Times of India, Sept. 20, 1999).

CONCLUSION In the infonnation age, where employees with their scarce skills can live in one country and work in another, the challenges are huge before the HR managers in formulating the reward strategy. The globalization process is trying to reduce the gap in pay across the country but it is being seen realized more in IT sector alone. The pay variance has become wider in recent times. The gap between the senior managers and the shopfloor people has widened. The stock option plan has benefited a few elite managers or knowledge workers. It is a paradoxical situation for most of the companies as they are trying to adopt softer issues of people management through empowerment and team-building strategies but they have not been able to pass the benefit of the performance and contribqtion across the organization which is hurting the team feeling and morale of the workforce. The widening gap between the senior managers and the rest has further reinforced this kind of feeling among employees. Furthermore, the restructuring and downsizing has negated to a great extent the efforts of cultivating the fruit of a creative compensation design. When companies are distributing pink slips24 to their workers, it becomes a difficult job for the poor HR manager to come out with a strategic compensation tool to sustain and raise the motivation and morale of the employees. PRP in a good number of cases has also failed to deliver its strategic edge because of the absence of a well-understood performance management system, and matching work culture and environment.

This can be done by actively involving line managers in the designing and implementing of PRP plan. Ultmost care has to be taken by managers in creating an honest and able performance management system in this regard.

Otherwise, "giving an award to an individual for an entire team's performance can quickly prove to be highly divisive ... and it makes little sense for a manager to bestow an award that demotivates other members of the work team" (Ford and Newstrom, 1999).

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In the present business scenario, where HR managers are forced to be actively involved in the management of cultural change, system and structure, relationship, politics, information, and new learning, the management of performance and reward is central for attracting, developing, retaining and motivating employees. The level of needs in this regard also goes up if a company is passing through the pangs of downsizing and restructuring.

It is the psychological contract between the employer and employees which has become more important now and the psychological experience of ownership on the part of employees is more critical for organizational effectiveness. HR managers have to learn to diagnose and doctor this pyschological experience of ownership on the part of employees while adopting PRP or ESOP (Khan, 1999). Line managers are also required to be involved in this process. In fact, they have to own this process whereas the role ofHR is to network with them. The adoption of a reward mix is a very tricky issue and HR and line managers have to work as a team spending more time on deciding these strategic aspects of compensation management. Line managers have to be given more discretion and power through the decentralization of the compensation administrative process where they can have the feeling of discretion over the reward issue. In this kind of scenario, the reward management can contribute to create value addition through effective management of competencies.

Though specialists are critical about the impact of the ESOPs in bringing team feeling and its availability also to the elite and previleged ones, employees are harvesting the benefits of ESOPs in a few cases. We need more employers like N. R. Narayana MurthyZ5,'the chairman ofInfosys to make ESOP more pervasive. Murthy wanted to create a thousand millionaires in his company, and he has done it in two years' time. There is no company other than Infosys in India where good number of drivers, attenders, electricians, plumbers and other employees low down in the pecking order are millionaries (in Indian rupee) in their own right (The Times a/India, Feb. 19, 2000).

The success of a reward and compensation strategy depends to a great deal on the attitudes of the managers in creating a high degree of commitment, involvement and cooperation among employees. It has to ensure that employees' contribution and performance are rewarded accordingly, and is aligned with other people policies, practices, and programmes towards developing the organizational capability and competency for achieving the objectives and goals of the firm.

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Khan 113

NOTES 1.

2.

3.

4.

5.

6.

7.

Hamel (1999) observes that "it wasn't that CNN spent more time building scenarios about the future. All of the things that you needed to create CNN were visible to anyone who cared about how the world was changing. You had cable television eroding the monopoly of the traditional broadcasters. You had people who didn't come home every night at an hour when they could watch the 6 0' clock news or the 90' clock news or whatever. You had satellite technology that made it possible to put a team anywhere in the world and get a signal out. Anybody who was willing to challenge their own assumption could see those things." And it was CNN who was willing not the BCC, according to Gary Hamel.

Human capital is proving to be more expensive now. The share of wage bill in sales tumover has increased from 7.4 percent in the year 1996-97 to 7.5 percent in 1997-98 and to 7.9 percent in the year 1998-98 in India, see Human Capital, November, 1999. In fact, in the year 1997-98, top 50 business houses in India paid Rs 12839.5 crores, i.e., 47.1 percent of the total wages and salaries paid by the private sector enterprises (CMIE, 1999).

The Michigan school puts primacy on the business strategy of the firm and its interconnection with the organizational structure and key HR systems, i.e., selection, appraisal, rewards, and development. The Harvard approach which is also refened to as the soft approach to HRM emphasizes on the responsibility and capacity of managers to manage workplace relations by bringing a unitary, integrative, and individualistic system. Reward system is one of the key policy areas of soft approach other than employee influence (participation), human resource flow, and work systems (work organization) (Mabey, Salaman and Storey, 1998: 61). Both schools identify reward management as an important strategic HR tool. See also, Fombrun, Tichy and Devanna (eds.), 1984; Beer et al., 1985; Blyton and Turnbull (eds.), 1992; Hendry and Pettigrew, 1986; and Saini and Khan (eds.), 2000. . Sandra 0 'Neal calls competencies as "The DNA of Organization."

In Japan, the annual income of a CEO is on an average only about 10 times that of an entry level employee, see Management Today, 1999.

A booming stock market is the most important factor driving the stock option search in the IT industry. Azim Premji is the richest Indian and the third richest person in the world. Wipro had 300 millionaire employees. A few weeks later, it had 1,600 millionaire and now it has some 32 billionaires among its stakeholders (Outlook, 2000).

As per the Nasscom estimate, some 10,000 infotech sectors have been vested with 18 million shares in 151 companies that might be worth Rs. 12,000 crores at current market capitalization levels (Outlook, 2000).

Management & Change, Volume 4, Number 1 (January-June 2000)

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114 Reward and Compensation Strategy: Issues and Challenges 8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

At Proctor & Gamble, 700 employees have been given stock options with a five year vesting period (Outlook, 2000).

Kinetic Motors Ltd. is the first company who offered ESOP to employees after the new SEBI guidelines allowing the companies to enjoy the benefit of ESOP (The Times of India, Sept. 17, 1999).

Jindal Polyster Ltd. (JPL), a Rs. 310 crore company decided to issue ten lakh equity shares of nominal values ofRs. 10 each to employees including executive and non-executive directors (The Times of India, Sept. 17, 1999).

Birla Sun Life planned to issue 5-10 percent of the equity capital under a phantom share option plan (Human Capital, Dec., 1999).

Phalmacia & Upjohn India, an MNC, has given stock options to its 170 marketing and sales personnel (Human Capital, Dec., 1999).

McDonald has offered stock option plan to its 40 employees and it will offer to more employees in the near future (Outlook, 2000).

At Mind Tree, even the entry-level employees have been given stock options (Outlook, 2000).

Some 4.6 lakh stock options convertible into equity shares of Rs. 10 each were given to some 65 employees of Zee and its associate companies (Outlook, 2000).

Dabur has offered 25,000 equity shares to 50 key executives at a discount price ofRs. 300, nearly a quarter of the scrip's market price (Outlook, 2000).

SRF has issued about 28 lakh shares appreciation right to all its employees including the factory workers (Outlook, 2000).

Max India has reserved some 5 percent of its issued capital for employees (Outlook, 2000).

At Zip Telecom, 210 employees will collectively reap Rs. 132 crore if all goes well according to the company plan (Outlook, 2000).

NUT is also diluting 5 percent of its cunent equity to grant 1.3 million shares to its 800 employees (Outlook, 2000).

ITIL, a software company who generates 70 percent of its revenues from exports also announced stock option to its 250 employees in the first go at a discount rate of 43 percent of the cunent market price (The Times of India, Feb. 18, 2000).

When Daimler-Benz announced its plan to merge with Chrysler, German newspapers were aghast at the size of the options given to Chrysler's executives

(The Economist, 1999).

23. Sat yam Computer alongwith Wipro and Infosys forms the top three IT companies in India. Its chairman B. Ramlinga Raju is of the view that employee capital scheme will enable the ÂŁ(}mpany to generate multi-fold value creation as a venture capitalist, and it will be a win-win situation as per him (The Times of India, Sept. 20, 1999).

24 . AT&T Corp., the number one US long-distance telephone company, has Management

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Khan 115 trimmed its slower-growing businesses to cut $ 2 billion in expenses, and thousands of employees have to be downsized. On Feb. 1, 2000, the company gave pink slips, i.e., the notice of 60 days to hundreds of managers and workers saying they would lose their jobs in two months' time (The Times of India, Feb. 5, 2000).

25. The astonishing entrepreneur N. S. Narayanamurthy is referred to as the man who started the stock option phenomena in Indian IT industry. Keeping just 7.7 percent equity for himself, he distributed the rest to the public and empolyees (Outlook, 2000).

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Vroom, Victor H. (1964) Work and Motivation. New York: Wiley.

Weliher, Jr., W. B. andK. Davis (1996) HR and Personnel Management. New York: McGraw Hill.

Sami A. Khan, Ph. D., is Associate Professor and Coordinator-HR..l\1 Area, at the Institute for Integrated Learning in Management (IILM), Lodhi Institutional Area, Lodhi Road, New Delhi-I 10 003. Earlier, he was with the Shri Ram Centre Managemenl

& Change,

Volume 4, Number

I (January-June

2000)

Khan 117 for Industrial Relations & Human Resources, New Delhi. His areas of special interest include Strategic Human Resource Management; Labour Management Relations; Training and Development; Compensation Management; Organizational Design and Development, and Strategic Management and HR Benchmarking. He was a member of the research team which conducted an all India Study on the Problems and Prospects of Rehabilitation of Voluntary Retired Workers at Shri Ram Centre for Industrial Relations and Human Resources (SRC), New Delhi. The report has been published by SRC as a book. He has recently co-edited a book, Human Resource Management: Emerging Perspectives in the New Era (Response Books, A Division of Sage Publications, New Delhi, 2000). He is also the associate editor of Management & Change. the journal ofllLM.

Management & Change, Volume 4, Number I

(January-June 2000)

'VORKERS' MANAGEMENT AND TURNAROUND OF SICK ENTERPRISES: EXPERIENCE OF AN INDIAN ORGANIZATION

Surya Mookherjee This paper examines the genesis, evolution, structure and performance of Workers' Management in turnaround of a sick enterprise. The logic of workers' management, the major impediments for the survival and success and the dynamics of turnaround strategy are examined in a micro context.

The prospect of workers' management at the macro level and the emerging issues that merit special attention are highlighted. It is argued that barring a few micro experiments, workers' management as an alternative is not poised for a big leap forward in India. Certain enabling conditions will be necessary for workers' management to take root as a concept and practice.

INTRODUCTION usiness environment in contemporary India is marred by an increasing incidence of industrial sickness. The fact is widely acknowledged that sickness has become a menace to industrial progress.

Consequently, it has cast a depressing spell on the overall performance of the economy and the industry. For observers, it is disturbing to note the swelling number of sick units every year. The situation has evoked considerable concern among government, corporate analysts, management practitioners, consultants and trade union activists.

In the event of sickness, two alternatives are available: Either the unit could be closed down and wound up or revived and turned around. By and large closure and liquidation of a unit has not found favour with the policy makers or the government barring under compelling circumstances. Neither labour nor trade unions have endorsed it particularly because closure results in job losses and affects workers most.

With regard to revival and turnaround, besides nationalization, modernization and merger, an option currently drawing widespread attention is workers' take-over and management of sick enterprises. In practice, formation of employee cooperatives becomes an instrument for take-over.

B

Management & Change, Volume 4, Number 1 (January-June 2000) @ 2000 Institute for Integrated Learning in Management. All Rights Reserved.

120 Workers' Management and Turnaround of Sick Enterprises

Since the recent past there has been increasing evidence of micro level experimentation with workers' management in India and elsewhere. Regardless of the achievements and shortfalls of such experiments, the advocates of workers' management have begun toying with the idea of having a worker sector in the economy in addition to public and private sectors.

However, considerable doubt and debates have surfaced in regard to the viability of the workers' sector (Bhowmik, 1991; Dandekar, 1987; Lieten, 1987; Thankappan, 1993).

Taking sickness as a point of departure, this paper seeks to examine the genesis, evolution, structure and performance of workers' management in the turnaround of New Central Jute Mills (NCJM), an ailing enterprise located in Budge Budge, 30 kilometers downstream of Calcutta.

The paper begins with an overview of industrial sickness at the all India level followed by an outline of the conceptual framework of workers' management and workers' cooperative. Subsequently, the salient features of workers' management in NCJM are analyzed and the emerging issues and prospect of workers' management in a larger context are examined.

This is an organization-based micro study. The methodology comprised gathering information from secondary published sources and collecting primary data from office records, files and correspondence at the company level. This apart, several visits to the mills and interviews and discussions with a cross-section of managers, trade union leaders and workers at various levels formed part of the methodology.

PERSPECTIVE

ON INDUSTRIAL

SICKNESS

All substantive matters pertaining to industrial sickness are dealt with under the Sick Industrial Companies (Special Provisions) Act (SICA) 1985. The Act, as amended in 1993, defines a sick unit as: An Industrial Company (being a company registered for not less than 5 years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net-worth. Under the Sick Industrial Company (Special Provisions) Act 1985, a Board For Industrial and Financial Reconstruction (BIFR) has been established to examine and decide the proposals referred to it by the sick units for rehabilitation, reconstruction and winding up.

According to the Reserve Bank of India, an Industrial Unit is regarded as sick if it has incurred cash loss for one year and in the judgement Management & Change, Volume 4, Number I (January-June 2000)

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of the bank it is likely to continue to incur cash loss in the two following years, it has imbalance in its financial structure such as Current Ratio being less than 1:1 and worsening Debt Equity Ratio.

Sickness in India is more pronounced in the private and small scale sectors, although public sector units have increasingly come under the clutches of this ailment. Out of a total of 244 public sector undertakings, 98 are identified as loss-making units and 58 out of these 98 units are diagnosed as being chronically sick.

Between 1990 and 1992, the total number of sick units (both public and private) increased from 2.21 lacs to 2.48 lacs. The corresponding increase in outstanding bank credit was from RS.9,352.53 crores to 11,533.30 crores. The increasing incidence of sickness continued in subsequent years. As of March 1996, the number of sick units in small scale and non-small scale sectors was estimated to be 2.64 lacs with an outstanding credit of RS.13,478 crores.

Sickness is caused by multiple factors. In an analysis of 472 cases of sickness referred to and disposed off by BIFR up to December 31, 1991, Narayanan (1994) identifies four major factors giving rise to sickness. The set of factors and the number of cases in which they were found responsible for sickness were: (i) mismanagement (239); (ii) government policies (114); (iii) labour problems (52) and; (iv) time and cost over-runs (69).

Experience tells us that in the event of sickness of a company the employer tends to take recourse to a variety of steps (Mehta: 1999) such as: Non-payment of workers' due wages and statutory benefits such as Provident Fund, gratuity, ESI, etc. Non-payment of dues of the Banks and Financial Institutions, Sales Tax and Excise Duty.

Layoff and Retrenchment of workers.

Non-payment of electricity dues resulting in discontinuation of power supply thereby automatically leading to closure of the unit.

Referring the unit to BIFR and under the provision of SICA seek a liberal rehabilitation package to revive the unit.

Go for winding up and liquidation in the event of failure to revive the unit.

In regard to closure, the matter comes under the purview of Industrial Disputes Act 1947. Winding up is dealt with by SICA and liquidation has Management & Change, Volume 4, Number 1 (Janual)'-June 2000)

122 Workers' Management

and Turnaround

of Sick Enterprises

to take place under reference to the Companies Act 1956.

LOGIC OF WORKERS'

MANAGEMENT

In common parlance, workers' management is viewed as an extension of the concept of workers' participation in management. In practice workers' participation has moved on a continuum from information sharing, joint consultation, joint decision-making to workers' ownership and management.

Workers' cooperative is recognized as an instrument for establishing workers' management. By forming workers' cooperative it is possible for employees to buy maximum number of equity shares and acquire the ownership and management right of the enterprise. The exponents of workers' cooperative believe that in the event of sickness, workers' management through cooperative could serve as a useful alternative to revive and turnaround the unit. The recent experience of workers' cooperative in Sonali Tea Gardens, Jaipur Metals and Electricals Ltd. (JMEL), Gujarat Tractors Corporation Ltd. (GTCL) and Kamani Tubes Ltd. (KTL) lends support to this argument (Bhowmik, 1988; Joseph, 1989; Mookherjee, 1988, 1992, 1993; Srinivas, 1993).

In essence, workers' management signifies workers' ownership and control over the work process and means of production. This is possible in a situation where the structure of the organization is such as would allow workers to become an integral part of the process of policy formulation and decision-making in organizational functions. By virtue of being the largest stock holders the employees or their nominees find place in the Board of Directors and other committees and crucial decision-making fora at various levels of the enterprise.

Under the regime of workers' management, union-management interaction takes a new tum. There has to be compulsive shift in the union's stand from conflict to collaboration. Under this circumstance, the substantive issues or the issues which are bargainable remain in hibernation at least in the short run. Since the surplus generated is shared proportionately by the members the scope for disparity in distribution no longer exists.

Under workers' control a new type of work organization is created where the conventional labour-management hostility ceases to exist. Instead a new work relationship marked by mutuality of interest and common bondage sets in. Closer interpersonal ties also develop in the organization.

The fact of collective ownership and the consequent realization that workers Management & Change, Volume 4, Number 1 (January-June 2000)

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have become owners bring about a sea-change in their work habits, attitude and behaviour. Under the new environment, the workers get an opportunity for active involvement in decision-making due to democratization of the work organization. This, in tum, creates a sense of belonging and self-confidence among the workers. They realize that their hard work will help raise productivity and reduce cost of production. Consequently, more surplus will be generated to be ultimately accrued to the workers only.

In trade-union parlance an opposite view point often surfaces. It is held that there is a role incompatibility in the very structure of workers' enterprise where the workers are owners as well as producers. More often than not, as owners, workers would like to retain a larger share of surplus as profit for future investment and expansion while as workers they would urge for a large size of the cake. Reconciliation of these two roles becomes difficult. It is also not possible to rule out in a worker-managed enterprise the perennial conflict between trade union and management. The moment workers occupy the position of managers they no longer remain workers. As a manager the worker has to impose control mechanism in various spheres of activity which other workers may not accept even in the changed circumstances. The compulsion to collaborate with management seems to be a major deterrent for trade unions to favour workers' management. In a larger context except in few specific micro instances, trade unions have not extended wholehearted support for workers' management and expressed reservation about its prospect. The main argument put forth by trade unions is that management of an enterprise is the managers' job and not the job of workers. When workers become an integral part of the management process, the bargaining strength of trade unions tends to weaken. It also cripples the support base for trade unions.

The Government of India has taken a favourable view about workers' management. In the Industrial Policy statement tabled in the Lok Sabha on July 24, 1991, it is stated: Government will fully protect the interest of labour, enhance their welfare and equip them in all respects to deal with the inevitability of technological change ... Labour will be made an equal partner in progress and prosperity.

Workers' participation in management will be promoted. Workers' cooperatives will be encouraged to participate in the packages designed to turnaround a sick company.

Much before this policy was announced, the BIFR had been empowManagement & Change, Volume 4, Number I (January-June 2000)

124 Workers' Management

and Turnaround

of Sick Enterprises

ered under SICA to sell or lease a sick industrial company or transfer its shares at a discount value to the cooperative society formed by the employees of the undertaking.

Two recent instances where BIFR authorized the employee cooperatives to take over and manage the sick enterprise are: Kamani Tubes Ltd. (KTL) and New Central Jute Mills Ltd. (NCJM). Being encouraged by their prospects some more employee cooperatives are lined up for approval of BIFR. WORKERS' Background

MANAGEMENT

IN NEW CENTRAL

JUTE MILLS

of Jute Industry

Jute is a core agro-industry in India having its genesis more than 100 years ago when the first jute mill was set up in Calcutta in 1855. Approximately four million farm families depend on jute for their life and living. India produces 8.5 million bales of raw jute and mesta every year. Out of this 1.3 million MT of jute products are produced annually. In the global market almost 40 percent of the total global production is contributed by India.

Jute products are of two types: traditional and value-added. Traditional products and their respective share in total jute production are sacking (50 percent), hessian (28 percent), carpetbacking (2 percent) and others (20 percent). Important among the value-added products are yam, special hessian, screen cloth, decorative fabric, webbing, etc.

In an all India background, West Bengal occupies a predominant position in terms of number of mills set up, employment generated and share in total production. Out of the total 73 mills in India, 59 belong to West Bengal employing 88 percent (1.86 lacs) of total (2.11 lacs) workers. The other mills are located in Andhra Pradesh (4), Bihar (3), Uttar Pradesh (3), Madhya Pradesh (1) and Orissa (1). These states combined together account for only 12 percent of the total jute workers.

Beginning in the 1980s, several disquieting features have surfaced in the Jute Industry. In the global market, the emergence of synthetic packaging material has made the traditional jute goods obsolete and the demand for such goods has substantially gone down in recent years. As a consequence, export recorded considerable decline from 4,37 lac tonnes in 198081 to 2.06 lac tonnes in 1990-91. The situation has been further aggravated by stiff competition from Bangladesh. According to industry observManagement & Change, Volume 4, Number 1 (January-June 2000)

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Mookherjee

125

ers, erratic supply of raw jute, recession in external markets declining labour productivity since the eighties and employers' resistance to modernization and technological advancement have placed the jute industry in a tight comer (Sen, 1993: 56).

Three more factors merit attention. First, in the domestic market as in the global market, the emergence of cheaper synthetic substitutes like polypacks has rendered jute goods uncompetitive. The price of a polypack is one-third of an equivalent jute bag. Second, the Union Government has recently announced dilution of mandatory use of jute bags for cement and fertilizer factories. This policy change has led to a steady decline in the demand for jute goods in the domestic market. It is apprehended that the industry will lose nearly half of its domestic demand. Third, ever increasing input cost has tended to eat away the profit margin of the jute goods manufacturers (Mahanti, 1998: 6).

The jute industry has experienced soaring cost of production from the mid nineties. Looking at Table-I, the monthly wages per worker increased from RS.2090 in the quarter November-January, 1994 to RS.3583 in November-January, 1999 and monthly D. A. per worker moved up from RS.1684 to RS.3087. In the corresponding period, the raw jute prices rose from RS.839 per Qnt1. to RS.I024 per Qnt1. and the sacking price jumped from Rs. 1508.72 per hundred bags to RS.2127 per hundred bags. The cost of electricity almost doubled from RS.l 076 per tonne in November-January, 1994 to Rs.2000 in November-January, 1999. The increasing cost of production adversely affected all units in the jute industry and NCJM was no exception. .

In jute industry, there exist three kinds of workmen: permanent, badli and contract workers. Permanent workers' employment is guaranteed throughout the year. They are entitled for leave, holiday and all other social security benefits. The second category of workers are known as badli who work as substitutes for permanent workmen in case they are absent. Badlis are of two types: (i) special badlis who get employment for at least 220 days in a year and enjoy proportionate leave and other benefits; and (ii) casual badlis who get work as and when need arises in the company. They are paid wages for the days they work and are not entitled to any other benefit. Apart from permanent and badlis, there are contract workers who are employed for special jobs and get only minimum wages for the days worked.

Since long, a contentious issue between labour and management has Management & Change, Volume 4, Number J (January-June 2000)

â&#x20AC;¢

Table-l Jute Industry: Cost of Production Item

Nov.-Jan.'94

Nov.-Jan.'95

Nov.-Jan.'96

Nov.-Jan.'97

Nov.-Jan.'98

Nov-Jan.'99

Monthly

wage per worker (Rs.)

2090.20

2286.20

2616.60

2946.95

3079.95

3583.45

Monthly

D. A. per worker (Rs.)

1684.20

1880.20

2150.60

2450.95

2583.95

3087.45

Less Price Rs.lIOO Mtr. Sacking

Price Rs.lIOO Bags

Raw Jute Price Rs.lQntI. Electricity

Cost Rs.lTonne

Source: Tushar K. Mahanti, Economic

587.28

628.90

930.57

772.55

706.45

837.00

1508.72

1572.86

2099.43

1~76.18

1912.58

2127.00

839.18

777.43

1361.11

993.88

624.84

1024.00

1076.75

1288.15

1658.10

1750.00

17.50.00

2000.00

Times, New Delhi, December

11, 1998: 6.

Mookherjee

127

been the unions' demand to make badli workers permanent workmen.

UNION STRUCTURE

AND LABOUR RELATIONS

An authoritarian management style is commonly found in handling personnel and industrial relations matters. In the majority of the mills there has not been any concrete personnel policy in practice. The trade union structure is fraught with multiplicity and fragmentation. Unions are organized at the industry level. There are fourteen industry-wide unions having their membership across units. Each union is affiliated with one or other central trade union such as INTUC, AITUC, BMS, etc. The membership figure for a particular union in a particular mill has never been ascertained by the mill authority. An important fact to be noted in this respect is the prevailing practice of dual membership. It is not uncommon to find the same worker having membership of two or three unions simultaneously.

The terms and conditions of employment are determined by tripartite agreement between the Government of West Bengal, Indian Jute Mills Association (JMA) and all fourteen unions. The tenure for one agreement lasts for three years although in practice it extends upto four years or so.

The multiplicity of unions has taken its toll on industrial relations. Jute industry is recognized to be a conflict-prone industry, where strike and lockout is a common phenomenon. Between 1970 and 1984, the industry experienced strikes lasting for 18 days in 1970, 27 days in 1974, 39 days in 1975,42 days in 1979 and 70 days in 1984. After this a major strike for 50 days took place in 1992.

Labour-management relations has worsened subsequently. The earlier tripartite wage agreement for the industry has expired on December 1, 1998 and a fresh agreement has to be arrived at. The workers are demanding a monthly wage hike of RS.500 plus certain amendments in the Bonus, Gratuity and ESI Act. The management is not ready to concede the unions' demand on the ground of financial stringency. Arguments and counter arguments continue to plague the relationship.

INCIDENCE

OF SICKNESS IN JUTE INDUSTRY

The health of the jute industry poses a dismal picture. Out of the 59 mills in West Bengal, three are closed and 56 mills are in running condition. Out of these, 20 mills are recognized as performing mills. The rest 36 mills Management & Change, Volume 4, Number I (January-June

2000)

130 Workers' Management and Turnaround of Sick Enterprises

time the company owed to the State Bank of India an amount of Rs. 6.5 crares and its other statutory dues reached Rs. 17 crores. The State Bank of India took legal action for recovery of its dues (Narayanan, 1994). In addition there was outstanding debt with Allahabad Bank and Industrial Reconstruction Bank of India (IRBI). As the crisis deepened and no recovery was in sight, the then promoters declared a lock out and announced their inability to run the business due to successive losses over the years.

As a sequel to this announcement the company had to remain closed.

In the wake of closure and the promoters' persistent refusal to run the mills, the immediate imperative for workers and managers was to work out: strategies for reopening the mills, restore normal production and reconstruct the company. Having recognized the reality that workers' support and cooperation would be indispensable to tide over the crisis, the Managing Director convened a series of meetings of the staff and office bearers of all 14 unions and sought their suggestions as regards the future course of action. The inevitability of suggestions regarding pay-cut, delay in payment of arrears and dues, some amount of job losses due to rationalization were hinted at. The likelihood of inducting equity participation by employees was also stressed. The unions at their respective levels discussed the crisis threadbare and agreed to cooperate with the Managing Director. The meetings and discussions ultimately culminated in a settlement between New Central and workmen/employees.

As per the terms of settlement the employees agreed to contribute towards enhancement of the capital funds of the company. Both permanent and special bodies would form an industrial cooperative to acquire and hold equity in the company on behalf of the employees. However, it was realized later that formation of a separate cooperative may not be necessary in view of the already existing cooperative credit society in the mill. The acquired shares by the employees could now be held by the existing cooperative.

The company was declared sick under SICA and the matter was referred to BIFR. The first hearing before BIFR took place on January 12, 1988. The Industrial Reconstruction Bank of India (IRBI) was appointed the operating agency to help the company prepare its revival proposal. In the first hearing itself the workers expressed their readiness to provide equity of Rs. 500 lacs by depositing a part of their wages regularly.

During the preparation of the revival proposal the following factors were diagnosed as the main cause of sickness: Management & Change, Volume 4, Number I (January-June 2000)

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Fall in market share due to obsolete products having lesser and lesser domestic and external demand.

Loss of export due to inroads made by synthetic substitutes and severe competition from the neighbouring country, Bangladesh.

The company was burdened with disproportionately high wage cost due to carrying of excess labour.

Withdrawal of protection extended by the Government of India to indigenous jute products.

Management's lack of knowledge and awareness of changing market trends due to absence of market intelligence as well as a complacent attitude on their side.

Revival Package The revival scheme submitted to BIFR was ultimately sanctioned on September 20, 1990. The main features of the revival package were: Writing off of 90 percent of the equity share capital and 75 percent of the preference share capital. At the Extra Ordinary General Meeting held on November 20, 1988 the consent of the erstwhile share holders in principle was obtained to such reduction of capital and to forego arrear dividend on preference shares.

Transfer of erstwhile promoters' shares to the employee cooperative at a reduced value of 10 percent of the face value, that is a ten rupees share at the concessional rate of Rs. 1/- per share.

The company retained its identity under the Company's Act but the majority shares were held by the New Central Cooperative Credit Society Ltd. which had already existed in the mills from 1965. â&#x20AC;˘ Existing management structure remained intact.

Some relief and concessions were granted by banks and financial institutions as well as by the Government of West Bengal and the Central Government.

The employees agreed to the following: (i) (ii)

To convert the arrears Bonus upto Rs. 150 lacs into equity.

To contribute Rs. 350 lacs to equity from the incremental wages within 30.6.1990. (iii) To convert an amount of Rs. 200 lacs out of RsAOO lacs to be contributed by the workers upto 30.6.1990 into interest free loan Management & Change, Volume 4, Number I (January-June 2000)

132 Workers' Management and Turnaround of Sick Enterprises

repayable after repayment of Banks' /Institutional loans on year to year basis. (iv) All Canteens shall be managed at "No Profit and No Loss" basis. (v) The existing practice of free supply of fuel to the Security Staff shall be discountinued immediately. (vi) Period of lock-out will be considered as "No Work No Pay." (vii) Employees will maintain discipline and raise productivity after resumption of work and allow operations of the Mills as per work practices followed in the best performing jute mills. (viii) Employees will accept changes in work practices/occupations due to change in product-mix or introduction of new technology warranted by market practices and exigencies of work. (ix) The employees and management will work jointly in close cooperation in eliminating/reducing all wasteful practices in the mills including reduction in wastage of process material at all stages with a view to obtaining cost reduction and sustaining viability of operations. (x) A Management Committee is to be constituted which would comprise the Chairman, Managing Director, Finance Director and one r~presentative each from Government of West Bengal, Banks and Financial Institutions and workers/employees.

According to thes~mctioned scheme, the workers ultimately became the owners of New Central by holding majority shares of the company. The share-holding pattern as on December 28, 1992 is given in Table-2.

Table-2 Pattern of Share Holding in New Central

Ordinary Share Holder

Value (Rs.)

No. of Shares

Percentage

New Central Co-operative Society Ltd. Government of West Bengal Financial Institutions Banks Others

51,02,503 40,00,000 4,63,150 4,109 1,46,238

5,10,25,030.00 4,00,00,000.00 46,31,500.00 41,090.00 14,62,380.00

52.52 41.17 4.77 0.04

Total

97,16,000

9,71,60,000

100.00

1.50

Source: Office Record of NCJM Management & Change, Volume 4, Number I (January-June 2000)

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ACTION PLAN FOR TURNAROUND In the changing context of workers' management, the immediate task for the Managing Director was to comply with the approved revival package and set in motion the action plan for the turnaround. In this respect the following steps were initiated: Step-I Ensuring Adequate Employee Representation in Management: To conform to this objective, the Board of Directors was reconstituted. Apart from the Chairman and Managing Director, the reconstituted Board included three nominees of the employees and one nominee each of BIFR, IRBI, West Bengal Industrial Development Corporation (WBIDC) and Industrial Finance Corporation of India (IFCI).

Step-II Capital Restructuring: In terms of capital restructuring, several adjustments were made. As on March 31, 1992 the employees' deferred wages including bonus for 1984-85 and 1985-&6 amounted to Rs. 1094.41 lacs. Of this Rs. 510.30 lacs were adjusted towards equity. Rs. 200 lacs were to be repaid at the rate of Rs. 20 lacs per annum without interest. It was decided that Rs. 200 lacs shall continue as interest free loan repayable from accumulated surplus after servicing the debt on a year to year basis. The amount of deferred wages in excess of Rs. 910.30 lacs (already covered above) would continue as a loan carrying interest at the rate of 13 percent per annum from 1993-94 repayable in installment in seven years as per proposal submitted to IRBI/BIFR. Step-III Encouraging Democratic Decision Making Process: Participatory mode of decision-making was strengthened by involving workers and unions at the shop floor and corporate level on such matters as redevelopment and retraining, determination of work load, quality improvement, change in product mix, inter-departmental transfer and rationalization of workforce.

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134 Workers'ManagementandTurnaroundof Sick Enterprises Step-IV Ensuring That All Unions Act in Unison Towards Achieving the Company Goal: Efforts were made to forge a closer tie between all the unions and create an atmosphere of cordiality and goodwill at the workplace. Frequent interaction and meetings with union leaders both at the shop floor and at the corporate office facilitated the process of unification.

Step-V Lobbying at Bureaucratic and Institutional Level: The Managing Director himself and in some cases Senior Managers were constantly engaged in dialogue, discussion and deliberation with government officials and officers of the banks and financial institutions. As a strategy ,these officers were kept informed about the latest development in implementation of the revival package.

The problems coming in the way for implementation wer'e also sorted out through discussion and dialogue.

Step-VI Embarking on Research and Development, Modernization and Product Diversification: In view of the changed market scenario and rising demand for non-traditional jute products both in the domestic and export market, the company decided to embark upon a scheme of modernization to produce a new product mix and incurred additional capital expenditure over the sanctioned scheme financed by its own fund.

The fact was realized that in the wake of stiff competition from Bangladesh and other countries, new products have to be developed to survive in the market. Accordingly, special emphasis was placed on research and development. The company developed many special jute and jute blended yam and fabrics for diversified application covering soft luggage, draperies, upholstry, floor c'overing and garment fabrics. It also installed machinery for dyeing and finishing of specialty items and for manufacturing non-woven products like jute felts.

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Step-VII Rationalization of Workforce: Being a labour-intensive industry the company was burdened with disproportionately high wage cost due to unavoidable compulsion to carry on with excess labour. It seemed ironical to prune the size of the workforce under the workers' management. The company was compelled to reduce its employment from 11,300 (prior to take-over) to 8,900 in 1991-92.

OBST ACLES TO THE TURNAROUND FORMANCE OF NCJM

STRATEGY

AND PER-

The process of turnaround has been plagued with hurdles. The major constraint has come from the government and the financial institutions.

Considerable delay in releasing the assured amount came as a major stumbling block for implementation of the revival plan. Commenting on this impediment, the annual report of 1991-92 observes: The flow of fund is a major constraint towards effective implementation of the sanctioned schemes as well as attainment of profitability/viability towards the revival of the company. With the outstanding fund considerably sizeable, the company is very much hard pressed to acquire the much needed capital equipment for launching its diversification schemes through product mix, on which the viability of the company substantially rests.

Under the workers' regime, the working of NCJM has never been smooth. The company suffered intermittent setbacks. Several constraintsFinancial and Production-Related-marred production and production schedule and in tum the business prospect of the unit.

Even as Net Sales recorded a consistent rise from RS.76.28 crore in 1992-93 to RS.89.79 crore in 1995-96, to RS.93.77 crore in 1997-98, the company witnessed a corresponding increase in losses (rather than profit) from RS.3.16 crore in 1992-93 to RS.21.97 crore in 1995-96 accompanied by a decline in losses to Rs. 16.42 crore in the next year. The expenditure on salaries and wages recorded a steep rise accompanied by a corresponding rise in the share of wages/salaries in Net Sales (Table-3).

Management & Change. Volume 4, Number I (January-June 2000)

138 Workers' Management and Turnaround of Sick Enterprises

The realization gained root among workers that unless the company remains responsive to the market need and demand, it will be compelled to go down-hill once again. The company has developed a market information system and started depending more and more on market intelligence.

The existing management information system in the company has been revamped and computer technology has been introduced to monitor and maintain data about the cost and prices and the trend of sale and market demand about its products. A separate cost and production planning section has been assigned the work of preparing detailed reports about the cost of labour, stores, inventory and the market situation. This feedback mechanism will be utilized by the production and marketing departments. The emphasis on this aspect will enable the company to develop its future vision and accordingly adjust its business strategy. This in a sense will determine its priorities in terms of product mix as well as human resource management.

An overview of the turnaround process in New Central suggests that the regime of workers' management traversed through two crucial phases.

Born in the midst of a crisis and economic distress, workers' management entered the primary phase of restoration and recovery. Full attention was devoted to reopen the unit and restore normal production. Subsequently, the company stepped in the second phase of development. In this phase, major emphasis was to go for technological advancement and product diversification. In the next phase, about three to four years hence, New Central aspires to acquire the status of a best performin.g unit in the industry.

The phasewise progress ofNCJM resembles the European experience of workers' takeover documented by Paton (1989).

CONCLUSION This paper has examine9 multiple dimensions of workers' management and its role in the turnaround of New Central Jute Mills located in a suburb of Calcutta. The central objective of the paper has been to trace the genesis, evolution and structure of workers' management and understand the dynamics of the turnaround strategy.

Historically, induction of workers' management was never an agenda of the company. Ownership of the unit changed hands from erstwhile promoters to employees under the precarious conditions of job losses and Managemcnt

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pecuniary distress resulting from sickness and closure. The workers' determined bid to'survive and reconstruct the company provided the basic impetus to tide over the crises. In the critical slituation,management also extended support to the workers' cause. The process of transition was greatly facilitated by BIFR's favourable response to the workers' endeavour.

The company has yet to poise for a turnaround although the process has begun. By turnaround it is generally meant regeneration of a sinking organization. The crippled demoralized and non-perfonning enterprise is propelled into bubbling activities. The company which was almost written off having no hope of recovery has bounced back to life humming with renewed activities.

Sickness in New Central needs to be comprehended in the context of sickness in the jute industry as a whole. The onslaught of industry sickness c(')uld not be escaped by New Central. Jute is commonly known to be a sunset industry. Most of the units in the industry are in doldrums.

Commenting on the CLllTentstate of affairs in the jute industry, an observer remarked, "Majority of the Mills are wading through troubled waters. Recession in the market, falling demand for traditional jute goods resulting in declining export, competition from Bangladesh, invasion of synthetic substitutes for raw jute, erratic supply of raw jute and above all lack of professional expertise in management of the mills have aggravated the crisis in jute industry. Added to this is the fact that ownership of many of the Jute mills rests with the traders and speculators who are mainly interested in manipulating supply and prices of jute goods rather than professionally running the industry. Over the years there has been little modernization of the industry and diversification of the product. The employers accorded little or no priority towards long-term development of jute industry. Barring a few, most of the jute mill owners remained preoccupied with making immediate gains and maximizing profit in the short-run. The lack of vision and future perspective is reflected by the fact that more than two third of the mills have paid inadequate attention to technological upgradation and have been using machinery which are 75 years old.

In the event of sickness it is the leadership that matters most in a turnaround irrespective of who offers the leadership-the manager or the trade union leader. In case of New Central, the key leadership came from the Managing Director and his associates who were armed with the solid support of the workers.

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140 Workers' Management

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The Managing Director of NCJM had shown enormous leadership skills coupled with diagnostic ability to dissect internal and external problems. Accordingly, he initiated appropriate action to resolve them. Added to this, he had enough knowledge of market dynamics, by maintaining linkage with government machinery. He has enthused employees to face the emerging crisis. Apart from his professional expertise and technical knowledge and competence his concern for labour earned him respect and reverence among employees. He also enjoyed credibility in government and industry circles. His leadership has contributed greatly towards the revival of the company.

Incidentally, in some other cases too of workers' management in India, the leadership came from the Managing Director. Examples may be cited of Jaipur Metals and Electricals Ltd. (JMEL) and Gujarat Tractors Corporation Limited (GTCL) where the Managing Directors initiated action towards induction of workers' management and played a predominant role in the turnaround of their respective units. In case of Kamani Tubes Limited (KTL), although ownership belonged to the workers' cooperative, the management of the organization rested in the hands of professional managers who were recalled after reopening of the enterprise. The crosscountry experience of workers' take-over and management of sick units suggests that exceptions apart, workers' main contribution in the process of turnaround was contribution of money alone and the enterprise was managed by professional managers (Paton: op. cit.).

In the process of turnaround, it became apparent in New Central that the government, despite its professed ideal of promoting workers' management, did not play any significant role. The same was true about trade unions. While the shop floor stewards and employees unanimously supported the induction of workers' management, the response from central trade unions was far from desirable. The politicians, bureaucrats, officials of banks and financial institutions also remained cool to the whole exerCIse. In the macro perspective, the experience of workers' management has not always been success stories. Most of the worker-managed enterprises have gone through a traumatic experience of hardship and failure. The major hurdle for a worker-managed enterprise comes in the form of lack of working capital and managerial personnel, cut-throat competition in the

market, and apprehension among customers. As soon as workers take over an enterprise, there happens an exodus of managers who leave for a greener Management

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pasture. It has also been found in the case of Kamani Tubes that professionals with high calibre refrain from joinil1g an employee-owned enterprise. Apart from modest salary and perks, they do not find any career prospect in such organizations. A worker-managed enterprise does not enjoy market support as there is apprehension and doubt regarding the quality and timely delivery of the product. Doubts are often raised in regard to the professional expertise of workers to run business and assume the role of an entrepreneur or industrialist.

In a larger context workers' ownership and management is not yet poised for a big leap forward. There are only a handful of workers' enterprises (KTL, JMFL, OTCL) which have attained celebrity. A considerable number of them, mostly in the small-scale sector, have either withered away at the infant stage or have been struggling for survival. The major impediments for survival are factors like inadequate government support, non-availability of working finance, procedural delay in legal matters, lack of spirit of cooperative culture and faulty revival packages due to lack of technical expertise. Lessons drawn from NCJM experience confirm that the experiments in workers' management cannot survive and grow in vaccum. It requires certain enabling milieu for its success. A constellation of factors such as homogeneous socio-economic background of workers, government support and responsive bureaucracy, adequate financial and raw material resources and workers' readiness to undergo suffering and hardship determine the prospect of workers' enterprises.

Added to this would be required risk-taking ability and considerable preparedness in acquiring managerial and enterpreneurial skills among the workers. An ownership aspiration has to be injected in the workers' minds.

This calls for a "U" tum of role for workers: from being employees to that of owner. Ownership alone, however, will not do. There needs to be something more than that. Ramaswamy's (1992: 257) revisit to KTL and his observations are worth quoting here: Kamani Tube ceased production in early 1997, and there seems to be little prospect of its ever returning to health. In retrospect, the main lesson of the Kamani experiment is that worker-owned firms have also to become workercontrolled and self-managed if they are to survive. Ownership is only the first step, and perhaps the simpler one. Once a firm has been taken over by a worker co-operative, ways have to be found for putting in place democratic control and management structures. This job must begin when workers are still full of enthusiasm.

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142 Workers' Management and Turnaround of Sick Enterprises If workers' management has to take root as a concept and practice and spread its net to cope with sickness, there has to develop a three pronged strategy. First, a networking would be necessary amongst different workers' enterprise to share each others' experience and learn lessons from their strengths and weaknesses. Secondly, Resource Centres may be set-up at major metropolis in pattern of industry associations. The primary role of such resource centres would be to provide expert advice and guidance to workers' enterprises as and when the need arises. The recurring cost for such centres is to be borne partly by the respective state governments and partly by the workers' enterprises themselves who benefit from such centres. Local professionals in different fields such as finance, production, marketing, personnel, etc. shall have to be roped in for such centres. They have to be pursuaded to offer voluntary services. The third strategy should emphasize on human resource development, more importantly, the development of managerial manpower for workers' enterprises. There is a prime need for emergence of a new breed of turnaround worker managers who will come about by sustained education and training imparted by workermanagement centres different from conventional management schools. The design, content and thrust of such training should be such as to make the new managers perceptive, to be able to comprhened the signals of emerging crises and sort out realistic solutions. The idea of a worker manager seems to be too utopian to translate into practice. However, a beginning has to be made in all earnest. Finally, once workers' management is inducted in a given enterprise, utmost priority should be accorded to build up and sustain its image as a sound and well-founded business organization. The exercise of building credibility calls for an unfailing joint effort on the part of managers, workers and unions.

The NCJM experience renders important lessons. Unit specific sickness needs to be viewed as a symptom of a deeper malady in the industry as a whole. Recovery or turn around of a given unit remains partial till the whole industry is redeemed to a healthy state. It would be too naive to predict when or how soon or to what extent NCJM workers' cooperative will be able to achieve success in its efforts to turnaround. Since workers' cooperative set its feet, the company has experienced many trials and tribulations. The signs of recovery were sighted in early years but eclipsed soon. NCJM's fluctuating fortunes as reflected in successive annual reports

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institutions, uncertain market and price behaviour and erratic supply of raw jute have pushed NCJM towards a blind alley. The only ray of hope in a seemingly unfavourable context seems to be the workers' resilence and determination to withstand all eventualities and look forward to a better future.

REFERENCES Bhowmik, Saritkumar (1988), "Ideology and the Cooperative Movement: Workers' Cooperatives in the Tea Industry," Economic and Political Weekly, xxiii (51), December 17: 2703-2708.

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(1991) "Is a Workers' Sector Viable?" Economic and Political Weekly, Xxvi (50), December 14: 2854-2856.

Dandekar, V. M. (1987) "Let the Workers Own and Manage," Economic and Political Weekly, xxii (9), February 28: M27-M31.

Joseph, Jerome (1989) "Human Resource Regeneration: The KTL Experience," Ahmedabad: Indian Institute of Management, Working paper.

Lieten, G. K. (1987) "Fallacies of Workers Ownership," Economic and Political Weekly, xxii (36-37), September 5-12: 1563-1566.

Mahanti, Tushar K. (1998) "Dilution of Packaging Act to Sound Death Knell for Jute Industry," The Economic Times, New Delhi, December 11, 1998: 6.

Mehta, S. S. and Harode Dinesh (1999) ."Industrial Sickness and Workers: Case of Gujarat Textile Industry," Economic and Political Weekly, xxxiii (52), December 26, 1998-Janary 1, 1999: L71-L84.

Mookherjee, Surya (1988) "Industrial Sickness and Revival: A Study of Select Organizations," Decision, 15 (3/4), July/October: 213-234.

-(1992) "Labour Towards Self-Reliance," The Economic Times, Ahmedabad, March 31.

--

(1993) "Workers' Cooperative and Turnaround of Sick Enterprise: The KTL Experience," Vikalpa, 18 (1), January-March: 15-24.

Narayanan, M. S. (1994) "Industrial Sickness Review ofBIFR's Role," Economic and Political Weekly, xxix (7), February 12: 362-376.

Paton, Rob, et al, (1989) Reluctant Entrepreneurs. Philadelphia: Open University Press.

Ramaswamy, E. A. (1999) "Workers' Co-operatives in India: Lessons from Kamani," Economic and Political Weekly. xxxiv (5), January 30 February 5, 1999: 254-257.

Sen, Ratna (1993) "Jute," in C. S. Venkata Ratnam and Anil Verma (ed.) Industrial Relations.' Current Perspectives. New Delhi, Allied Publishers Ltd,

Thankappan, D. (1993) "Worker Owned Enterprises: The Critical issues and an Over View," paper presented in the National Workshop on Experience sharManagement & Change, Volume 4, Number I (January-June 2000)

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146 Organizational Restructuring in the Era of IT bought $1 billion worth of goods via the internet in 1997 it cut material costs by 10-20 percent and labour costs by 30 percent and about 60 percent of the staff was redeployed to more productive uses.

Information is the glue that holds together the structure of all businesses. A company's value chain consists of all the activities it performs to design, produce, deliver and support its product. In many industries not widely considered information businesses, information actually represents a large percentage of the cost structure. About one third of the cost of healthcare in the United States-some $300 billion-is the cost of capturing, storing and processing such information as patients' records, physicians' notes, test results and insurance claims (Evans and Wurster, 1997).

When managers talk about the value of customer relationships, for example, what they really mean is the proprietary information that they have about their customers and that their customers have about the company and its products. Brands after all are nothing but the information-real or imagined, intellectual or emotional-that consumers have in their heads about a product.

TRENDS

IN TECHNOLOGY

There are certain changes taking place in technology which would have an impact on all the businesses: Convergence of technologies; Miniaturization; and Offering solutions to customers rather than isolated products.

Convergence

of Technologies

The technologies are converging. One finds that the audio and video technologies are converging. The telecom and computer technologies are converging. This convergence has led to the emergence of new organizations which span different industries. For instance, an organization in media industry also ventures into software and cabling industry. Technology has become the common medium for education, information and entertainment.

The technologies for telecom, IT and entertainment are converging. Convergence has broad ramifications for the entertainment and media business.

The convergence of IT and entertainment would imply that one cable would provide telephone, TV and internet among other things. The delivManagement & Change, Volume 4, Number 1 (January-June 2000)

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ery systems-satellite, cable, TV's or PC's would have a lot of action. With DTH (Direct to Home) or cable, the possibilities for broadcasters are endless. Apart from regular channels, they can provide value- added services like internet, telebanking, shopping, telemedicine. The key here is interaction between the broadcaster and the consumer. The consumer can choose what he wants by blocking the rest.With the bulk of India's satellite delivery being done through the cable, it becomes a critical link in the delivery channels.

Miniaturization During the past two decades, the global network of computers, telephones and televisions has increased its information carrying capacity a million times over. Computing power doubles every 18 months or so in line with Moore's law. Today a $2000 laptop is more powerful as compared to what a $10 million mainframe computer was in the mid 1970s. A fibre optic cable can carry 1.5 million conversations while a transatlantic telephone cable could carry only 138 conversations simultaneously. The trends show that attempts are being made towards moving on to nano technology. The chip sizes are getting smaller and smaller. The machines will, therefore, get smaller and smaller. For instance, one talks of keyhole surgeries being performed. With the technological advancements machines would be manufactured having cutters which can perform the entire surgery with the help of a computer without any incision being made in the body. The size of the gadgets would become smaller which, in tum, saves cost eventually.

Offering Solutions There would definitely be a trend towards networking with other firms.

For example, Intel, Kodak and Canon have little in common except digital technology. Kodak clicks pictures on a digital medium, Intel has a microprocessor which recognizes and processes these images and Canon can print these pictures. As a combined entity, the three organizations provide a complete solution to the consumers. So, organizations across different industries are getting networked to reach out to the consumer.

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148 Organizational Restructuring in the Era oUT Origin of Technology The process of change is continuous. In the area of technology, it is surprising to see the sources of innovation. The development of a coloured picture tube used in monitors or televisions owes its origin to polymer chemistry wherein the ability of different molecules to deflect light at different angles is made use of. The innovations in technology might arise from diverse sources such as communications, solid state, aero sop ace and engineering, electronic design, power and energy, industrial electronics, medical electronics, software engineering and so on. So one has to keep a track of changes happening in different areas for identifying and commercializing new technologies.

EFFECTS TIONS

OF INFORMATION

TECHNOLOGY

ON ORGANIZA-

Traditionally, the concept of the firm came in because different functions had to be coordinated. Ronald Coase, a Nobel prize winning economist in 1937 asked why workers were organized in firms instead of acting as independent buyers and sellers of goods and services at each stage of production. He concluded that firms were needed because of the lack of information and the need to minimize transaction costs. A world without firms, in which production was organised entirely through markets, would require full information and no transaction costs; but in the real world it takes time and money to find out about the product being bought and sold.

A firm resolves these problems. The size of firms is determined by the relative costs of buying in services from outside and the overhead cost of providing them in-house. For instance, a car firm can either make tyres by itself or buy them from a supplier. The tyres will probably cost less if bought in the competitive market place, but some of this saving may be offset by higher transaction and co-ordination costs. The higher these costs are, the greater the likelihood that firms will find it more profitable to provide services internally, which will increase their size. However, Information Technology-in the form of e-mail, the internet, fax machine and computerized billing-reduces these costs and increases the attraction of buying goods and services from outside. As these costs fall, the traditional logic of the firm becomes less persuasive. All kinds of goods and services can be outsourced and many employees replaced by outsiders linked by elecManagement

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tronic networks. In this way, IT encourages vertically integrated corporate giants such as AT&T to break themselves up into smaller more efficient. firms loosely connected by networks. Two opposing forces are therefore at work. In industries such as software and entertainment, where network externalities are powerful, IT will favour a greater concentration of bus iness to exploit larger economies of scale, so a firm will tend to increase in size. Elsewhere falling communications costs will favour decentralization.

With the introduction of powerful personal computers and broad electronic networks-the coordination technologies of the twenty-first century-the economic equation changes. Because information can be shared instantly and inexpensively among many people in many locations, the value of centralized decision-making and expensive bureaucracies decreases.

Individuals can manage themselves, coordinating their efforts through electronic links with other independent parties (Malone and Laubacher,1998).

Where once a sales force, a system of branches, a printing press, a chain of stores, or a delivery fleet served as formidable barriers to entry because they took years and heavy investment to build, in this new world, they could suddenly become expensive liabilities. New competitors on the Internet will be able to come from nowhere to steal customers. Similarly, the replacement of expensive, proprietary legacy systems with inexpensive, open extranets will make it easier and cheaper for companies to, for example, bid for supply contracts, join a virtual factory or form a competing supply chain (Evans & Wurster, 1997).

Another development that is being foreseen is the elimination of the middlemen or as it is termed, frictionless capitalism. Through the internet, consumers will have direct access to information about goods and services without having to pay middlemen. Travel agents, estate agents, insurance brokers, retailers and even dating agencies will have to change their way of operations. There will be a direct impact on the business of existing internet shops because producers will be selling their products through electronic stores situated on the internet, and customers will be exercising their choices online from home. Lower communication and transaction costs on the internet will also make it easier for new middlemen to set up business and provide information services. To succeed in the new competitive world, the middlemen would,have to become more efficient and find out ways to offer more value-addition.

Newly emerging technologies such as robotics or artificial intelligence, Management

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150 Organizational Restructuring in the Era oflT which would have a crucial impact on future defence operations as well as on many industrial sectors, merit a closer look in order to become com~ petitive.

Jim Carroll in his work, "Nomadic Workers-Business Organizations and Strategies for the New Millennium" makes the following observations: The number of full-time jobs will begin to shrink dramatically. There will be a dramatic change in the relationship between employer and employee, as a nomadic worker becomes a dominant form of corporate resource.

Companies will hire the best talent regardless of where the person might be. Where people work from will not matter. This trend has implications for the future of both urban and rural economies.

Lifestyle choices will come to dominate career decisions. The nomadic worker carries different attitudes towards life and work and rejects many of the currently accepted norms of the corporate environment.

Their attitudes will revolutionize the world of work.

The walls of its offices would not define the shape of tomorrow's company. It will be defined by the reach of its computerized knowledge network and its ability to tap into the skills and capabilities of the nomadic workers wherever they might be With the use of networks it will become possible to combine a number of small businesses in order to create many of the performance capabilities of a large business (Lawler III, 1997). This is also called the smalV big approach. Lawler III describes a number of companies which have followed this approach which include Benetton, Nike, Reebok and many motion picture and entertainment industry companies. They have built networks of many companies, each with a limited and specific role. At the core of each network is an organization that performs some key functions for the network and coordinates the activities of other network members.

The key advantages of such a network are focused approach, flexibility and replication of a small organization in terms of efficiency and independence from corporate control and bureaucracy to push them to excellence.

ORGANIZATION-RELATED

CHANGES

The share ofInformation Technology in firms' total investment in equipment has jumped from 7 percent in 1970 to over 40 percent in 1996 (The Economist, 1996). Yet, productivity gains in the big industrial economies Management & Change. Volume 4, Number I (January-June 2000)

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have slowed sharply since the early 1970's. The theory that the use of Information Technology will contribute to productivity also needs to be analyzed. Krugman points that just because today's computer is 50 times more powerful than it would have been ten years ago, does not necessarily mean that it will be 50 times more productive. As computers become more productive, people sometimes use them for less than vital tasks, such as playing solitaire. One reason why spending on computers is high is that equipment is replaced ever more frequently by more powerful newer models, long before it is worn out. In a recent study on technology, productivity and jobs, the OEeD points out that a growing slice of spending on R&D and information technology is devoted to product differentiation and marketing in a battle for market share, not to make existing production more efficient.

A second more hopeful explanation for the paradox draws upon history, which shows that there is often a delay of several decades before technological breakthroughs deliver economy-wide productivity gains. Firms take time to identify the most efficient way to use new technology and to make organizational changes. It is a wide diffusion of technology rather than the invention that brings biggest benefits. When computers first appeared in offices in the 1970' s they were used to automate existing tasks such as typing. About three-quarters of all spending on information technology has gone into service industries, such as telecommunications and financial services. Until recently, these were often sheltered from competition, having little incentive to use Information Technology efficiently.

Information technology no doubt will bring about productivity gains, which are not measured by.conventional terms. A large share of the benefits of IT comes through not as cost savings but in the shape of quality improvements, wider consumer choice, better customer service, time savings and convenience. These are important to consumers but difficult to measure.

For example, 24-hour automatic teller machines have clearly made life more convenient for banks' customers, but this added convenience does not show up in the national accounts. On the contrary, as fewer cheques are processed measured productivity appears to fall.

Brian Arthur, an economist at Stanford University, is the leading proponent of the so-called theory of increasing returns. He argues that in a growing number of industries, there is a natural tendency for the market

leader to get further ahead, causing a monopolistic concentration of bus iness. The traditional industries such as wheat and steel are subject to Management

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152 Organizational Restructuring in the Era oflT diminishing returns, but the knowledge-based industries are different.

Knowledge-based industries have three things in common. First they have high fixed costs, such as R&D but low variable costs. The cost of writing a computer programme is the same regardless of the number of copies sold, so higher the sales the greater the profit margin. The same is true for other industries that are heavy on know-how and light on material resources from pharmaceuticals to defence. A second common characteristic is what Arthur calls network realities. In the software industry, for example, this means that the more an operating system is used, the more likely it is to become a standard for the industry and more people will want to use it to ensure that their software is compatible with that of other network users.

The third factor, which strengthens a leader's grip on a market, is the customer lock-in effect. Many hi-tech products are difficult to use. Once a customer has learnt how to use such a computer programme he would hate to switch. If all the three factors are present, increasing returns will magnify the market leader's advantage. By cutting its price, a leader can grab a bigger share of the market, earn bigger profits and spend more on R&D than its rivals, sharpening its edge even further.

In hi-tech businesses, heavy R&D costs, network and lock-in effects are common. Information Technology and globalization also allow the firms to sell cheaply into a bigger global marketplace and so exploit bigger economies of scale. Banking and insurance are becoming subject to mild increasing returns. As banks move to low cost computers and to online networks to process their customers' business, variable costs will plunge.

The bank with the largest customer base will be able to spread its fixed costs more widely than its competitors and therefore, offer the best interest rates, which will enable it to attract yet more customers.

In such a framework, a firm such as Microsoft can conquer a market for at least some time-by exploiting increasing returns, but its ability to abuse power is limited. Although the size of the firm at which diminishing returns begin may have increased in some industries, there are good reasons to question the idea that increasing returns are becoming widespread. For one thing, the rapid pace of innovation, which favours the emergence of new products and thereby opens the door to new entrants, tempers the advantage of the lock-in effect. If a market leader becomes complacent and jacks up its prices or neglects R&D, it risks being shoved aside by rivals with better products. Falling communication costs and the Internet are helping to lower barriers to entry in many markets. In the past only Management

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,big companies could afford big data networks and a global marketing presence; now tiny firms can have the same access. Another factor favouring small firms is that the new technologies tend to be less bulky than the old ones. Unlike car plants or steel mills, new businesses in knowledge-based industries which can often be set up at minimum capital costjust a PC and a telephone. Information technology also brings down the minimum size a firm needs to operate profitably, by making overheads more divisible. Legal and accounting expertise, for example, is now available relatively cheaply online.

MARKETING APPLICATIONS TIle marketing function would change in the light of changing environment.

It would also be affected by changes taking place in the IT area. While the marketing mix elements would remain the same, yet they would have to be handled in a different manner. Product design would become more sophisticated with a need for more inputs from the customer. The supply chain and the distribution channels would be altered radically. By creating web-sites and suitably designing them, the supply chain can be enlarged.

The suppliers need not be from the same country. Best quality at the lowest price and a sense of commitment would be the driving factors for identifying the suppliers. Similarly for distribution of the products, one would also have to rely on the web-based network. For instance, one does not need a physical office to carry out the business. An address on the web is good enough. One could operate a store on the web where all the product offerings are displayed. A customer can place an order. The order is automatically passed on the concerned suppliers who further pass on the instructions to a particular wholesaler or the retailer and the goods can be delivered to the customer. One does not need to carry any inventory on the premises.

The advertising strategy would also undergo a drastic change with the coming of satellite television and the internet going deeper into the market. The number of slots increases dramatically and taking media mix decisions would even become more difficult. With market boundaries melting away on account of the internet, the customer base also enlarges making it an arduous task for the marketer to manage such a wide scale of operations.

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154 Organizational Restructuring in the Era ofIT The typical sales function would also undergo a change. The convent tional role of the sales person was to give information to the customer which is altered. Information is already available on the web and what is required is to offer solutions to the customer rather than make cross comparisons.

Relationship marketing becomes more important wherein one looks at the lifetime value of the sales of the product through an individual rather than one single transaction. This has been made possible with the help of database marketing. ".

The market dynamics is changing at an astounding pace. With increasing competition, consumers certainly have an option to exercise. In light of these changes, consumer focus, therefore, assumes a lot of importance.

Marketers are now looking at building long-term relationships with the consumers rather than analyzing isolated transactions with them. The whole paradigm of marketing is witnessing a sea-change whereby the following shifts are taking place PARADIGM

• • • • • • •

SHIFT IN MARKETING

1980s

1990s

Mass Marketing Passive Consumer One off, Short-Term Limited Use of Technology Serve Customers Well Success Measured by Current Marketshare Success measured by current profits

Personal Participative Lifetime, Long-Term Widespread Use of Technology Serve Customers Differently Success Measured

by Lifetime Marketshare Success measured by lifetime profits

The success as mentioned above is being measured by lifetime marketshare and lifetime profits. For instance, a single pack of cigarettes could just cost a few rupees whereas the lifetime value of one cigarette smoker is RS.l.l 0 lakh over a 10-year period which is roughly 7000 times the value of a single pack of cigarettes. Another estimate points out that the value of all the consumer products and services which one could personally use over the next 25 years would be worth RS.l.4 crore. The value of the products whose buying one would influence would be RS.25 crore over the same period of time. The customer becomes important because Management

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companies lose roughly 15 percent of their customers every year and in three years the company would be left with only half the customers it started with. In three years, the company would be left with half the customers it started with.

Some of the Indian organizations have realized the importance of relationship marketing and have tried to cash upon the opportunity. Citibank, for instance, has launched a product called life-stage marketing wherein it recognizes the needs of the customers as they grow older. As a student, a customer may need a loan for higher education; a few years into his job, he will need money to get married and then a loan to buy a house.

Apollo Tyres has also harped onto relationship marketing and it discovered that the lifetime value of a truckowner in India was Rs 1.68 crores and there are approximately 1,50,000 truck owners in India. Therefore developing a relationship with all of them made a lot of sense. Apollo started a privilege card for the customers and on purchase of every tyre, a customer collected certain points on his card. These points could be redeemed for various awards-ranging from a music system to a trip to New York. The programme works like frequent flyer programmes the airlines run. The Apollo tyres super value programme value club already has 42,000 owners collecting miles on their trucks.

Most of the marketers initiating relationship marketing need to build up a database of their consumers. For instance, General Motors hired McCann to generate a list of 50,000 potential buyers. At the click of a mouse, General Motors can get an idea about how much each of these people can earn, the kind of electronic gadgets they possess, how large their families are, what cars they own and where they holiday. Glaxo has a database of 2,30,000 doctors to initiate a relationship-marketing programme through its Care and Aid programme for medical practitioners wherein it started communicating with each of the 2,30,000 doctors on its list 3-12 times a year.

For relationship marketing, the marketer would have to listen, recognize, understand and then individualize. Orissa Cements Ltd. (OCL) has collected 10,000 names of potential builders in Calcutta, Bhubneshwar, Cuttack and other eastern towns. Orissa Cements Ltd. (OCL) would start talking to these people through a variety of mail offers. If one buys Konark brand of cement, OCL would insure a house for them. Usha International has a database of about 5,00,000 customers, which it is willing to swap with a database of other non-competing brands.

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156 Organizational Restructuring in the Era oflT

Some of the marketers even track the transaction histories of their best customers and provide customers with gift certificates and additional services based on specified percentages of their annual spending at the store.

For instance, customers at the upscale departmental store Nieman Marcus who spend $75,000 receive first class airfare and accommodation for two to a choice of several events, including the Masters Golf Tournament and the Super Bowl.

Many of the marketers believe in creating positive surprises for the customers. Blockbuster, the video rental chain, is trying to use its database of 36 million customers and two million daily rentals to implement a computerized system that recommends' a list of 10 movie titles based on the customer's rental history.

Appropriate market segmentation is also essential for a right strategy.

For that, one needs to answer some of the following questions: Do all my customers have the same service needs and expectations?

If not, can I regroup them into a few manageable clusters?

Does it leave me with enough commonality that I will have a basic common offer?

Who belongs to which segment?

Hear Music, a record and CD music chain in California, identified four service segments: Passive Consumer Eclectic Specialist Collector

Interested in only top hits Wide tastes-little bit of jazz and classical Knows more than the sales people about their selections Looking for masterpieces

The marketer needs to respond to these segments through the training of service personnel. Relationship marketing entails a lot of efforts on the part of the marketer but sustained efforts ensure loyal customers, which certainly is worth all the effort.

The companies can use internet technology to deliver three forms of service to customers (Ghosh, 1998). Ghosh remarks: First, companies are giving customers just about the same level of service through the internet that they can currently get directly from a sales person.

For instance, Marshall Industries, a distributor of electronic components, Management

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Jauhari and Misra 157 makes it very convenient for customers to search for and order parts on line.

They can place an order for parts, pay for them electronically, tTack the status of previous orders and even speed deliver by connecting directly from Marshall Industries' Website to the shipping company's site. Second, companies are using new internet technologies to personalize interactions with their customers and build customer loyalty. One way is to tailor the information and options customers see at a site to just what they want. For example, Staples is creating customized supply catalogues that can run on its customers' intranets. These catalogues contain only those items and prices negotiated in contracts with each company. Third, companies can provide valuable new services inexpensively. A company could, for example, draw on data from its entire customer base to make available wide ranging knowledge on some topic. One could ask questions or seek clarifications. For example, Amazon.com, the online bookstore, encourages customers to post reviews of books they have read for other visitors to see, making it possible for customers to scan reviews by peers-in addition to those from publications such as the New York Times-before deciding on the book. Investments in the electronic channel displace traditional sales, marketing and service costs; moreover, the technology allows companies to offer increasingly higher level of service without incurring incremental costs for each transaction.

Pitt et al. (1996) have illustrated as to how different organizations have made use of the web to achieve different marketing objectives: Gain access to previously unknown or inaccessible buying influences; Project a favourable corporate image; Provide product information; Foster and encourage consumer involvement with the product range; â&#x20AC;˘ Generate qualified leads for sales people; Handle customer complaints, queries and suggestions; and Serve as an electronic couponing device.

In India, companies like Maruti Udyog, Henkel, DuPont, Asea Brown Boveri, Essar Ispat, Bajaj Auto, TVS Electronics and Sam sung Electronics are shifting substantial chunks of their business from physical space to virtual space. This has led to reduced time periods for production schedules; for instance, when a dealer for a car company sends an e-mail to Maruti asking for ten gear box assemblies, the message goes to the database which rummages within the system for the right part, it then sends the order for despatch to the warehouse and a copy of the invoice to the dealer. Within an hour, the dealer gets the message about the availability Management

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158 Organizational Restructuring in the Era ofIT of gear box assemblies. If he needs them urgently, they are sent to him by the next day via an express company; otherwise a door to door service delivers them within three to four days. Earlier, processing requests for spares would take between 7 and 15 days which has been reduced to a few hours with the automated systems. In 1997, Maruti Udyog did business worth Rs. 300 crore in spares over the intranet which amounts to nearly Rs. 1 crore a day. The benefits are faster cash in the system, reduced cost of working capital, faster movement of inventory, no piling up, slashing of STD and fax bills.

CONCERNS

FOR IMPLEMENTING

INFORMATION

TECHNOL-

OGY IT certainly offers a lot of advantages to the organization, yet in implementing, one needs to carefully look at certain issues which could create problems if overlooked.

A company must fully understand its requirements before embarking on e-business. National Film Development Corporation site offers information about the films it airs on six channels. In return for billing the channels using its films, NDFC gets to sell over 8300 seconds of commercial time to advertising agencies. It reckoned that if the agencies booked at least 50 percent of the commercial time through the net, the cost, time and paperwork saved would be worth RS.10 lakh. Two years after the site was set up, just about 25 percent of the total airtime it sells is booked through the net. Advertising and media agencies are extremely apprehensive about issuing release orders over the net because they contain details of the advertisement, the rates and so on. A Forrester survey of 63 companies in the US showed that though all of them were placing their orders on the net, only 38 percent confirmed the delivery and 41 percent confirmed payment through the electronic medium. Poor security perception is also one reason holding up the use of the net for doing business.

What is missing, is an effective system of payment. While the accounting gets done on the net, the disbursement happens manually.

Ghosh (1998) points out that the opportunity for those companies that move first to establish electronic channels is a threat to those that do not.

When customers choose to do a business through an internet channel, they make an investment of their time and attention. If a site involves personalization, it means revealing details which they would not like to do again Management

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and again. If sensitive information is also involved, the average customer, once he or she has established a relationship with one electroli.ic seller, is unlikely to go through the effort again with many suppliers. Companies that do not want to participate in internet commerce may be forced to do so by competitors or customers.

Another issue is the compatibility of facilities. While the company may possess state of art facilities, the suppliers, users and dealers may not have such facilities-which, impedes routine transactions over the net. It is documented that 60 percent to 70 percent of the problems in a network are attributed to cabling. It is important to understand the need for testing and the methodology that should be adopted for assuring performance of an installed cable plant.

Planetasia.com which offers e-commerce products estimates that the total cost of a solution in India would be between RS.3 lakh and RS.25 lakh, depending on the company size. E-business is most suitable for companies with a large network, distribution chain and vendor network. This means transportation companies and those that sell automobiles, fast moving consumer goods, consumer durables. Each of these companies deals with thousands of small vendors, suppliers and distributors across a badly connected country like India. For them, the net makes up for the lack of basic infrastructure as in the case of Maruti.

Often one hears of the need for use of enterprise systems. An enterprise system (ES) enables a company to integrate the data used throughout its entire organization. Davenport (1998) points out that because of the growing number of horror stories about failed or out of control projects, Mobil Europe spent hundreds of millions of dollars on its system only to abandon it when a merger partner objected. Dow Chemicals spent seven years and close to half a billion dollars implementing a mainframe based enterprise system; now it has decided to start over again on a client server version. Companies fail to reconcile the technological imperatives of the enterprise system with the business needs of the enterprise itself. An enterprise system, by its very nature, imposes its own logic on a company's strategy, structure and culture. It pushes a company towards full integration even when a certain degree of business segregation may be in its best interest. It pushes a company towards generic processes even when customized processes may be a source of competitive advantage. A good ES is a technological tour deforce. At its core is a single comprehensi ve database. The database collects data from and feeds data into modular apManagement

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plications supporting virtually all of a company's business activities-across functions, across business units, across the world. When new information is added at one place, related information is automatically updated. Some degree of ES customization is possible. Because the systems are modular, for instance, companies can install only those modules that are most appropriate to their business. However, the system's complexity makes major modifications impracticable. As a result, most companies installing enterprise systems will need to adapt or even completely rework their processes to meet the requirements of the system. For companies that compete on cost rather than on distinctive products or superior customer service, enterprise systems raise different strategic issues. The huge investment required to implement an ES at large companies typically range from $50 million to more than $500 million-it needs to be weighed carefully against the eventual savings the system will produce. In some cases, the companies may find that by foregoing an ES they can actually gain a cost advantage over competitors that are embracing the systems. They may not have the most elegant computer systems or the most integrated information flows and processes, but if customers are concerned only with the price, that may not matter. The federalist model perhaps raises the most difficult question-what should be common in the organization and what should be allowed to vary. Corporate and business unit managers will need to sit down together-well before system implementation begins-to think through each major process in the company. Difficult questions need to be raised: How important is it for us to process orders in a consistent manner worldwide? Does the customer mean the same thing in every business unit? Answering such questions is essential to making an ES successful.

The issues mentioned above are not comprehensive in scope. The trends that have been mentioned are predictions based on observations.

How it really materialises, is yet to be seen. In India, where a substantial number of people live below the poverty line and the quality of infrastructure is still poor, it will still take a long time for e-commerce to really pervade the entire country.

REFERENCES Davenport, Thomas H. (1998) "Putting the Enterprise into the Enterprise System," Harvard Business Review, July-August.

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Jauhari and Misra 161 Evans, Philip B. and Thomas S. Wurster (1997) "Strategy and the New Economics of Information," Harvard Business Review, September-October.

Ganesh M. (1998) "The Future of Business," The Economic Times. July 31-6 Aug. Ghosh, Shikhar (1998) "Making Business Sense of the Internet," Harvard Business Review, March-April.

Lawler III, E. E. (1997) "Rethinking Organization Size," Organizational Dynamics, Autumn.

Mal.one, T. W. and R. 1. Laubacher (1998) "The Dawn of E Lance Economy," Harvard Business Review, September-October.

Mukheljee, R. and A. Vaidyanathan (1998) "Lights! Camera! Where's the Mouse')" The Economic Times, December 18-24, 1998 Pitt, 1.P. Berthon and R. T. Watson (1996) "From Surfer to Buyer on the WWW: What Marketing Managers Might want to Know," Journal of General Management, 22(1), Autunm.

Sitaramaiah, A. (1998) "Testing and Certifying," The Economic Times, July 3 iAug 6.

The Economist (1996) "The Hitchhiker's Guide to Cybereconomics," September.

Vinnie Jauhari, Ph. D., is Associate Professor & Associate Dean, Institute for International Management & Technology, 336, Udyog Vihar IV, Gurgaon-l22 00 I. She has to her credit a number of papers published in Indian journals. Her areas of interest are strategic management, technology management, and marketing.

Kamlesh Misra, Ph. D., is Director, Institute for International Management & Technology, 336, Udyog Vihar IV, Gurgaon-122 001. His interest areas include strategic management, economics of industry and financial management. Formerly, he was the director of Institute for Integrated Learning in Management, New Delhi. He has held teaching positions at Norteastem University, University of Pittsburgh, USA and National Institute of Public Finance and Policy (NIPFP), New Delhi. He has authored/edited more than six reports of national significance at NIPFP, New Delhi on areas of local finance and state-local relations, and two books-Housing the Poor in Third World Cities, and Million Cities of India (co-edited).

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MANAGEMENT STYLES AND FINANCIAL PERFORMANCE OF ORGANIZATIONS

Irfan A. Rizvi The impact offour tFpes of management styles treated as antecedent/independent variables is seen on the financial peljormance of the organization assessed throughfinancial ratios. In addition, the combined impact of management style and certain intervening. variables (job satisfaction, group cohesiveness, organization commitment) onfinancial ratios is also studied. The study is conducted over 150 employees (42 managers, 108 non-managers) of an organization belonging to the Office Automation Industry. Coaching style of management, both individually and in combination with intervening variables emerges to be having maximum positive impact on financial peljormance, followed by pacesetting style Coercive style relates negatively with financial performance, both individually and in combination with intervening variables. Authoritative style fails in producing any significant impact onfinancial performance. Results reveal that antecedent variables (management styles) when combined with intervening variables in right permutation, are Iwt only better predictive of organizatio".financial peljormance but also have positive impact on it.

INTRODUCTION

.

orld over, particularly in developing economies of China, India, Taiwan, etc., Governments have resorted to economic and . administrative reforms to improve the health and wealth of the nation and of its people. All this is being done with the objective of giving a boost to the economy by creating an environment conducive to commercial activity. In order for these efforts to bear fruit, the effectiveness in the performance of all agencies and organizations involved in these areas becomes crucial.

The performance of organizations, especially of business organizations on financial terms, has been a subject of major concern and controversy for

w.

The author acknowledges the critical comments and suggestions by Dr. Anand Prakash (Reader, Department of Applied Psychology, University of Delhi), and the logistic support provided by the members of The Action Research Unit (TARU), New Delhi for conduction of this research.

Management & Change. Volume 4, Number I (January-June 2000) @ 2000 Institute for Integrated Leaming in Management. All Rights Reserved.

164 Management

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quite some time or in this era of "market economy" dominated by "mass consumerism," fostered by multinationals operating as big sharks, this issue becomes additionally significant. In developing economies like India the performance of domestic industries and their ability to compete with outsiders becomes a matter of national pride.

Management theorists, researchers, teachers, and practitioners have all addressed this performance issue from various perspectives. Unfortunately there is still lack of consensus as to what should constitute organizational perfonnance, and how effective perforn1ance of business organizations may be achieved. This study is an attempt to revisit the performance effectiveness of organizations.

As it would not be humanly possible to address the perfonnance of a plethora of organizations involved in myriads of functions, this study is limiting itself to only industrial organizations, which are, purportedly, the heart and soul of the economy.

THEORETICAL

FRAMEWORK

The role of management styles in bringing about performance effectiveness of business organizations has been a subject of great interest all along.

In theory, the impact of management styles on organization effectiveness has been addressed mainly through two approaches, viz, the "goal models approach" and the "systems model approach."

The "goals model approach" (Thorndike, 1949; Katz et al., 1950; Kohn and Morse, 1951; Morse, 1953; Drucker, 1954; Goergopoulos and Tannenbaum, 1957; Price, 1968; and Reddin, 1970) assesses the effectiveness ofleadership or management style by the extent of its impact on achievement of desired output, results, and turnover, etc. In this approach primary importance is given to the ability of management styles in sustaining the profit making activity of the organization (ultimate end-objectives), and the means or resources are considered subservient and subject to manipulation and exploitation to achieve these "ends."

On the other hand, the systems model approach (Parsons, 1991; Caplow, Etzioni etc.) tends to view organization effectiveness and the impact of management style on it on the basis of its ability to: Sustain the organization as a social system in a dynamic environment; Maintain a state of equilibrium in the dynamic interaction amongst its constituent elements within, and exchange interaction without; and Management

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Foster all activities towards the achievement of the net results or goals of the systems.

A comparison of the above two approaches reveals that, the goals model approach is too simplistic and mechanical with total ignorance of the "means," especially the "human" inputs while assessing management styles and organization effectiveness. On the other hand, the "systems model approach" views the whole process in a "system dynamics" way with equal emphasis on inputs as well as the output, though without much consideration for measurability of the same and comparison across organizations. (Mahoney, 1967).

In an attempt to reconcile and integrate the two approaches and to facilitate comparison of effectiveness across organizations, a third approach viz., "Mid-range Criteria approach" was visualized. (Druker, 1954; Georgopoulos and Tannenbanm, 1957; Likert, 1961; Miles, 1965; and Mahoney, 1%7).

According to Mahoney (1967), the "mid range criteri~ are measures, generally predictive of ultimate criteria achievement and are more general in applicability across organizations." Thus mid-range criteria have been visualized as: a) Intermediate between unique operating measures which apply to single organizations, and general criteria applicable to all organizations (systems model approach), but which cannot be assessed except at terminal points in the organization's life (goals model approach). b) More generally applicable than the unique measures but not as conclusive as ultimate criteria since they are viewed only as predictive of ultimate success. c) They may not be consciously sought by an organization; nevertheless, their association with the "means" makes them crucial for achieving organizational effectiveness.

Rensis Likert (1961), working on similar lines, suggested a paradigm, which he used not only to assess the organizational effectiveness but also to test the effectiveness of various management styles. Likert in this paradigm visualized organization effectiveness with two kinds of events in the organization: The outcome of the leadership event; Total organizational effectiveness on both means/mid-range criteria, and ultimate/end-resultiaccounting criteria.

Likert identifies three variables-causal, intervening and end-result, which Management & Change, Volume 4, Number 1 (January-June

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are useful in discussing the organizational effectiveness and the impact of the causal variables on it.

CA USAL VARIABLES Causal variables are those variables that influence the course of development within the organization and its results or accomplishment. They are subject to alteration or change by the organization. The examples of causal variables are leadership strategies, skills, and behaviours; management decisions; and the policy and structure of the organization.

MID RANGE/INTERVENING

VARIABLES

Similar to Mohoney's mid-range criteria, the intervening variables represent the prevalent condition of the internal state of the (human resources) of the organization. Subject to the effect of the causal variables, the intervening variables reflect the organization members' commitment to objectives, motivation, role satisfaction, morale, cohesiveness, communication and problem solving ability, etc.

OUTPUT

OR END-RESULT

VARIABLES

Output or end-result variables are the dependent variables that reflect the level of achievements of the organization on their desired objectives or goals, e.g., production, costs, sales, earnings, turnover, etc.

RELA TIONSHIP

AMONGST

THE THREE

VARIABLES

According to Likert (1961), the level or condition of the intervening variables is largely determined by the causal variables, and these in turn influence the end-result variables. Any attempt to alter intervening variables directly to bring about a positive change or improvement may not bear much fruit, unless the efforts are directed towards modifying them through altering the causal variables. Similarly any attempt to modify end-result variables would be more successful if it is introduced at the causal variable level than at the level of intervening variables.

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PRESENT STUDY In the present study, a modified version of Likert's organizational effectiveness model is used to assess the role of management styles of the organization in bringing about high achievement at the level of desired endresults/states, output variables, or financial outcomes. In this modified model, the management styles have been used as "antecedent variables," rather than as "causal variables" (as in Likert's model). Since it is assumed that the financial outcomes do not have a "cause and effect" relationship with management style/s, and a large number of other factors and variables also have a bearing on such end results e.g., production technology product characteristics like quality and cost, market trends, advertising, etc.

At the level of "intervening" variables (Likert, 1961) or "mid-range criteria" (Mahoney, 1967), certain "Human Resource" related variables are taken, which are conceptualized as the "individual-organization intersectional outcomes" and act not only as the building blocks of the organization system, but also as its functional entities.

The intervening variables are related to the employees' feelings and attitudes towards their work roles; their relationship with other constituent elements of the organization; and towards the organization as whole, and tend to play an active mediator role between the antecedent variables, and the end state variables. These intervening variables are: Job satisfaction: human resource affective reactions towards their jobs and its outcomes, the extent to which their membership with the organization fulfills their individual desires and goals; Group cohesiveness: the extent to which the members' relationship with each other in cooperative mutually beneficial and couple memory towards the organization.

Organization commitment: the extent to which the organization members voluntarily imbibe organizational goals, and exert themselves to achieve them.

In other words, the intervening variables used in this study represent the extent to which the contented, satisfied and positively oriented individual members of the organization are voluntarily embedded into a cohesive group and how such groups in a voluntarily functional manner are embedded into the organization and its structure.

The end-result variables that are treated in this study represent the financial outcomes desired by an organization, that is the financial stability Management

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Table-I coutd ...

2100-3000 3100-4000 4100-5000 5100-600 6100-& above

2 12 8 20

TOTAL EXPERIENCE

4 28 19 48

38 30 11 1

of Organizations

35 28 10 1

38 32 23 9 20

36 24 14 6 12

(YEARS)

1..5 6-10 11-15 16-15 21 & above

4 21 10 2 5

EXPERIENCE

IN TIllS ORGANIZATION

1-2 3-5 6-8 9 & above Number

Performance

7 16 14 5 42

11 50 24 5 10

17 38 33 12 100

64 33 11 2 1

51 40 11 6 108

57 31 9 2 1

47 37 10 6 100

65 54 21 4 6

58 56 25 11 150

44 36 14 2 4

39 38 17 6 100

Research Instrument The information on the variables of the study were collected through an unsigned research instrument consisting of standardized scales that had been validated and previously shown to be reliable by other researches and the author himself.

Managemellt Style Management style, which is defined as the "consistent pattern of behaviour shown by managers while acting their job roles," is measured through a 36item questionnaire developed by McBer and Company (I982). The questionnaire measures management styles on six dimensions viz. coercive, authoritative, affiliate, democratic, pacesetting and coaching. The questionnaire has two versions, managerial version for self-assessment of managers of their own management styles, and the employee version for tapping the perceptions and feelings of non-managers of the management styles of their managers. Both versions have been used here to get a realistic, Management

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unbiased and complete picture of the management styles of the organization under study. The test-retest reliability of the questionnaire varies between 0.68 to 0.82, and it has shown high criterion validity. The questionnaire was adapted to Indian conditions by Rizvi, Ganguli and Shankar (1990).

Job Satisfaction Job satisfaction which is defined as the "affective response resulting from the job is measured through a culture free instrument developed by Hoppock (1935), and revalidated by McNichols, Stahl and Manley (1978). The questionnaire has four global items measuring response on 7-point Likert scale. The reliability and internal consistency of the instrument is quite high as depicted by coefficient alphas, ranging from 0.76 to 0.89.

Group Cohesiveness Group cohesiveness that is a "resultant of all the forces working on members to remain in the group" is measured through an eight-item iilstrument developed by Dobbins and Zaccaro (1988), and adopted to India conditions

by Rizvi, Ganguli, and Shankar (1990). The responses on this instrument are collected on a 7 point Lifetree scale. The reliability of the instrument as depicted by coefficient alpha is 0.91.

Organization

Commitment

Organization commitment which is defined as the "willingness of social actors to give energy and loyalty to the organization" (Luthans, Baack and Taylor, 1987), and "strong belief in and acceptance of the organizational goal and values" (Porter, 1974), is measured through an instrument developed

by Meyer and Allen (1984). This is an eight-item questionnaire soliciting responses on a 5 point Likert scale. The reliability of the instrument assessed through Cronbach's alpha varies between 0.84 to 0.88.

Organization

Performance

The financial performance of the organization is assessed through three

types of financial ratios calculated over three financial year periods, viz., 1986-87, 1986-87, and 1988-89 and expressed in percentages. The ratios Management & Change, Volume 4, Number 1 (January-June

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172 Management Styles and Financial Performance of Organizations used here have the recommendations of various financial experts (Gooding and Wagner, 1985; Holt, 1987; Hill, 1988; and Pearce and Robinson, 1988) for their ability to tap financial performance accurately. The reliability and validity of these ratios in assessing financial performance of organizations is further supported by "the Economic Times-Harvard Business Association ofIndia" (The Economic Times, April 29, 1989) which uses these ratios to adjudge the best performing companies ofIndia every year.

The ratios are: Current Ratio (CR) Current ratio refers to the liquidity status of the organization, i.e., its ability to meet its short term financial and other obligations, and thus remain solvent.

Current ratio is a ratio of current assets to current liabilities of the organization, 1.e.,

Current Ratio (CR)

Current Assets/Current Liabilities

=

Activity Ratios (AR) Activity ratio refers to the organization's "ability to utilize its resources effectively." Calculating asset turnover ratio, which gives an idea about turnover over plant and equipment, i.e. the fixed assets, help in assessing the activity of the organization.

Asset Turnover

=

Sales/Total Fixed Assets.

Profitability Ratio To assess the profitability of the organization, i.e., its profits, etc., a ratio of total earnings to sales is calculated, which gives an idea about the return on sales (ROS) for the organization.

Return on Sales (ROS)

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Earnings/Sales

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RESEARCH DESIGN The research design of the present study and the statistical treatment of the data can be understood from figure 1.

Research Design (Fig. 1) ANTECEDENT

VARIABLES

Management

Style

+

IMS.nml

IMS.nml

MSCO, MSAU, MSPA, MSCOA ;:l

cz::

~ >-'" rf1

::/'MUIt.

INTERVENING VARIABLES

/ (MS, IV) vs. ERU

IV

JS

GC OC CR AR

ROS

-

...\

JS GC OC

Legend: MS. nm MS.m

::t

R

VS.

ERU

END RESULT VARIABLES Financial CR AR ROS

Ratios

Management Style as Perceived by Non-Managers Management Style Followed by Managers Job Satisfaction Group Cohesiveness Organization Commitment Current Ratio Activity Ratio Return on Sales

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174 Management Styles and Financial Performance of Organizations

ANALYSIS OF DATA AND RESEARCH FINDINGS Data on the distribution characteristics of and interrelations among the study variables are presented in Table-2. The perusal of the means on the four management style dimensions reveals that authoritative style (MSAU) is the dominant style of the organization closely followed by the coaching style (MSCOA).

Hypothesis 1

Management Styles vs. Organization Financial Performance

Table 2 shows that management styles correlate significantly with various financial ratios, barring in case of authoritative style (MSAU). The coercive style (MSCO) has significantly high negative correlation with the financial ratios, and has negative correlation only with AR. The coaching style (MSCOA) emerges to be having consistently significant and high positive correlation with all the three financial performance indicators, CR, AR & ROS. These results are in consonance with the findings of earlier studies by Lieberson and O'Connor (1972); Hall (1977); Pfeffer & Salancik (1978), Weiner & Mahoney (1981), Thomas (1988) Rizvi, Ganguli and Shankar (1990), and Saxena (2000).

Thus, the null hypothesis 1, proposing no relation between various dimensions of management style (antecedent/independel)t variables) and the financial ratios (and results variables) is rejected.

Hypothesis 2

There exists no relation between intervening variables and financial performance of the organization

Table-2 further reveals relationship between the intervening variables, (JS, GC, OC), which are the outcomes of individual-organization interactions (or the internal state of the human resources of the organization) with the end result variables i.e., financial ratios (CR, AR, ROS). The direction of interrelationship emerges to be positive thereby proving that members' positive feelings and attitudes towards their work Uob satisfaction), co-employees (group cohesiveness), and organization (organization commitment) has positive influence on organization performance. A contention held by Drucker, 1954: Geogropoulos & Tannenbaum, 1957; Likert, 1961; Miles, 1965; Mahoney, 1967; Child, 1974. The magnitude of this relationship is mild and Management

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Table-2 Mean, SD and Inter Correlation amongst

MSCO MSAU MSPA MSCOA JS

GC OC CR

AR ROS

Mean

SD

5.51 7.06 5.61 6.761 19.69 39.74 27.01 146.'11 233.85 7.19

2.00 1.60 1.90 1.63 3.25 7.35 5.36 37.05 47.81 3.41

N = 150 * = Significance at 0.05 level **=SignificanceatO.Ollevel

MSCO

MSAU

1.00

0.11 1.00

MSPA -0.13 -0.41 ** 1.00

MSCOA -0.35** -0,26** -0.16* 1.00

Study Variables

JS -0.25** -0,07 0.01 0.22** 1.00

GC -0.12 -0.01 0,03 0.15* 0.42** 1.00

OC -0.29** -0.11 0.D3 0,22* 0.48** 0.50** 1.00

CR -0,26** -0.13 0.33** 0.38** 0,13 0.11 0,14 1.00

AR

ROS

-0.16* -0.28** -0.17* -0.12 -0,31 ** -0.17* 0,38** 0.29** 0,17* 0.21 ** 0,05 0,09 0.17* 0.17* 0,65** 0.25** 1.00 0.17* 1.00

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176 Management Styles and Financial Performance of Organizations

hence intervening variables have only a little impact on financial ratios or end-results (only job satisfaction and organization commitment of the members tend to correlate significantly positively with two of the financial performance indicators, viz., AR & ROS).

The comparison ofthe magnitude ofthe cOlTelationcoefficients between antecedent variables (management styles) and financial ratios with that of intervening variables and financial ratios reveals that antecedent variables have higher cOlTelation and thus higher impact on financial outcome than the intervening variables.

Out of nine correlation coefficients calculated between three intervening variables (JS, GC, OC) and three end-result variables (CR, AR, ROS) only 50% of them (four correlation coefficients) are statistically significant. In the light of the above empirical finding and in consideration of the theoretical contentions held by Likert, Mahoney, Child etc. the null hypothesis 2 is accepted tentatively.

Hypothesis 3:

Antecedent Variables vs. Intervening Variables

Table 2 reveals that MSCO operating as independent/antecedent variable has significant negative relation with JS and OC, whereas MSCOA has significant positive relation with all the three intervening variables JS, GC, and Oc. MSAU also related to the intervening variables negatively but MSPA has non-significant positive relationship with them.

Thus, the two extreme forms of management styles, one totally taskoriented (MSCO), have contrasting effect on job satisfaction, group cohesiveness and organization commitment (the antecedent variables). The above finding is amply supported by empirical studies-YukI (1971), Kakar (1971), Gruenfield and Kassum (1973), Dey (1975), Sinha (1980), Angle and Perry (1981), Morris and Sherman (1981), Pascarella (1981), Mowday, Porter and Steers (1982), Licata (1983), Alvi and Ahmed (1987), Rizvi and Singh (1987), Rizvi and Shankar (1987), and Beehr and Gupta (1987).

Thus null hypothesis 3 in the light of above finding is rejected.

Hypothesis 4:

Interactive/Combined Effect of Antecedent and Intervening Variables on Organization Financial Performance

To see as to how various combinations of antecedent variables (management styles-MSCO, MSAU, MSPA and MSCOA) and intervening Management

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variables (IS, GC, OC) relate with end-result variables (financial performance indicators, CR, AR & ROS), the multiple regression analysis technique was used. The results of this analysis are shown in Tables-3, 4, and 5.

Table-3 reveals that various combinations of management styles and intervening variables are better predictors of the financial outcome, CR, than the antecedent or intervening variable alone. (Most of the F ratios are significant at 0.01 level). Various combination ofMSCOA and MSPA with intervening variables tend to account for variance between 13 percent to 22 percent in CR, thus emerging as best predictors. MSAU as the antecedent variable has predictive value among all the management styles.

Table-3 Multiple Correlation between the Dependent Variable (CR) and Combination of Independent (MS) and Intervening Variables (IV) Dependent

Predictor

Variable

Variable

MSCO. JS MSCO. GC MSCO.OC MSAU. JS MSAU. GC MSAU.OC MSPA. JS MSPA.GC MSPA.OC MSCO. JS MSCOA. GC MSCOA.OC

(CR)

Mult. R. 0.29 0.27 0.33 0.23 0.20 0.15 0.38 0.46 0.41 0.47 0.44 0.36

R. Sq.

Adj. R. Se.

F

0.08 0.07 0.11 0.05 004 0.02 0.14 0.21 0.17 0.22 0.19 0.13

13.33** 11.61 ** 18.52** 7.60** 5.99* 310 25.26** 29.58** 26.18** 31.51 ** 25.22** 19.01 **

0.08 0.07 0.11 0.05 0.04 â&#x20AC;˘ 0.02 0.14 0.21 0.17 0.22 0.19 0.13

Tables- 4 & 5 show a continuation of the same trend as in table 3.

Various combinations ofMSCOA with intervening variables tend to account for significant variances between 8 percent to 19 percent in AR (all F-ratios significant at 0.01 level), and between 7 percent to 9 percent on ROS (all Fratios significant at 0.01 level). MSPA, in combination with intervening variables, emerges as the second best predictor for the variance in AR (7-9 percent, F < 0.01), and ROS (6-8 percent, F < 0.01).

MSCO, which has negative correlation with both intervening variables as well as with the end-result variables, in combination with intervening Management

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178 Management

Styles and Financial Performance

of Organizations

variables does improve in its predictive quality. MSAU, am0!1gst all the four antecedent variables, has least effect on end results, both individually as well as in combination with intervening variables.

Table-4 Multiple Correlation between Dependent Variable (AR) and Combination of Independent (MS) and Intervening Variables (IV) Dependent Variable (AR) Predictor Variable MSCO. JS MSCO.GC MSCO.OC MSAU. JS MSAU.GC MSAU.OC MSPA.GC MSPA.OC MSCOA. JS MSCOA.GC MSCOA.OC

Mull. R.

R. Sq.

Adj. R. Sq.

F

0.21 0.19 0.23 0.13 0.13 0.18 0.27 0.29 0.45 0.38 0.30

0.04 0.04 0.05 0.02 0.02 0.03 0.07 0.08 0.20 0.14 0.09

0.04 0.04 0.05 0.01 0.01 0.09 0.07 0.07 0.19 0.14 0.08

4.98** 5.10* 6.32* 2.21 2.21 12.51 ** 11.90** 11.65** 24.66**.

21.58** 16.18**

Table-5 Multiple Correlation between Dependent Variable (AR) and Combination of Independent (MS) and Intervening Variables (IV) Dependent Variable (ROS) Predictor Variable MSCO. JS MSCO.GC MSCO.OC MSAU. JS MSAU.GC MSAU.OC MSPA. JS MSPA.GC MSPA.OC MSCOA. JS MSCOA.GC MSCOA.OC

Mult. R.

R. Sq.

Adj. R. Sq.

F

0.28 0.28 0.30 0.21 0.17 0.17 0.28 0.25 0.26 0,33

0.08 0.08 0.09 0.04 0.03 0.03 0.08 0.06 0.07 0.11 0.08 0.10

0.07 0.07 0.08 0.04 0.03 0.03 0.08 0.05 0.06 0.09 0.07

13.63** 12.17** 14.25** 6.34 6.11 5.97 12.50** 7.44** 8.93** 16.16** 11.93** 15.51**

0.29 0,31

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DISCUSSION

I

I

The study examined how the two sets of variables, antecedent and intervening, individually and in interaction with each other produce an impact on the endresult variables. The results of correlation analysis reveal that individually both the sets of variable a effect the end-result variables, but the effect of antecedent variables, i.e., management styles is statistically more significant in comparison to the effect of the intervening variables. This outcome is in consonance with the earlier held views of Mahoney (1967) and Likert (1961).

The results further reveal that management styles, manipulated as antecedent/independent variables produce much more significant effect on end-result variable when they work in tandem or combination with the intervening variables. Interestingly, even those antecedent variables which individually do not produce any effect on end-result variables (e.g., MSAU in Table-2), produce significant variations in them when they combine with intervening variables (e.g., MASU x (JS, GC, oq, Tables-3, 4 & 5).

Coaching style (MSCOA) emerges to be having maximum positive and significant effect on all the financial ratios (CR, AR, ROS; Table-2) and the same is repeated when it combines with the intervenIng variables and interacts on end-results. This indicates the validity of the earlier research findings by Rizvi, Ganguli and Shankar (1990) which revealed coaching style to be having maximum impact on JS, GC and OC, and also on financial performance of the organizations.

A comparison of the impact of MSCO & MSP A individually on intervening variables (JS, GC, OC) reveals that MSCO has more significant impact on intervening variables than on end-result variables, whereas MSP A has more significant impact on end-result variables than intervening variables.

(Table-2). But MSPA has more significant correlation with end-result variables individually (all three correlation significant at 0.01 level) in comparison to MSCO (only two correlation coefficients significant at 0.01 level and less in magnitude than MSPA). Thus MSPA is able to produce more variance in end-result variables, when it combines with intervening variables. This proves that financial.performance or end-result variables are subject to variation more due to antecedent variables than intervening variables. (Likert, 1961). This also refutes the contention of "goals model" proponents that "end-results" of the organization can be achieved by

concentrating only upon antecedent and end objectives, and intervening variables do not play any significant role in this process.

I

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Management & Change, Volume 4, Number I

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180 Managemep.t Styles and Financial Performance of Organizations This can be further seen from the correlation values between MSCOA and intervening variables, and MSCOA and end-results variables (Table-2, all correlation coefficients significant at 0.0 I level) and its combined effect with intervening variables, on CR, AR, & ROS (Tables 3, 4, 5-all F ratios significant at 0.01 levels).

Thus it isproved beyond doubt that intervening variables do playa significant mediator role between antecedent and end-result variable relationships.

CONCLUSION In conclusion, in the light of the results of this study, it can be argued that the Likert (1961) and Mahoney (1967)' "mid-range criteria" or "intervening variables" have to be given due consideration while making an attempt to increase the achievement of end-result objectives (i.e. financial outcomes) of the organization. For increasing the effectiveness of the organization attention is to be paid not only to the antecedent variables and their quality, but also to the quality of their impact on intervening variables. The employee centered coaching style (MSCOA), in contrast with the task centered coercive style (MSCO) not only affects the intervening variables in a significant positive manner but also causes a significant improvement in financial outcomes.

The other significant conclusion that can be drawn from this study is that the management styles either individually or in combination with intervening variables, account for only a limited percentage of variance in financial performance indicators (minimum 3 percent to maximum 22 percent), and a major portion of the variance remains unaccounted for. This does not give enough reason to establish a "cause and effect" relationship between management style and financial performance outcomes of any organization. Hence it would be better to label management styles as "antecedent" variables for organization performance and effectiveness, rather than "causal" variables.

IMPLiCA TIONSOF

THE STUDY

The lessons drawn from this study have the following practical implications for business organizations: The management styles ofthe organization need to ensure positive impact on the employees, as without this an organization cannot achieve its Management

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bottom line.

Extremely task centered management styles followed in an organization not only lower the morale, commitment, and team-work but also lead to poor financial results.

People-centered styles characterized by features like participative decision making, empowerment of employees, and helping people grow enhances commitment and involvement of employees to organizational goals. This positive impact on people motivates them to channelise their energies towards achieving higher financial gains for the organization.

Organizations, involved in high-end activities like office automation, information technology, and consulting, that use knowledge workers for achievement of their objectives have to follow management styles that are more worker friendly, if they wish to get the best results out of them.

Organizations that ignore employee satisfaction and morale by following autocratic management practices can not be financially viable in contemporary knowledge driven economy.

REFERENCES Alvi, S. A. and S. W. Ahmed (1987) "Assessing Organizational Commitment in a Developing Country: Pakistan, A Case Study," Human Relations, 40 (5): 267-280.

Child, John (1974) "Management and Organization Factors Associated with Company's PerfOlmance," The Journal of Management Studies, II: 175-189.

De, N. R. (1975) "Contents & Discontents of Work Commitment," Lok Udyog, 9(1): 23-28.

Drucker, P. F. (1964) Managingfor Reslfits. New York: Harper & Row. Etzioni, Amitai (1961) A Comparative Analysis of Complex Organization. New York: The Free Press.

Georgopoulos, B. S. and Tannenbaum, A. S. (1975) "A Study of Organizational Effectiveness," American Sociological Review, 22: 536.

Gruenfield, L. and S. Kassum (1973) "Supervisory Style and Organizational Effectiveness in Pediatric Hospital," Personnel Psychology, 26: 551-544: Kakar, S. (1971) "Authority Patterns and Subordinate Behaviour in Indian Organizations," Administrative Science Quarterly, 16 ( 3): 298-307.

Katz, D., N. Maccoby and N. Morse (1950) Productivity Supervision and Morale in an Office Situation, Part-I. Ann Arbor: Michigan Institute for Social Research.

Licata, Joseph W. (1983) "Legitimize Your Leaders by Surveying Followers," Training, August: 13-14.

Lieberson, S. and O'Connor, 1. F. (1972) "Leadership and Organizational Performance: A Study of Large Corporations," American Sociological Review, Management

& Change,

Volume 4, Number 1 (January-June

2000)

182 Management Styles and Financial Performance of Organizations 37: 117-130.

Likert, Rensis (1958) "Measuring Organization Performance, " Harvard Business Review, XXXVI (2): 41-50.

Likeli, Rensis (1961) The New Patterns of Management. New York: McGraw-Hill.

-(1967) The Human Organization. New York: McGraw Hill.

Miles, Raymond E. (1965) "Human Relations or Human Resources," Harvard Business Review, July-August.

Mowday, R., L. POIier and R. Steers (1982) Employee-Organization Linkages: The Psychology of Commitment, Absenteeism and Turnover. London: Academic Press.

Pascarella, Peny (1981) IndustlY Week's Guide to Tomorrow's Executive: Human Management in the Future COIporation. New York: Van Nostrand Reinhold.

Pfeffer, 1. and G. R. Salancik (1978) The External Control of Organization: A Resources Dependence Perspective. New York: Harper & Row. Price, James L. (1968) Organizational Effectiveness: An InventOl}' of Propositions.

Homewood, III: RichardD. Irwin Inc. Reddin, William, 1. (1970) Management Effectiveness. New York: McGraw-Hill.

Rizvi, Irfan A. and W. Shankar (1987) "Ego-Strength and Job Satisfaction," Indian Journal of Psychology, 62 (1-4): 56-57.

Rizvi, Irfan, A. and A. P. Singh (1984) "Ego-Strength as Moderator Variable in Occupational Stress Job Satisfaction Relationship: Private Sector Marketing Executives," Unpublished M. Sc. Dissertation, Dept. of Psychology, Banaras Hindu University.

Rizvi, Irfan A., H. C. Ganguli and U. Shankar (1990) "Management Styles & Their Effect on Organization Performance," Unpublished Ph. D. Thesis, Dept. of Psychology, University of Delhi.

Saxena, Uma (2000) "Corporate Culture & Organization PerfOImance: A Comparative Study of Manufacturing Organizations," Management Review, March: 60.

Sinha, 1. B. P. (1980) The Nurturant Task Leader: A Model of the Effective Erecutive Learning. New Delhi: Concept.

Sisonis, John G. and B. Goldberg (1996) Corporation on a Tight Rope: Balancing Leadership, Governance and Technology in an age of Complexity. New York: Oxford Univ. Press.

Thomas, A. B. (1988) "Does Leadership Make a Difference to Organizational Performance?" Administrative Science Quarterly, 388-400.

Weiher, Nan and Thomas A. Mahoney (1981) "A Model of Corporate Performance a Function of Environmental, Organizational and Leadership Influences, " Acadamy ofManagementJournal, 24: 453-470.

Yuki, Gary (1971) "Towards a Behavioural Theory of Leadership," Organizational Behaviour and Human Performance, 6: 414-440.

Irran A. Rizvi, Ph. D., is Professor and Head-Organizational Behaviour Area, Institute for Integrated Learning in Management, Lodhi Institutional Area, Lodhi Management & Change, Volume 4, Number 1 (January-June 2000)

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Rizvi 183 Road, New Delhi-II 0003. He was earlier with the Faculty of Management Studies, University of Delhi, Delhi as a faculty member. He has over ten years of teaching, training and consulting experience. His areas of interest include individual and organizational perfOlmance, leadership and management of change.

Management

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Volume 4. Number I (January-June

2000)

MANAGING CHANGE IN THE OIL INDUSTRY: TIVES AND CHALLENGES

INITIA-

Atmanand

The growing demand-supply gap in the oil sector has been exerting pressure on the govemment to develop the strategies for further exploration in hydrocarbon sector. The oil companies do not have sufficient amount of risk capital required to invest in exploration business. The Government of India has embarked upon the process of inviting private investment into the oil sector. The New Exploration Licensing Policy (NELP) has been promulgated with a view to eliminate the country's demand-supply gap. The need to privatize the oil industry is important not only because of massive investment to the tune of Rs. 300,000 crores required during the next ten years but also for providing more autonomy to the oil Public Sector Units (PSUs).Such PSUs have to face competition and deregulation in the market.

Though NELP has been in operation for more than two years, the success in achieving the targets has been broadly hampered due to a number of reasons. It is quite imperative that the NEL? terms be revised in order to attract a large number of international oil majors for sharing a larger proportion of crude production. The policy has still a long way to go before it really becomes attractive for world oil majors to explore in India.

INTRODUCTION he oil industry in India is considered to be the wheel of the ...â&#x20AC;˘ economy as it is inevitably linked with all other sectors. It is common knowledge that any hike in prices of petroproducts and petrol pushes up the rate of inflation. Oil is important for industry, infrastructure and the economy as a whole. The growing demand-supply gap in the oil sector has been exerting pressure on the government to develop the strategies for further exploration in hydrocarbon sector.

Success in oil exploration in OUT country has come in different phases.

Bombay High was the brilliant discovery in western offshore fields but since then no appreciable advances have been made. By and large, exploration has been in the hands of the Oil and Natural Gas Corporation

T

Management & Change, Volume 4, Number 1 (January-June 2000) @ 2000 Institute for Integrated Leaming in Management. All Rights Reserved.

186 Managing Change in the Oil Industry

(ONGC) and Oil India Limited (OIL). These two corporations have concentrated their business in areas of high prospects near producing fields.

However, the exploration and production is a very high risk and capitalintensive business. The national oil companies do not have sufficient amount of risk capital required to invest in exploration business. It is precisely in this perspective that the Government of India has embarked upon the process of inviting private investment into the oil sector. The remarkable development in this context has been the promulgation of New Exploration Licensing Policy (NELP) in the 1997-98 fiscal year. With it, the government hopes to eliminate the country's demand-supply gap and built-up pressure on import of crude and petroleum products.

So far, attempts to induct the private sector have borne at best mixed results. There have been nine bidding rounds for awarding blocks for exploration. They have not attracted foreign direct investment in a desired manner. The very expectation that the prospective investors should participate in biddings has been belied. Indian oil fields are perceived to be of low productivity and also there is poor coverage of seismic data.

There is, therefore, a case for revising the NELP in the interest of getting a larger number of international majors involved even if, in the process, a larger proportion of the resultant crude production has to be shared with the companies concerned (The Business Line, 1999).

POTENTIAL

OF THE INDIAN HYDROCARBON

SECTOR

India is endowed with large sedimentary basins that can be tapped for oil and natural gas. Out of 28 billion tonnes of hydrocarbon resources, only about 6.8 billion tonnes have been converted to reserves. Based on recent analysis carried out by Directorate General of Hydrocarbons (DGH) and analogy with other producing sedimentary areas of the world, it is felt that, so far, in India we have upgraded less than half of possible producible reserves (Chandra, 1999). India is in a position to produce/establish at least as much more oil and gas reserves as has been done so far without any major success.

Studies reveal that major parts of the sedimentary areas of the country are still unexplored. As per the data of the total 3.14 million square kilometers of sedimentary area, about 1.06 million square kilometers, i.e.,

34 percent remains totally unexplored and another 1.58 million square kilometers, Management

i.e., 50.32 percent remains inadequate or poorly explored. & Change,

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Deep-water areas also remain almost completely unexplored. Deep-water potential of Indian waters is estimated to be in the range of 5 to 9 billion tonnes of hydrocarbon resources. DGH has recently carried out satellite gravity, 2 D seismic and gravity and magnetic surveys of the Eastern offshore and Andaman seas and these deep water areas have now been opened up for exploration. It appears that resources of deep water are likely to be several times higher than what was anticipated earlier. Along the East Coast alone, about 30 new geological plays/structures have been mapped with limited data collected by DGH. Structures mapped fall under large to medium size category and average size is close to 500 sq. km.

Several structures exhibit direct seismic indicators for the presence of gas deposits. Latest interpretations carried out by DGH suggest that some of these prolific oil and gas producing areas are the west coast of Africa, deep water areas of Gabon, Nigeria and Campos basin in Brazil. Several large international companies have shown interest in deep water areas surveyed

by DGH (Chandra, 1999) (Table-l and Fig.-l).

Table-l Sedimentary Basins Level of Exploration

Area (Million Sq. Km.) (upto 200 m. isobath)

Area (Million Sq. Km.) (including deep water)

Unexplored

0.601

1.062

Exploration initiated Poorly explored Moderate to well explored

0.156 0.529 0.498

1.051 0.529 0.498

Total

1.784

3.140

Source: Directorate General of Hydrocarbons,

Ministry of Petroleum Natural Gas, Government of India, New Delhi.

and

Surveys have also highlighted presence of significant deposits of gas hydrates and free gas below the hydrates. National Gas Hydrate Programme has already been devised for exploration of the hydrate resources in the country. Thus, a huge potential exists in the country for discovering new hydrocarbon resources. India can produce much more oil Management & Change. Volume 4. Number I (January-June

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188 Managing Change in the Oil Industry Fig.-l (Upto 200 M Isobath)

Exploration Initiated 9%

Unexplored 33%

Moderate to Well Explored 28%

(Including Deep Water)

Exploration Initiated 33%

Unexplored 34%

Mod â&#x20AC;˘â&#x20AC;˘

III WoII

Explorod

16'4

Poorly Explored

17%

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than what it has already so far. It puts more primacy on exploring new sources of oil.

NEED FOR MORE EXPLORATION The strategy for attaining oil security may require an investment of around Rs. 1000 billion over the next 10 years. As the national oil companies will not be in a position to arrange for funds of this magnitude, the government is encouraging participation of domestic private and foreign enterprises in the development of hydrocarbon resources in the country. The exploration and production activities need to be accelerated on a massive scale, as the demand-supply gap has been widening over the years. The Sundararajan Committee report predicts crude produce to be 38.69 million tones in 2001-02 and the demand for petroleum products to reach 112.8 million tonnes. Domestic production has been stagnant since 1994-95 at around 32 million tonnes while imports have risen from 27 million tonnes in 1994-95 to aprojected 38 million tonnes in 1998-99 and 41 million next year. In fact, present projections of domestic crude production indicate that about 60 percent of the demand will continue to be met through imports.

Consumption Year

Table-2 of Petroproducts

in India

Consumption (in million tonnes) 82.77 79.16 74.67

1997-98 1996-97 1995-96

The Eighth Plan had emphasized the need for maximization of domestic crude oil production. However, against a total planned production of 197.3 million tonnes during 1992-97, the crude oil production was only 154.28 million tonnes. The terminal year production was only 32.90 million tonnes as against the target of 47.08 million tonnes. The medium-sized oil fields to be developed under Joint Ventures were expected to produce

Management

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190 Managing Change in the Oil Industry Table-3 The Rising Oil Import Year

Production (million tonnes)

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00*

Import (million tonnes)

26.95 27.03 32.24 34.52 32.88 33.83 32.50 32.50

29.25 30.82 27.35 27.34 33.91 34.49 37.80 41.50

Source: CMIE *Projections

about 11 million tonnes of crude oil during the Plan period. The full production from these fields is now expected to materialize only in the Ninth Plan period on account of delays in award of contracts. The details of crude oil production during the Eighth Plan are given in Table-4.

Table-4 Crude Oil Production (million tonnes)

Companies

Actual

1991-92 to 1996-97 Eighth Plan Target Achievement Cum. Target Achievement

ONGC a) Onshore b) Offshore II OIL ill JVC/Pvt.

27.82 8.86 18.96 23.53

43.38 14.13 29.25 3.70

28.68 8.50 20.18 2.87 1.35

180.73 61.77 118.96 16.59 0.0

138.32 43.75 94.57 13.97 1.99

30.35

47.08

32.90

197.32

154.28

Total

Source: Ninth Five Year Plan (Vol. 2)

Consequent to the lower domestic production of crude oil, the gas production was also lower than the targets. In addition, there was a shortfall Management & Change, Volume 4, Number I (January-June 2000)

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in the production of free gas on account of delays in development of gas fields. Against the Eighth Plan target of 125.42 billion cubic meters (BCM), the actual gas production was 101.71 billion cubic meters. Accordingly, dispatches to downstream users of gas fell short of the target. The overall management of the domestic gas sector has improved during the Eighth Plan with better utilization of the produced gas and minimization of flaring.

The level of gas flaring was reduced from about 10.3 percent of the total production at the beginning of Eighth Plan to about 4.9 percent in the terminal year of the Plan. The production of natural gas during the Eighth plan is given below in Table-5.

Natural

Table-5 Gas Production (billion cubic meters) Eighth Plan

Companies

Cumulative Target

Actual Achievement

ONGC Onland Offshore Sub Total II

ill

28.64 87.34

19.32 74.08

115.98

93.40

9.44

7.47

OIL Onland

0.84

JVC

101.71

125.42

Total

Source: Ninth Five Year Plan (Vol.2)

The demand for petroleum products is estimated to grow at a compound growth rate of 5.77 percent and is expected to be 104.80 million tonnes in the terminal year of the Ninth Plan. This does not include liquid fuel requirement for power generation (see Table-6).

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192 Managing Change in the Oil Ind ustry

Demand Projections

1.

2.

3.

Table-{) of Petroleum Products

(million tonnes)

Products

97-98

98-99

Light Distillate Middle Distillate Heavy Ends

16.87 50.45 16.41

18.25 53.43 16.88

19.62 56.62 17.43

21.03 60.24 17.80

22.15 64.38 18.27

Total

83.73

88.56

93.67

99.07

104.80

99-00

00-01

01-02

Source: Ninth Five Year Plan (Yol.2)

The cumulative production during the Ninth Plan would be 180.82 million tonnes of crude oil and 144.53 billion cubic meters of gas. The projection of oil and gas production during the Ninth Plan is given in Table-7.

Oil and Companies ONGC Onshore Offshore Total Oil Gas IT OIL Oil Gas ill Private/JV Oil Gas Total Oil Gas

Gas Productidn

Table-7 Projected

for the Ninth Plan Period

1998-99

1999-00

2000-01

2001-02

Total

9.854 18.238 28.092 63.813

10.142 19.038 29.18 65.492

10.309 19.562 29.871 65.293

10.429 19.589 30.018 69.143

50.307 94.587 144.894 119.075

3.2 6.4

3.29 6.61

3.38 7.756

3.35 7.786

4.40 7.26 35.692 77.403

4.08 6.98 36.55 79.662

3.93 6 82 37.181 79.923

3.46 6.79 36.978 84.213

I

Note: - Source:

16.4 7 12.642 19.46 12.628 180.824 144.346

Oil in MMT/Gas: in MMSC MD for individual years and in BCM for total.

Ninth Five Year Plan, Yol. 2

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There are shortfalls in the availability of natural gas vis-a-vis the commitments already made in the different regions of the country especially on the HBJ pipeline and in Gandhar. In addition, the demand for natural gas in core sectors like power generation and fertilizer production has been on the increase. Many states are planning to set up short gestatiofl power plants based on naptha through private promoters. Against this background, a clear view on the issues of large-scale import of naptha/ natural gas for power generation has to be addressed urgently. The need for involving the PSUs in the petroleum sector to have participating interest in oil and gas development for sourcing the new infrastructure would be emphasized. The long-term gas demand would depend on: supplies of other primary energy sources from domestic sources; availability of transportation infrastructure to reach fuels to the endusers; mix of make versus buy options as in the case of fertilizer sector; long term power plan.

Obviously, the stagnating domestic production of crude is increasing the country's dependence on imports. The other area of concern has been the significantly lower capacity accretions in the last few years. The country has not made major discoveries of oil fields since Bombay High in the late seventies. Rapid strides were made since then, reaching a peak of 34111.1.during 1989-90. Production then fel1to 27 111.1. in 1992-93, mainly due to the closure of some wells in Bombay High. The present figures are not adequate enough to make any dent on the imports. As a result, the self-reliance which was 50 percent in 1991-92 declined to 39 percent in 1996-97 and is expected to decline further to 32 percent in 2000-01 (Table-8).

The rising import and dependence on it makes the oil industry in India more susceptible to international prices, which are highly volatile and unpredictable. Hence, the answer lies in searching and intensifying exploration activity. If the investment of RS.l 000 biIIion are required over the next 10 years to step up the level of domestic production and accelerate the rate of reserve accretion besides other things, more sops are to be provided to the private sector in exploration. One thing is undoubtedly clear--that capital will be mobilized by the private sector-whether indigenous or foreign. But, at present, the capacity addition is quite marginal Management

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194 Managing Change in the Oil Industry

and the private sector is not likely to have more than a 12 percent market share in the near future. The peak production envisaged through these is only 4.4 million tonnes (Gidadhubli, 1999).

Table-S India is Becoming Less Self-Reliant Crude Production (million tones)

Year

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 2000-01 *

Demand for Petroproducts (million tones)

30.35

57.0

26.95

58.9 61.5 67.4

27.03 32.24 35.19 33.72

50 43 41 45 44 39

74.7

80.2 112.8

38.69

Self Reliance (in %)

32

* Projections Source: Ministry

of Petroleum

and Natural

Gas

The Government of India may have several policy options to meet the future demand-from prospective demonopolization, allowing people to invest only in new opportunities, to restructuring in the form of conveying certain existing opportunities for fields, refineries and so on (see Box). With the increase in the degree of private sector participation, competition intensifies and investments expand. This results in improved supplies, greater consumer choice, lower long-term prices, a healthier industry and improved revenues to the government. The available options reflect progressive degrees of private sector involvement. Moore (1996) has analyzed different options in tenus of three criteria, the left axis in Figure 2 shows the benefits of competition with the maximum at the top; at the bottom the availability of capital with the maximum to the right and government take with the maximum being at the top. From this analysis, we infer that it is the privatization which produces more competition, generates more capital and a higher government stake. On the broad spectrum of private sector participation, the lower end is that of partial restructuring. The private sector in this case provides 30-40 percent of assets to the existing companies in the industry. It becomes a dominant Management

& Change. Volume 4. Number 1 (January-June

2000)

--,

----

Box

I

Options

for the Government

~

--~

~

Maintain Status Quo

Prospective De mon 0 polizatio

n

Privatization

Broad Restructuring

Partial Restructuring

----~

Continue Present path

Demonopol ize and convey all ownership to the Private sector

Demonopolize & invest large portion of existing assets

Demonopolize & divest certain existing assets

Demonopolize only

)w new investors to acquire Allow ,tantial industry assets through substantial ctive asset sales followed by selective sale of all shares in NOCs. ire a substantial Allow new investors to acquire portion larticipate of existing assets and fully participate in new activities. ertain productive fields and Allow new investors to acquire some existing assets such as certain ,ration and development refineries and participate fully in new activities such as exploration and new project construction.

I

tion Allow new investors to participate only on a prospective basis through new exploration and development, new refinery construction, new pipelines, and so forth.

Ii I

I I

i I

I I

I

Continue

to operate

the sector

as a monopoly,

funding

all investments

primarily

from internally

in certain

new activities

generated

funds â&#x20AC;˘ funds.

I â&#x20AC;˘ These include Fair Practices provisions which limit the participation control 40 percent or more of the market place.

petitor, by any competitor,

including

NOCs,

whicl

196 Managing Change in the Oil Industry Available Options Maximum Privatization Broad Restructuring Partial Restructuring

Benefits of competition

>

Maximum

Government stake

>

Prospecti ve Demonopoliza~~~_//

None

-------------

-----------7

Minimum

Maximum

Figurc-2 Availability oflnvcstment Capital

aspect in case of the refining sector, which witnesses more players in the market. In case of broad restructuring option half or more of the assets going to the private sector creates customer base for domestic supply companies. Competition is generated and more revenues go to the nation and industry.

The last option to the government is privatization, which is the completion of the process with private sector ownership. In all these cases important conditions for attracting capital into the industry are access to infrastructure, neutral regulation in terms of tariff, etc., and the legal infrastructure.

The need to privatize the oil industry in India is important not only because of massive investment to the tune of Rs. 300, 000 crores required during the next ten years, but also for providing more autonomy to the oil PSUs. Some of them are in the category of navratnas. Such PSUs have to face competition and deregulation in the market. Deregulation will not be detrimental to privatization, rather, will supplement it. In a Management

& Change. Volume 4. Number

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Atmanand 197

deregulated environment, however, some regulatory body would still be required to monitor the operation of competitive forces and ensure fair play (Chhabra, 1997).

It was in March 1986 that the government decided to allow private sector entry in the petroleum sector when 27 offshore blocks were offered for exploration by foreign oil companies. But, actually the process of privatization started only in September 1991, when the fourth round of bidding was announced. Bids were invited in 1992 and a number of contracts were signed in 1994. Apart from Mukta-Panna-Tapti fields, the Ravva oil fields in the Krishna-Godavari basin were awarded to a consortium consisting of Videocon, Command Petroleum, an Australian company and Marubeni, a Japanese conglomerate.

There can be little doubt that the discovered oilfield's privatization policy has been a relatively successful one. For the past two years it is the production from the private sector JVs that has been on an upswing while production from the National Oil Companies has been stagnant. In 1997-98, the JVs produced 2.514 million tonnes of crude oil which was 84 percent higher than the 1.345 million tonnes produced by them in 199697. On the other hand, ONGC's production in 1997-98 was 1.5 percent lower than the previous one year. The trend continued this year. In 1998, the JV s pumped out 1.63 million tonnes of crude which was 8 percent higher than the corresponding period last year. ONGC's production showed a 6 percent decline over the same period (Radha Krishnan and Ganguli, 1999).

SALIENT

FEATURES

OF NELP

In order to increase the quantum of investments into this sector and to achieve a greater level of self-sufficiency in oil production, the government recently announced the New Exploration Licensing Policy (NELP). This is now expected to offer a level playing field to all the companies entering this sector and thus it would address the major complaints of many of the private sector companies. The policy is expected to be set into motion and in the first phase nine blocks in the Western, Eastern and the Andaman offshore areas are being offered for open bidding. The national oil companies too will have to compete in this process if they want to carry out operations in these areas. The salient features of NELP are given below: Management & Change, Volume 4, Number I (January-June

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198 Managing Change in the Oil Industry

There will be no mandatory state participation through ONGCIOIL nor will there be any carried interest of the state.

ONGC and OIL will compete for obtaining the petroleum exploration licenses (PEL) on competitive basis instead of the existing system of granting them PELs on nomination basis. At the same time, ONGC and OIL will also get some fiscal and contract terms available to private companies.

Open availability of exploration acreages to provide a continuous window of opportunities to oil companies. The acreages will be demarcated on a grid system and blocks will be carved out for offer.

Companies will be able to choose and propose acreages.

Freedom to the contractors for marketing of crude oil and gas in the domestic market.

Royalty payments for crude oil at the rate of 12.5 percent for the onland areas and 10 percent for offshore areas and 10 percent royalty on natural gas both for onland and offshore; half of the royalty from the offshore area will be credited to a hydrocarbon development fund to promote the exploration related activities such as acquisition of geological data on poorly explored basins, promotion of investment opportunities in the upstream sector, institution building, etc.

To encourage exploration in deep water (beyond 400m) and frontier areas, royalty will be charged at half the prevailing rate for the first 7 years after commencement of commercial production.

Cess, which was earlier levied on crude production, has been abolished for the blocks offered under NELP and there will be no signature, discovery and production bonuses.

Companies will be exempted from payments of import duty on the goods imported for petroleum operations.

A seven-year tax holiday from the date of commencement of commercial production is available for northeast region.

Contractors will be provided fiscal stability during the entire period of contracts.

A separate petroleum tax code will be put in place to facilitate investors.

A revised model contract will be prepared and will be made available to the companies.

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Atmanand

THE NEW EXPLORATION

LICENSING

199

POLICY

National Oil Companies to compete with private sector for licenses Exploration blocks to be allotted on open acreage system Freedom to choose and propose with companies No compulsory state participation or carried interest Freedom to contractors to market crude and gas discovered No payments of signature, discovery or production Royalty: 12.5% for onlana, 10% for offshore, 5% for deep offshore for first 7 years.

Infrastructure status to E&P sector Tax-holiday for 7 years for production in North-East Regions International prices to national oil companies under NELP Cess on crude oil produced under NELP abolished

So far, six rounds of exploration have been announced. As a result 30 exploration blocks were cleared for award to private Indian and foreign oil companies and 22 contracts have been signed. Yet, this may not be far reaching enough to make a major impact on the ever increasing gap between sustained increase in the demand for petroleum products in the country which is growing at the rate of 6.5 to 7 percent per year and somewhat stagnant crude oil production which is growing at a very slow rate. Moreover, due to certain international developments like emergence of several oil producing Central Asian republics which were earlier part of USSR, and opening of new deep water areas in the world, it was noticed that the necessary exploration capital from overseas was not moving into India and was getting invested in better known oil producing areas.

This gave rise to approval for the NELP. The NELP terms are widely regarded as the best in the world for attracting greater investment in the upstream oil and gas sector. These terms are far superior to the earlier terms offered by the government as can be seen from the comparative Table-9.

Moreover, these terms are beneficial both to the NOCs, as well as to the Private investors.

NELP Terms Beneficial to National

Oil Companies

(NOCs)

NOCs are exempted from payment of cess under NELP (a concession of almost US $ 3.0Ibbl); Management

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20(0)

200 Managing Change in the Oil Industry Table-9 Differences Between Earlier Rounds of Bidding for Exploration Blocks and NELP Terms

Earlier Rounds

Royalty/Cess

Payment

NELP

Companies were exempted Companies to bear from payment of royalty royalty, cess have been and cess. ONGC/OIL to exempted bear royalty/cess on behalf of private companies (approved by Government)

Participating Interest by 0-40% participating interest National Oil Companies NOCs at their option (NOCs) (except for JVEP, where NOCs had to take 25-40%) beginning of the contract Carried Interest of NOCs had 30% carried NOCs interest (except for JVEP, where they have working interest from the beginning), which is exercisable on commercial discovery Level Playing Field to NOCs

NOCs carried certain burden on behalf of companies and for their own operation; they do not get same terms as available to private investors

NOCs to Compete For Acreage

NOCs used to get acreages on preferential basis No special incentive

Incentive For Deep Water Exploration

No participation by NOCs as Government nonunee

No carried interest by NOCs

NOCs to get same terl11 as available to private investor under NELP. i.e. they will get international price on their production of oil and gas and exemption from payment of customs duty and cess NOCs to compete for acreages under NELP Only half of the royalty payable in the initial 7 years from the start of

commercial Managcmcnt

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Volume 4, Numbcr 1 (January-June

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production

l

Atmanand

201

The maximum royalty rate under NELP is 12.5 percent of intemational price as against 20 percent of the administered price in non-NELP areas; Incentive for deep-water exploration with only half of the royalty payable in the initial seven years from the commencement of commercial production; Exemption from customs duty; NOCs to get intemational price on their production of oil and gas Seven years tax holidays from the date of commencement of commercial production; Liberal depreciation provisions will make companies eligible for further tax adjustments; and Contribution made to Site Restoration Fund Scheme is deductible in the year of contribution as against in the year of Site Restoration as per earlier provision of the income tax.

NELP Terms Beneficial to Private Investors All the above benefits are applicable to private investors also. In addition, following benefits will also apply: Can-ied interests of NOCs which was at 30 percent earlier has been abolished; Companies are free to have 100 percent participating interest, as earlier upto 40 percent paliicipating interest was to be held by NOCs. This will also provide operational flexibility to the companies in selecting partners of their choice; and A true "level paying field" established as no blocks are reserved for NOCs. WHAT NELP OFFERS? Under the NELP, 48 exploration blocks have been opened. Of the 48 blocks on offer, 10 are onshore while the remaining are offshore. Offshore blocks consist of 26 blocks located in water up to a depth of 400 meters, of which 12 are along the west coast and 14 along the east coast. Twelve deep-water blocks, where water ranges between 400 and 3,000 meters are located along the east coast of India. So far, exploration was confined Management

& Change, Volume 4, Number I (January-June 2000)

202 Managing Change in the Oil Industry

mainly to onland and up to water depths of 200 bathymetry. With the rapid development of cutting edge technology for deep-water exploration, it is high time such areas are also let out. The geology and tectonics of deepwater blocks on offer are quite similar to other prolific oil producing water areas of West Africa and Brazil. These are off the eastern coast ofIndia, in the Cauvery, Palar, Krishna-Godavari, Mahanadi, and North-East coast basins. The other off shore blocks are in the Bengal, Cauvery, GujaratKutch, Krishna-Godavari, Kerala-Konkan, Mumbai, Mahanadi, Polar and Saurashtra basins. The onshore blocks are in the Assam-Arakan, BengalPurnea, Ganga Valley and Rajasthan basins.

Table-lO Exploration Blocks Blocks I

Onland

Approx.

Blocks

Assam-Arakan

IT

Area (sq.km)

300

Bengal- Purnea

7,395 12,505

Ganga Valley

36,750 14,460 3,965

Rajasthan

13,225 23,945 3,545 2,535

Deep Water Cauvery

Blocks 10,260 8,360 8,000

Palar

10,200 9,620

Krishna-Godavari

7,280

10,000 Management

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2000)

J

Atmanand 203 Contd ... Table- 10 9,260 10,600 10,840 10,260

Mahanadi

North-East

III

11,068

Coast (NEC)

Offshore Blocks 10,425 14,535

Bengal

Cauvery

4,940 5,215 3,530 5,920

Gujarat-Kutch

1,450

Krishna-Godavari

4,485 4,790 2,472 4,000

Kerala Konkan

20,180 19,450 15,910 ] 4,075 8,595 ] 6,] 25

Mumbai

9,255 5,270 5,740 ] 8,870

Polar

6,730 8,480 5,420 7,840

Saurashtra

5,040

Mahanadi

Management

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204 Managing Change in the Oil Industry

EXPLORATION BLOCKS ON OFFER UNDER NELP .1999 100 0

JOOKm.

~I=+-I=I ONLAND OFFSHORE DEEPWATER TOTAL

10 BLOCKS 26 BLOCKS 12BLOCKS 48 BLOCKS

~~

Management

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Atmanand 205

ROAD BLOCKS

AND CONCERNS

Though NELP has been in operation since the last two years, the success in achieving the targets has been broadly hampered due to the following reasons: For the first round ofNELP, bids were invited after years of making the policy; There was poor response from foreign oil companies resulting in extension of the last date; Problems are aplenty in India during financial evaluation of bids, and negotiations. Due to this, financial closure is a lengthy process viz., power projects; After the above process, time consuming activities like seismic studies and exploration work would begin. Commercial production will start thereafter; Production sharing contracts with private companies in 1994 have not yet been signed for some of the blocks awarded; Plan expenditure on oil exploration has been consistently falling from 83 percent in 1992-93 to 46 percent in 1998-99. It will create negative impact on the performance of oil PSUs; and There has been no major discoveries in the last decade and no major find since Bombay High.

Though the NELP appears to sweep many of the cobwebs in existing exploration policy, it does nothing to address the private sector's main complaint-long time taken to process the tenders. The award process is slow and because of that the advantage of continuous bidding will be lost. Furthermore, private companies grumble that the NELP does nothing to remove the arbitrary nature of the award procedure. There are no clearcut guidelines for evaluating the bids. The whole process can be manipulated by changing the parameters.

In the above context, it is quite imperative that the NELP terms be revised in order to attract a large number of international majors for sharing a larger proportion of crude production. Domestic oil exploration outfits- ONGC and OIL-do not have the requisite finance for exploration on a sustained basis.

For increasing crude production foreign oil majors have to be invited only by making tenTISof bids more attractive. Earlier rounds of bids failed in the sense that they were not able to make the activity commercially as attractive as elsewhere especially for foreign oil companies (The Business Line, 1999).

Management

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206 Managing Change in the Oil Industry

Recently, the government has closed the first round of bids under the NELP. It is significant in two aspects-it marks the consolidated entry of the private sector, both domestic and foreign, into this area and, second, the policy has still some way to go before it can really induce the world oil majors to explore in India (The Business Line, 1999). In the first round of bidding, Reliance has emerged as the largest private sector bidder for oil exploration blocks under the NELP. The company has bids for 14 blocks.

It has been surpassed only by ONGC, which has bids for 15 blocks.

Reliance's bids are for blocks in the Bombay offshore region, KeralaKonkan Basin, Kutch, North-Eastern Coast, and the Krishna Godavari.

Cairn Energy India has emerged as the second largest private player putting in a bid for three blocks in the Krishna-Godavari basin. The ONGC is eligible for fiscal incentives under the NELP for the deep-sea blocks awarded to it earlier on nomination basis. The NELP features that would prove beneficial for ONGC include that both foreign and domestic companies will get tax holidays for 7 years from the start of commercial production. This incentive was not stipulated in the earlier exploration policy. Moreover, no custom duty will be levied on imports required for petroleum operations under NELP. Further, biddable cost recovery limit exists upto 100 percent. The prospective exploration company will have the option under NELP to amortize exploration and drilling expenditure over a period of 10 years from the first commercial production. Royalty rates for onland area and offshore area have been reduced (The Business Standard, 1999).

ONGC has made India's first deep water oil discovery in Krishna Godavari offshore area. The discovery is likely to improve the prospects of investments by global majors under the NELP. Oil exploration beyond a depth of 200 meters falls in deep water category. Indian deep waters are estimated to have huge oil reserves-eight billion tones. Of this, the Krishna-Godavari Offshore alone is estimated to have three billion tones.

The well where oil has been struck is located 24 km northeast of the Amalapuram Coast of Andhra Pradesh (The Times of India, 1999).

In one of the most striking oil finds in recent times since the oil sector was opened up to private investors, the Shell group has struck crude in India's north western desert. It struck oil in the Guda-II at a depth of around 1,900 meters (6',232 feet). It is the first find by a private international oil company in India under the system of offer of blocks that the government has followed for over 20 years. The discovery by Shell Managcment

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Volume 4, Number I (January-June

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L ..

Atmanand 207

will prop up potential investor interest in Indian fields.

CONCLUSION We have ONGC and OIL as the two giant national oil companies engaged in exploration and production of crude oil and have predominant share of about 90 percent and 10 percent respectively. Since 1981-82 there has been massive increase in drilling activities in the offshore areas representing a rationalization of exploratory activities in line with prognostication of reserves. But, the current reserve accretion continues to be low and is a major concern for the government.

ONGC and OIL were known as good finders. However, as they faced the challenge of exploring more difficult areas and the deep waters, the technology gap has become critical. According to some experts this gap between the best globally available technology and that used by ONGC IS senous.

The average recovery factor in India is about 28 percent of initial oil in place reserves. This is low by international standards. Improvement in recovery factor would yield additional oil and gas without any corresponding additionality in the reserve accretion.

The demand-supply gap in oil sector has been rising for the last one or more decades. The demand for petrol-products has been higher than the crude production. As a result, self-reliance has declined to 39 percent.

Domestic production has been stagnant. The exploration and discovery achievements have been slipping in the last few years. Most production fields are either on the declining phase or are facing technical problems.

ONGC's onshore production has remained steady in the last eight years.

The industry is about to witness a distinct transformation in the near future and this calls for massive investment with long gestation gaps.

Presently, there is a need to mobilize huge venture capital to the tune of $60 billion, which is mostly in the form of risk capital. The government is encouraging private capital-both domestic and foreign and for this procedures are being simplified and more fiscal incentives are being given under the NELP. The NELP terms are widely regarded as the best in the world for attracting greater investment in the upstream oil and gas sector.

These terms are beneficial both to the national oil companies as well as to private investors. However, earlier rounds of bids failed in the sense that they were not able to make the activity commercially as attractive Management

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208 Managing Change in the Oil Industry

as elsewhere especially for foreign oil companies. Recent closure of the first round of bids under NELP has been important due to two reasons.

Firstly, it marks the consolidated entry of the private sector (both domestic and foreign) into this area and, secondly, the policy has still a long way to go before it really becomes attractive for world oil majors to explore in India.

REFERENCES Chandra, Avinash (1999) "NELP Terms are Comparable Worldwide," Drilling and Exploration, 8 (1) and (2), March.

Chhabra, Vinod (1997) "Privatising Petroleum," in M. V. S. Gowda and S. Subramauga (eds.) Inji-astructure Development/or Economic Growth. New Delhi: Deep & Deep.

Gidadhubli, R. G. (1999) "Sengupta Proposals, Myopic and Illogical," Fortune India, April 30, 17(12).

Moqre, David (1996) "Petroleum Industry in India: Present and Future Trends," in U. K. Dikshit and Anjali Hazarika (eds.) Petroleum IndustlY Restructuring.

New Delhi: NPM Programme.

Radha Krishnan, N. and B. Gauguli (1999) "Looking for Oil," The Business India, February 8-21, 57.

The Business Line (1999) "Policy Needs further Exploration," Editorial, 6 (238), August, 27.

The Business Line (1999) 6 (238), August 27, New Delhi.

The Business Standard (1999) August 10, New Delhi.

The Times 0/ India (1999) August 13, New Delhi.

Atmanand, Ph. D., is an Associate Professor of Economics at the Management Development Institute (MDI), PO Box 60, Mehrauli Road, Sukhrali, Gurgaon122001. Earlier, he was a faculty member at the Institute of Management Technology (IMT), Ghaziabad. He was a member of the State Finance Commission, Government of Bihar. Besides having authored eight books, he has published a large number of research papers in reputed journals and books.

His areas of interest include managerial economics, economic policy, public enterprises, financing of education, financing of panchayati Raj, and international

Management

trade.

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Volumc 4, Numbcr

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COMMUNICATION PRIVATIZING STATE ENTERPRISES: A STRATEGIC MANAGEMENT PERSPECTIVE

Attahir B. Yusuf In the task of privatizing state enterprises. nations traditionally focus their strategic efforts around financial considerations and the general need for business. GIld in particular, sectoral reforms. From a global perspective however, privatization is increasingly becoming competitive with global investors contimwlljl assessing competitive investment prospects. In this respect. national telecom operators moving toward privatizing find that they have to offer a variety of incentives and messages to woo investors. It is apparent therefore that there is a need for nations to manage their privatization process strategically. This could be achieved through a multi-tasking process that allocates key tasks to appropriate quarters at both individual and institutional levels. and by transmitting the right message to the right audiellce appropriately.

The end result would be the opportunity to extend government and business resources in the privatizing process effectively without the influence of the desires and activities of the often conflicting outside forces.

INTRODUCTION

'

rivatization, an integral part of the strategic renaissance that swept . across Western European countries in the late seventies and eighties, is now sweeping Eastern European, South East Asian and some Latin American countries, and is beginning to be .felt in the Middle East, Africa and other developing countries of the world.

The attention of the world and of policy makers the world over was captured in 1984 with the partial privatization of the British Telecom by the British government which netted the government US$4.9 billion.

Subsequent privatization around the world such as the sale of $12.4 billion worth of shares of Nippon Telephone and Telegraph (NTT) in 1986 by the Japanese government, the privatization of New Zealand Telecom for $2.5 billion in 1990, the sale of Telefonos de Mexico in 1991 for $2.2

p.

Management & Change, Volume 4, Number I (January-June 2000) @ 2000 Institute for Integrated Leaming in Management. All Rights Reserved.'

"i

210 Privatizing State Enterprises

billion further heightened the interest in privatization by governments across the world. In fact the British government alone made over $45 billion by the end of 1991 by selling state owned firms to private investors (Miller, 1994). With the tremendous increase in the equity value of some privatized companies such as Telemex with 460 percent increase in equity and Telecom New Zealand with 138 percent, privatization came to be recognized as the most viable method for nations to restore their fiscal rectitude. Since then privatization has become a significant contrivance for economic restructuring (Nankani, 1990).

The literature on privatization has been extensive. Most of it, however, has been evaluative and focused strongly on the benefits derived or derivable from the exercise (Ramamurti, 1992). From the economic and financial perspectives, the literature dwelled mainly on the methods of privatizing (e.g., Frydman and Rapaczynski, 1992). From a political angle the literature espoused the notion that privatization leads to a smaller government which is argued to be good for effective dispensation of government services to the populace. Privatization, from a managerial standpoint, attempted to determine the outcomes of the exercise (Goodman and Loveman, 1991). There are also a few studies that are anecdotal describing individual privatization (Miller, 1994) while others analyzed differences in approaches to privatization in different countries (Castro and Uhlenbruck, 1997). There is, however, a dearth in the privatization literature of a viable strategic approach to privatization to guide governments and their advisors in shaping the privatization process to take into cognizance the characteristics of the firm and the country.

This paper, therefore, is aimed at developing a strategic process that will allow for a successful transformation of government-owned enterprises into privately-owned firms. The paper proceeds with an examination of privatization and explains the different approaches to the process. It also describes the strategic issues in privatization and a strategic management approach to the process.

REASON FOR PRIVATIZATION Privatization essentially is the sale of government assets. It can take a variety of forms and scope involving the sale of all the shares of the

company on offer at once or over several separate offerings. It may also involve the sale of some shares of the company being offered with the Management

& Change. Volume 4, Number I (January-June

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Yusuf 211

government retaining the ownership of the remaining shares, or the sale of the company's major subsidiary or a part of it, or the sale of a major asset owned by the company.

State enterprises (SEs) have a notorious record of poor performance all over the world. The long-term effect of such poor performance effectively resulted in lack of competition in major national economic segments, higher prices for goods and services from the SEs, narrow range of products and services for customers, and malevolent political interference in the operations of the SEs. Inevitably, these lead to customer dissatisfaction, low employee morale and productivity, and economic stagnation at the end of the day (Miller, 1994). To deal with the effects of poor performance of SEs and the attendant social, political, macro-economic and political predicament that they generate, governments embark on privatization programmes.

In order for a privatization programme to be effective, it must be part of an overall national reform. The reasons advanced for privatization and its aims are diverse but mainly include providing consumers with better, cheaper and more diverse range of products and services, raising the tax revenues and lower the debt of national governments, and promoting greater distribution of wealth through share ownership and allowing stakeholders greater influence in the activities of their organizations, thereby enhancing motivation and productivity. Other reasons include lessening government interference in business; allowing managers to respond to competition through a fuller use of their initiatives and, in the interest of their organizations, providing the atmosphere for entrepreneurship and innovation, and reducing the size and scope of government.

Pro-privatization arguments postulate that by divorcing itself of ownership and running of business in favour of the general public and the private sector respectively and devoting itself to regulatory roles (Moore, 1992), government will be able to increase its efficiency and the quality of its remaining activities (Goodman and Loveman, 1991). It is not the wish in this paper to delve into the merits and demerits of privatization. This has been covered substantially and ably elsewhere (e.g., Aharoni, 1986; Donahue, 1989; Perry and Raney, 1988; Quiggin, 1995; and Ramamurti, 1992).

Looking at the objectives of privatization, it is evident that they can be integrated into three perspectives: Financial, economical and developmental. From a financial perspective, privatization may serve the role of Management & Change, Volume 4, Number I (January-June 2000)

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~

212 Privatizing State Enterprises

raising government revenues or developing a business framework that can reduce future government outlays. Economically, privatization may serve the purposes of increasing organizational efficiency, performance and innovation. Development-wise, privatization can be employed to develop or enhance domestic capital markets or distribute equity ownership.

The goals in privatizing some SEs, such as telecommunication companies, must be understood in the light of all of these perspectives and some more, in view of their national strategic importance. This multiplicity of objectives means that successful privatization would have to involve a wide spectrum of individuals, institutions and the working politic.of the nation. From the viewpoint of the three perspectives highlighted earlier, it would appear that financial issues of the privatization exercise would be handled by entities seeking or generating financial wealth. Concerns for economic development on the other hand may be handled by specialized government organs such as the telecommunication regulatory agency in the case of the telecommunication sector. Issues of national development encompassing many economic agenda are often administered by cross-department government establishments, such as national development boards, department of economic planning and so on.

METHODS OF PRIVATIZATION There is no single correct method of privatizing SEs. The most widely known and practised methods include: A public floatation on the stock exchange: The floatation could either take the form of a fixed price offer or it could be a tender offer with a minimum price tag; Trade sales: In this method the company that is being privatized is sold to another company or group of companies; Privately placing the company with a group of investors; and Employees and/or management buying out the company.

By and large, of the four methods identified above, public floatation and employee and/or management buyout account for more than 63 percent of all privatization (Miller, 1994).

While selecting the method of privatization, it is necessary to consider the options that would best accomplish the aims of the privatization exManagement & Change, Volume 4, Number I (January-June 2000)

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Yusuf 213

ercise. This is done by taking into consideration specifically, the type of privatization infrastructure available in the country where the privatization is to take place. For instance, some countries have sophisticated capital markets while others do not, and some have a private sector large enough to absorb public enterprises compared to others. These are some of the factors that would influence the choice of the method and the scope of privatisation.

STRATEGIC MANAGEMENT APPROACH TO PRIVATIZAtION Whatever be the objectives and the approach adopted ina privatization programme, the overriding concern is that it must be successful if the momentum of the programme is to be sustained. The perplexity of the process will vary from one privatization to the other. A simple privatization involving trade sale or a management buy-out for instance, will require less preparation than one with a more sophisticated form involving, for instance, floatation on the stock exchange. Whatever type of privatization is being dealt with, a careful preparation is necessary and a strategic management approach to the process is desirable.

Strategic management of privatization fundamentally refers to a series of managerial, policy and financial activities that lay the foundation for an effective formulation and implementation of the programme. This will basically involve the setting up of the goals and objectives of the programme, analyzing all elements with the potential of influencing or affecting the process and identifying alternative approaches and selecting the most suitable option based upon the goals and objectives of the programme and the D)undations laid in strategic analysis. Finally, an implementation mechanism is developed for a successful deployment of the programme.

Strategic management as a process involves a number of steps which are normally grouped into strategic analysis, strategic choice and strategy implementation. In the same manner, strategic privatization management can be segmented into strategic privatization analysis, choice of privatization method, and implementation.

STRATEGIC PRIVATIZATION ANALYSES This is the first phase of the privatization process. There are two major steps to be taken here: preliminary actions and feasibility study. In the Management & Change, Volume 4, Number I (January-June 2000)

214 Privatizing State Enterprises

preliminary step, the government outlines its overall privatization goals, prioritizes and then translates them into a particular policy and business agenda. The typical goals of privatisation in many countries include providing an immediate source of revenue for government and turning inefficient government enterprises into efficient and accountable concems. The government would also need to clarify its key macro-economic policy issues, list and catalogue all govemment entities and establish a clear focus towards the development or restructuring of the nation's capital and stock markets.

At this stage, it is desirable to set up a privatization bureau or an independent privatization board to oversee the privatization efforts of the government. The bureau or board breaks down the process into phases and activities and assigns the coordination, management and implementation of each of the tasks to a unit within the organization or to the most appropriate national institution. Each of the tasks should be linked to a policy or business mission. It is also desirable that individual and institutional stakeholders are identified and representation made to them as issues are debated and decisions taken. It is highly recommended that the individual and institutional stakeholders have representation not only at the debating level but also at managerial levels in privatization working groups.

Another step in the preliminary stage is the question of corporatization.

This is relevant only where the privatization involves an organization whose various aspects are controlled or managed by different units of government.

The organization may have developed over time into an unwieldy fusion of activities. In a situation like this, the government should devise a means of moulding these activities together into a corporation to improve efficiency and. results. The corporation that emerges should have a clearly defined structure, a target focusing on the improvement of performance and its own management. A specialist may be engaged by the government to handle these.

Where the entity to be privatized is already in the form of a corporation, the actual privatization (as we know it) starts with a feasibility study to consider the options available and what is needed to be done. Usually the privatization bureau or board may coordinate and supervise the study.

The study team usually includes not only civil servants but external consultants as well. The mandate of the team will be to examine the feasibility of the privatization by weighing all political sensitivities against the benefits to be attained. The team will also address the question of how Management & Change. Volume 4, Number I (January-June 2000)

Yusuf 215 to achieve the transfer of ownership. The report from this study should outline the options available and the prerequisites for the proposed privatization and then be presented to the government for consideration.

The government may approve the privatisationand the method for the privatization will then be determined.

SELECTING

THE PRIVATIZATION

METHOD

There are three steps in this phase: Preparing the company for sale, preparing for the sale and choice of method of privatisation.

Preparing

the company for sale

The extent of preparation required prior to a sale varies. Preparing for a major floatation may take up to 2 years or even longer if a problem is encountered along the way.

The first activity in this step is to select advisors. There may be separate advisors for government and the enterprise that is to be privatized. Government by the nature of its responsibilities and accountabilities, will be more concerned with politically acceptable results by maximizing the proceeds from the sale. The enterprise on the other hand, represented by its management, will be concerned with the interests of its investors (i.e., the purchasers) especially with regard to the future of the organization. These opposing positions even though moderated by the desire for the success of the privatization process, will require different forms of advice.

After appointing advisors, the next step is to prepare a comprehensive report on the enterprise detailing its history and business, management structure, profits, assets and liabilities, and the value of its financial control systems. The report should also outline the previous years' results of the company, its future prospects, the profitability of the company for its different products or services, identify which product or service may be redundant, determine the strengths and weaknesses of its management, and so on. The report is used as a database to supply information on the enterprise for the preparatory work.

The information provided by the report will cement the foundation for preparing the enterprise for sale by, for instance, strengthening its management, orienting it to the private sector norms and attitudes, and alterManagement & Change. Volume 4, Number I (Janualy-June 2000)

216 Privatizing State Enterprises

ing its strategy and structure. These interventions may result into certain redundancies and other unpalatable results. Commitment to change on the part bf the parties involved in the process is, therefore, of paramount importance and the key to their success in the new dispensation.

After restructuring the company and putting it into a reasonable shape with an improving track record, legislation for the privatization could then be developed. If the enterprise is a monopoly, regulatory issues should be addressed and an appropriate regulatory agency and legislation established.

The major player here is the government whose principal role is shaping and implementing national strategy. In this role, the government communicates through policies (e.g., tariff structures, repatriation modalities) executed by a variety of instruments such as legal and administrative mechanisms, and regulatory bodies. The bottom line here is that the role of the government is to support the vision for privatization through changes in national plans and policies. The regulatory agencies will function together with related government organizations to tum the plans and policies into a development strategy that will then be transmitted appropriately to the general public.

Preparation for the sale and choice of the privatization

method

When the enterprise is strong enough to the extent that it has, for instance, a sound debt to equity ratio and commercially-oriented management structure, preparation for the actual sale can start. First, advisors for the sale are to be recruited or re-appointed. They can include among others, solicitors, accounting and financial firms and merchant bank brokers.

At this juncture, the government will then decide on the method of privatization to use. To widen the ownership of shares and encourage a more equitable distribution of wealth, floatation and employee or management buyout may be selected as the method of privatisation. Whatever the method selected, the government must decide on the extent of the privatization by establishing how many shares of the enterprise are to be sold. Decisions would also be made on whether to underwrite the sale or not, where to sell and how to fit that particular sale to other on-going or prospective sale of enterprises. Other sale preparation activities at this stage will involve determining the methods of identifying candidates for the sale, developing templates for deciding on the privatization approach to the selected candidate, developing a practical and detailed time-table for the Management & Change. Volume 4, Number I (January-June

2000)

r-------Yusuf 217

sale, initiating an advertising campaign to inform both the public and civil servants of the sale and its potential benefits, producing a prospectus for the sale, and undertake any further financial and market reforms necessary. In identifying the candidate for selling the shares to, the government may opt to make it a purely domestic issue as Malaysia did in the privatization of T;:lekom Malaysia, or a global offer as Singapore did in privatizing Singapore Telecom. The marketing arrangement and issues that purchasers address will be different in these two instances and must be addressed accordingly.

We also have to understand that there are basically two types of buyers in a privatization exercise: operating companies and market equity investors. The fonner buy because they understand the enterprise (they may be in the same sector as the enterprise being privatized) and they know how to a make profit. Given the right business environment they know they will generate positive returns. Market equity investors on the other side are described as gamblers with a short-term horizon and concerned with profiting from a traditionally poorly managed and therefore, undervalued enterprise. In considering bids, investors generally evaluate a variety of aspects of a nation's activities. They will normally analyze the nation's overall environment, look at the relationships and inter-relationships between the sector and national and international centres of organizational activity, evaluate a variety of research and statistical parameters and assess the effectiveness of the institutional environment to conclude on the attractiveness of the offer.

Implementation The next and probably one of the most important steps is valuation and deternlining the share price. Privatizing a state enterprise either wholly or in part, requires a value to be ascribed to it. That can be a difficult task to achieve because it demands a careful consideration of a variety of elements that contribute to the value. It is even more difficult in developing countries. For instance, reliable financial information is difficult to come by and understanding how the enterprise is affected by governmentimposed limitations such as in price or tariff controls is crucial to valuation. Another problem for developing countries is that of education. Most of the factors and the technicalities involved in the valuation process will be new to those who need the information. These issues must be addressed Management & Change, Volume 4, Number I (Junualy-June

2000)

218 Privatizing State Enterprises

fully in the privatization process. Nonetheless, a value for the enterprise has to be established; where it is too high, investors may be discouraged from buying shares, and if it is too low the government will be charged with selling a national asset too cheaply, especially where privatization is a contentious issue.

There is also a political cost in underpricing, with the result that buyers make instant capital gains. In the case of sale by tender, no apparent ground for a claim of underpricing can be made. In the same vein, a failure to generate an acceptable bid cannot be concealed. Evidence from past privatization suggests that underpricing has been very common, particularly in public floatation. In the U.K for instance, public floatation in the 1980s was heavily oversubscribed at the rate of about 5 to 1 (Yarrow, 1989).

When all goes well, the enterprise is privatized on the pre-determined date and transfer of ownership is effected and the sector will begin to operate under new regulatory guidelines. This will complete the transfer of the enterprise to the private sector.

Unquestionably, the privatization process detailed is long, and will not work in all circumstances, but it can be modified to meet the needs of different expectations and situations. In the Middle-East for instance, privatization programmes may encompass new infrastructure undertakings such as enhancing electric power generation and distribution, or expanding desalinated water capacity. The following issues must be considered by the government when such projects may involve financing from the private sector and which may have shares sold on the domestic stock exchanges: The size of the demand for the services to be offered by the project, and the viability, "commerciability" and feasibility of the project.

Other issues that should be considered include identifying and understanding the regulatory and customer protection implications, the risk of conflict with existing or potential privatization initiatives, commercial options for the project, pre-selecting potential project bidders, determining what would happen at the end of the concession term especially with respect to the transfer of assets, and implications of any changes that may occur in public tariffs.

CONCLUSION It is imperative that the privatization process adopted for the state firms Management & Change. Volume 4, Number I (January-June 2000)

.__.... . .

I

._ ..1

I

I

L~_

Yusuf 219 should be strategically managed as it involves a multitude of agenda and a variety of interests. To ensure a hitch-free process, key tasks must be identified and handed over to appropriately competent individuals and institutions to manage. An environment that will ensure a cordial working relationship between government and business representatives must be cultivated with the hope that privatization issues may emerge and be handled at suitable fora. Consequently, it will lead to the realization of national objectives of stimulating a much needed economic reform in the new market-driven economic scenario.

REFERENCES Aharoni, Y. (1986) The Evolution of Management of State-Owned Enterprises.

Cambridge, Mass.: Balling.

Castro, J. O. and Klaus Uhlenbruck (1997) "Characteristics of Privati sat ion: Evidence from Developed and Less Developed and Former Communist Countries", Journal of International Business Studies, First Quarter: 123-143.

Frydman, R. and A. Rapaczynski (1992) "Mass Privatisation Proposal in Eastern Europe: Ownership and the Structure of Control," in F. Targetti (ed.)

Privatisation in Europe: West and East Experiences, 75-88. Brookfield, Vt.: Dartmouth Publishing Company.

Goodman, J. B., and G. W. Loveman (1991) "Does Privatisation Serve the Public Interest?" Harvard Business Review, NovemberlDecember: 26-38.

Miller, A. N. (1994) "Privatisation: Lessons from the British Experience," Long Range Planning, 27(6): 125-136.

Moore, J. (1992) "British Privatization: Taking Capitalism to the People," Harvard Business Review, January/February: 115-124.

Nankani, H. B. (1990) "Lessons of Privatization in Developing Countries," Finance and Development, 27 (March): 43-45.

Perry, J. L. and H. G. Rainey (1988) "The Public-Private Distinction in Organization Theory: A Critique and Research Strategy," Academy of Management Review, 13: 182-20l.

Quiggan, J. (1995) "Does Privatization Pay?" Australian Economic Review, 110: 23-42.

Ramamurti, R. (1992) "Why Are Developing Countries Privatising?" Journal of International Business Studies, 23(2): 225-49.

Athar B. Yusuf, Ph. D., is at present Assistant Professor at Management Department, Sultan Qaboos University, PO Box 20, Al Khod, Postal Code 123, Muscat, Sultanate of Oman. He obtained his Ph. D. in 1986 from the University

Management & Change, Volume 4, Number 1 (January-June 2000)

220 Privatizing State Enterprises of Sussex, UK. He has since then taught at universities in the West Indies, the South Pacific, Africa, New Zealand and the Middle East. His areas of teaching and research interests are strategic management and enterprise development. Dr. Yusuf is presently attached to both Massey University in New Zealand and Sultan Qaboos University in Oman.

Management & Change, Volume 4, Number 1 (January-June 2000)

L_

BOOK REVIEWS

Economy and Business Environment Sunanda Sen, Trade and Dependence: Essays Delhi: Sage, 2000. 316 pp. Rs. 475 cloth.

011

the Indian Economy.

New

This collection of essays by Sen is bound by a unifying theme and it tries to provide a testimony to the process of unequal exchanges in h'ade relations between countries. The same rhetoric of the 70s, similar logic of import substitution efforts and export-led growth distortions have been highlighted. Will we ever learn from the success of many developing countries, and more particularly from our next door neighbours? Left-oriented political economists worldover, perhaps barring India, have revised if not radically changed their opinion, in view of the empirical evidence from a number of economies. They do admit gains from the trade exchanges. Yes, the gains have neither been automatic nor even. Also, the openness and unbridled market system has, to an extent, raised the degree of vulnerability and dependence of the developing countries at least in the short-term.

Nobody denies the nature of such distortion in exchanges in the arena of world trade. But what is the way out? Throwing the baby with the bath water!

There is a universal agreement that free trade is a myth and the gap between .the prosperity of rich and poor nations has widened. However, it is important to ask whether rhetoric alone can bridge the gap between North and South. The world bas changed. Yet in the slow process of realization, leftist think tanks, time and again, have raised and repeated the old controversies in a traditional flair and have tried to argue that as if unequal exchange and asymmetrical relations alone are responsible for lack of development.

Thankfully, however, there is one change and that is the admittance of the fact that though there have been "gains" from trade and investment liberalization in general but the sharing arrangements have been unequal. How to optimize these gains for developing countries is, therefore, the case of the debate. Alas'!

Sen after admitting the obvious gains from such exchanges returns to the likeable premise that integration into the world economy and the resultant transaction do not generate net flows, One is tempted to ask what is the way out of such distortions? Go the Myanmar way-isolation has not produced a single evidence of prosperity in any period of the last century. Yes, positive regulation and surveillance is going to be needed but can we blindly argue that such a regulatory mechanism by the state has produced a stabilizing (and more than that perhaps) impact on the Management & Change, Volume 4, Number I (January-June 2000) \S! 2000 Institute 1'01' Integrated Learning in Management. All Rights Reserved.

222 Book Reviews growth of the economy? While the need for regulation cannot be denied yet, the regulation mechanism has given only a mixed picture. In fact, some commentators have solely held the regulatory mechanism and the regulations responsible for preventing the lJ.igher gains to be achieved from the trade exchanges.

Essays in the present volume collected by Sen are not all new and hence the context has changed. But the author claims, the arguments remain valid and relevant today. How it remains valid can be a debate in itself. Even if one ignores such a debate, one cannot certainly be blind to the success of many developing countries (small and big both) which by opening up and by integrating into the world economy gained from such processes. There is a wealth of well-documented evidence suggesting how country after country (through well-regulated mechanism) gained from liberalizing their trade exchanges. Can any analysis, therefore, that is set in historical context and that dwells upon the exploitative practices of centre-periphery relations in a politicoeconomic context, be taken as a general framework for explanation of development or lack of it today? If one's presumption is that "trade is a handmaiden of colonialism" then one is likely to have only obvious, forgone and well-predicted conclusions. The author has completely ignored the dynamic forces of exchanges and this statist view of development economics is no longer valid to provide any guidance for future. It must, however, be mentioned that this fine collection does provide a very useful input and a base, however bias,ed, for further research into such questions as: Has external trade and payments failed in providing a sustainable and steady inflow of real resources? The debate could and should surround the question of "real," which may not be reflected through financial data alone.

The argument of general "demand deficiency" was valid in times of commodity and raw material exports regimes, and the stagnancy of foreign market theorem perhaps remained a big issue till 1960s & 1970s, but the world has since changed. Market structures have undergone a metamorphosis and diversification in markets in terms of both products (better brands) and more particularly in terms of emergence of a wide range of services. This is a reality.

Ignoring these dynamic changes in the last three or four decades (even if all transactions are lumped as overall trade) and incessantly leveling charges of zero sum game that such transactions generate is ignoring the diversified reality.

The author has given crude and overall generalizations pointing to deceleration in growth through debatable assumptions such as: "When rate of increase in investment and output in export sector fails to compensate for the declines in other sector" or "subsidization of export production at the cost of wage goods, and the resulting tilt in domestic prices in favour of exportable implies a subsidization of capitalist consumption ... might make very populist agent material for leftist lobbies but the reality is, if not contrary, it is at least far away from this." A few examples could testify this. For instance, take notice Management & Change. Volume 4, Number I (January-June 2000)

Book Reviews

223

of the wide range of services (not all documented) from India, specially IT-related services and software exports or even the handicrafts mainly from rural origin.

The gains from exports already achieved and the potential they hold for future may indicate a very different empirical reality.

Besides, the role of external exchanges in promotion of competitive edge, quality improvement impact and even direct revenue gain cannot be ignored.

The skeptics of liberalization regime, colonial theorists looking for further alibi on continuance of exploitative colonial legacy in newer forms and lobbyists against the globalizing trends will however find this in-depth analysis very good support for their pre-determined conclusions. Very neatly divided themes into 12 chapters, this volume provides a good summarized view of this opinionated class. One, however, wishes the think tanks to reconsider if economic backwardness of India could still (and how long!) be explained through colonial exploitation and how much blame really our external trade relations can take in view of India's integration with the global economy which has been of very small magnitude whatever way one looks at it.

M. S. Verma (Dr.) Professor-Marketing Area, Institute for Integrated Learning in Management, Lodhi Institutional Area, Lodhi Road, New Delhi-11O 003.

Bagchi (ed.) Economy and Organization: Indian Institutions Under the Neoliberal Regime. New Delhi: Sage, 1999. 427 pp. Rs. 495

Amiya Kumar cloth.

The need for a comprehensive theory on economic organization has been felt for very long both by economists and other social scientists. Studies on theoretical framework and analysis on economic organization, its changing nature and particularly its peculiarities in the less developed world has been an area that has received only scant attention and has largely been neglected for long.

The development of amazing multiplicity of economic and social organizations and institutions and their impact on Indian economic organization map, the model of economic organization in India historically and also that continues even after 1991 reforms. This exercise of delineating the structure and analyzing the functioning and network of institutions is a very ambitious task. The editor deserves compliments on highlighting this hitherto neglected perspective. It is universally acknowledged now that a uniform model on the behaviOUr" and structure of firms is not tenable. For, this behaviour is largely induced by the diverse economic organizations. Imperative, therefore, is to understand the principal forms of economic organizations and institutions that shape the behaviour of firms.

Management & Change, Volume 4, Number 1 (January-June 2000)

224 Book Reviews To analyze these various forms of economic organizations that influence the behaviour of firms is a very complex task, and hence it was naturally expected from an eminent scholar of A. K. Bagchi's stature to bring together the diverse perspectives on logic of growth and transformation of basic economic organizations of a society and bind them coherently. The editor has amply succeeded in doing it and giving us such a frame under a neoliberal regime.

Microprocesses and macrooutcomes as opined by Bagchi very rightly, are intimately connected. These organizations have a great impact upon the development of firms, cooperatives and other socio-economic and cultural institutions along with households or firms at micro level. The capacity to generate and optimize use of resources, both capital as well as human, lies in the appropriate development of their structures and institutions. Understanding the industrial growth in developing economies has hitherto been based on neoclassical factors, i.e., resource endowment, preferences analysis or external relations and functions such as technology, etc. The institutional perspective and treatment has been ignored and thus poorly understood. Structural aspects of organization of Indian industries need to be probed for a proper understanding and performance of firm and economy. In a fast globalizing economy, it has been even more crucial for individual firms.

Tracing the historical perspective of economic organization, Bagchi himself in chapter 1 has brilliantly captured the social forces that have shaped as well as distorted the evolution of such organizations.

Through a very insightful analysis of social forces the author has classified economic organization, institution of Indian style capitalism into three habitats where he delineates foreign capitalists, Indian industrialists and landlord-moneylender type organisms. The role of rural migrants has been explained in an evolutionary perspective. The emergence of large scale factories in well organized and basic industries has been analyzed through industrial clusters and their peculiarities.

Knitwear cluster of Tiruppur as a case study by Padmini Swaminathan and Jeyaranjan (Ch. 3) presents very interesting results of the growth aspects of institutional organizations and its features. In building networks of firms the role and nature of subcontracting has been examined in detail, which highlights certain interesting findings for the industrial organization and integration. With plenty of live examples and cases from different industries a very vivid account of family firms, conglomerates and transnationals has been presented by different answers in several chapters. How such organisms will face challenges and opportunities in the liberalization era with TNCs gaining prominence is a very pertinent question for the future in industrial organizations. The editor has succeeded in providing us a diverse view by bringing together the illustrative experiences of public sector, private sector and also some of the multinational firms' behaviour.

What really takes the cake and perhaps could generate polemics Management & Change, Volume 4, Number 1 (January-June 2000)

is the

Book Reviews

225

theorizing efforts on industrial organizations through available evidence on practices from developing countries such as India (Ch. 2). Stmcture-ConductPerformance resulting from institutional grounding could pave the way for study of industrial growth through newer dimensions. The author has succeeded in providing us a background here and has hinted the key questions for future research and examination.

Industrial organization theories have been stimulated by analyzing the problems of industrial performance.

Such an analysis here has found institutional approach by examining the structure and setting it against the performance. Earlier attempts focused on productivity factors concerning both intra-firm and inter-fum analysis, but Mookerjee's contribution here in this volume points at the role of institutional mechanism in three perspectives viz., managing agency system in the historical setting; private corporate sector in view of emerging competitive settings; small scale sector riddled with gross inefficiencies resultant of both policies and practices; and the public enterprises needing restructuring of control pattems and liberalized operative practices. The questions of ownership, family control mechanism, limited competition and lack of internal efficiency and productivity have been debated lucidly against the theoretical frame and approaches to industrial organization. This debate, however, in itself alone needs a much deeper treatment and perhaps requires an exhaustive research beyond the scope of such a compilation of strands of work. The editor has, however, done a yeoman's service by pointing out the issues relevant for countries such as India.

These essays written in simple style could provide useful reference to those who wish to study Indian industry, its problems and structure. To researchers and professionals in the field of labour relations, sociologists and industrial development scholars it would provide a base to examine the issues further. But more importantly, the question of how these organizations will cope up with the structural changes in response to liberalization will provide us with insights into management network and practices for future.

M. S. Verma (Dr.) Professor-Marketing Area, Institute for Integrated Learning in Management, Lodhi Institutional Area, Lodhi Road, New Delhi-l 10 003.

V. Padmanand and P. C. Jain, Doillg Busilless sponse Books, 2000. 269 pp. Rs. 245 paper.

ill Illdia. New Delhi: Re-

In view of the onset of the new millennium and the working of economic reforms in India for a decade or so, the book under review is very appropriate and well timed. This book targets at a niche segment of Non Resident Indians (NRIs) and delves upon various aspects of doing business in India. The book Management & Change, Volume 4, Number I (JanuaJy-June 2000)

226 Book Reviews carries a number of cases and caselets highlighting various aspects of doing business in India.

The book has been split in four parts. In the first part, the authors talk about the Indian economy, changes related to FDI, privatization, tariff barriers, smallscale industry. Different strategies for investing in India have also been discussed, with the help of case studies.

Part two of the book highlights the investment climate in India. This part dispels myths related to NRIs and their investment pattern. Investment is a business decision by NRIs and other foreign investors seeking to make a good return on capital, giving due consideration to subjective risk-return trade off.

The Indian business and bureaucratic environment is not conducive to investment in comparison to other global options.

This part of the book highlights the need to focus on the nostalgic NRI and to get him to do business in India. He is the one who intends to return to India "sometime;" our policies should be progressively tailored to attract him.

NRI technical professionals, management professionals, technocrats and entrepreneurs have a lot more to contribute to the national economy than mere fund .investment in hard cUlTency. Their technical skill, managerial expertise and new or adapted business ideas, if properly harnessed and channelized could do wonders for Indian industry, even while contributing to their own material success. The chapter also discusses about the apprehensions of NRIs. NRIs seem to be concerned about the risk of repatriation, fall in exchange value of the rupee and about the taxation rules and procedures, leading to red tape and corruption. Inadequate banking standards and information facilities served as impediments to industrial investment. The authors have also developed a typology of NRIs in India.

Part three of the book deals with different cases. These cases trace the growth of different units. They also give insight into the reasons such as how the businesses were set up, problems faced at various times and suggestions for carrying out the work plan without a problem.

One of the case studies has highlighted that the environment is not necessarily an excuse for avoiding the business option. It is entrepreneurial skill for doing business in India that counts. This includes strong problem solving skills, ability to project a solid image and strong skills in financial management.

The importance of a business plan is also highlighted. In order to acquaint himself with indusuy environment, an NRI can work as an employee in a related industry in the indusu.y environment. An NRI must give serious weightage to a business plan. One should understand factors like business acumen, awareness of practices and competition within specific markets that count. If one is getting into business at a medium scale of investment, it is sufficient to interact with senior officials of support institutions and avoid the corruption at the grass root levels. There are lessons that eventual success in business is deterManagcment & Changc. Volume 4, Numbcr 1 (January-Junc 2000)

Book Reviews 227 mined by committed hard work and positive thinking and an appreciation of the advantages of doing business in India and not on harping on limitations in bureaucratic market or infrastructure aspects, to justify one's own incompetence.

Taking cues from one of the NRI entrepreneurs, the importance on right presentation of a business style is highlighted. Presentation does not imply a blown up image or media hype but a solid conservative profile. This helps in mobilization of funds from institutions and the public in a growing firm. Focus on presenting a solid image implies the necessity of maintaining the functional management area of marketing as a priority area. Marketing and management capabilities remain paramount factors for success in business. Entrepreneurs in India often forget that spawning too many small firms, different entities only on paper but in reality parts of the same manufacturing process, under specifying profits, carrying on non-recorded transactions to evade or avoid statutory levies in the short term can only harm them in the long term. Unethical practices, financial frauds, underhand dealings, information about rules and regulations and government procedures should be known. The first generation entrepreneurs need information about all applied aspects of functional management, project ideas, technology, bureaucratic procedures and guidelines, specifically about product wise business practices. They also need to be trained. The need for working capital management is also emphasized. A planned and optimum capital structure planning ensures efficient use of funds and maximizes return on the promoter's equity.

Part four summarizes the learning from the earlier three parts. The book is quite readable. It has a distinct style of narration. It is full of examples to illustrate different aspects. However, the authors could have condensed the contents into a lesser number of chapters. Also at many places there is lack of coherence and cOImectivity. Overall, however, the book would be a useful tool for information for the NRIs, and the government. The latter can target suitable sections of NRIs to make India a viable destination for foreign investment. It can also give government insight into the areas, which could do with improvement, so as to enhance India's image as art investment destination. Though the authors propound that one could target the nostalgic NRIs, one must clearly keep in mind that investment decisions are made in most cases on merit. Emotions even if they playa role, can not be the sole criteria to make such an investment decision. Entrepreneurs setting up a new business and the academicians interested in knowing about doing business in India would also find the book quite useful.

Vinnie Jauhari (Dr.) Associate Professor & Associate Dean, Institute for International & Technology, 336, Udyog Vihar IV, Gurgaon-122 001.

Management

Management & Change, Volume 4, Number I (January-June 2000)

228 Book Reviews Ani! K. Yadav, Structural Changes ill the Indian Economy. New Delhi: Northern Book Centre, 2000. xiv+11 0 pp. Rs. 138 hard.

The book under review is a valuable addition to economic literature, especially for those interested in economic growth and development. Yadav presents an exhaustive survey of literature, sound empirical analysis, and sets the path for future research in the field.

The book examines two aspects-growth and structural changes in the Indian Economy; and a comparison of the growth patterns of the Indian economy with some other countries. The discussion of the Indian economy is focused around four parameters-demand, trade, production and employment. Comparisons with other countries look at production and employment.

The work is logically structured and easy to follow. This is a major strength of the book, considering the rigorous data analysis. A piece of econometric work that is well-written and easy to follow makes reading a pleasure for economists. And this is what Yadav has been able to achieve.

The introductory chapter looks at, in the author's words, the "rationale of the book." It is here that one feels the need for a more comprehensive discussion of the theoretical foundations of the research exercise. The author limits himself to a very brief sketch of growth and structure of the Indian economy.

This is one chapter where one actually wonders what the rationale is. A somewhat more detailed discussion of the theory would be welcome. One would appreciate some elaboration of the linkages between economic development, growth, and structural change. For readers of other disciplines, and in fact economists also, an introduction to some theory would help in understanding the subsequent empirical work.

The survey of literature is exhaustive till the mid 1980s. Dr. Yadav gives a good overview of the work done by Clark, Kuznets, Chenery and Syrquin. He also surveys the work of Indian economists in this regard. However, there is no mention of research work done after the mid 1980s.

The second and third chapters deal with the growth and structural changes in the Indian economy. The main findings of the author indicate fluctuations in the growth of Net Domestic Product (NDP) ip the Indian economy, with relatively stable periods during 1950-1960 and i980-1988. The agricultural sector showed maximum fluctuations. Overall, however, fluctuations in all the three sectors-agriculture, industry and services-followed trends of NDP. The author also looks at changes in the rural-urban population distribution patterns.

A significant conclusion of the author is that net income from abroad did not have any major impact on the structural changes in the Indian economy.

In the next part of the book, Dr. Yadav examines cross-country analysis.

Here he looks at high and low growth countries and their levels of instability.

He also looks at sectors contributing to instability.

Management & Change, Volume 4, Number 1 (January-June 2000)

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229

The book ends with a sunm1ary chapter, and with a note setting the pace for future research. Growth patterns in India and other developing countries, he says, are not in tandem with models defined by Kuznets, Kaldor, and Clark. However, for economies with faster rates of growth, structural changes do not deviate much from what these economists said. This is an area where further work could be done.

One limitation of the book is poor editing and grammatical errors at some places. Also, one does feel that it is more an extension of a thesis rather than a book. However, it makes good reading, and overall is a quality piece of research. Readers will benefit in their understanding of the structural changes in the Indian economy. It is good reading for anybody interested in this area.

Vibha Sheel Fellow-Economics Area, Institute for Integrated Learning in Management, Lodhi Institutional Area, Lodhi Road, New Delhi-l 10 003.

Leadership Barbara C. Crosby, Leadership Transnational Community. London:

for Global Citizenship: Building Sage Publications. 216 pp. US$ 54.95

paper.

Believing that the world is moving towards becoming a world conmmnity, the author of the book under review considers it necessary to articulate what are the rights and obligations of world citizenship, and the characteristics of the leadership to deal with global social problems within and across national boundaries. To explore this question, the author studied transnational organizations dealing with global social problems. This book reports in detail case studies of two such organizations, Anmesty International and the International Women's Right Action Watch (IWRA W). The emphasis in the case studies is on understanding the nature of leadership to deal with the global social problems and the contribution of the collectivity in this process. Both the organizations are very successful and have multi-national membership. They focus on human rights but they offer contrasting models of organizational design and styles of working.

Leaders in organizations which have global concerns need to think systematically and holistically about the process of problem solving. The pattern of change hardly ever proceeds along pre-conceived lines. Across nations, people frame and reframe problems, and new problems are created which alter the situation or the solution. The decision-makers reject policies, only to be overruled by courts (p. 175). The author identifies seven inter-related phases in the process of tackling public problems. They are: (a) the initial agreement, (b) problem definition, (c) the search for solutions, (d) policy or plan formulation, Management & Change, Volume 4, Number 1 (January-June 2000)

230 Book Reviews (e) proposal reviews, (t) adoption, implementation, and evaluation, and (g) maintenance, succession, or termination. The recognition of the change cycle helps leaders to consciously manage global social problems. It also helps them to identify the different types of leadership for different phases of the cycle.

Leadership capabilities to deal with global social problems are different in many ways from those required in other situations. The leaders have no personal power or authority to influence action across nations. They have to identify local leaders, obtain agreement for action, build public support, exert international moral pressure and win respect of many for the causes. Mere power wielding is not enough. The action plan must involve large number of people apart from forging individual relationships. The author refers to this task as building "regimes of mutual gain."

Crosby identifies seven main leadership categories. As per these the leadership should (1) attempt to understand the social, economic, political, and technological context in which the changes they seek will occur, (2) understand their own strengths and weaknesses and those of others who are involved in leadership roles, (3) be able to build teams that can launch and sustain the effort to solve public problem, (4) have organizational stmcture and systems and keep the vision/mission stubbornly clear, (5) provide visionary leadership, (6) be able to forge alliances/coalitions to influence decision-makers, and (7) be known and respected for ethical behaviour.

The author has given examples of such leadership in Amnesty International and IWRA W. In fact, the entire thesis on leadership for global action in this book is based on the case study of these two organizations. The data is obtained from interviewing people who have occupied leadership positions in these two organizations, questionnaire responses of IWRA W's members, study of transcripts of interviews of executive committee members of Amnesty conducted by Andrew Blane, a historian, and published data and repOlis about the two organizations.

Two interesting perspectives emerge from this study which differentiate the demands on leadership in an organization involving global concerns and those that deal with other situations. These are given below.

The processes that concern corporate leaders are also the same as they are for global leaders but the task in the latter case has to be performed differently.

The global involvement has to develop consensus among vastly spread out and disparate groups which share a belief in the purpose but respond individually to a different socio-cultural milieu and the political environment. The author refers to the task as "building regimes of mutual gain."

The force that binds people in the organization is moral force and the leadership has to continuously reinforce this mission by actions and programn1es which are consistent and seem to be so.

The other interesting feature is that the initial leader-style in Amnesty and IWRA W was very different. The moving spirit in the initial period, Peter Management & Change. Volume 4, Number I (Janualy-June 2000)

Book Reviews 231 Beneson in Amnesty International, was charismatic and created a vast network of dedicated supporters; but his style was more dictatorial than one of a consensus builder. Anmesty's founders created an organizational design that connected positional leaders, staff, and members to each other in local groups, national sections, international meetings, missions, and research efforts. They referred often to the sum of these relationships as the "prisoner of conscience movement" (p. 91). The stress was on the constant struggle to accomplish ambitious goals with minimal resources and to establish effective administrative systems in an atmosphere highly influenced by Peter Beneson's charismatic personality.

The two women who provided leadership in IWRA W, Arvonne Fraser and Rebecca Cook relied on a shared and grass-root action. IWRA W leaders endeavoured to build internal community in several ways by emphasizing communication among members and by strengthening the extended network. They put special emphasis on building supportive relationships with core network members. The leadership also tried to develop personal relationships (p. 92).

Both organizations were successful and in their own area achieved sustained influence. The success of the organizations is attributable to their ability to communicate meaning and ethical principles rather than a particular style of functioning. The leaders do not have personal power. The author emphasises that power plays out through three main social practices (p. 6): "creating and communicating meaning (the focus of visionary leadership), making and implementing policy decisions (the focus of political leadership ), and sanctioning conduct (the focus of ethical leadership)."

The book consists of nine chapters. Chapter one outlines concerns for collective action in pursuit of the common public good in the global context.

Chapter two emphasizes the need to understand the local or the national context for problem solving. Understanding of the social, cultural and political environment is essential for formulating a strategy for action.

Chapter three deals with the need for the leader to understand himself and his own orientation. Knowledge of the self will help the leader understand people living in a different socio-cultural and political environment. For effective leadership in the global context, the leader should understand how and why people react differently to similar situations. Chapter four deals with the necessity of building a team that initiates, sustains, or oversees work on global public problems.

Chapter five discusses the leader's role in building transnational citizen organizations or networks.

Chapter six deals with the kind of fora that leaders have to create for developing shared meaning at national and international levels. Chapter seven discusses the need to effectively deal with differing political systems. Chapter eight emphasizes the need for principles and norms to support the organizational mission. Chapter nine summarizes the elements of leadership to resolve global public Management & Change, Volume 4, Number 1 (January-June 2000)

232 Book Reviews problems that are discussed earlier in chapter 5.

The four appendices provide details of the questionnaire used by the author and other relevant material relating to the study.

The author suggests that the book will be most useful for those who want to be leaders in the global problem-solving role. The strategy is guided by what may be referred to as democratic values and the vision of global citizenship.

The data is dervied from the Western world. Whether the dream of global citizenship is achieved or not, I believe that the processes and strategies discussed in the book are relevant for leaders who operate in global context and I have no doubt that they will find this volume relevant and useful. The second category of people to whom I recommend this book are students who are interested in the study of organizations. I do so because many organizations, multinationals and nationals, assume that there is one best design, or a system of working that should apply to all or most situations. In this belief they ignore the fact that strategy and leadership has to be based on the social, cultural and political considerations. These considerations are likely to be increasingly more important with globalization of economic activity than ever before. No nation can survive without carving out a distinct identity of its own. The success of transnational leadership will depend on each player recognizing the need of other players, as the author has also emphasized in this book.

The publication is useful and I believe it is a significant addition to the scant literature on the subject.

Ishwar Dayal (Dr.) Senior Fellow, Shri Ram Centre for IR & HR, 4, Safdar Hashmi Marg, New Delhi-I 10 001.

Marketing

Management

R. B. Smarta, Revitalizing tlte Pharmaceutical Business: Innovative Marketing Approaches. New Delhi: Response Books, 1999.294 pp. Rs. 225 paper.

The pharmaceutical business in India is changing very rapidly. With the patents regime due for implementation from the year 2005, there are going to be several changes which would take place. Amidst these changes, organizations would have to look for new strategies to survive. This book is a welcome entrant amidst this turmoil.

The book has been divided into ten chapters. The first chapter delves into the need for innovation and support mechanisms for sustenance of innovation. !talso elaborates on the paradigm shifts which are taking place and the industry drivers for the same. For instance, in the 1980s science played a predominant role through massive scale discovery effort and blanket market and sales while Management & (,hange, Volume 4, Number 1 (January-June 2000)

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Book Reviews 233 beyond 2000 the importance would shift to outcomes. The competitive paradigm would comprise discovery back in the spotlight, but with new rules; smaller and nanower disease segments; nanower patient demographic targets; enabling technologies like genomics, combinational chemistry, high thoughts would be screening the industry drivers; only differentiated value would command high margins; and proliferating competition would maintain pressure on differentiation.

It also discusses the forces shaping Indian pharmaceutical industry. The author identifies eight major forces acting on the Indian pharmaceutical industry. They include co-strengths of Indian pharmaceutical industry; disease patterns; doctors; patients; alternative medicine; health infrastructure; information technology; and health insurance.

The critical success factors which emerge are new products; well-trained sales force; integration with Indian business opportunities; R&D efforts to provide competitive advantage; information technology to drive cost advantage and to be customer responsive; good manufacturing practices to providecompetitive advantage in terms of quality; strong OTC brands; exports; strategic alliances; and business design and strategy Chapter 2 is titled "New Marketing Approaches." It talks about the alliances, co-marketing, brand image marketing, creating right perception as the steps to building better brand image. It also highlightes the need for involvement marketing. It also discusses aspects of medico marketing.

Chapter 3 discusses the acquisition of strategic marketing capabilities, which an organization must acquire-marketing and R&D; intangible assets; profit capabilities. It also discusses the sources of strategic assets-architecture, reputation, innovation, synergy and market research.

Chapter 4 looks at the ways to nurture core phalmaceutical businessesfixed dosage formulations, branded products and generics. Chapter 5 discusses the communication strategies. It discusses the importance of the right media mix using the right positioning strategy, effective copy, among others. Chapter 6 discusses alternate methods of sales promotion. The objective for promotions to physicians, chemists, medical representatives and field managers must be absolutely clear.

Chapter 7 is titled, "Market Dynamics and Strategic Distribution." It begins with discussion on a number of medical practitioners and classification of customer groups in India. The physicians then have been clubbed into three major clusters-general practitioners, specialists, full-time hospital doctors attached with practising and teaching staff.

The retailers can be classified into three categories. The physicians have also been classified depending on their prescription behaviour into categories such as corporate loyals; band shifters; early adopters; and late adopters.

The author talks about innovation in the distribution strategy. He points out at the need for cost benefit analysis, product availability, cost effective disManagement & Change, Volume 4, Number 1 (January-June 2000)

"I 234 Book Reviews tribution, delivering satisfaction through the value chain. It has also delved upon forces behind retail behaviour and has proposed a 4P model for continuing education of pharmacists.

Chapter 8 is titled "Policies and Procedures." It highlights the need for well-fonnulated policies which perf 01111several definite functions. Chapter 9 focuses on the sales force and developing total quality control systems. It also emphasizes on the need for information based selling.

Chapter 10 which is titled "Financial Implications of Marketing Operations" emphasizes the importance of cost analysis for successful SMIR. The author has also attempted to measure performance through various ratios to monitor an organization. The book is quite readable and covers a range of issues from the pharmaceutical industry. It has highlighted the issues which need to be addressed by the pharmaceutical firms and have also tried to relate them with the strategies being adopted by different organizatios. As the author himself has been a consultant in the area of phal111aceuticals, he covers a lot of practical aspects, which emanate only out of experience. The book would make a useful reading for managers or entrepreneurs operating in the phal111aceutical segments, academicians and students in pharmaceutical industry.

Vinnie Jauhari (Dr.) Associate Professor & Associate Dean, Institute for Intel11ational Management & Technology, 336, Udyog Vihar IV, Gurgaon-l22 001.

s. Balachandran,

Customer-Driven Services Mal/agemel/t. New Delhi: Response Books, 1999. 333 pp. Rs. 225 paper.

One of the main indicators of a developed economy is the increasing importance of the services sector, which accounts for a major chunk of the GDP of a country (as high as 70 percent in the United States). India with its strange mix of undeveloped, developing and developed economies, has come forward in this sector, more so in recent times with a quantum leap in the mushrooming of a plethora of innovative services. Travel and tourism, cybercafes and cellular phones, burghers and business schools, they are all here with a rallying around of intel11ational and national brand names, Small wonder that practitioners, consultants and academicians are taking note of this phenomenon and, as a result, articles and books have been appearing with increasing regularity.

UnfOltunately, very little professional expertise has developed in this widely divergent field and we have Masters in Sociology writing on service delivery and insurance specialists writing on tourism. The picture is somewhat brighter in the international arena, with a few stalwarts like BeITY,Zeithaml and Lovelock along with a host of industty specific researchers and practitioners. Our country, Management & Change. Volume 4. Number I (Janualy.June 2000)

Book Reviews 235 given its dearth of reliable textbooks and other literature in most areas in marketing, has seen predictably enough, very few books in either services management or in services marketing. Given this lacuna, Mr. Balachandran's effort, "Customer Driven Services Management" is a welcome addition to the literature in this area. One wishes more and more practitioners and consultants pick up their pens for such laudable causes.

The proof of the pudding however, is in the eating. The blue paperback, more than three hundred pages thick, has a title which in itself is controversial.

Services management per se passes muster, but, I fail to understand the relevance of the redundant prefix "customer driven." What has been written about customers and customer-driven management since the days of Mohandas Karamchand Gandhi would fill an empty planet. Management has at least evolved to the stage where customer focus is implicitly assumed and such a prefix, especially in literature, is, to say the least, an anachronism. Further, marketing of services and services management are as different as the management of a retail outlet is from consumer goods marketing. The book, like the walms said, talks of many things, but rarely does it touch services management. One takes a look at any standard textbook on services marketing and finds a replica, more detailed, more exhaustive, of most of the concepts outlined in this book. As such, the title itself is a misnomer and more careful thought would perhaps -generate a more relevant little.

Ambition is a welcome and very necessary trait. Ambition, however, needs to be tempered with realism in order to yield results. The author, by his own admission, claims that this book deals with reengineering. This book focuses on quality. He further adds that many of the ideas in this book will also be relevant for the service components of manufacturing industries like marketing, customer care, retail management, purchasing, vendor development, office administration, wananties, franchising, relationship management and so on. In my entire exposure to literature, I yet have to see a book which achieves so much.

Let us now take a look at how the author claims to have achieved so much.

The book has been divided into ten chapters sequenced strangely. I have no objection to the first three: Services today, the distinguishing characteristics and developing the service product. I fail to see the logic of the sequence that follows: Knowing the customer, marketing of services, achieving high quality, releasing people potential and strategies for growth. The sequence ends with managing information and a very unrepresentative choice of service industries, insurance, public services, tourism, etc. I have read many books, which lay no claims to logical sequencing but are mere compilations and accepted as such.

A book with a central theme and focus needs more careful organization.

The first chapter, as the name itself suggests, is indicatory in nature. The second comes as a surprise. After discussing various service dimensions like intangibility, inseparability, etc. the author inexplicably moves into barriers to Management & Change, Volume 4. Number I (January-June 2(00)

236 Book Reviews entry, an unexplainable addition to an otherwise simple and logical chapter.

Developing the service product begins with a hitherto unknown concept in marketing that of product personality, concludes with product differentiation, takes a quantum jump into packaging and labeling, and finally gets into the business of development. Product range seems to be a hastily tagged on afterthought. Delivery systems is relevant to services management, though why it should be preceded by returns and guarantees and succeeded by complaints beats my imagination.

"Knowing the Customer" talks mostly of excerpted consumer behavior concepts and hardly of the customer. Marketing of services summarises the first few chapters of any basic marketing text, right from marketing and selling to the marketing concepts. This chapter is replete with statements like "the main elements of a marketing programme are conceptualized in terms of four P's," "the most important job of a marketer is to know his market," "marketing adds value."

To conclude, an interesting subject loses value through cavlier treatment.

Reorganization and some careful thought would add tremendously to the value of the book.

Gautam Bhattacharya Professor-Marketing Area, Institute for Integrated Learning in Management, Lodhi Institutional Area, Lodhi Road, New Delhi-l 10 003.

Ian Chaston, New Marketing Strategies. New Delhi: Response Books, 1999. vi+199 pp. Rs. 195 paper.

This particular book comes as a whiff of fresh breeze in an arid climate in an area which rarely sees high quality, thought provoking books. One word of caution at the outset-the book is not meant for fresh students or new practitioners of marketing. One needs at least an understanding of the core concepts of basic marketing management as well as a nodding acquaintance with the principles of strategic management. To that extent, the book is targeted at advanced marketing students as well as practitioners in the field.

The justifications for New Marketing Strategies-Evolving Flexible Processes to Fit Market Circumstance lie in the relevance of the new alternative vision that the author talks about. The basic levels of the new vision are that variations in circumstances across areas such as markets, customer behaviours, process technologies and organizational competencies are combining to require marketing to move away from a single, purist managerial concept towards an approach in which strategic decisions are influenced by whether the organization has adopted a transactional, relationship and/or entrepreneurial orientation to manage process. The author is all the more appreciable since he does not, like most theorists today, reject transactional Management & Change, Volume 4, Number I (January-June 2000)

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Book Reviews 237 marketing, but suggests instead a blend of the different orientations in order to arrive at a suitable mix that can be designed for changing market profiles.

Unfortunately, both marketing and management today are dominated by concepts, which have fired the imagination of both academicians and practitioners.

We have a world dominated by phrases such as marketing orientation, value chains, customer delight, differentiation and focus, a potpourri overflowing with the otherwise excellent models of Porter and Kotler. The practising manager is faced with bewilderment and sheer confusion leads him to close his eyes and reach out for some magic concept that will tum his company around. We talk of focus and core competencies in companies. It is time one needed some focus in marketing academics.

New Marketing Strategies is a beginning towards this. It extracts relevant theories and tries to focus on the need of the day processes which are flexible enough to adopt to change.

The book has been divided into twelve chapters. An interesting beginning is made with "Marketing: An Evolving Philosophy." The author traces out the evolution of management thought and narrows down to the genesis of marketing.

I specially like the almost poetic joumey with the birth of marketing theory, a troubled adolescence which discusses, among other things, altemative marketing philosophies and the final joumey into adulthood.

Internal competencies and the external environment follow, high density chapters given the enormous volume of research that has been carried out in . these areas.

The chapter on Strategy and positioning, however, given the target market along with the levels of treatment in the earlier part of the book, may need a relook at the first ten pages where segmentation, positioning and the product life cycle have been explained at length and perhaps could have been done way with or at least summarized. A redeeming feature of this chapter is the treatment of uncertainty and marketing styles. The same criticism holds true for the chapter on selecting strategies and plans with its emphasis on the GE model.

This trend of the author to move back into basics in an advanced text is evident in all the three subsequent chapters on buyer behaviour, business-tobusiness marketing and services marketing. The quality of the book, high as it is could have gained substantially with a judicious pruning of much of the basic material in these chapters. The sections on innovation is well thought out while the product process management model [new?] might have been further explored.

To conclude, this is a book well worth reading and one hopes the author, in the next edition, adds more value through careful editing.

Gautam Bhattacharya Professor-Marketing,

I

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l~_

Institute for Integrated Learning in Management,

Lodhi

Management & Change, Volume 4, Number I (.IanuJly-June 2000)

238 Book Reviews Institutional Area, Lodhi Road, New Delhi-110 003.

Human Resource Management Ashok Chanda and Kabra Shilpa, Human Resource Strategy: Architecture for Change. New Delhi: Response Books, 2000. 313 pp. Rs. 245 paper.

Visualizing and creating a long-tem1 HR strategy in the context of the fluidity in the concept of human resource management (HRM) is a difficult proposition. Unlike the proverbial stone cutter, who could visualize the Tajmahal in the stone which he was chiseling, it is not a common trait among many of us to visualize the future leave alone to plan for it. It is in this context that the book under review provides us a step by step guideline to create and implement an HR strategy.

The book has been divided into four parts consisting of eleven chapters.

The first part gives an overview of the emerging business scenario. It laments that HR professionals over time have gradually compartmentalized t/1eir functions. The authors argue for a need to realign the HR function as a true business partner in an era where change is the key word and managing knowledge is the emerging source of competitive advantage. In this part the authors also propose their "house model" of HR strategy which is an integrated, holistic view encompassing the various factors that affect HR strategy.

The second part (containing chapters 3-8) deals with "how to evolve" the HR strategy. It begins with building the HR vision (the driving force of the employees) initially by articulating the organization's vision, and thereafter creating the HR vision keeping in mind the needs of the stakeholders. By doing so the organization is articulating the basic philosophy for which the HR function stands for. It is this HR vision which gives momentum to build the HR strategy. Chapter 4 talks about scanning the environment-both internal and external which needs to be integrated into the HR strategy. The next chapter projects the need to audit the organization's HR competencies and resources which would provide us a clear picture of what the organization possesses and subsequently what the organization needs to have. While chapter 6 talks about analyzing the strategic business plan (SBP) on an ongoing basis and linking the HR strategy with the SBP, chapter 7 suggests creating targets/objectives (which converts the vision statements into specific, concrete, measurable terms) towards which the organization needs to move to fulfill the HR vision. The last chapter in this part highlights the need to integrate the action plans which more specifically "requires the identification of the HR system to fulfil the objective, drawing a long-term time chart for each system, consolidating the systems and working out detailed action plans for the system for each year" (p 203).

In the third part of the book, the authors talk about the impact of creating Managcment & Changc. Volume 4, Number I (.Ianllaly-.Il1nc 2000)

Book Reviews 239 and implementing such an HR strategy in the organization. Not only it gives in some details of the effect on various HR subsystems but also elaborates the need for recalibration of HR strategy, some processes of review and subsequently improving the HR strategy. By committing to recalibration, organizations can not only detect results faster but can also determine more rapidly what is working and what is not. This part also provides the pre-requisites for the success of HR strategy in an organization.

The last part provides opportunities for the readers to go through a case study and understand the evolution of HR strategy over time in an organizational setting. Included in this are some readymade questionnaires, which can be utilized in building an HR strategy in an organization.

The authors deserve credit for their attempt at documenting the process of building HR strategy. However, there are some areas of concern. While ready made questionnaires for survey help us in data collection, doubts about the data can be raised without any mention of their reliability and the validity scores.

The objectivity would have been enhanced if either the source of these questionnaires were mentioned or the statistical parameters were defined.

The book appears incomplete at certain places. For example, the authors mention "unfortunately for many HR functions the vision statements are usually boring, confusing, a structurally unsound stream of words (p 72)" but they forget to give an example of what is "boring and confusing" without which it is difficult for readers to differentiate the good from the bad and why the authors think so.

In spite of the attractiveness of comparing the HR strategy model to that of building a house (probably conjuring the image of a family in an organization), it is imperative that any claim about the newness of the house model needs to be supported by reasons. Unfortunately, the authors do not provide us with any rationale as to why and in what manner doe's their model differ from the existing literature (e.g., Dy~r, 1984; Kydd and Oppenheim, 1990; Purcell, 1989: 67-91) about HR strategy and its linkage to the overall business strategy.

Moreover, it seems apparent from the model that HR vision/objective is subservient to the business objective and goals. This would not be much of a problem when business goals are ethical and "good for the society," but if not then HR has a difficult and critical choice to make. The question gains importance in today's market economy where individualization and cut-throat competition is the order of the day. The book does not address such sensitive issues. However, the authors indirectly try to incorporate a safeguard in their model by involving the employees as one of the stakeholders. "As stakeholders employees playa dual role: They have their own expectations along with other stakeholders; and they are the only players who work towards the expectations of other stakeholders working in the organization (p 48)." Unfortunately orgaManagement & Change, Volume 4, Number I (.Ianualy-.Iune 2000)

240 Book Reviews nizations and human resources are complex in nature and such corrective forces do not work, as the authors would have desired them to do.

The authors have complained that "many HR professionals have been so focussed recently on the harder side of HR-understanding business issues, quantifying the impact of HR function and becoming business partners-that they have neglected HR's softer side-the principle that employees need to be treated as people, not just as assets or as resources (p 69)." While it is true that of late the HR professionals have been neglecting the softer HR issues, it is also hue that this is because of the constant coaxing and appreciation that the HR professionals receive from their organizations. Traditionally, HR has been blamed for being too much concerned with the softer HR issues and compared to other departments (production, finance, etc.). HR was expected to play second fiddle.

However, in order to strengthen their position in the organization, HR professionalshave redirected themselves by emphasizing the harder HR issues. To a large extent even aligning themselves to the business strategy would also require some harder issues. Thus, the authors' argument that HR had become too engrossed with the harder side does seem out of place. While balancing may be the ideal goal, it is important to ask whether realistically it is allowed in the organizations. Chances are that it is not.

On the whole, the book provides a step by step guide towards building a dynamic HR sh'ategy suited to the fast changing environment. This is a "how to do" book which tries to build up from scratch with exercises and questionnaires as added tools. Throughout the book one comes across "try it out" excersises. They help the readers to understand the basic essence of the chapters. In an era when strategy is fast becoming the modem mantra for corporate existence and growth, this book is a welcome addition especially in the Indian context.

REFERENCES Dyer, L. (1984) "Studying HR Strategy," Industrial Relatiolls, 23/2: 156-169, Kydd, B, and Oppenheim, L. (1990) "Using HRM to enhance competitiveness: Lessons from four excellent companies," HRM Journal, 29/2: J 45-66, Purcell, John (1989) "The Impact of Corporate Strategy on HRM" in John Stoney (ed,), New Perspective 011 HRM. London & New York: Routledge,

Pranabesh Ray Professor-HRM

Area, Xaviers Labour Relations Institute, Circuit House Area,

Jamshedpur-831 001.

Management

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Book Reviews

241

Wayne F. Cascio, Mal/aging Humal/ Resources: Productiviiy-Quality of Work Life, Profits (Fifth Edition). New York: IrwinIMcgraw Hill, 1998. xxxi+720 pp.

Rs. 851 paper.

The contemporary human resource management (HRM) discourse postulates a paradigm shift in management thought, which manifests a dramatic change in the way we view business problems and ways to tackle them. Some of the key themes that have become critical in this regard in the new dispensation are: teams, globalization of markets, customer focus, diversity management, network of alliances, delayeling and flexibility. It is being realized that people management is the critical determinant of business success. The function ofHRM has become a concern of nearly all managers. The question is: Are managers in general prepared to face this new challenge?

The book under review caters to the needs of general and line managers.

Various chapters in the book have been linked to three outcome variablesproductivity, quality of work life (QWL), and profits. The sixteen chapters in the book find place in one or the other of the six parts into which the book has been divided: Environment; employment; development; compensation; labourmanagement accommodation; and support, evaluation, and international implications. Apart from the usual chapters in any text on HRM,. others which find place in it include: Diversity at work (chapter 3); competitive strategies, HR strategies, and the financial impact of HRM (chapter 15); and international dimensions of HRM (chapter 16). Part I develops a broad picture of the social, legal, economic and organizational environment in managing human resources.

This part includes a chapter on "diversity management." These chapters in pan I discuss the people-related problems that are likely to arise as a result of changes in the fOlms of organizations and how they could be avoided or minimized. The author also stresses on how people need to be managed differently in a globally competitive environment, and also how these issues are to be juxtaposed with productivity, quality of work life, and profits. This section demonstrates refreshing originality, arid is perhaps the most interesting pan of the book.

It arouses tremendous interest in the reader to know the HR challenges in the new era. These chapters set the pace for the rest of the book. They highlight how the new organization can work effectively if it is premised on values such as redistribution of power, greater employee involvement, and more teamwork.

Perhaps the most original pan of the book is the chapter on diversity (chapter 3). It discusses why companies are paying greater attention to diversity. It also suggests how to manage diversity so that the best talents can be attracted to the company. 1'he last chapter of the book, which is titled "international dimensions of HRM" has also been written in a very imaginative and thoughtful way. Among others, it discusses components of expatriate recruitment, selection orientation, etc., of certain issues that deserve attention in the repatriaManagement & Change. Volume 4, Number I (Janualy-.Iune 2000)

242 Book Reviews tion of overseas employees. Intemational issues are dealt with not just in this chapter, they are in fact interspersed in almost all parts of the book.

Some of the most important merits of this book include lucidity and practicability of the formulations made. In addition to these, the author has taken care to provide examples of HRM practices not just from large and medium businesses but also in small businesses. Topics included and examples provided in support of formulations presented are amply appropriate. It contains up to date references of new-knowledge generated through latest publications in reputed joumals. The textbook is highly readable, yet it is not simplistic. The detailed glossary at the end of the book makes it still more attractive for students and managers alike. Most chapters are replete with formulations based on research findings, company examples and international comparisons. Each chapter contains impact boxes which help link the chapter contents with the strategic objectives of the book, i.e., productivity, quality of work life and profits.

Unlike most other American texts on HRM, nearly all chapters in this book relate the formulations to competitive realities faced by modem business. The discussion on alternative dispute resolution in chapter 13 is quite interesting.

Let me come to the limitations of the book which are not far too many.

Cascio admittedly wrote this book as containing material for a one-semester course for an MBA programme. It is for this reason that he has compressed the 18 chapters in the earlier edition of this book to 16 in the present one. I fail to understand whether it is a good idea to so link the purposiveness of a book.

No two management departments in different universities design their syllabi by basing it on a particular textbook. Further, there is not much discussion in this book on HR strategy, which is becoming so important with nearly all companies. Also, there is hardly any mention, not to talk of treatment, of performance-related pay, management of competencies, human resource development, and leaming organizations. The chapter on performance management needs to discuss the critical variables of performance, such as flexibility, commitment, leaming organization, culture, empowerment, and leadership. The chapter mainly discusses issues related to performance appraisal only. While HRM activities and responsibilities of line managers and the HR department have been enumerated quite impressively, no attempt has been made to clarify what the term HRM connotes and how it differs from personnel management. If Cascio feels that attending to all these issues would make the book unmanageably bulky, two volumes or two books with complementary titles can be brought out, one titled HRM, and the other titled Strategic HRM or HR Strategy. It is now agreed that the term HRM carries a strategic connotation; for the trigger point of all HR agenda is competition and the consequent chaos produced by it in the business environment, thus needing more efficacious and strategic management of people-related issues.

Another point needs to be made. It is well-known that strategic themes in Management

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HRM are based on the assumptions of either soft model (Harvard model) or the hard model (Michigan Model). The key assumptions of the two models are quite different. Interestingly, these two models originated in USA itself, and that too way back in early 1980s. Even though, chapters 1 to 3 of this text have impressively discussed the importance of people management, there is no discussion on the "hard" and "soft" models of HRM. Of course, this is true of most other HRM textbooks coming from the USA, but that is not a sufficient argument for ignoring these conceptual innovations in the HRM discourse. If Cascio can add a chapter on these lines in future editions of this book, it would render a greater value-addition to the book, and will be liked by all readers including general and line managers. Any prescriptions by a textbook writer, in order to be useful, must appropriately be linked to their theoretical underpinnings. These models (especially the soft one) have intimate connections with Japanese management. A discussion on these will therefore clarify the operationalizability of Japanese management assumptions in American and other business settings. Cascio might counter-argue that since the book is meant for managers in general and not for HRM specialists, that discussion is avoidable. First of all, the book has been admittedly developed primarily as an HRM textbook for students in management schools; hence, development of such perspectives should be essential. Secondly, even the general reader needs to be exposed to these developments. As John Galbraith has said, even the most complex of economic models can be stated in a way as to be understood by the common reader. HRM concepts are much less complex compared to those related to economics.

Overall, despite these comments this book is an important addition to the available literature on HRM, especially for the students and practising managers. The coherence and lucidity in it are remarkable. The reader finds the book quite useful even as a practical guide for operationalizing HRM philosophy and policies in specific organizational situations.

Debi S. Saini (Dr.) PM & IR Area, Delhi College of Arts and Commerce, University of Delhi, Netaji Nagar, New Delhi-ll0 023.

c. S. Venkata Ratnam (ed.) Human Resource Development/or Adjustment at the Enterprise level (Vol. I & Vol. II). Geneva: International Labour Office, 1999. Price not mentioned.

The book under review is based on researches conducted in twelve enterprises in six Asian countries (Bangladesh, India, Nepal, Pakistan, Philippines and Sri Lanka) with a view to leaming how enterprises are adjusting to cutTent changes that are taking place in business environment and how HRJIR issues are being handled in the process of such restructuring. Adjustment is adaptation to Management

& Change.

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244 Book Reviews change. Human Resource Development (HRD) should focus on preparing people to cope with the challenges for adjustment. The growing gap between technology and existing skills re-emphasizes the importance of flexible training, which includes enterprise-based training as well as continuous education. HRD and the creation of a highly skilled and flexible workforce are especially important in a global economy framework because these enable enterprises and nations to remain competitive. This case book enables enterprises to identify and understand adjustment issues and develop the suitable strategies to be applied in organizations.

The book is divided into two volumes: Vol. I is the PaJ1icipants' Manual and Vol. II is the Facilitator's Manual. Vol. I consists of four sections. Section I deals with the introduction to the cases. The cases cover a broad range of industries, sectors and contexts. The cases relate to different stages of adjustment; some have spotted the crises, others reflect that the concerned organizations have either solved or are in the process of solving the problem. The cases have attempted to point to the issues and the strategy to be developed to manage these issues.

Section I describes the concept of adjustment at micro level and the HRD issues to be developed to facilitate such adjustment. Section II describes the cases exhaustively in 12 Asian Countries, covering a wide range of indusu'ies.

The cases have tried to identify the crises prevailing in the organizations, the HRlIR interventions by the organization and the process of such adjustment through the issues identified. Section IV deals with the activities concerning the participants. It identifies certain areas of adjustment at the enterprise level and the issues have been developed accordingly for discussion among participants.

Vol. II, the facilitator's guide, too is arranged in four parts: introduction, teaching notes, overhead transparencies for text/concepts session wise (OHTconcepts), and overhead transparencies for the cases (OHT-cases).

The teaching notes seek to provide a helping hand to the case analyzer. To this end they attempt to identify the issues country-wise and organization- wise.

It provides excellent inputs to teachers to handle the cases in a classroom situation. Each country has its unique system of adjustment to changes. Therefore, the notes provide a wide variety of experiences prevailing in different countries.

They outline the approaches to the piscussion of case studies and the learning value for each case to be conveyed to the participants. The last two sections of this volume clearly present the issues for overhead transparencies, text/concept-wise, and case-wise for the class handling. It provides ample help to the facilitators for classroom discussion.

Both the chapters in Vol. II are very innovatively developed. They provide excellent teaching aids to both the facilitator and the participants so as to make the discussion more meaningful. I must say that the publication of this case book is a rare contribution to the literature on human resource management Management & Change. Volume 4, Number 1 (January-June 2000)

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from an Indian author. The author has demonstrated immense sense of imagination and innovativeness in developing the cases to as to raise variety of issues. The organization of the book also reflects developing different approaches and strategies to make the classroom discussion of the cases more effective.

These cases would no doubt be very usefulleaming tools in analyzing and developing appropriate HRM strategies. The book contains extremely useful material for teachers, students, the employers, trade union leaders and the administrators. It would help them in analyzing the problems in their respective organizations and to recommend the necessary HRD interventions for adjustment. The three-day training programme on HRD for adjustment at the enterprise level developed by Professor Venkata Ratnam on the basis of his study in six Asian countries would especially enable the employers' organizations to train the member firms in HR and IR aspects of restructuring.

P. K. Mohanty (Dr.) Dept. of Business Administration, 751 004, Orissa.

Utkal University, Vani Vihar, Bhubneshwar-

T. V. Rao, HRD Audit: Evaluating the Human Resource Function for Business Improvement. New Delhi: Response Books (A Division of Sage Pub.), 1999. 344 pp. Rs. 245 paper.

Human resource development as a body of knowledge has comprehensively contributed tools for developing and motivating human resources in organizations. The key concem of HRD philosophy is developing people's capabilities and thus helping organizations in achieving excellence through them. Traditionally, the trickle down approach is advocated in adopting a variety of HRD mechanisms and subsystems. Often, these mechanisms were viewed as ends in themselves. The HR function, in general, has been mostly the reactive one and the i;>electionof HRD interventions in particular situations were also reflected as an extension of this thinking. In the present environment when we talk about strategic human resource management (HRM), the developmental interventions are also being linked to business strategies. It details the various aspects of HRD that should be referred for a comprehensive evaluation and fom1Ulation of business plans. HRD is supposed to be outcome- and result-oriented.

The book under review has attempted to benchmark the contribution HRD can make in organizational perfom1ance in the new business scenario. It provides a comprehensive evaluation of the HR function so as to align it with business goals and strategies. Rao has written this book with an intention to refocus HRD on business goals, business linkages, competence building, commitment building and culture building (p.ll).

It is organized in four sections consisting of sixteen chapters.

Management & Change, Volume 4. Number 1 (January-June

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246 Book Reviews Section one of the book consists of three chapters where the author raises fundamental questions such as, what are good HR practices? How can one assess the status of HRD in an organization? In what dimension should a business-driven HRD input be assessed? The author is of the view that good HR practices are those which contribute to one or more of the 3Cs-competences, commitment (of employees), and culture. He also clarifies the distinction between HRD and HR function for a better understanding of the issues discussed in the book. According to him the HR function (he refers to human resource management (HRM) function as HR function) is all-encompassing, includes HRD and, of course, it has HRD at its core. HR function in India consists of three main sub-functions: HRD, IR, and Human Resource Administration. HRD includes all aspects of competence, commitment- and culture-building. It is temled as the soul of HR. HR function cannot be thought of-without HRD in the new business scenario. Rao is of the view that a focused and nalTowed down definition of HR function is HRD (p. 35). Chapter 3 which is titled "HRD Audit: Basic Concepts and Components," delineates the concept of HRD audit. This is one of the important chapters of the book where the author deals with the role of HRD' in improving businesses. It also talks about the limitations of HRD audit in terms of transforming and improving business organization.

Section two of the book, HRD and HRD Audit, calTies five chapters which discuss in detail HRD strategies, HRD styles and culture, HRD structure, HRD systems and HRD competencies. In this section, the author has explained HR strategies at the corporate level. He has suggested seven strategic focal points for adopting different HRD mechanisms as facilitators of business strategy.

These are: Communication strategy; accountability, ownership and commitment; quality strategies, quality- and customer-orientation throughout the company; cost reduction; developing entrepreneurial spirit among employees; and culturebuilding exercises. These interventions are supposed to be the pith and substance of future HRD efforts needed in an organization though they may vary from firm to fiml. Chapter 5 discusses HRD styles and culture. In any organization, the long-term goal of HRD interventions is building appropriate culture for the enhancement of skill competency and commitment of employees. Using his earlier work Rao refers to OCT AP ACE culture. It provides, he feels, the energy needed to run the system well.

Chapter 6, "HRD Structure," deals with the current or altemative structure which are or can be used for organizing HR function in a firm. Rao feels that appropriateness of the structure is very important, which can be institutionalized through right kind of departmentalization. This chapter also provides tips for evaluating the effectiveness of the structure and staffing of HRD department. Different HRD systems and subsystems, viz. training, performance appraisal, feedback and counseling system, career development and career planning, potential appraisal and development are discussed in brief in this chapter.

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It also provides the blueprint to audit these systems for measuring their effectiveness. In section three of the book, four methodologies for auditing HRD have been discussed. These include: Interview, observations, questionnaires, and analysis of records/reports and other secondary data. This section can be said to be the essence of the book. It exhorts HR managers to adopt various methodologies of HRD, and their nuances are detailed for evaluating the existing HRD systems. Comprehensiveness of data and involvement of all those who form paI1 of the value chain, i.e., the suppliers, disseminators and users of HRD, are very imp0l1ant issues while deciding any pm1icular method. Each method has its own utility and limitation. These are discussed comprehensively in chapters 9, 10, and 11. Taking a cue from Kaplan and Norton (1992, 1993, 1996), the author presents the HRD score card in chapter 12 of this section. A four-letter rating has been proposed by the author to grade the maturity level of the HRD systems existing in a fiml.

The book also provides a number of insights while designing and using HRD audit for business improvement. It clarifies the role of CEOs, top management, line managers and HR managers while conducting HRD audit. It also talks about the competencies of auditors who are conducting HRD audit.

Section four of the book appears to be more relevant for management students and academicians as it provides three good cases to understand the dynamics of an HRD system. It also carries brief of a doctoral research conducted by M.G. 10mon at XLRI in 1998 to study the factors influencing the utilization of HRD audit inputs in a firm. I am of the view, the reader will feel more comfortable if this portion was put in an appendix.

In all, the book in its lucid and comprehensive style is a welcome addition to the HRD literature. It will surely help HR managers, consultants, researchers and students in demystifying the intangibles of HR and the transformation which they can bring in their organizations through HR interventions.

NOTES Kaplan, R. S. and D. P. Norton (1992) ''The Balanced Score card: Measures that Drive Performance," Harvard Business Review, January-February.

Kaplan, R. S. and D. P. Norton (1993) "Putting the B.alancedScore Card to Work, Harvard Business Review, September-October.

Kaplan, R. S. and D. P. Norton (1996) The Balanced Score Card. Boston, MA: Harvard Business School Press.

Sami A. Khan (Dr.) Associate Professor and Coordinator-Human Resource Management Area, Institute for Integrated Learning in Management, New Delhi-l 10 003.

Managemenr&

Change, Volume 4, Number 1 (January-June

2(00)

248 Book Reviews George T. Milkovich and Jerry M. Newman, Compensation, Sixth Edition. Boston: Irwin Mcgraw-Hill, 1999.656 pp. Rs. 806 paper.

Attracting, developing and retaining employees with the right kind of skills and competencies has become a challenge for human resource managers in the new business scenario. Organizations are regularly in search of innovative compensation plans to motivate their employees. Companies are moving from broadbanding to stock option plans to market pricing; and the psychological contract between the employees and employer is passing through the phase of redefinition in present business imperatives. The traditional job evaluation-based pay plans are giving way to skill- and competency-based plans. Wages and salaries are not entitlements any more which come with your position and job. Rather they have to be eamed; they are becoming more performance-related in the new business reality. Companies are paying to the people, not to the jobs. The impact of globalization and infom1ation technology on the compensation dynamics of the organization is substantial. A lot of changes are occurring at the same time. Where the pay packet seems to be converging is for top talents world over from Bangladesh to Britain. The employee stock option plans (ESOPs) appear to revolutionize the compensation pattem in certain industries. It has chumed out many billionaires worldwide. In 1997, executives in large American companies owned 13.2 percent of their companies' shares-double of the propOliion owned by them in 1989. It has reached to an equitable country like Japan in a big way where 150 out of 3000 companies have adopted ESOPs in the year 1999. In India also, companies like Infosys, Satyam, Wipro, NUT, Cadence Design, Mind Tree, among others, are redefining the reward strategy for others through ESOPs and venture plaris. The constituents of pay viz., base pay, add-on, benefits and services, and deferred payment, both long-term and short-tem1, are being evaluated sharply. Compensation managers are in search of a pay model which can add value to their strategic concems of the firm with equity and goal realization. The book under review is one of the few good textbooks available on the subject and is refened worldwide by compensation management students and salary manag .. ers.

The sixth edition of this book provides all chapters in a revised form.

There are 18 chapters organized in six parts of the book. A new chapter, Strategic Perspectives, has been added in this volume which provides insights into how to craft a compensation strategy; it also examines the research on strategic perspectives applied to compensation dimensions. New chapters on performance-based pay go deeper into all forms of variable pay such as profit sharing, gain sharing and team-based payment plans.

The authors provide a pay model in the beginning (p. 11 Chapter 1) which runs throughout the book as an integrating framework. Part I of the book, "Intemal Consistency: Determining the Structure" consists of four chapters (3,4,5, .Management & Change. Volume 4, Number I (January-June 2000)

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and 6) which deal with consistency, job analysis, evaluating work, and personbased structures. The chapter on person-based structures is a remarkable one and the authors deserve kudos for developing it. It provides the blueprint to the readers to adopt skill and competency plans in organizations. Part II of the book carries two chapters on external competitiveness, and pay levels and pay structures. External competitiveness is referred to as the pay relationship and the chapter provides knowledge about what shapes external competitiveness and the dynamics of labour market. Chapter 8 titled, Designing Pay Levels and Pay Structure, is one of the finest chapters in this book with adequate data being used purposefully. Part III consisting of three chapters (9,10, and 11) deals with performance-related pay. This section of the book appears to me the most important seeing the eventualities of the present compensation scenario. It talks of compensation and non-compensation issues. It provides inputs about what behaviour employers care about, and also discusses total reward systems. Chapter lOin this section deals with various pay for performance plans, viz. short term, merit pay, lump-sum bonuses, individual spots awards, individual and group incentive plans, gain-sharing plans, profit-sharing plans and earnings-at-risk plans. This chapter also deals with much hyped ESOPs and broad-based option plans (BBOP).

Part four of the book provides information on how to administer different compensation benefits in an organization and issues involved therein. The compensation dimension of the special group, i.e., the CEOs, top management, sales staff, professional employees, supervisors, who face conflict in their positions are delineated in chapter 14 of the book. Substantial discussion is devoted to discuss the role of unions in the administration of wages and salaries. A chapter is also devoted to international practice of pay system providing global comparisons of various workplaces. The authors pose an interesting question: Will the emerging trend of borderless world lead to borderless pay? The authors also quote Jack Welch, CEO of General Electric, who says that the aim in a global business is to get the best ideas from everyone, everywhere. The quote itself aptly summarizes the issues dealt in this chapter.

The last part of the book, "Managing the System," discusses the role of government in compensation, and administration of the pay model, i.e., execution of the devised pay plans. It provides insights on how to administer the pay structure while managing labour costs and controlling salary level vis a vis motivating employees. It also talks about the centralization-decentralization dilemma of compensation function which is very topical considering the higher involvement of line managers in compensation decisions and administration in recent times.

The book is a must for students of compensation and management. It provides an opportunity to readers to sharpen their decision-making abilities through real life "Your Tum" exercises given at the end of each chapter. The Management & Change, Volume 4, Number 1 (January-June 2000)

250 Book Reviews greater strength of the book lies in its apt handling of concepts and use of related data interspersed throughout the book in the form of boxes, snippets, etc. What I very much liked in the book is the address bank of the \vebsites given in a separate chapter at the end of the book devoting a good twenty one pages. It is interesting to note that the authors have provided in every chapter website addresses of the sources from where the text and data have been quoted. Apart from that, the appendix of chapter 18 carries 41 websites addresses pertaining to compensation issues. It includes sites of the consulting firms (F.W.Cook, Hay Group, Hewitt, KPMG, Watson Wyatt, Mercer among others); executive compensation; workers' compensation, various surveys conducted by Universities, Govell1ment Departments; Institutes, Chambers of Commerce, etc.; compensation laws and regulation; benefits; and pensions and retirement. I am sure this book will prove very helpful to management students, researchers, policy makers, compensation and salary managers, HR managers and academicians alike.

Sami A. Khan (Dr.) Associate Professor and Coordinator-HRM Area, Lodhi Road, New Delhi-I 10 003.

Area, IILM, Lodhi Institutional

Quality Management Robert E. Cole and W. Richard Scott (eds.) The Quality Movement and Organization TheOlY. Thousand Oaks: Sage, 2000. xxix+425 pp. Price not mentioned, paper.

During the last 15 years or so business organizations have been rediscovering renewed emphasis on quality in products and services. Quality focus is now one of the hallmarks of globalized business and one of the key strategic themes in organizational theory in general and human resource management (HRM) in particular. The concept of quality originated in manufacturing community. To begin with, concepts such as quality control, statistical quality control (SQC), statistical process control appeared in production management literature. Later on, they culminated in concepts such as quality circles (QC), total quality management (TQM) and just-in-time (JIT) methodologies. But with the globalization philosophy dominating business thinking, "quality" focus became a key concern in management theory and the soul of all HRM exercises or even business itself.

To respond to the need for ensuring quality, organizations assigned to chief quality officers' budgets and resources to manage the quality process. Gradually, came the focus on "process" as a major contribution to the field. Thus, we came across kaizen (continuous improvement) as a major focus of manaManagement & Change. Volume 4, Number 1 (January-June 2000)

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gerial activity. Creation of learning environment and learning organization, emerged as important business strategies. Bench-marking aroused still greater interest in quality. We now talk of best knowledge-management practices. Today, the quality concept is spread through out an organization-not just within the enterprise but even outside. Quality process is now used interchangeably with innovation process whereby along with market positioning and customer interaction we juxtapose issues in organizational change and HRM. Lately, the subject of personnel management is being invaded by perspectives of organizational theory and HRM. This has made it mandatory that all managers pursue the agenda of customer-orientation and hence quality enhancement focus. As per the new quality model, quality is not the job of any functional specialist, but it is a strong competitive strategy of the enterprise. One can notice integration of quality into control systems of plans, goals, and actions.

Quality improvement by management exhortation and directions did not prove to be quite effective. Thus, the "new quality paradigm" has emerged in private as well as public sectors.

How have theories on management and organization studies contributed to the quality movement is the focus of the book under review. It contains in all 17 papers by some of the best-known theorists in the area. These papers are revised versions of those presented at a workshop on "Improving Theory and Research on Quality Enhancement in Organizations," which was held in September 1996 in Washington, D.C. The chapters have been classified into four major parts: Questions and concerns from organization theory; the quality movement in America; stages and processes in quality improvement; and conditions and contingencies affecting quality development. The book, perhaps, reflects the first major collection of papers which link quality to organizational theory, and carves out a research agenda in this regard. Some of the major theses that are discernible from the contents are: Organizational outcomes in relation to quality improvement initiatives; relationship of quality with new product development process; quality culture in organizations; and relationship of quality in1provement with organizational tTansformation.

The book reflects breaking of new grounds in work organization, the new knowledge coming through the joint efforts of both academics and the practitioners. Most chapters focus on developments in quality management in the USA in recent decades. But they address a larger question relating quality management to organizational change, eventually leading to evolution of more general fOl1mJlations in a theoretical context. Some papers have resulted from the empirical studies while others are more general chapters.

The finest contribution in the general chapter category can be found in the introductory chapter titled "management theory and total quality" by Dean and Bowen. They have linked the subject with leadership theories, HRM, and strategic quality planning. This chapter, together with the other two in this section,

l~_

Management & Change, Volume 4, Number I (January-June 2000)

252 Book Reviews provides an overview of the key principles and practices associated with the quality movement. They have also surveyed the theoretical approaches used in understanding quality practices.

The four chapters in Part II deal with the dynamics of quality movement in the USA. Robert Cole's paper (chapter 4) on market pressures and institutional forces discusses various insights from organization theory, which can be used in analyzing the reactions of American managers to the Japanese quality threats in the early 1980s. He talks of patterns of inertia at work in organizations as managers by and large continued to do more of the same things. In chapter 5, Eastern and Jarrell analyse the pattern of quality programmes which leading companies deployed, and also highlight the role which consultants played in adopting change models. Kaboolian's chapter (6) on public sector reviews differences in implementing quality initiatives in public and private sectors. In the next paper, Weick analyses organizing for continual improvement as the key element of approaches to quality management.

In Part III, which consists of five chapters, the authors deal with empirical approaches. In chapter 8, MacDuffie's case study analyses shop floor problemsolving at three auto-assembly plants. He talks of the dynamics of problemsolving activities and ways of thinking about process standardization. In the next chapter, Repenning and Sterman use two in-depth case studies to develop a quality model which envisages several aspects: Technical and social processes; integrating physical structures of process improvement with theories of human cognition; and learning. They point out that a holistic understanding of the issue wanants an integrated approach to physical and behavioural. dimensions. The paper by Hamada reviews many conceptions of the nature and functions of organizational culture to show how the concept of quality culture varies over time and space.

What conditions and contingencies affect quality development is the concern of five papers in Part IV. In chapter 13 the authors suggest an integrative approach and seek to show the conditions under which organizations can respond both to the needs of control and learning, which otherwise appear contradictory. In chapter 14 Hargadon and Eisenhardt detail the procedures and structures developed by successful companies which seek to combine rapid new product development with high-quality production methods.

As the book nears its conclusion, in the last three chapters (15 to ]7), technical and social systems become important. These chapters emphasize that mere emphasis on technical know-how and production methods cannot deliver the intended results. It is necessary that appropriate HRM policies ensuring employee commitment and quality culture are devised. In a very interesting paper, Ichniowski and Shaw assess the effects of quality improvement initiatives and innovative HRM practices on production performance in a sample of steel finishing lines. They also show that different patterns are adopted in older Management & Change. Volume 4. Number I (January-June 2(00)

~

Book Reviews 253 "brownfield" units than the newer "greenfield" sites. They have argued that in the case of the fom1er, quality initiative practices are usually adopted first which lead to the adoption of some participatory HRM practices. At greenfield sites, they argue, quality initiatives are likely to be embedded in a broader complex of HRM practices. In chapter 16 Levine and Shaw propose a theory of the interaction between quality improvement and incentive pay. They have also analyzed the conditions under which pay incentives can supplement quality improvements.

As if pointing out problems in the analysis made in all other chapters, the concluding chapter by Thomas Kochan and Saul Rubinstein points out the need to juxtapose issues in quality movement with broader changes in the structure and operation of organizations. The latter include human resource programmes, production systems, labour-management relations, and corporate governance arrangements. They argue that quality improvement warrants basic changes in status, power, and governance structures of the organization. In other words, quality initiatives that are linked merely to managerial prerogatives are bound to fail as a long-term strategy.

The book has presented at one place particular research as well as general analyses on quality movement by leading specialists on organizations from various basic disciplines. Most papers are rich in content and reflect theoretical underpinnings in the formulations made. It is a fine attempt towards suggesting the kind of organizational changes that are being introduced in organizations to affect quality enhancement and the effects they are producing.

The editors seem to have worked hard to critique and revise the papers so as to link them in a systematic way and promote in them a semblance of requisite commonality of analysis that must inform narrations in an edited volume such as this.

I must say that quality movement literature from now onwards will draw considerably on the perspectives developed by distinguished specialists in suggesting the contributions which various theories can make in understanding quality and vice versa. More specifically, the book has been able to link the key questions in the recent quality movement to the broader agenda of management theory.

The book should be of great help not just to the students and academics in quality management; it should also help the trainers in this field to develop much finer perspectives of various related issues. At a time when "quality" is one of the key strategic themes of the emergent HRM discourse and when it has assumed critical importance in business success and organizational turnarounds, this book is bound to be of great help to HRM specialists as well as line managers, despite the fact that it is very rich in theory. It also gives an unequivocal message to the academic community that it should take quality movement more seriously than has been the case so far. It also throws a challenge to organizations and HRM specialists to link quality movement with wider aspects of Management & Change, Volume 4, Number I (January-June 2000)

254 Book Reviews employee participation and commitment. It has succeeded in pointing out tremendous scope for researching into relations between innovative HRM practices and improvement of quality improvement technologies.

I must, however, say that most quality initiatives in organizations involve reengineering and downsizing, which prove contradictory to the main goals of soft HRM initiatives. This arouses suspicion in employees about the legitimacy of the quality initiatives. Thus, neither "error prevention culture" nor "perpetually creative culture" of quality movement are free from contradictions. I wish this problem had received greater attention of the contributors to this book. In the concluding chapter, Thomas Kochan and Saul Rubinstein have advocated greater focus on the ways through which "employees gain a voice in the decisions affecting their role in the innovations and change process, especially in the era of declining unionization" (p. 397). It is absolutely essential that intimate links are established between quality improvement research and HRM research agenda.

Debi S. Saini (Dr.) PM & IR Area, Delhi College of Arts and Commerce, Netaji Nagar, New Delhi-I 10 023.

University

of Delhi,

Financial Management L. C. Gupta (ed.) India's Financial Markets and Institutions. Delhi: Society for Capital Market Research and Development, 1999. xxi+283 pp. Rs. 390 paper.

India is passing through a phase of financial transition. In the recent years, a number of structural changes and developments as well as policy initiatives could be witnessed in financial markets and institutional financing. However, there are concems vis-a-vis the development and regulation of financial markets and institutions: how could debt market be developed to cater to the financing needs of the infrastructure sector? How could the restoring of investors' confidence help in reviving the depressed equity market? How could derivatives markets be created and developed and how could risk be managed?

How could financial institutions perform the required finance functions and provide the financial services? What policy initiatives are needed for the development and prudent control and regulation of financial markets and institutions?

The book under review is a collection of articles that attempt to answer these questions. Most papers contained in the book are based on the presentations made by participants at a seminar organized by the Society for Capital Market

Research and Development in Mumbai on 29 January 2000.

The book starts with a succinct summary of the proceedings of the semiManagement & Change, Volume 4, Number I (Janualy-June 2000)