UNIT I CORPORATE MANAGEMENT AN OVERVIEW

Objective

After reading this unit, you should be able to

understand the nature and scope of corporate management
deseribe the concept, nature, process, benefits and pre requisites of corporate
planning
Appreciate the importance of implementation and evaluation aspects of corporate
plan
compare distinct approaches to corporate management
assess the role of various strategists in corporate management
identify factors leading to the need of corporate management
know the differences in corporate management practices adopted by non business
organizations

Structure

1.1 Introduction
1.2 Nature and Scope of Corporate Management
1.3 Corporate Planning
1.4 Implementation of Corporate Plan
1.5 Review and Evaluation of Corporate Plan
1.6 Approaches to Corporate Management
1.7 Strategists and their role in Corporate Management
1.8 Need for Corporate Management
1.9 Corporate Management in Non Business Organisations
1.10 Summary
1.11 Key Words
1.12 SelfAssessment Questions
1.13 Further Readings

1.1 INTRODUCTION

Though corporate planning has been widely used in the United States and some other
European Countries for the last thirty five years or so, there seems to be scant use of the
term Corporate Management. Corporate management is a broad phenomenon and
covers a wide spectrum of activities. In the context of strategic management, the term has
three dimensions:

Corporate planning
Implementation of corporate plans
Evaluation and control of corporate plans.

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On the academic side, research on corporate management has not taken off in India.
However, a few studies may be seen with respect to corporate planning.

1.2 NATURE AND SCOPE OF CORPORATE MANAGEMENT

For the sake of convenience, the concept of corporate management has moved through
five paradigm shifts as narrated below:

Adhocism- when the exigency used to force the mangers to take appropriate action to
deal with situation. This continued till 1930.

Planned Policy- the great depression forced the planners and thinkers to have a planned
policy. Unforeseen incidents and contingencies are to be anticipated.

Environment Strategy Interface- the strategy has to cope with environment. The forces
of internal and external environment have created uncertainties. In order to cope with
such situation, appropriate strategies are being formulated keeping in mind the
competitive advantage.

Corporate Planning- involves moving ahead from environmental appraisal to strategic

alternatives and choice. The planning needs to be strategic.

Corporate Management- aspects of implementation and control are also considered in

corporate planning process. It is a unified and integrated process to get best results.

Nature of Corporate Management

The following aspects are important in this regard:

(i) It encompasses the entire management process.

(ii) It is concerned with the choice of alternatives, determination of future course of
action, mobilization of resources and deployment of resources for attainment of
goals.
(iii) It is both short term and long term.
(iv) It is related to all levels of management. Strategic issues, however, are related to top
management.
(v) It includes the following phrases:
Corporate Planning
Implementation Issues in Corporate Plan
Evaluation and Control
(vi) It is concerned with coping uncertain future with active intervention.
(vii) It is based on various types of plan viz strategic plan, functional plan, operating
plan, organizational plan etc.
(viii) It is all pervasive and integrative.

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Scope of Corporate Management

The term corporate management is an extension of the term corporate planning and also
includes implementation and control aspects. More specifically, the scope of corporate
management is narrated as below: spread over different areas. They are as follows :

(i) Role of top management in corporate governance.

(ii) Code of conduct including audit committee, governance committee etc.
(iii) Competitive scenario for domestic and global markets.
(iv) Competitive scenario for dynamic and global markets.
(v) Market structures and net work externalities.
(vi) Strategic enablers like IT, R & D, knowledge management and innovations etc.
(vii) Corporate social responsibility including ethics, values and social audit.
(viii) Philanthropy as a strategic choice.

Activity I

(i) Discuss the nature of corporate management in Indian context.

(ii) Discuss the scope of corporate management.

1.3 CORPORATE PLANNING

Corporate planning is a comprehensive planning process which involves continued

formulation of objectives and the guidance of affairs towards their attainment. It is
undertaken by top management for the company as a whole on a continuous basis.

Druker defines corporate planning as a continuous process of making entrepreneurial

decisions systematically, and with the best possible knowledge of their futurity,
organizing systematically the efforts needed to carry out these decisions, and measuring
the results against expectations through organized systematic feedback.

This definition clearly emphasises the relation of corporate planning to strategy.

According to Hussey Corporate long range planning is not a technique, it is a complete

way of running a business. Corporate planning is a way of keeping the companys eyes
open.

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The following are the essentials of corporate planning.

(i) Corporate planning deals with the future of current decisions.

(ii) The process of corporate planning integrates strategic planning with short range
operational plans.
(iii) A few authorities use comprehensive corporate planning, strategic planning, long
range planning, formal planning, corporate planning etc. as synonymous to each
other.
(iv) Corporate planning is viewed as an organizational process resulting in developing
strategic intent and action plans to achieve the objectives.

The object of corporate planning is to identify new areas of investment and marketing.

The purpose of corporate planning process is to formulate the organizations purpose ,

missions, objectives, goals, policies, programme strategies and major action plans to
achieve its objectives.

The corporate planning process involves the following steps:

(i) Formulation of strategic intent.

(ii) Environmental appraisal
(iii) Generation of strategic alternatives.
(iv) Evaluation of alternatives.
(v) Decisions in terms of strategy, policies and programmes.
There are many advantages of corporate planning and are as follows :

The following are the benefits of corporate planning:

(i) It ensures a rational allocation of resources and improves coordination between

various units or divisions.
(ii) With corporate planning, significant improvement in performance is reflected. In
US, the percentage improvement in performance was 30-40 percent.
(iii) A formal planning system can help the management in responding to a dynamic
environment and in managing a strategically complex organization with limited
resources.
(iv) With corporate planning, a sense of making a systematic and critical review of
business is developed.
(v) This develops a visionary approach . A habit of forward thinking is encouraged in
forward planning.
In India the organizations corporate planning process could not succeed.

The following can be the reasons attributed to the failure of corporate planning in
Indian organizations:

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(i) Failure to keep the corporate planning system simple.
(ii) Failure to develop awareness about corporate planning process in the organization.
(iii) Corporate planning tries to do all planning itself.
(iv) chief Executive gives planner a low status.
(v) Failure to modify the corporate planning system with the charging conditions in the
company.
(vi) Planner has only a part time interest in planning.
(vii) There is conflict between available soft database and managers need for hard
answers.
(viii) Top management becomes so engrossed in current problems that it spends
insufficient time on the corporate planning process.

Bhattacharya and Chakravarti have observed some commonalities in instances of

successful introduction of corporate planning in Indian companies. A few prerequisites
for success in corporate planning are as follows:

(i) The chief executive must be totally committed and involved in the corporate
planning process.
(ii) Participation of those executives who would be responsible for implementation
must be ensured.
(iii) The process of corporate planning should be introduced on continuous basis to
cope with ever changing environmental factors.
(iv) The executives must understand that the real purpose of corporate planning is to
provide direction to the organization.

Activity 2

1) Discuss the nature and process of corporate planning.

2)Name three to four big companies where corporate planning exercise was initiated
in recent years.

3) Briefly the mention reasons of failure of corporate planning.

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1.4 IMPLEMENTATION OF CORPORATE PLAN

Implementation refers to those objectives which are necessary for achieving the plans
already formulated. Quite often, companies having good corporate plans are not
successful at market place. The planning commission in India has formulated elaborate
plans for poverty alleviation through a number of programmes but it is a well known fact
that the achievements in terms of the original goals are far from the targets. It is to be
noted that the implementation of strategy is mainly an administrative task based on
strategic as well as operational decision making. This activity primarily refers to action
and doing. The task of strategy formulation is some what distinct. It is primarily an
entrepreneurial activity and this managerial task requires analysis and thinking.

Implementation of corporate strategy requires the analysis of the following aspects:

Project Implementation
Procedural Implementation
Resource Allocation
Structural Implementation
Behaviorial Implementation
Functional Implementation

Any organization which is planning to implement strategies must be aware of the

procedural framework within which the plans, programmes and projects have to be
approved by government agencies. The regulatory mechanisms for trade, commerce and
industry in India span the whole range of legal structure from the constitution of India,
the Directive Principles of state policy to the rules and procedures imposed by the
implementing authorities at the local level. The requirements of licensing SEB, MRTP,
foreign collaboration, labour laws, environmental protection laws etc. are to be seen
carefully. The resource allocation for budget be based on either of the following
methods:

Strategic Budgeting
Zero Base Budgeting
PLC Based Budgeting
BCG Budgeting

The total responsibilities to implement strategies (structural implementation) has to be

subdivided as follows:

(i) Defining the major tasks required to implement a strategy.

(ii) Grouping task on the basis of common skill requirements.
(iii) Sub-division of responsibility and delegation of authority to perform tasks.
(iv) Coordination of divided responsibility.
(v) Design and administration of the information system.
(vi) Design and administration of the control and appraisal system.
(vii) Design and administration of the motivation and development system.

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(viii) Design and administration of the planning system.

The first four mechanisms will lead to the creation of the structure. The remaining
mechanisms are devised to hold and sustain the structure.

The aspects of strategy implementation that have an impact on the behaviour of strategies
in implementing the chosen strategies are related to behaviorial implementation. In this
regard, the following issues are important:

Leadership
Corporate Culture
Corporate politics and use of power
Personal values and business ethics
Social Responsibility

Rather than letting strategy implementation suffer due to politics and power games within
organizations, strategists have to learn to use them to implement strategies.

Functional implementation is carried out through functional plan and policies in five
different functional areas. Operational implementation is performed in four areas for
operational effectiveness. The areas are productivity, process, people and pace. The
productivity is the measure of the relative amount of input needed to secure a given
amount of output. Pace is the speed of operational implementation and is measured in
terms of time. Efficiency is the parameter often used to express the pace of operational
implementation.

1.5 REVIEW AND EVALUATION OF CORPORATE PLAN

Corporate planning cannot be said to be effective unless management monitor how well
the planned actions are matching actual achievements as implementation programmes. If
they find that the actual performance does not confirm to the planned performance,
corrective action is taken to enforce a strategy that is not being followed or modify
corporate plan that is not working. Strategic evaluation operates at two levels.

Strategic Level
Operational Level

The idea of strategic control is of a relatively recent origin and its techniques are still in
an embryonic stage. Four types of strategic controls are premise, implementation,
strategic surveillance and special alert control. Operational control consists of setting
standards, measuring performance, analysing variance and taking corrective actions.
MBO, network techniques, balanced scorecard, key factor rating, bench marking, value
chain analysis, systems modeling, responsibility control centers, etc. are the techniques of
strategic evaluation and control.

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The following aspects differentiate strategic control with operational control:

(i) Strategic control is related to external environment while operational control is

related to internal organization.
(ii) Strategic control has longest time horizon.
(iii) Control is exercised exclusively by top management in strategic control.

(iv) Budget schedules and MBO are used in operational control.

1.6 APPROACHES TO CORPORATE MANAGEMENT

Corporate management systems vary from organization to organization depending on a

variety of factors: environmental conditions, organizational size and complexity, age, top
management values and styles. Variations in the corporate management systems across
organization may be found first in the top managements basic approach to carry on
corporate planning. These approaches are as follows:

Top down Approach- In this approach, the top management decides everything and the
implementation is being taken care of by the middle and lower level management as
instructed by top management.

Bottom up Approach- This approach takes into account the realities and complexities of
operations at the ground level. The top management adopts an open door approach.
Suggestions are invited from all levels.

Hybrid Approach- This is a combination of top down and bottom up approaches which
is generally used in decentralized companies. There is vertical communication between
top management and the Strategic-Business Units (SBUs) at different phases of the
corporate planning and implementation process.

Team Approach- Where lateral communication between the top managers is easier. The
chief executive may himself in collaboration with senior managers, prepare corporate
plans.

Activity 3

1) What are the methods of resource allocation?

2) Explain Hybrid approach and team approach in corporate management.

3) Distinguish main points of difference between strategic control and operational

control.

1.7 STRATEGISTS AND THEIR ROLE IN CORPORATE MANAGEMENT

Strategists are individuals or groups who are primarily involved in the formulation,
implementation and evaluation of strategy. There are persons outside the organization
who are also involved in various aspects of corporate management. In this section, we
shall assess their role in corporate management:

Board of Directors

The role of the board of directors has come under intense scrutiny in recent times leading
to the emergence of the issue of corporate governance. It relates to the functioning of the
board of company and the conducting of the business internally and externally. The
composition of Board of Directors in some of the organizations is narrated below:

State Bank of India 7 Whole time Directors

4 Part time Directors
6 Nominee Directors

Larson & Toubro Ltd. 6 Whole time Directors

11 Part time Directors

TISCO
2 Nominee Directors
2 Whole Time Directors
9 Part Time Directors

Reliance Industries Ltd. 5 Whole time Directors

4 Part time Directors
2 Nominee Directors

The Companies Act, 1956 specified the following:

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(i) One-third of directors will retire by rotation.
(ii) A public limited company must have at least three directors and a private limited.
company must have at least two directors.
(iii) Only individuals and not the institution, can be appointed as directors.

The role of the board is to guide the senior management in setting and accomplishing
objectives, reviewing and evaluating organizational performance and appointing senior
executives.

Chief Executive Officer

The CEO is designated as the managing director, executive director, president or general
manager in business organization. As the chief strategist, the CEO plays a major role in
strategic decision making with the increase in size. Many companies have adopted the
practice of sharing the responsibility of chief executive among two or more persons. In
India, Reliance Industries has chairman, vice- chairman and managing directors while
L&T has managing director and joint managing directors. ITC Ltd. has a multiple
executive system in the form of corporate management committee. Attributes like self
management and time management are very important for CEOs.

Entrepreneurs
The entrepreneurs always search for change , respond to it and explicit it as an
opportunity. The entrepreneur is a venture capitalist. They play a proactive role in
strategic management. As initiators, they provide a sense of direction to all concerned. S.
Kumar Sundram as the chairman of the Bank of Madurai Ltd., and after his death in
1986, the new chairman S.V. Shanmugavadivelu provide an excellent example of the role
of entrepreneurs as strategists.

SBU level Executives

In corporate management, SBU level strategy formulation and implementation are the
primary responsibilities of the SBU level executives. They act as divisional heads. They
weild considerable authority within the SBU while maintaining coordination with other
SBU heads and corporate level management.

Consultants
They assist the organizations in their corporate management process. Smaller
organizations may take the benefit of consultants for improving their corporate
governance. A.F. FerguSon, S.B. Billimoria, Mckinsey Company, Anderson Consulting
etc. are the notable consultants. Boston Consulting helps in building competitive
advantage while KPMG Peat Maruick assist in strategic financial management and
feasibility studies.

1.8 NEED FOR CORPORATE MANAGEMENT

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The following factors have forced the strategists to look into issues of corporate
management:

(i) Scarcity of Resources

(ii) Fast Technological Changes.
(iii) Changing Human Values
(iv) Multiplicity of Stake holders.
(v) Growing Competition
(vi) Liberalization, Privatization and Globalization
(vii) Growing scale of business operations
(viii) Faster and Quicker Modes of Transportation and Communication
(ix) Professionalisation in Management

1.9 CORPORATE MANAGEMENT IN NON BUSINESS ORGANIZATIONS

The basic objective of non-business organizations is to provide service to the people who
come in contact with these organizations. Unlike the business organizations which are
characterized by profit motive, risk bearing and creation of utilities, non business
organizations provide service to the clients. Measurement of the effectiveness of these
services is highly qualitative and therefore judgmental. The following are the specific
areas where corporate management issues are to be taken with greater care:

(i) Non business organizations are not interested in attracting large number of clients.
Such organizations do not go for rigorous environmental analysis.
(ii) Non- business organizations have larger number of interest groups. In this
environment, the corporate management process becomes more political. The
decision outcomes may not be as service oriented as is usually conceived.
(iii) Non business organizations seldom go through the rigour of strategic management
process. They get their resources from the public. They operate on the basis of non
focused strategic actions.
iv) The performance evaluation criteria in case of non-business organizations is highly
qualitative and therefore judgmental.

Activity 4

i) Critically evaluate the role of Board of Directors in corporate management.

(ii) State three important factors forcing the immediate need of corporate management.

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1.10 SUMMARY

Corporate management is a broad phenomenon and covers the activities of corporate

planning, implementation of corporate plans, evaluation and control of corporate plans.
The concept of corporate management has moved through the stages of adhocism,
planned policy, environment strategy interface and corporate planning. Corporate
management has the following broad characteristic.
encompassing entire management process
short term as well as long term
all pervasive, integrative and relates to all levels of management
concerned with coping uncertain future with active intervention.

Corporate planning is a way of keeping the companys eyes open. It is a comprehensive

planning process which involves continued formulation of objectives and the guidance of
affairs towards their attainment. This process is continuous and is carried on by top
management. The process involves the following steps:

Formulation of strategic intent

Environmental appraisal
Generation of strategic alternatives
Evaluation of alternatives
Decision in terms of corporate plan

In India, corporate planning could not bring desired results. Factors like poor
participation, complicated process, part time interest, domination of routine issues bring
bottlenecks to effectiveness in corporate planning process.

Implementation refers to those activities which are necessary for achieving the plans
already formulated. This administrative task is based on action and decision making. The
issues like project, procedure, structure, resource allocation, behavior and managerial
functions need special attention.

Review and evaluation of corporate plan operate at two levels i.e. strategic control and
operational control. Budgets, schedules and MBO are used in operational control. Four
types of strategic control are premise, implementation, strategic surveillance and special
alert control.

Variations in the corporate management systems may be top down approach, bottom up
approach, hybrid approach and team approach. Board of Directors, Chief Executive
officer, Entrepreneurs, SBU level executives and consultants play an important role in
corporate management process. Scarcity of resources, fast technological changes, LPG,
changing human values etc. are forcing the strategists to push the case of effective

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corporate management. Non business organizations have to adopt a distinct corporate
management process to cope up with the changes in the emerging environment.

1.11 KEY WORDS

Corporate Management- It includes corporate planning, implementation and evaluation.

Corporate Planning- is a continuous process of making entrepreneurial decisions

systematically and with the best possible knowledge of their future, organizing
systematically the effort needed to carry out these decisions.

Implementation- refers to those activities which are necessary for achieving the plans
already formulated.

Strategic Control- is aimed at a continuous assessment of the changing environment to

see that the strategy is not out of line with it.

Operational Control- is directed towards the evaluation of real time action.

Hybrid Approach- A combination of top down and bottom up approach of corporate

management.

1.12 SELF ASSESSMENT QUESTIONS

1. What is corporate planning and what are its important characterstics?

2. Corporate planning is as good as its implementation Discuss.
3. What is corporate management? Discuss its nature and scope.
4. Explain the benefits and failures of corporate planning.
5. Narrate corporate planning process in brief. Also state the benefits of corporate
planning.
6. Explain various types of implementation issues in brief.
7. What is behavioral implementation? Explain it with the help of the details of a
company.
8. What is strategic control? How is it different from operational control?
9. Narrate briefly the approaches to the corporate management. Which one is the best
in Indian environment?
10. Critically evaluate the role of board of directors in corporate management process.
11. Write a note on corporate management in non- business organizations.
12. Write notes on the following:
a. Procedural implementation
b. Role of consultants in corporate management
c. Approaches to corporate management.

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1.13 FURTHER READINGS

SHRIVASTAVA, R.M., Management Policy and Strategic Management, Himalaya

Publishing House, Bombay. 1999

MAMORIA C.B., MAMORIA SATISH, RAO, P. SUBBA, Business Planning and

Policy, Himalaya Publishing House, Bombay.2001

GHOSH, P.K., Business Policy Strategic planning and Management , Sultan

Chand & Sons, New Delhi 1996

KAZMI, AZHAR, Business Policy and Strategic Management, Tata Mcgraw Hill
Publishing Co, Ltd., New Delhi-2002.

MILLER A. and G. G. Den Strategic Management Mcgraw hill, New York 1996
PRASAD, L.M., Business Policy: Strategic Management, Sultan Chand & Sons,
New Delhi. 2002

GLUECK WF and LR Iavch, Business Ploicy and Strategic Management Mc graw

Hill, New York 1984.

THOMPSON J.L. Strategic Management: Awareness and Change, International

Thompson Business Press, London 1997.

SHRIVASTAVA, R.M., Corporate Strategic Management, Pragati Prakashan,

Meerut, 1995.

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 UNIT 2 INTRODUCTION TO CORPORATE
STRATEGY
Objectives
After reading this unit, you should be able to:
! explain the concept and nature of corporate management;
! acquaint yourself with the components and functions of corporate strategy;
! distinguish different levels of corporate strategy;
! identify various kinds of corporate strategies;
! discuss various schools of thought on corporate strategy formation; and
! underline significance and limitations of corporate strategy.
Structure
2.1 Introduction
2.2 Concept and Nature of Corporate Strategy
2.3 Components of Corporate Strategy
2.4 Functions of Corporate Strategy
2.5 Levels of Corporate Strategy
2.6 Kinds of Corporate Strategy
2.7 Schools of Thought on Corporate Strategy formation
2.8 Significance of Corporate Strategy
2.9 Limitations of Corporate Strategy
2.10 Summary
2.11 Key Words
2.12 Self Assessment Questions
2.13 Further Readings

2.1 INTRODUCTION
The twenty fifth National Business Conference sponsored by the Harvard Business
School Association in 1955 made one of the earliest attempts to discuss the concept of
strategy. In 1965, Ansoff published a book Corporate Strategy which was based on
his experiences at the Lock heed Aircraft corporation. Chandlers historical study of
the development of some of the American enterprises proposed strategy as one of the
most important variables in the study of organizations. From the literature on strategic
management, it is evident that strategic planning refers to the management processes
in organizations through which the future impact of change is determined and current
decisions are made to reach a designed future.

2.2 CONCEPT AND NATURE OF CORPORATE

STRATEGY
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The word strategy is derived from the Greek word strategtia which was used first
around 400 B.C. This connotes the art and science of directing military forces. In
business parlance, there is no definite meaning assigned to strategy. A few definitions Introduction to Corporate
Strategy
stated below may clarify the concept of corporate strategy:
KENNETH ANDREWS(1955), The pattern of objectives, purpose, goals and the
major policies and plans for achieving these goals stated in such a way so as to define
what business the company is in or is to be and the kind of company it is or is to be
This definition refers to the business definition.
IGOR ANSOFF(1965) explained the concept of strategy as the common thread
among the organizations, activities and product markets, that defines the essential
nature of business that the organization was or planned to be in future.
The definition stressed on the commonality of approach that exists in diverse
organizational activities.
HENRY MINTZBERG (1987) explains that strategies are not always the outcome
of rational planning. .a pattern in a stream of decisions and actions.
The definition makes a distinction between intended strategies and emergent
strategies.
ANSOFF (1984) Basically a strategy is a set of decision making rules for the
guidance of organizational behavior.
This definition has changed drastically what Ansoff had said earlier in 1965.
William Glueck defines the term strategy as the unified, comprehensive and
integrated plan that relates the strategic advantage of the firm to the challenges of the
environment and is designed to ensure that basic objectives of the enterprise are
achieved through implementation process
The definition lays stress on the following:
! It is a unified, comprehensive and integrated plan
! Challenges of the environment are seen in the context of strategic advantage
! Strategy ensures achievement of basic objectives through proper implementation
process
From the definitions discussed above, we may identify the following elements:
! It is a plan or course of action or a set of decision rules.
! It is derived from its policies, objectives and goals.
! It is related to persue those activities which move an organization from its
current position to a desired future state.
! It is concerned with the requisite resources to implement a plan.
The term Corporate Strategy is gaining importance in the era of privatization,
globalization and liberalization. A few aspects regarding the nature of strategy are as
follows:
! Corporate strategy is related mostly to external environment.
! Corporate strategy is being formulated at the higher level of management. At
operational level, operational strategies are also formulated.
! Corporate strategy integrates three distinct and closely related activities in 19
Issues in Corporate strategy making. The activities are strategic planning, strategic implementation
Management
and strategic evaluation and control.
! Corporate strategy is related to long term.
! It requires systems and norms for its efficient adoption in any organization.
! It provides overall framework for guiding enterprise thinking and action.
! It is concerned with a unified direction and efficient allocation of organization
resources.
! Corporate strategy provides an integrated approach for the organization and aids
in meeting the challenges posed by environment.

2.3 COMPONENTS OF CORPORATE STRATEGY

The major components of corporate strategy are purpose and objectives, vector,
competitive advantage, synergy, personal values and aspirations and social
obligations. Ansoff has used the term common thread for the purpose. According to
him, the common thread is a statement of relationship between present and future
product market postures. In this section, the different components of corporate
strategy are discussed.
Objectives
Corporate objectives should be stated in such a way so that they may provide a clear
idea about the scope of the enterprises business. Objectives give the direction for
which action plan is formulated. Objectives are open-ended attributes denoting a
future state. Objectives translate the purpose into goals. A few specific aspects about
objectives are as follows:
The objectives should
! have time frame
! be attainable
! be challenging
! be understandable
! be measurable and controllable
For having clarity in objectives, the business domain is defined specifically in terms
of a product class, technology, customer group, market need or some other
combination.
Vector
Corporate strategy has one more important component i.e. Vector. Vector gives the
directions within an industry and across industry boundaries which the firm proposes
to pursue. If an organization has the objective to maximize sales, the series of
decisions will be to enhance salesmans commission, release nationwide
advertisement, introduce total quality management and introduce new product range.
Vector signifies that a series of decisions are taken in the same direction to
accomplish the objectives.
Competitive Advantage
Corporate strategy is relative by nature. In the formulation of corporate strategy, the
management should isolate unique features of the organization. The steps to be taken
20 must be competitively superior. While making plans, competitors may be ignored.
However, when we formulate corporate strategies, we cannot ignore competitors. If an Introduction to Corporate
Strategy
organization does not look at competitive advantage, it cannot survive in a dynamic
environment. This aspect builds internal strength of the organization and enhance the
quality of corporate strategy.
Synergy
Synergy means measurement of the firms capability to take advantage of a new
product market move. If decisions are made in the same direction to accomplish the
objectives there will be synergic impacts. The corporate strategy will give the synergy
benefit.

2.4 FUNCTIONS OF CORPORATE STRATEGY

Corporate strategy performs the following functions:
i) It provides a dual approach to problem solving. Firstly, it exploits the most
effective means to overcome difficulties and face competition. Secondly, it
assists in the deployment of scarce resources among critical activities.
ii) It focuses attention upon changes in the organizational set up, administration of
organizational process affecting behaviour and the development of effective
leadership.
iii) It offers a technique to manage changes. The management is totally prepared to
anticipate, respond and influence to look at changes. It also offers a different way
of thinking.
iv) It furnishes the management with a perspective whereby, the latter gives equal
importance to present and future opportunities.
v) It provides the management with a mechanism to cope with highly complex
environment characterized by diversity of cultural, social, political and
competitive forces.
Activity 1
1) As a layman, what do you understand by the concept of corporate strategy?
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2) Distinguish between vector and synergy as components of corporate strategy.
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3) State three functions of corporate strategy.
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Issues in Corporate
Management 2.5 LEVELS OF CORPORATE STRATEGY
Corporate strategy may exist at three levels in an organization. They may be at
corporate level, business level and operating level. In this section, a brief description
of these three levels of strategy is given:
Corporate Level Strategy:- It is believed that strategic decision making is the
responsibility of top management. At the corporate level, the board of directors and
chief executive officers are involved in strategy making. Corporate planners and
consultants may also be involved. Mostly, corporate level strategies are futuristic,
innovative and pervasive in nature. Decision like spreading the range of business
interests, acquisitions, diversification, structural redesigning, mergers, takeovers,
liquidations come under corporate level strategies.
Business Level Strategy:- Strategic business unit (SBU) managers are involved at
this level in taking strategic decisions. These strategies relate to a unit within an
organization. At business level, the objectives are formulated for SBUs and resources
are allocated among functional areas. These strategies operate under the defined scope
of corporate level strategy. Business level strategy is more specific and action
oriented. It relates mainly with how aspect. The corporate level strategy is related to
what aspect of corporate strategy.
Operating Level Strategy:- This level of strategy is at the operating end of the
organization. It is also known as functional level strategy. These decisions relate to
training, investment in plant, advertising, sales promotion, total quality management,
market segmentation etc. This decision is almost tactical. They deal with a relatively
restricted plan providing objectives for specific function, allocation of resources
among different operations within the functional area and coordination between them.
The following table shows distinctive characteristics of the three levels of strategy:
Table 1: Statategic decisions at different levels of corporate strategy

Dimensions Levels
Corporate Business Operating Functional
1. Time Horizon Long Medium Short
2. Type of Decision Philosphical Mixed Operational
3. Risk Involved High Medium Low
4. Impact Significant Major Insignificant
5. Profit Potential High Medium Low
6. Flexibility High Medium Low
7. Adaptability Poor Medium Significant
8. Innovations Innovative Mixed Routine
9. Levels of Decision Highest Middle Lowest
Making

The strategies at different levels are interrelated to each other. The interrelationship
between corporate strategy and functional strategies is shown in figure 2.1. Figure 2.2
shows the relationship between corporate, business and functional strategies. The
example of first category can be that of Reliance Industries Ltd. It is a highly
integrated company producing textile yarns and a variant of petro chemical products.
The second figure may be related to Ashok Leyland Ltd., which is engaged in
manufacturing and selling of heavy commercial vehicles. The SBU concept was
22 considered in this case.
 Introduction to Corporate
Strategy

C O R P O R AT E S T R AT E G Y C O R P O R AT E M A N A G E M E N T

F U N C T IO N A L S T R AT E G IE S M ID D L E M A N A G E M E N T

O P E R AT IO N S M A R K E T IN G F IN A N C IA L PE RSO N N EL
S T R AT E G Y S T R AT E G IE S S T R AT E G IE S S T R AT E G IE S

Figure 2.1: Corporate and Functional Strategies in Single SBU Firms

C O R P O R AT E S T R AT E G Y CORPORATE MANAGEMENT

MIDDLE MANAGEMENT

SBU 1 SBU 2 SBU 3

S T R AT E G Y S T R AT E G Y S T R AT E G Y

F U N C T IO N A L S T R AT E G IE S

O P E R AT IO N S M A R K E T IN G F IN A N C IA L PERSONNEL
S T R AT E G Y S T R AT E G IE S S T R AT E G IE S S T R AT E G IE S

Figure 2.2: Corporate SBU and Functional Stratgies in Multiple SBU firms

2.6 KINDS OF CORPORATE STRATEGY

There are four grand strategic alternatives. They are stability, expansion, retrenchment
and any combination of these three. These strategic alternatives are also called as
grand strategies. A brief description about them are as follows:
a) Stability Strategy- It is adopted by an organization when it attempts to improve
functional performance. They are further classified as follows:
i) No change strategy
ii) Profit strategy
iii) Pause/Proceed with caution strategy
b) Expansion Strategy:- It is followed when an organization aims at high growth.
They operate through 23
Issues in Corporate i) Concentration
Management
ii) Integration
iii) Diversification
iv) Cooperation
v) Internationalization
Mergers, takeovers, Joint ventures and strategic alliances come under expansion
through cooperation. International strategies are further classified into global strategy,
transnational strategy, international strategy and multidomestic strategy.
c) Retrenchment Strategy:- It is followed when an organization aims at a
contraction of its activities. It is done through turnaround, divestment and
liquidation in either of the following three modes:
i) Compulsory winding up
ii) Voluntary winding up
iii) Winding up under supervision of the court
d) Combination Strategies:- They are followed when an organization adopts a
combination of stability, expansion and retrenchment either at the same time in
different businesses or at different times in the same business. The well known
companies of the TTK group, based in Southern India, adopted a restructuring
plan in the late 1980s involving following strategies.
i) Merger of TTK chemicals with TTK pharma.
ii) TT industries & Textiles Ltd. Planned for expansion through joint venture.
iii) TTK Ltd. diversified into the field of non stick cooking utensils.
iv) TTK maps & publications expanded into the general publishing business
after a turnaround.
Business strategies are of three types: Cost leadership (lower cost/ broad target),
differentiation (differentiation / broad target) and focus (lower cost or differentiation /
narrow target).
Activity 2
1) Identify at least four decision areas for each of the three levels of corporate
strategy.
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2) Discuss the process of integrating corporate level strategy with business level
strategy.
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24 ..................................................................................................................................
 .................................................................................................................................. Introduction to Corporate
Strategy
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3) Give one example each of the three growth strategies in the Indian context.
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2.7 SCHOOLS OF THOUGHT ON CORPORATE

STRATEGY FORMATION
The subject of strategic management is in the midst of an evolutionary process. In this
regard, several strands of thinking are emerging. They can be classified under the
following groups:
! The Prescriptive Schools
! The Descriptive Schools
! The Integrative Schools
a) The prescriptive schools:- Under this category, three variations are found. The
brief description about them are as follows:
i) The design school:- (Selzniek and Andrews) Strategy is seen as
something unique. The process of strategy formation is based on judgment
and thinking.
ii) The planning school:- (Ansoff) Under this school, the strategy is seen as
a plan divided into sub-strategies and programmes. The lead role in strategy
formation is played by the planners.
iii) The positioning school:- (Schendel-Hatten & Porter) The process of
strategy formation is analytical, systematic and deliberate. Under this
school, strategy is seen as a set of planned generic positions chosen by a
firm on the basis of an analysis of the competition and the industry in which
they operate.
b) The Descriptive Schools:- In this category, six schools of thought are existing.
Their brief description is as follows:
i) Entrepreneurial School (Schumpeter & Cole):The process of strategy
formation is intuitive, visionary and largely deliberate. Strategy is seen as
the outcome of a personal and unique perspective often aimed at the
creation of a niche.
ii) Cognitive School (Simon and March): This school perceives strategy
formation as a mental process. The lead role is played by the thinker
philosopher.
iii) Learning School (Weick, Quinn, Senge and Lindblom) This school
perceives strategy formation as an emergent process. The process is
25
informal and messy and the lead role is played by the learner.
Issues in Corporate iv) Power School (Allison & Astley): Under this school, strategy is seen as
Management
political and cooperative process or pattern. The process of stategy
formation is messy, emergent and deliberate. This school perceives strategy
formation as a negotiation process.
v) Cultural School (Rhenman and Normann): Under this school, strategy is
seen as a collective perspective. The process of strategy formation is
ideological, constrained and deliberate.
vi) Environmental School (Hanan, Freeman and Pugh): The lead role in
strategy formation is played by the environment as an entity. This reactive
process of strategy formation is passive and imposed and hence emergent.
c) The Integrative School: The major contributions to the configuration school
are by Chandler, Miles and Snow. Under this school, strategy is viewed in
relation to a specific context and thus could be in a form that corresponds to any
process visualized by above nine schools. The strategy formation process is
integrative, episodic and sequential.

2.8 SIGNIFICANCE OF CORPORATE STRATEGY

In the present day competitive environment, no business organization can dream of
survival without formulating appropriate corporate strategy. As the environment is
continuously changing, the need for corporate strategic framework is more specific.
The following areas clearly show the importance of corporate strategy:
i) Corporate strategy rationalises allocation of scarce resources.
ii) Corporate strategy motivates employees examples to shape their work in the
context of shared corporate goals.
iii) Strategy assists management to meet unanticipated future changes.
iv) Organizational effectiveness is ensured through implementing and evaluating the
strategy.
v) Corporate strategy is a powerful tool to management to deal with the future
which is uncertain and hazy in all respects.
vi) Corporate strategy improves the capability of management in coping with the
volatile external environmental forces.
vii) Corporate strategy encourages the management to choose the best course of
action to realize the objectives.
viii) Strategy planning system provides an objective basis for measuring performance.

2.9 LIMITATIONS OF CORPORATE STRATEGY

The corporate strategy has the following specific limitations:
i) The process of strategy formulation is not an easy one. The process of forming
corporate strategy is complex, cumbersome and complicated.
ii) Corporate strategies are useful for long range problems. They are not effective to
overcome current exigencies.
iii) The corporate strategy formulation process calls for considerable time, money
and effort. Developing appropriate corporate strategy is not a simple and
economical proposition. For financially weak companies, cost becomes a great
26
hindrance.
iv) As future is uncertain and cannot be predicted accurately, the strategic planning Introduction to Corporate
Strategy
system based on hazy and uncertain estimates is not exact.
v) Implementation of corporate strategy is influenced by organizational factors,
behaviorial factors and motivational factors. The gap between formulation and
implementation of corporate strategy does not give desired results to the
organization.
Activity 3
1) Explain briefly the design schools and the entrepreneurial schools of thought on
strategy formation.
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2) State any four areas of significance to corporate strategy.
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3) State any three limitations of corporate strategy.
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2.10 SUMMARY
The word strategy is derived from the Greek word strategtia. Strategy is perceived
as the unified, comprehensive and integrated plan that relates the strategic advantage
of the firm to the challenges of the environment. Strategy is primarily related to
external environment. It is a long term overall framework for guiding enterprise
thinking and action. This integrated approach is developed by top management. The
components of corporate strategy are i) Objectives, ii)Vector, iii) Competitive
Advantage, and iv) Synergy.
Corporate strategy may exist at three levels in an organization. Corporate level
strategies are futuristic, innovative and pervasive in nature. Strategic business unit
managers are involved for business level strategies. These strategies are more specific
and action oriented. Operating level strategies are formulated at the functional level. It
relates mainly with routines.
There are four grand strategic alternatives. They are: stability, expansion,
retrenchment and combination of these three. Expansion strategies operate through
concentration, integration, diversification, corporation and internationalization.
Retrenchment strategy is carried out through turnaround, divestment and liquidation.
We also see upon the compendium of various perspectives to strategy formation that
have evolved over a period of time. The 10 schools of thought on strategy formation
have been grouped into the prescriptive school, the descriptive school and the 27
Issues in Corporate integrative school. Corporate strategy has an important role to play in coping with
Management
environment. It has great utility in planning, coordination, control and direction. We
should also not forget that corporate strategy formulation process is not only a
different exercise but also it is a costly proposition and has only long term utility.

2.11 KEY WORDS

Corporate Strategy :
A unified, comprehensive and integrated plan that relates the strategic advantage of
the firm to the challenges of the environment.
Vector :
It is the direction in which the firm will move regarding the product market complex.
Synergy :
It is the measurement of the firms capability to take advantage of a new product
market move.
Corporate Level Strategy :
The top management involves themselves in futuristic, innovative and pervasive
decisions. This is related to what aspect of corporate strategy.
Business Level Strategy :
It relates mainly to how aspect of corporate strategy. They are more specific and
action oriented.
Grand Strategies :
Stability, expansion, retrenchment and combination are the strategic alternatives and
are named as grand strategies.

2.12 SELF-ASSESSMENT QUESTIONS

1) Discuss the concept of strategy.
2) Explain the nature and components of strategy.
3) What are the various levels at which a strategy may exist?
4) Distinguish between corporate level strategy and business level strategy.
5) State various schools of thought regarding strategy formation.
6) Name at least four Indian Companies under each of the grand strategies.
7) Explain the significance and limitations of corporate strategy.
8) Write notes on the following:
a) Vector
b) Synergy
c) Business Level Strategy
9) Corporate level strategies are important for business level strategies comment.
28 10) Name three companies and illustrate their corporate level strategies.
 Introduction to Corporate
2.13 FURHTER READINGS Strategy

Shrivastava, R.M., .(1999). Management Policy and Strategic Management, Himalaya

Publishing House, Bombay.
Mamoria C.B., Mamoria Satish, Rao, P. Subba. 2001. Business Planning and Policy,
Himalaya Publishing House, Bombay.
Ghosh, P.K. (1996). Business Policy Strategic planning and Management , Sultan
Chand & Sons, New Delhi
Kazmi, Azhar, (2002). Business Policy and Strategic Management, Tata Mcgraw
Hill Publishing Co, Ltd., New Delhi
Miller, A. and G. G. Den (1996). Strategic Management Mcgraw hill, New York.
Prasad, L.M., (2002). Business Policy: Strategic Management, Sultan Chand &
Sons, New Delhi.
Glueck W.F and L.R, Iavch, (1984). Business Policy and Strategic Management Mc
graw Hill, New York
Thompson, J.L. (1997).Strategic Management: Awareness and Change,
International Thompson Business Press, London.
Shrivastava, R.M. (1995). Corporate Strategic Management, Pragati Prakashan,
Meerut.

29
 UNIT 3 CORPORATE POLICY
Objectices
After reading this unit you should be able to
! understand the concept of corporate policy and its features;
! list out the determinants of corporate policy;
! develop an understanding about the scope and need of corporate policy;
! explain the steps in formulation of policy;
! discuss the various types of corporate policy; and
! understand the significance of corporate policy.
Structure
3.1 Introduction
3.2 Concept and Meaning of Corporate Policy
3.3 Features of Corporate Policy
3.4 Determinants of Corporate Policy
3.5 Scope of Corporate Policy
3.6 Policy Formulation Process
3.7 Classification of Corporate Policy
3.8 Importance of Corporate Policy
3.9 Summary
3.10 Key Words
3.11 Self-Assessment Questions
3.12 Further Readings

3.1 INTRODUCTION
The organization sets the objectives and works towards their achievement. Once these
objectives are defined and strategies determined, certain policies have to be made to
put them into action. Corporate policies act as a guide to action. They provide the
framework within which an organization has to meet its corporate objectives. The
policy points out the direction in which the company ought to go. Some of the policy
statements are-
We promote employees on the basis of experience
We sell televisions only for cash
In each of these statements, one could understand that there is a problem and the
policies help as a guide for finding the solution.
Some policies are just broad guidelines while some can be more specific. According
to Koontz and ODonnell, Policies are plans in that they are general statements of
principles which guide the thinking, decision making and action in an organization.
Policies aid in decision making and are the basis for procedures. They are
responsibilities of top management. Policies are applied in long range planning and
are directly related to goals. They are concerned with estimating availability of
resources, their procurement their augmentation and their efficient utilization.
In this unit, we shall discuss the concept, features, scope and essentials of a policy.
The classification of policies has also been discussed. In this era of competition and
30 dynamic environment, the need and importance of policies has also been explained
alongwith the formulation process.
 Corporate Policy
3.2 CONCEPT AND MEANING OF CORPORATE
POLICY
Corporate policy is the guide post to decision making. It helps in the managerial
thinking process and thus leads to the efficient and effective attainment of the
objectives of any organization.
Corporate policy has been defined as Managements expressed or implied intent to
govern action in the pursuit of the companys objectives. Corporate policy clarifies
the intention of management in dealing with the various problems faced. It gives the
managers a transparent guideline to take their decisions by being on the safe side.
Corporate policy helps the manager in identification of the solutions to the problem. It
provides the framework in which he has to take the decisions. The distinct views
regarding policies can be categorized into the following three broad groups:
i) The first category holds the opinion that policy and strategy are synonymous.
Corporate policy has been defined by William Glueck as Management policy is
long range planning. For all practical purposes, management policy, long range
planning and strategic management mean the same thing. However, this view is
quite controversial as strategy and corporate policy do not mean the same thing.
Strategy includes awareness of the mission, purpose and objectives. It has been
defined as, the determination of basic long term goals and objectives of an
enterprise, and the allocation of resources necessary to carry out these goals,
while policies are statements or a commonly accepted understandings of decision
making and are thought oriented guidelines. Therefore, strategy and corporate
policy cannot be used interchangeably as there is a clear line of differentiation
between the two terms.
ii) The second group of experts view corporate policy as the process of
implementing strategy. In the words of Frank I. Paine and William Naumes,
Policies guide and channel the implementation of strategy and prescribe how
processes within the organization will function and be administered. Thus the
term policy refers to organization procedures, practices and structures, concerned
with implementing and executing strategy.
Supporting this view, Robert Mudric has defined corporate policy as A policy
establishes guidelines and limits for discretionary action by individuals
responsible for implementing the overall plan.
The view represents corporate policy to be
! Restrictive
! Laying stress only on the tactical side and ignoring the strategic dimension.
iii) The third view considers corporate policy to be decisions regarding the future of
an organization.
In this view, Robert J. Mockler defines corporate policy as, Strategic
guidelines for action. They spell out what can and what cannot be done in all
areas of a companys operation.
According to the policy manual of General Electric Company, Policy is
definition of common purpose for organization components of the company for
benefit of those responsible for implementation, exercise discretion and good
judgment in appraising and deciding among alternative courses of action.
The views of different management scholars differ because of following reasons:
! There is no clear differentiation of policy from other elements of planning.
! There are different policies made at different levels of management for 31
directing executives.
Issues in Corporate ! Corporate policy encompasses and relates to the entire process of planning.
Management
Thus, corporate policy focusses on the guidelines used for decision making and
putting them into actions. It consists of principles along with rules of action that
provides for successful achievement of corporate objectives.

3.3 FEATURES OF CORPORATE POLICY

After understanding the concept of corporate policy, following features can be
identified:
! General Statement of Principles: Policies are general statement of principles
followed by corporate for the attainment of organizational objectives. These
principles provide a guide to action for the executives at different levels.
! Long Term Perspective: Corporate policies have a long life and are formulated
with a long term perspective. They provide stability to the organization.
! Achievement of Objectives: Corporate policy is aimed at the fulfillment of
organizational objectives. They provide a framework for action and thus help the
executives to work towards the set goals.
! Qualitative, Conditional & General Statements: Corporate policy statements
are qualitative in nature. They are conditional and defined in general manner.
These statements use words as to maintain, to follow, to provide etc. They can be
specific at times but most of the times, a corporate policy tends to be general.
! Guide for Repetitive Operations: Corporate policies are formulated to act as a
guide for repetitive day to day operations. They are best as a guide for the
activities that occur frequently or repeatedly.
! Hierarchy: Corporate policies have an hierarchy i.e. for each set of objectives at
each level of management there is a set of policies. The top management
determines the basic overall policy, then the divisional and / or departmental
policies are determined by the middle level management and lower level policies
are more specific and have a shorter time horizon than policies at higher levels.
! Decision Making Process: Corporate policy is a decision making process. In
formulating corporate policy one has to make choices and the choice is
influenced by the interests and attitudes of managers engaged in making the
policies.
! Mutual Application: Corporate policies are meant for mutual application by
subordinates. They are made for some specific situation and have to be applied
by the members of the organization.
! Unified Structure: Corporate policies tend to provide predetermined issues and
thus avoid repeated analysis. They provide a unified structure to other types of
plans and help mangers in delegating authority and having control over the
activities.
! Positive Declaration: Corporate policy is a positive declaration and a command
to its followers. It acts as a motivator for the people following it and thus they
work towards the attainment of the objectives efficiently and effectively. The
corporate policy lays down the values which dominate organizations actions.

3.4 DETERMINANTS OF CORPORATE POLICY

The corporate policy of an organization is influenced by various interrelated and
interacting factors. These factors can be classified as internal and external factors. The
determinants which are internal to the firm/organization and which influence the
32 decisions directly are known as the internal factors. External factors include all those
factors which act from outside the firm and influence the organization externally. We Corporate Policy
discuss these determinants one by one below:
Internal Determinants
The determinants include the corporate mission, corporate objectives, corporate
resources and the management values which are all internal to the organization and
play a very important role in the formulation of corporate policy.
i) Corporate Policy
The policy maker has to understand the corporate mission, so that the policy is in
tune with it. Corporate mission provides the company with the meaning for
which it exists and operates. Because policy provides guidelines for managerial
action, it has to be made in a manner that it accomplishes the corporate mission.
ii) Corporate Objectives
Another internal determinant of corporate policy are the corporate objectives. All
organizations frame organizational objectives and work towards their
achievement. Policy makers must take into account the economic, financial and
other objectives of the company.
iii) The Resources
The organization has to carry out its activities keeping in mind the resources it
has. The corporate policy has to identify the various resources available and then
only can it be made sound. The size of plants, capital structure, liquidity position,
personnel skills and expertise, competitive position, nature of product etc. all elp
in the formulation of corporate policy.
iv) Management Values
Corporate policy reflects the values imbibed in the organization. The personal
values of the managers forming corporate policy influences its formulation.
Management values differ from organization to organization. It is an important
determinant of corporate policy.
External Determinants
These include the forces external to the firm. The external determinants of corporate
policy are industry structure, economic environment and political environment.
i) Industry Structure
The formulation of corporate policy is influenced by the industry in which the
firm exists. The structure of industry comprises of size of firms, the entry
barriers, number of competitors etc. The corporate policy is formulated keeping
in mind competitors, strategies, policies etc.
ii) Economic Environment
Economic environment comprises of the demand, supply, price trends, the
national income, availability of inputs, the various institutions etc. It includes all
these factors which influence the policies of the firm. Therefore, it becomes one
of the most important determinants of corporate policy.
iii) Political Environment
The firm has to carry out its activities in accordance with the government
regulations and policies. If these are not complied with the firm would not be
able to meet its objectives in an efficient manner. The various policies like
monetary policy, fiscal policy, credit policy influence the corporate policy of the
firm.
33
Issues in Corporate iv) Social Environment
Management
The firm affects various sections of the society. The various sections in turn
influence the activities of the firm. The social beliefs of the managers influence
policies. The religious, cultural and ethnic dimensions have to be dealt with
while formulating policies of an organization.
v) Technology
Every now and then, new technologies are entering the market. An organization
has to change with the changes in the environment. It has to remain up to date
with respect to technology it uses. Thus technology also plays an important role
in formulation of corporate policy.

3.5 SCOPE OF CORPORATE POLICY

Corporate policies are statements of guidelines for corporate thinking and action.
They lay down the approach before the management to deal with the challenges in the
environment. They cover the following broad areas that affect the decisions of the
organization.
i) Corporate policy consists of a variety of subject that affect various interest
groups in the organization and outside it.
ii) Corporate policy is concerned with the various functional areas like production,
human resources, marketing and finance.
iii) We can understand corporate policy areas in two broad categories: Major and
minor policies. The overall objectives, procedures and control are covered in
major policies. These policies are concerned with each and every aspect of the
organization, its structure, its financial status, its production stature, its human
resources and all those issues which require attention like mergers, research,
expansion, etc. Basically, the top management is involved in the framing of such
major policies. Further, the operations and activities are also carried out by
executives so that the organizational objectives are met.
The minor policies are concerned with each segment of the organization with
emphasis on details and procedures. These policies are part of the major policies.
The operational control can be made possible only if the minor policies are
implemented efficiently. The minor policies are concerned with the day to day
operations and are decided at the departmental levels. The minor policies may
cover relations with dealers, discount rates, terms of credit etc. Thus, corporate
policies cover wide range of subjects ranging from operational level policies to
the top level policies.
Activity I
1) Policy and Strategy are synonyms to each other. Comment.
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34
2) What are the determinants of corporate policy? Corporate Policy

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3.6 POLICY FORMULATION PROCESS

A corporate policy is formulated by the top management. The formulation comprises
step wise procedure. The process is similar to the decision making process and
requires analysis, judgment and experience. The steps involved in the process are:
i) Environmental analysis
ii) Identification of policy alternatives
iii) Evaluation of alternatives
iv) Choice of policy
Figure 3.1 explains the process.

ENVIRONMENTAL INTERNAL
I ANALYSIS ENVIRONMENT

EXTERNAL ENVIRONMENT

IDENTIFICATION OF
II POLICY ALTERNATIVES

EVALUATION OF
III ALTERNATIVES
(CONSEQUENCES OF
POLICIES)

If, not acceptable

IV CHOICE OF POLICY

Figure 3.1: Policy Formulation Process

35
Issues in Corporate I) Environmental Analysis
Management
The first step in the process of policy formulation is environmental analysis. There are
basically two environmental factors: internal and external. The external environment
of the company comprises of economic, technological, political and social forces
operating outside the boundaries of the company. These influence the company
indirectly and the company has no control over them. These have to be continuously
analyzed and understood before the formulation of polices.
The internal environment of the organization comprises of the firms employees, the
organization structure, resources, value system, functional departments etc. These
affect the organizations activities directly as they are internal to the organization.
Both internal and external forces interact and a change in one affects the other one.
The two together provide for identification of problem areas with respect to which the
policies could be made.
II) Identification of Policy Alternatives
Once the analysis has been done, the next step requires identification of policy
alternatives. The environmental analysis helps to determine the opportunities and
threats facing the company and also its strengths and weakness. When the
organization is engaged in the matching of its strengths with the opportunities, various
policy options emerge. The options or alternatives also arise with the help of past
experience, past performance results and the practices followed by the management.
Identification of alternatives has to be done efficiently and then only can they be
evaluated for one choice.
III) Evaluation of Policy Alternatives
After the various alternatives have been identified, they are to be evaluated so that the
best one could be selected. The evaluation of policies is known as policy audit. The
alternatives can be evaluated on the basis of their consequences in terms of their
contribution to corporate goals. Several criteria could be used for evaluation like
growth, unit, profitability, development, organizational goals, etc. The evaluation has
to be done with care so that errors may not occur. Policy should not only be feasible
but it should also be consistent with organizations goals.
IV) Choice of Policy
The last step in the policy formulation process is the choice of the best alternative
from among the various alternatives identified and evaluated. The evaluation helps in
the selection of the best possible policy. If any of the alternatives are not acceptable
and not consistent with companys objectives then the process reverts back to the
identification of alternatives where fresh alternatives are looked for. The search begins
again.
The various alternatives are compared with each other and the most preferred option
is selected. This selected policy has to be tested so that it could be known whether it
fits in the organizational boundaries and meets the organizational goals. After being
successfully tested, the policy becomes ready for implementation and the manner in
which it would be implemented should be explained clearly.
After the policy has been made, it becomes necessary to review it from time to time so
that it does not become obsolete.
Activity 2
1) Discuss environmental analysis aspect in strategy formulation.
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36 .................................................................................................................................
2) Discuss the fourth step in policy formulation process. Corporate Policy

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3.7 CLASSIFICATION OF CORPORATE POLICY

Corporate policies have been classified on the basis of various criteria. Over the years,
the number of bases have changed and developed.
Basically there are three main types of policies:
! Basic Policies
! General Policies in
! Departmental Policies
Different authors have given different kinds of classifications. Some have classified
policies on the basis of functional areas, while some have classified them on the basis
of levels. Alfred and Beatty have classified policies as:
! Top Management Policies
! Upper Middle Management Policies
! Middle Management Policies
! Foremen Policies
! Operating Force Policies
! Sales Policies
! Production Policies
! Research Policies
! Financial Policies
! Costing Policies
! Accounting Policies
! Marketing Policies
! Promotion Policies
! Product Policies
To make the study easier, the policies have been classified differently in figure 3.2
given below.
I) Classification on the Basis of Scope
On the basis of scope of an organization, policies are classified as Basic Policies,
General Policies and Departmental or Specific Policies.
! Basic Policies:- These are framed by the top management and spell out the basic
approach of a company to its activities and its environment.
! General Policies:- These are framed by the middle level management and are
more specific. They apply to large segments of the organization.
! Specific Policies:- These are framed by the foremen and supervisors and are
very specific in nature. They are applicable to routine activities.
II) Classification on the Basis of Expression
On the basis of expression, corporate policies can either be expressed or implied. 37
Issues in Corporate ! Expressed Policies:- The policies which are expressed in clear words either
Management
orally or in writing are the expressed policies. These are most suitable for small
organizations.
! Implied Policies:- The Policies which are understood by the employees, code of
conduct or behavior and are not expressed orally or through written statements
are known as implied policies. They flow from philosophy, values and traditions
of the organization.
g
ON THE BASIS OF:
Basic Polices

I) SCOPE General Polices

Departmental /Specific Polices

Oral
Expressed
II) EXPRESSION Written
Implied

Top Management Policies

III) LEVELS OF Middle Level Management Policies

MANAGEMENT
Lower Level Management Policies

Originated Policies

Appealed Policies

IV) NATURE OF ORIGIN Imposed Policies

Derivative Policies

Production Policies

Marketing Policies
V) FUNCTIONAL AREAS
Financial Policies

Personnel Policies

Planning Policies

Organizing Policies
VI) NATURE OF MANAGEMENT
FUNCTIONS
Actuating Policies

Controlling Policies
38
Figure 3.2: Classification of Policies
III) Classification on the Basis of Level Corporate Policy

Different policies are framed at different levels of management. These include:

! Top Management Policies:-These are framed by the top management and it is
only responsible for them. The policies are derived from top management
planning and top management sees that they are put into effect and judges the
results.
! Middle Level Management Policies:-These are laid down by the middle level
managers and deal with the organizational activities e.g. selection of executives,
employee training, deciding processes, methods, techniques etc.
! Lower Level Management Policies:- Those people who have direct control
over the working force comprise the lower level management. These people set
up policies with respect to the accomplishment of tasks of sub divisions of the
organizations.
IV) Classification on the Basis of Origin
On the basis of origin, policies are classified as original policies, appealed policies,
imposed policies and derivatives policies.
Original Policies:- These policies are formed from the company objectives. These are
formed by the top management and the top management is responsible for guiding
and directing them and the subordinates are responsible in the attainment of
organization objectives.
Appealed Policies:- These are also called suggested policies because they are made
by taking into account the suggestions of subordinates or people who implement these
policies.
Imposed Policies:- External forces sometimes force the company to accept certain
policies forcibly. These policies are called imposed policies. The external forces could
include government rules and suggestions, arguments with trade unions etc.
Derivative Policies:- These policies are operational in nature and are derived from
companys major policies. They are made as guidelines to perform day to day
operations.
V) Classification on the Basis of Functional Areas
In an organization, various functional areas are seen. The policies are classified
according to functional areas i.e. production policies, marketing and sales policies,
financial policies and personnel policies.
Production Policies:- These policies are concerned with product to be produced, type
of technology, equipment, selection of plant layout, location and size, manufacturing
cost, inventory control, quality control, etc.
Marketing & Sales Policies:- The policies which relate to policies in market
analysis, business law, salesmanship, advertising are concerned with total process of
marketing mix and product mix. These include decisions with respect to customers,
channels of distribution, dealers, sales control, promotions, etc.
Financial Policies:- The success of business depends upon these policies. These
consist of policies with respect to capital structure, methods of raising funds, the
utilization of funds, credit policy, dividend decisions, profit policy, costing and
accounting policy, etc.
39
Issues in Corporate Personnel Policies:- Employees are very important for the organization and the
Management
personnel policies are concerned with issues like recruitment, selection, training and
development, promotions and transfer, wages and incentives, etc.
VI) Classification of Policies on the Basis of Nature of Management
The main functions of an organization comprise of planning, organizing, actuating
and controlling. The policies may therefore be classified as planning policies,
organizing policy, actuating policy, and controlling policy.
Planning Policies:- These policies are concerned with the determination of ways to
attain the objectives of the organization. Such policies decide corporate objectives,
alternative courses of action, comparison of alternatives, establishment of budgets,
schedules, procedures, etc.
Organizing Policies:- These policies are concerned with allocation of activities to
members of the group so that through their collective efforts, objectives could be
achieved. These are those policies which provide for issues like organization
structure, authority, responsibility, delegation, centralization and various
relationships.
Actuating Policies:- The actuating policies include providing leadership, integrating
tasks, communication and organization climate. These policies are concerned with
organizing the employees of the organization.
Controlling Policies:- Controlling is the process by which the performance is
compared with the set objectives. These policies provide for establishment of
standards, pointing out deviations, ascertaining causes for deviation and taking
corrective actions.

3.8 IMPORTANCE OF CORPORATE POLICY

For effective management, the solving of day to day problems is not enough. What is
required is the proper assessment of all kinds of activities and operations taking place
in the organization. After the assessment, they are to be defined in clear cut way, so
that objectives could be met. For definition of the business activities and their
efficient implementation, the selection and application of policies is required. Without
a guiding light, it would become very difficult for the business to go on and policies
act as guide and facilitate the manager to direct all the activities towards the same
goal.
! Policies are needed to carry out the business activities in a smooth manner.
! They provide clear cut courses for attainment of business objectives.
! If a proper explicit policy has been formulated, many of the details could be
conveniently handled by the subordinates and management would not
unnecessarily waste its time and energy in doing them.
! Policies provide a guide and framework for decision making.
! Policies encourage delegation of the power of decision making.
! Good policies provide a direction in which all management activities are
focused.
! Policies provide stability to the action of the members of the firm.
! Policies deter the subordinates to rethink on the day to day issues and thus avoid
repetitive analysis of issues.
! Policies facilitate evaluation of performance by acting as a standard.
40
! They enhance employees enthusiasm and loyalty for the organization. Corporate Policy

! They help in solving the problems for optimum utilization of scarce resources.
! The sound policies help in building good public image of the business.
! Polices provide the firm with clear objectives with which the managers can
decide about the future course of action.
! They act as tool for coordination and control.
Thus, corporate policy is very important for an organization and helps in the overall
development and growth. A sound policy provides satisfaction to the employees in
terms of working conditions, culture, authority, responsibility and relationships.
Activity 3
1) Distinguish between expressed and implied policies.
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................
2) Explain functional policies in brief.
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................
3) State the importance of corporate policy.
..................................................................................................................................
.................................................................................................................................
..................................................................................................................................
.................................................................................................................................

3.9 SUMMARY
Corporate policy is the guideline which helps the management to carry out its
activities in an efficient and effective manner so that the objectives of the organization
are met. However, there are different views with regard to definition of corporate
policy. The features of corporate policy include general statement of principles, long
term perspective, achievement of objectives, qualitative, conditional and general
statements, guide for repetitive operations, helps in decision making process, provides
a unified structure and helps to determine a positive declaration for its followers. The
determinants of corporate policy include internal and external determinants. The
scope of corporate policy is very broad and consists of variety of subjects that affect
various internal groups in the organization. The formulation of corporate policy is
very important and facilitate the managers to achieve goals. The process of corporate
policy formulation include four steps- environmental analysis, identification of
alternatives evaluation of alternatives and choice of corporate policy. Policies are 41
Issues in Corporate classified on the basis of various criteria - scope, expression, level of management,
Management
nature of origin, functional areas and nature of management functions. Policies have
an important role to play in organizations.

3.10 KEY WORDS

Corporate Policy :
Managements expressed or implied intent to govern action in the pursuit of the
companys objectives.
Internal Determinants :
The internal factors which influence the policy formulation of a firm.
External Determinants :
The external factors which influence the policy formulation of a firm.
Actuating Policies :
The actuating policies include providing leadership, integrating tasks, communication
and organization climate. These policies are concerned with organizing the employees
of the organization.
Appealed Policies :
These are also called suggested policies because they are made by taking into
account the suggestions of subordinates or people who implement these policies.
Derivative Policies :
These policies are operational in nature and are derived from companys major
policies. They are made as guidelines to perform day to day operations.
Implied Policies :
The policies which are understood by the employees code of conduct or behavior and
are not expressed orally or through written statements are known as implied policies.
They flow from philosophy, values and traditions of the organization.

3.11 SELF-ASSESSMENT QUESTIONS

1) What do you mean by corporate policy? What are the different views with
respect to corporate policy?
2) Discuss the features of corporate policy. What are the essentials of an effective
corporate policy?
3) How is corporate policy formulated? Describe with the help of a diagram.
4) In todays changing scenario, what is the importance of forming a corporate
policy?
5) How is corporate policy classified? What are the various kinds of corporate
policy?
6) Select an organization of your choice and name various types of policies it had
adopted.

42
 Corporate Policy
3.12 FURTHER READINGS
Shrivastava, R.M., Management Policy and Strategic Management, Himalaya
Publishing House, Bombay. 1999
Mamoria C.B., Mamoria Satish, Rao, P. Subba, Business Planning and Policy,
Himalaya Publishing House, Bombay.2001
Ghosh, P.K., Business Policy Strategic planning and Management , Sultan Chand
& Sons, New Delhi 1996
Kazmi, Azhar, Business Policy and Strategic Management, Tata Mcgraw Hill
Publishing Co, Ltd., New Delhi-2002.
Miller A. and G. G. Den Strategic Management Mcgraw hill, New York 1996
Prasad, L.M., Business Policy: Strategic Management, Sultan Chand & Sons, New
Delhi. 2002
Glueck WF and LR Iavch, Business Ploicy and Strategic Management Mc graw
Hill, New York 1984.
Thompson J.L. Strategic Management: Awareness and Change, International
Thompson Business Press, London 1997.
Shrivastava, R.M., Corporate Strategic Management, Pragati Prakashan, Meerut,
1995.

43
Issues in Corporate
Management CASE STUDY
Maharaja Textiles India Ltd.
Maharaja Textiles India Ltd. New Delhi was one of the leading companies with staff
strength of 2030 in the field of textiles. It started its manufacturing activities in Oct.,
1986 with an installed capacity of 1,52,000 spindles and 60 tonnes production per day.
About five years back, the company bought a smaller textile company at Cochin.
Primarily, this unit has to cater to the needs of southern region comprising Andhra Pradesh,
Tamilnadu, Karnataka and Kerala of the country. This taken over unit was set up long
back in 1940 by Rustom Ji, a private entrepreneur.
Reports from the Cochin Division were not encouraging. Hence, the top management of
Maharaja deputed a core group of experts from the headquarters to understand the nature
of problems confronted over. A few specific problems were identified by the company.
Their brief description is given below:
! Profits The Cochin units is incurring losses. Earlier, it was earning profits. During
the last few years, a few more textile companies were set up in southern area. This
has enhanced competitiveness. Las year, the company could achieve break even
ppoint after lot of special efforts.
! Absenteeism Employees have tendency to remain absent without giving proper
information to the management. During festivals and marriages, they prefer to meet
their social obligations instead of organizational duties. This disrupted the entire
production schedules. Statistics have revealed that this rate is around 20%.
! Sales The sales curive of the division has started flattening. Products having the
design from North are not aceptable in SOuth. Variety, Colour and Texture are the
other issues affecting the sales of the company. On the ohter hand, the sales of
corporate office has increased annually by 8%.
! Dealer Relations The erstwhile company at Cochin which was taken over by
Maharaja later on, had very good relations with dealers in the area. Once the company
was taken over by Maharaja, the dealers started moving towards the ompetitors.
Competitors have also started paying higher commission for promoting their local
products.
! Old & Obslete Textile Machines The company was following traditional process
of manufacture. It has old machines acquired in 50s. Most of the machines have
completed their life. They needed replacement immediate with newer models.
! Shortage of funds Maharaja has gone for a fresh issue of equity. The equity was
fully subscribed. But, it could not raise debt funds from the market later on. This
has led to reduced allocation of funds to Cochin unit.
! Starategic Intent The company has not formulated its mission. The objectives
of Cochin division are not in tune with the objectives of Maharaja at New Delhi.
The employees working at these two places place themselves differently.
! Autonomy The chief executive of Cochin unit contends If we people are allowed
to work independently, they would be doing fine. The company at New Delhities
their hands with policy manuals, directions, forms, reports
The core group has collected some important facts about Cochin unit:
! The unit was purchased for Rs. 20 crore five years back. Now, it requires an
44
additional investment of Rs. 160 crore.
! The unit has staff strength of 130. They include 45 unskilled and 30 offficers. Case Study
Newly recruited employees are only three.
! The unit does not have quality contron and R&D cells.
! The unit sends one six monthly report to Maharaja, New Delhi. No other
communications were formalised.
! The unit is located at around 10 kns. fromCochin city and at around 5 km. from
Cochin harbour.
! The unit is not making any exports. Further, it has to get the cotton from producers
residing near Kolkata.
The top executives are presently busy in identifying the mpost important problem of
Cochin unit.
Questions
1) Whic of the problems reported by the core group is most important?
2) How will you set corporate level and divisional level objectives for the company?
3) What policies and procedures be laid for better coordination between Maharaja
Head Office at New Delhi and Divisional Office at Cochin?
4) What strategic action may be taken to improve the performance of Cochin unit.

45
Unit 4: Historical Perspective

Objectives

After going through this unit, you will be able to:

understand the meaning of corporate governance;

identify the need for corporate governance;

lack the history of corporate governance;

explain corporate governance in Indian Context.

Structure

4.1 Introduction

4.2 The History

4.3 The need (Why?)

4.4 Corporate Governance in Indian context

4.5 Summary

4.6 Self-Assessment Questions

4.7 Further Readings

4.1. Introduction:

Change is the order of the day. Advancement in science and technology has changed the way we

live. Globalisation and liberalization has changed the way we do our business. There is change in

environment, change in culture and change in ethos. This change has brought some negative

impacts along with the positive ones. There is decline in ethics and values that ought to be

followed by everyone including states and corporates. This means that there is loose governance

by these entities. When this happens the objectives set for the entity cannot be achieved. In this

unit we shall focus on the meaning, objective and nuances of corporate governance.

1
 Before we understand the term Corporate Governance (CG), let us first understand the

term governance. The concept of governance has been known in both political and academic

circles for a long time, referring generally to the task of running a government, or any other

appropriate entity for that matter. According to the World Bank, Good governance is

epitomized by predictable, open and enlightened policy making, a bureaucracy imbued with a

professional ethos acting in furtherance of the public good, the rule of law, transparent processes,

and a strong civil society participating in public affairs. On the other hand, Organisation for

Economic Cooperation and Development (OECD) defines governance as the use of political

authority and exercise of control in a society in relation to the management of its resources of

social and economic development. This broad definition encompasses the role of public

authorities in establishing the environment in which economic operators function and helps in

determining the distribution of benefits, as well as the nature of the relation between the ruler

and the ruled. Good governance encompasses all actions aimed at providing its citizens, a good

quality of life.

With the rapid change in the business environment and emergence of new regulations by world

bodies like EEC, WTO, OECD, World Bank etc. the concept of CG is gaining momentum.

Corporate governance is a concept rather than an instrument. It focuses on appropriate

management and control structure of a company. Also included in the concept are power

relations between owners, the board of directors, management and the stakeholder. Most

definitions relate to control of a company or managerial conduct. The Cadbury Report (U.K.)

states; Corporate governance is the system by which businesses are directed and controlled.

OECD definition says, Corporate governance provides the structure through which the

objectives of the company are set, and the means of attaining those objectives and monitoring

performances are determined. The following definition helps us in understanding the concept

even better: Corporate governance is not just corporate management, it is something much

broader to include a fair, efficient and transparent administration to meet some well defined
2
objectives. It is a system of structuring, operating and controlling a company with a view to

achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and

suppliers, and complying with the legal and regulatory requirements, apart from meeting

environmental and local community needs. When it is practiced under a well-laid out system, it

leads to the building of a legal, commercial and institutional framework and demarcates the

boundaries with in which these functions are performed. To state in simple terms, corporate

governance relates to a code of conduct, the management of a company observes while

exercising its powers. Quality corporate governance not only serves the desired corporate

interest, but is also a key requirement in the best interests of the corporates themselves.

Box No.4.1: Some Useful Definitions of Ethics and Corporate Governance

Sri Aurobindo

But that which determines his ethical being is his relations with God, the urge of the
Divine whether concealed in his nature or conscious in his higher self or inner genius.
He obeys an inner ideal, nor to a social claim or a collective necessity. The ethical
imperative comes not from around, but from within and above him.

Peter F. Drucker
The History The Ecological Vision (1993)

Above all, the ethics or aesthetics of self-development would seem to be tailor-made for
the specific dilemma of the executive in modern organization.
Theirthefunction
Though demands thegood
terms governance, self-discipline
governanceandand
thecorporate
self-respect of the superior
governance man. gly used
is increasin

in development literature since reRGarrett andthe

cent times, Klonoski,
concept 1986:2
of governance is not new. It is as old as

humBusiness ethics is
an civilization. Theconcerned primarily with
eastern civilization hasthe relationship
enumerable of business
examples, goals
where inand
emphasis was
techniques to specifically human ends. It studies the impacts of acts (DECISIONS)on the
laid good of the
on good individual,The
governance. theactivity
firm, theofbusiness community
the state, and by
as envisaged society as a wholebusiness
the great eastern thinkers on
ethics studies the special obligations which a person and a citizen accepts when he or she
politbecomes a part
y relates to of the of
all aspect world of commerce.
human life, social, economic and religious. Peace, order, security

Robert C. Solomon
Ethics and Excellence (1992)
.integrity, in the face of conflict of the virtues, is the challenge rather than the answer.
It is moral courage moral courage is not self-sacrifice
Moral courage is not self-righteous obstinacy and it is not at all opposed to
compromiseMoral courage includes an understanding of the big picture, the purpose(s)
of the organization, and the way in which the organization or some part of it thwarts its
own best intentions. 3
Corporate Governance is a system by which companies are run. It relates to the set of
incentives, safeguards and the dispute resolution process that is used to control and coordinate
Activity 1

Enumerate five points to highlight the importance of Corporate Governance as a concept than an

instrument.

4.2 History

Though the terms governance, good governance and corporate governance is increasingly used

in development literature since recent times, the concept of governance is not new. It is as old as

human civilization. The eastern civilization has enumerable examples, where in emphasis was

laid on good governance. The activity of the government of the state, as envisaged by the great

eastern thinkers on polity relates to all aspects of human life, social, economic and religious.

Peace, order, security and justice were regarded as the fundamental aims of the states (the largest

form of corporate). State was considered a means to the realization of decent, good and

meaningful life and justice were regarded as the fundamental aims of the states (the largest form

of corporate). State was considered a means to the realization of decent, good and meaning full

life.

Manu, the son of Prajapathi was the first king who brought out a comprehensive code of conduct

or governance for men, society and the state as a whole in his treaty called Manu Dharma

Shastra. In Mahabharata while delivering his first formal discourse on polity Bhisma says in

equivocal terms that the kin should always put the interest of his subjects over that of his own.

The great political thinker of 3rd century BC namely Kautilya in his treaty Arthasastra has laid

down the ideals at which the king was expected to aim.

In eastern literature a good society is one wherein a high, ethical standard of life is characterized

by the pursuit of wealth, enjoyment and liberation. It is the prevalence of dharma, which

characterizes an ideal society. Such a society is possible if the governance of the country is based
4
on clear, efficient and effective administration and all the rulers aim at this goal in the ancient

times.

Box No. 4.2: AGELESS ETHICS and GOVERNANCE

Q SATYAVADI RAJA HARISCHANDRA

Q SRI RAMA and THE CONCEPT OF RAMA RAJYA -"RAGHUKUL REETI
SADAA CHALI AAYEE PRAAN JAYE PAR VACHAN NA JAYE"
Q M. K. GANDHI- MY EXPERIMENTS WITH TRUTH
Q GOVERNMENT OF INDIA - SATYAMEVA JAYATE

However people in the west started feeling the need for good corporate governance in early 80s

as the corporate misdemeanours increased. In U.K., in 1980s, the corporate sector was beseeched

with a number of problems. Business failure, limited role of auditors, weak accounting standards

culminated in loss of control. The Cadbury committee was set up by the London Stock Exchange

to address the dreary financial aspect of corporate performance. A few years later, directors pay

became such a live political issue that a study group on directors remuneration was formed

under Sir Richard Greenbury. Then came two other committees the King Committee and the

Hampel Committee to diagnose the issue of corporate governance. The Asian financial crisis,

recent scandals in US, Italy, India have triggered fresh initiatives of thinking towards good

governance. Corporate governance has been much talked in India particularly after 1993.

Liberalisation brought in its wake a spate of corporate scandals, the first of which was a bank

scam involving securities. CRB scam and the UTI episode made it very clear that a serious

thinking is required on the front of corporate governance. SEBI in India has taken the initiative

in framing new rules and laws to strengthen corporate governance. Committees like Kumar

Mangalam Birla Committee (2000), Naresh Chandra Committee (2002) brought out reports on

corporate governance. SEBI has also constituted a committee on corporate governance under the

chairmanship of Sri N.R. Narayana Murthy.

5
 Presently corporate India is going through a great churning phase, as companies are doing

business with global ambition, placing a lot of emphasis on governance and transparency.

4.3 The Need of Corporate Governance

Recent corporate failures and scandals involving mis-governance and unethical behaviour on the

part of corporates rocked the corporate sector all over the world, shook the investor confidence in

stock markets, and caused regulators and others to question the assumption that most companies

do the right thing most of the time. These incidences diminished reputation and goodwill of even

those corporates who enjoy the trust and confidence of public at large. These factors highlight

the importance of good corporate governance. On the other hand, corporate governance is

important because corporate decisions impinge on its shareholders, customer, creditors, the state

and employees. Globally the objective of corporate governance is to maximize long-term

shareholder value. With the assumption that capital and financial markets are working properly,

anything that maximizes shareholder value will necessarily maximize corporate prosperity.

For sound governance, managers need to act as trustee of shareholders, prevent asymmetry of

benefits between sections of shareholders, especially between owner-managers and the rest of

shareholders. They also need to be a part of societal concerns about labour and environment. In

fact stock market analysts see these days a greater correlation between governance and returns.

Investment analysts recommend a company based on strength or weakness of a companys

governance infrastructure. Confidence of investors, both domestic and foreign, is the need of the

hour. This is to attract patient long term capital that will reduce their cost of capital. Thus,

there is a need for intellectual honesty, integrity and transparency, which form the basis for good

corporate governance.

Activity 2

State any three prerequisites for a sound Corporate Governance.

4.4 Corporate governance in Indian Context

6
As it was briefly stated earlier, corporate governance has been much talked about in India

particularly after 1993. Liberalization brought mixed results for Indian economy. Noticeably, it

brought in its wake a spate of corporate scandals. Later on scores of companies made public

issues with large premium and then disappeared; prospectus misled the public. The management

of most of these companies diverted funds and investors had no option but to repent their lost

money. Primary market literally collapsed in the after math of these failures. Slowly, many a

family owned businesses moved to become widely held limited companies. The question, how to

function in a corporate setup overriding family interest and obligations called for a code of

governance. Similarly, corporate banks also came under strain due to scams; governance failure

was total. The story of UTI is also well known where millions of small investors lost their capital

due to inadequate management practices and weak supervision.

Auditors were following questionable accounting practices on behest of the management and

often advising on how doubtful accounting choices might be made so as to remain on the right

side of law and at the same time, escape detection by users of financial information. All these

factors put strong pressure on many corporates to evolve a good governance practice.

Over the period of time in India companies like Tata Group, Infosys, Wipro have evolved sound

principles of governance, intertwining corporate governance with social responsibility. These

companies have become global and it is common to find global norms of accounting and

disclosure being followed in these corporate houses. Rights of employees, stock options,

independent directors, meeting quality norms, price warranty and guarantee- all these have made

room for quality governance. Managers have indeed become trustees of shareholders.

It began in 1998 with the Desirable Code of Governance- a voluntary code published by CII, and

the first formal regulatory framework for listed companies, established by the SEBI in February

2000, following the guidelines enunciated by the Kumar Mangalam Birla Committee Report. On
7
21st August, 2002, the Department of Company Affairs under the Ministry of Finance appointed

Naresh Chandra Committee to examine issues pertinent to governance. The committee looked

into financial and non-financial disclosure and independent auditing and board oversight of

management.

Apart from financial compliance or disclosure, the independent oversight of management is also

important. Many companies have disappeared, vanished either due to fraud or poor quality of

board resulting in lack of independent oversight. The Kumar Mangalam Birla Committee

focused on the role of independent and statutory auditors and also the role of the board of

directors.

SEBI constituted a committee on corporate governance under the chairmanship of Sri N. R.

Narayana Murthy. The committee included representatives from the stock exchange, chamber of

commerce and industry, investor associations and professional bodies, which debated on key

issues related to corporate governance. Findings and recommendations of these committees are

discussed in the later chapter.

Thus we find that the corporate India is going through a great churning phase. New aggressive

companies are doing business with global ambitions, placing a lot of emphasis on governance

and transparency. FIIs are very serious about good governance and disclosures. Liberalization

brought great challenges, after initial jolts and pain of restructuring, companies are seeing profits

more than before.

4.5 Summary

Good corporate governance is good business because it inspires investors confidence, which is

very essential to attract capital. A few unscrupulous businessmen can, largely undo all the

8
 confidence built through the good work by the good companies over time. They need to be

handled with iron hands.

However, corporate governance goes beyond the realm of law. It comes from the culture,

mindset of management and cannot be regulated by legislation. The watchwords are openness,

integrity and accountability.

Companies need not be myopic with short-term goals, caring only about quarterly results or

immediate stock prices in the bourses, or that cherished P/E ratio. Good governance maximizes

long-term shareholder value, which in turn takes care of short-term goals too.

4.6 Self-Assessment Questions

1. Explain the concept of Corporate Governance.

2. Why has it become necessary for business houses to have a good corporate Governance? Discuss.

3. Discuss the emergence of Corporate Governance as a concept.

4.7 Further Readings

Gopalasamy. N. (1998)., CorporateGovernance : The New Paradigm, Wheeler Publishing, Allahabad.

Balasubramanium N. (January-March, 1997). Towards excellence in board performance,Management Review.

O.E.C.D. Report on Corporate Governance.

Aiyangar. K. V. R. (1941). Rajadharma. The Adyar Library, Chennai.

Altekar. A.S. (1992). State and Government in Ancient India, Motilal Banarsidas, New Delhi.

www.sebi.gov.in

Report of Sir Adrian Cadbury Committee on Financial Aspect of Corporate Governance (1992).

www.business-ethics.com

Narayana Murthy, N.R., Corporate Governance: The Key Issues, Vikalpa, vol. 24, No.4.
9
Prasuna D.G. (June 2001). Governance Matters, Chartered Financial Analyst, June 2001.

10
 Unit 5 Top Management and Corporate Governance

Objectives

After going through this unit you should be able to:

understand the role and responsibility of BoDs;

understand the role and functions of Chairman and CEO; and

know the process of creating an Effective Board.

Structure

5.1 Introduction
5.2 Role of Board of Directors
5.3 Responsibilities of Board of Directors
5.4 Strategic Management: Role of the Board
5.5 Board Committees
5.6 Role of Chairman
5.7 Role of CEO
5.8 Creating an Effective Board
5.9 Summary
5.10 Self-Assessment Questions
5.11 Further Readings
5.1 Introduction

The major players in the area of corporate governance, within the corporation are corporate

board, shareholders and employees. Externally, the pace for corporate governance is set by the

government as the regulator, customer, and lenders of finance and social ethos of our times. The

scope and extent of corporate governance are set by the legal, financial and business framework.

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In essence, corporate governance is the system by which companies are directed and controlled.

Board of directors are responsible for the governance of their enterprises. -Corporate

Governance: A Multi-faced Issue; The Chartered Secretary, May97

As it is very clear from the above statement, people at the helm of affairs of an enterprise are

responsible for the good governance of the enterprise. The Board of Directors are responsible for

the governance of their enterprises, in a given economic, political and social environment. The

role of the board and the shareholder is interactive in nature and therefore the quality of

governance depends upon the level of interface established by them. The quality of the board

also depends upon a number of other factors, such as its size, its composition in terms of number

and proportion of whole-time and part time directors, the chairman of the board, power and

position of the CEO, the merit and qualification of the directors, etc. In this unit we will try to

find out the roles and responsibilities of the board and other executives for good governance.

5.2 Role of Board of directors

Law Related Expectations

The Indian Companies Act does not define the Board of Directors (BoDs). Even Director is

simply defined as it includes any person occupying the position of Director, by whatever name

called [sec.2 (13)]. With the help of this open definition of Director, we may infer that a Board

of Directors is a group of individuals each of whom is labeled as Director (or by any other title

with identical substantive intention). No person is to hold more than 20 directorships.

Section 269 says that, the commencement of the Companies (Amendment) Act, 1988, certain

specified public companies or private companies which are subsidiaries of public companies,

2
 shall have a Managing or Wholetime Director, a Manager, and each such appointment must be

made with prior approval of the central Government.

What is a BoDs suppose to do? This again we can know inferentially by referring to a definition

of Manager and Managing Director in section 2 of the Act, and also Sections 291-93. Both

these incumbents have to exercise their powers of managements subject to the superintendence,

control and direction of the Board. Thus, the BoDs, in broad terms, is expected to perform the

role of overseeing the running of the enterprise by its chief executive.

On whose behalf does the BoDs perform this role of overseeing? It is expected to do this on

behalf of the shareholder. It is they who elect the directors on the board. And it is the BoDs,

which, in turn, selects the Chief Executive.

The directors individually have no powers in the eyes of law. It is only the collective body of

directors, i.e., the board, which has a superior total power over the Chief Executive. The intent of

the Indian Companies Act appears to include only outside non-employee directors on the board.

Otherwise, if internal Wholetime Executive, say the MD were to be the directors on the board,

how could they exercise superintendence, control and direction over themselves?

Section 291 stipulates that the BoDs shall be entitled to exercise all such powers, and to do all

such acts and things as the company authorizes to exercise and do, except those things which can

be done in a general meeting of the company. The powers exclusive to the BoDs (sec. 292) are:

To make calls on shareholders in respect of money unpaid on their shares

To issue debentures

To borrow money otherwise than through debentures

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 To invest the funds of the company

To make loans

Correspondingly, section 293 restricts the powers of the BoDs, by making them subject to the

consent of general meeting of the company, in respect of selling, leasing or disposing of the

property of the company; remitting debt due by the director; borrowing money to an extent

which exceeds the net worth of the company etc.

The Board of Directors is expected to meet once in a quarter and the quorum for a valid meeting

of the board is one third of the total strength or two directors, which is higher. The power to

declare dividends is exclusive to the BoDs.

Section322 of the companies Act allows memorandum of association of a limited company to

provide for a director or directors with unlimited liability.

Managerially Derived Expectations

The dimension relating to the managerially derived expectations of the Board of Directors role

seems to be of relatively recent origin. In more than two decades or so, industrial development

had been marked by far-reaching technological changes, leading to equally fundamental

competitive reorientation at the global level. As a result, many erstwhile great names in the

industry have been humbled. With such rapidly mounting changes and uncertainties, the role of

BoDs has begun to be viewed from much wider and long term perspective beyond the

minimum requirements of the law. Probably, upto 1970s, the duty of BoDs to superintend,

control and direct had gone by defaults. Stable environment had helped this key role to remain

4
 dormant. What is then the renewed ramifications of this role at present? These are meant to

ensure that.

The enterprise continues to remain effective on the standpoint of technology parameter.

The enterprise continues to achieve healthy market growth in competitive conditions.

Divestments and diversification take place on sound lines.

Long-term productivity and quality are never sacrificed at the alter of short term profitability

Judicious earnings retention policy is adopted for financing growth, modernization, etc.

Serious and sustained attention is adopted towards building a sound system of human values and

exalted corporate culture.

It is a common observation that BoDs function rather passively. Often the members are selected

not because of their knowledge and competence but because of their compatibility, prestige or

esteem in the community. Usually, the Chief Executive Officer or the group of promoters has

free reign in choosing the directors and in having them elected by the shareholder. The directors

thus selected often feels that they should go along with any proposal made by the CEO and his

group. Interestingly, the board members find themselves accountable to the very management

they are expected to oversee.

Over the recent past, however, lending institutions, financial media and corporate analysts have

seriously questioned the role of BoDs. The investors and government in general are better aware

of the role of the BoDs. Though the Companies Act throws some light on the powers of the

BoDs and the restrictions placed on those powers, it does not specify to whom they are

5
 responsible and what for. However, there is a broad agreement that BoDs appointed or elected by

the shareholders are expected to:

Oversee the management of the companys assets

Establish or approve the companys mission, objective, strategy and policies

Review management actions and financial performance of the company

Hire and fire the principal executive and operating officers of the company

An important issue in this context is: should BoDs merely direct or may they manage also? Many

experts and practicing top managers say that BoDs should only oversee and direct, and never get

involved with the detailed management. There are others who feel that, for direction to be

realistic and sensible, some in-depth involvement with details is necessary. The majority view,

however, is in favour of directors directing the affairs of the company and not managing them.

5.3 Responsibilities of BoDs:

The board is expected to act with due care. That is, they must act with that degree of

diligence, care, and skill which ordinarily prudent men would exercise under similar

circumstances in like positions. If a director or the Board as a whole fails to act with due care

and, as a result, the company in some way, is harmed, the careless director or directors may be

held personally liable for the harm done.

Further, they may be held personally responsible not only for their own actions but also for the

actions of the company as a whole.

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 In addition, directors must make certain that the company is managed in accordance with the

laws and regulations of the land. They must also be aware of the needs and demands of the

constituent groups so that they can bring about a judicious balance between the interest of these

diverse groups, while ensuring at the same time that the company continues to function.

5.4 Strategic Management: Role of the Board

According to Bacon and Brown, BoDs, in terms of strategic management, have three basic tasks.

To initiate and determine: A board can delineate an organisations mission and specify

strategic options to its management.

To evaluate and influence: A board can examine management proposals, decisions and actions;

agree or disagree with them; give advice and offer suggestions; develop alternatives.

To monitor: By acting through its committees, a board can keep abreast of developments, both

inside and outside the organization. It can thus bring new developments to the attention of the

management, which it might have overlooked.

While the BoDs are not expected to involve itself in day-to-day operating decisions, they are

nonetheless expected to consider and give their views on all such matters that have long-term

connotations. In fact, such matters by convention are referred to the board. These relate to issues

such as introduction of new product, new technology, collaboration agreements, senior

management appointments and major decisions regarding industrial relations.

The directing function of the board has internal and external components. Internal components

relates to various actions taken by the executives and their implications for the organization,

including R&D, capital budgeting, new projects, new competitive thrust, relationship with

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 financial institutions and banks, foreign collaborators, major customers and suppliers. External

component relates to identifying broad emerging opportunities and threats in the environment

and feeding them to the management so that strategic mismatch do not occur. The board

should see that the organization always remains in alignment with the social, economic and

political milieu.

5.5 Board Committees

The provision of section 292 of the Companies Act provides for delegation of powers by the

BoD to the Committee of Directors of the powers regarding (a) borrowing money for the

company otherwise than for debentures, (b) investing the funds of the company, and (c) making

loans by the company.

In practice, however, Boards do appoint specific committees for in-depth exploration of certain

matters e.g., diversification project, shutting down a plant. These committees work for a

specified period and submit their views to the full board. There are standing committees, which

meet in the interval between the board meetings, and are expected to devote greater attention to

details in important matters arising from those functions. It is the outside directors who officially

comprise such committees. Some important committees usually set up by the board, comprising

outside directors are as follows:

Audit committee: It consists of independent directors who report to the board. Usually the

committee acts as a link between the board and the external auditors. They look into the issues

raised by the external auditors in greater details. Some of the functions of the audit committee

are:

- To review the interim and final accounts in Toto.

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 - To solve any problem they come across while completing the audit with due consultation

with the independent auditor.

- To make recommendations regarding the audit fees, selection and replacement of the

auditors.

Remuneration committee: This committee reviews the remuneration packages of the executive

directors and other top-level managers. It consists of independent directors and drafts the

remuneration policy of the company, which checks the unreasonable increase in the executive

compensations.

Nomination Committee: Nomination committee is usually set up to select new non-executive

directors. The chairman of the board heads the committee.

5.6 The Role of a Chairman

The role of the Chairman is to manage the board and ensure that its policies are put into practice

by the management. He must have a good knowledge of companys financial position and

closely monitor its performance. The chairman has to work closely with the company secretary

to address legal issues.

With the knowledge of the way in which the company is managed and its financial standings, the

chairman has to play a proactive role. He should be in a position to identify the short comings

and see that the board discusses these. By being proactive the chairman can help the CEO take

corrective action before things get out of hand. Since the chairman leads the board, its for him to

maintain good relation between the board and the companys shareholders. In the process of

maintaining such relationship he ensures that the board makes decision in accordance with the

interest of the shareholder and all other stakeholders of the company. Primarily the chairman has

9
 to cater to the internal needs of the board and its conduct. He also should maintain good relation

with the CEO and executive and non-executive directors.

Functions of the Chairman

Some of the other important functions of the chairman include:

To act as a representative of the company

To ensure that policies and practices are in place

To see to it that directors make good decision

To act firmly in times of crisis

To upgrade the competence of director so as to meet the current and future needs of the

company.

5.7 The Role of CEO

The role of a CEO is to achieve the organizational objective, by efficiently running the

organization. He also needs to maintain close working relation with chairman and the directors.

His relation with the chairman requires a high degree of trust, respect and an ability to

communicate openly. On the other hand he should maintain cordial relationship with the

executive directors to ensure that they act in the interest of the whole organization. He needs to

motivate the directors in improving the performance of the organization.

Functions of the CEO

Apart for the above roles, a CEO should;

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 Present the company to major investors, media and the government

Provide leadership and direction to all executive directors

Assist the executive directors in formulating strategies proposals that have to be endorsed by the

board.

Be a source of inspiration , leadership and direction to all the employees, customers and

suppliers

Take firm decision when situation demands.

Non-Executive Directors

These are the directors, who do not hold an executive position in the organization. They are also

known as outside directors. These directors play a very important role in the governance of the

company. As these directors do not have any other (than remuneration) material pecuniary

relation or transaction with the company, its promoters, its management or its subsidiary, they

will have unbiased judgment on the workings of the board and the company.

5.8 Creating an Effective Board

The function of a board is very comprehensive. In practice, it could be said that the board is

responsible for laying down matters of principle and of accounting, statistical and management

procedures. It is also responsible for the decision of what product to make, which market to

penetrate, determination of manufacturing capacity, investment decision, cash flow, liquidity etc.

In summary, the directors are responsible for ensuring that the top management functions

effectively and that through the information system, proper reports are generated and information

is made available for both control and planning purposes.

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 Ideally, the board of directors should be the heart and soul of a company. Whether a company

grows or declines depends very much upon the sense of purpose and direction, the values, the

will to generate customer satisfaction, and the desire to achieve, develop and learn, that emanates

from the board and the extent to which it is visibly committed to them.

The efficient board should be the one which is willing to identify, discuss and tackle barriers to

its own contribution. The board can be constrained or enhanced by the limitations or strengths of

its individual members.

While effectiveness may be influenced by a number of factors, the following provide a model

checklist:

Do the board members share a common, clear and compelling vision? Are they committed to an

agreed and realistic strategy to the achievement of the vision?

Have the necessary resources, processes, role, competencies, enabling technology and learning

capabilities for successful implementation been assembled?

Whether special responsibilities for projects that stretch beyond a financial year, such as

strategic business developments, entrusted to select directors?

When the company expands into a international network, whether the governance needs of the

new style entity are given a fresh look?

When the role of chairman and the CEO are separated, whether there is mutual trust and respect

to supplement and complement each others responsibilities and contributions?

Activity

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List some more functions of the Chairman and CEO, to improve the Corporate Governance of an

organization.

5.9 Summary

A group of outstanding individuals do not necessarily make an effective board. Directional

competence and contribution depends upon the interaction of a particular combination of people

and personalities in the boardroom. This sense of direction and purpose of the board will lead to

good governance and that will determine the growth of the enterprise.

5.10 Self-Assessment Questions

1. Discuss the legal and managerial roles of BoDs.

2. Should the role of Chairman and CEO be merged? Explain.

3. What are the major attributes of creating an Effective Borad?

5.11 Further Readings

Gopalasamy. N. (1998). Corporate Governance : The New Paradigm, Wheeler Publishing,

Allahabad.

Balasubramanium N. (1997). Towards Excellence in Board Performance, Management Review,

January- March.

Various Committees Reports.

www.sebi.gov.in

www.dca.nic.in

13
 Unit 6 Code and Laws for Corporate Governance

Objectives

After going through this unit, you will be able to:

know the emergence of corporate governance;

understand the importance of government initiatives taken to boost good

corporate governance.

Structure

6.1 Introduction
6.2 Reports of Committees on Corporate governance
6.3 Government Initiatives
6.4 National Award Initiated by the Government of India
6.5 Recent Developments in Other Markets
6.6 Summary
6.7 Self-Assessment Questions
6.8 Further Readings

6.1 Introduction

For any concept or idea to form a part of our existence or business needs to be put in

papers in distinct terms, so that they are understood and followed by all in a similar

fashion. These are called rules or codes of conduct. These are principles and standards

that are intended to control, guide or manage behaviour or the conduct of individuals.

However, codes are self-imposed and regulations are imposed by the states.

There are many corporate governance codes developed by non-governmental

organizations, stock exchanges, investor groups and professional associations.

1
Government also issues rules concerning corporate governance through capital market

regulatory body like SEBI and by enacting laws.

Here we will try to understand codes of corporate governance recommended by various

committees and some relevant laws enacted by the government.

6.2 Reports of Committees on Corporate governance

As it was explained in the previous units the events in the corporate world (through out

the world) raised concern about standards of financial reporting and accountability of

management. Many believe that the failures could have been avoided had the companies

followed good governance. In recent years, governments and corporates have made

sincere efforts in designing and implementing codes for good corporate governance.

Some of the reports on corporate governance published abroad and in India are:

Cadbury Committee Report

CII Committee Report

Kumara Mangalam Birla Report

Narayana Murthy Committee Report

Cadbury Committee Report

The Cadbury Committee was set up in May 1991 by the Financial Reporting Council of

the London Stock Exchange to address the financial aspects of corporate performance.

The sponsors of the committee were concerned at the perceived low levels of confidence,

both tin the financial reporting, and in the ability of auditors to provide safeguards which

the users of the company reports sought and expected. The move to set up the committee

2
was to improve the standards of financial reporting and to arrest any likely damage to

Londons reputation as a financial centre and the reputation of the British accounting

firms.

The Committee published its report and code of best practice in December 1992. From

July 1993; all companies registered in the UK and listed on the London Stock Exchange

have been obliged to state in their Annual Report how far they comply with the code, and

to give reasons for areas of non-compliance.

The Code of Best Practice has been divided into four sections- the first concerning the

role of the board of the directors and covering such matters as the duties of a board, its

composition; the second dealing with the role of the outside non-executive directors; the

third covering executive directors and their remunerations, and the final section

addressing questions of financial reporting and financial controls. The major

recommendations made by the committee are as follows:

A single person should not be vested with the decision making power i.e. the roles

of chairman and chief executive should be separated clearly.

The non-executive directors should act independently while giving their

judgement on issues of strategy; performance; allocation of resources; and designing the

code of conduct.

A majority of directors should be independent non-executive directors, i.e. they

should not have any financial interests in the company.

The term of the director can be extended beyond three years only after the prior

approval of the shareholders.

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 A Remuneration Committee with majority of non-executive directors should

decide on the pay of the executive directors.

The Interim company report should give the balance sheet information and should

be reviewed by the auditor.

The information regarding the audit fee should be made public and there should

be regular rotation of the auditors.

An objective and professional relationship with the auditors must be ensured.

It must be reported that a business is a going concern.

CII Report

Post liberalization years saw major upheavals in the Indian corporate world. Growing

international competition, growth in the economy as well as scams and frauds brought

forth the importance of corporate governance.

The Confederation of Indian Industry (CII) took the initiative to draft some codes of

corporate governance. A national task force on corporate governance was set up in mid

1996 under the leadership of Mr. Rahul Bajaj, ex.-President, CII, and then CMD, Bajaj

Auto Ltd. The committee issued desirable corporate governance. The major

recommendations are as follows:

The board should meet minimum of six times a year, preferably at an interval of

two months, and each meeting should have agenda items that require at least half a days

discussion.

At least 30% of the board (where the chairman of the company is non-executive)

and 50% (where the position of the chairman and managing director is combined) of

4
listed companies with a turnover of Rs.100 crores and more should comprise of

professionally competent and independent non-executive directors.

No person should hold directorships in more than 10 companies. In an earlier

draft of the code this number was to exclude directorship on the companys subsidiaries

(50% or more of equity holding) and affiliates (25% or more of equity holding).

While re-appointing members of the board, companies should give the attendance

record of the concerned directors. If a director has not been present (absent with or with

out leave) for 50% or more meetings, then this should be explicitly stated in the

resolution that is put to vote. As a general practice, one should not re-appoint any director

who has not had the time to attend even one half of the meetings.

Non-executive directors should actively participate in board affairs and not be

passive advisors, have clearly defined responsibilities within the board, and should be

literate in understanding financials of the company.

Non-executive directors should be adequately compensated through commissions

and stock options. The need for remuneration committee of the board has been brushed

aside as not being necessary.

Board members should be provided timely and adequate information to enable

them to discharge their duties. A comprehensive list of illustrations is provided in the

code.

Listed companies with a turnover of at least Rs. 100 crores and a paid up capital

of at least Rs. 20 crores must appoint audit committees of the board within two years.

Major Indian Stock Exchanges should gradually insist upon a compliance

certificate, signed by the CEO and CFO which clearly sates that, the management is

5
responsible for the preparation, integrity and fair presentation of the financial statements

and other information in the annual reports, and which also suggest that the company

will continue in business in the course of the following year; the accounting policies and

principles confirm to standard practice, and where they do not, full disclosure has been

made of any material departures; the board has overseen the companys system of

internal accounting and administrative controls system either directly or through its audit

committee.

Kumara Mangalam Birla Committee Report

Over the years some Indian companies have voluntarily established high standards of

corporate governance, but there are many more, whose practices are a matter of concern.

There is also an increasing concern about standards of financial reporting and

accountability, especially after losses suffered by investors and lenders in the recent past,

which could have been avoided, with better and more transparent reporting practices.

Investors have suffered on account of unscrupulous management of the companies, which

have raised capital from the market at high valuations and have performed much worse

than the reported figures leave alone the financial projections at the time of raising

money. Another example of bad governance has been the allotment of promoters shares,

on preferential basis at preferential prices, disproportionate to market valuation of shares,

leading to further dilution of wealth of minority shareholders. This practice however was

later contained.

There are also many companies, which are not paying adequate attention to the basic

procedures for shareholders service; for example, many of these companies do not pay

6
adequate attention to redress investors grievances such as delay in transfer of shares,

delay in dispatch of share certificates and dividend warrants and non-receipt of dividend

warrants. SEBI has been daily receiving large number of investor complaints on these

matters. While enough laws exist to take care of many of these investor grievances, the

implementation and inadequacy of penal provisions.

In the above-mentioned context, the Committee on Corporate Governance was set up on

May 7,1999, by the Securities and Exchange Board of India (SEBI) under the

Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise

the standards of corporate governance. The purpose of the committee was;

1. To suggest suitable amendments to the listing agreement executed by the stock

exchanges with the companies and any other measures to improve the standards of

corporate governance in the listed companies, in areas such as continuous disclosure of

material information, both financial and non-financial, manner and frequency of such

disclosures, responsibilities of independent and outside directors;

2. To draft a code of corporate best practices; and

3. To suggest safeguards to be instituted within the companies to deal with insider

information and insider trading.

Major recommendations of the committee are as follows.

The board should have an optimum combination of executive and non-executive

directors and at least 50% of the board should comprise of non-executive directors.

7
 No director should be a member in more than 10 committees or act as chairman of

more than five committees in which he is a Director.

The board of the company should set up a qualified and independent Audit

Committee.

Board should set up a remuneration committee to determine the remuneration

packages for the executives.

The corporate governance section of the Annual Report should make disclosures

on remuneration paid to directors in all forms including salary, benefits, bonuses, stock

options, pensions and other fixed as well as performance linked incentives .

Management should assist the board in its decision-making process in respect of

companys strategy, policy, code of conduct and performance targets.

The management should implement the policies and code of conduct of the board

It should provide timely, accurate, substantive and material information, including

financial matters and exceptions to the board, board committees and the shareholders.

As a part of the disclosure related to management, in addition to the Directors

report, Management Discussion and Analysis Report should form part of the Annual

Report to the shareholder.

The committees also took note of various steps taken by SEBI for strengthening

corporate governance, some of which are:

Stringent disclosure norms for Initial Public Offers

Providing information in directors reports for utilization of funds and variation

between projected and actual use of funds as per the requirements of the Companies Act,

8
 Declaration of quarterly results

Mandatory appointment of compliance office for monitoring share transfer process

Timely disclosure of material and price sensitive information having a bearing on the

performance of the company

Dispatching one copy of complete balance sheet to every household and abridged

balance sheet to all shareholders

Issue of guidelines for preferential allotment at market related process

Issue of regulations providing for a fair and transparent framework for takeovers and

substantial acquisitions.

The recommendations made by Shri Kumar Mangalam Birla Committee were accepted

by SEBI in December 1999, and are now enshrined in Clause 49 of the Listing

Agreement of every Indian stock exchange.

Refer to Annexure No. 1 for the Draft report of the committee.

Narayana Murthy Committee

In its zest to improve governance in the companies through the regulatory process SEBI

also instituted a committee under the chairmanship of Mr. N. R. Narayana Murthy which

recommended enhancements in corporate governance. The committee comprised of 23

persons and submitted its final report on 8th February 2003.

The Narayana Murthy Committee has mentioned about correct approach for successful

corporate governance. It has said:

Corporate Governance is beyond the realm of law. It stems from culture and

mindset of management, and cannot be regulated by legislation alone. Corporate

governance deals with conducting the affairs of a company such that there is fairness to

9
all stakeholders and that its actions benefit the greatest number of stakeholders. It is

about openness, integrity and accountability. What legislation can and should do, is to

lay down a common framework- the form to ensure standards. The substance will

ultimately determine the credibility and integrity of the process. Substance is inexorably

linked to the mindset and ethical standards of management.

Thus we see that the whole thing has got an ethical orientation now, and emphasis is laid

on raising the ethical standards for good corporate governance. Some of the major

recommendations made by the committee are as under:

All audit committee members should be financially literate and at least one

member should have accounting or related financial management expertise.

Mere explanation as to why a company has followed a different accounting

standard from the prescribed standards will not be sufficient.

Board members should be informed about risk assessment and minimization

procedures.

Board members should be trained in the business model of the company as well as

the risk profile of the business parameters, their responsibilities as directors and

best ways to discharge them.

Use of proceeds of IPO should be disclosed to the audit committee.

There shall be no nominee directors when a director is to be appointed on the

board and shareholders shall make such appointments.

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 Board of Directors, limiting the maximum number of stock options that can be

granted to non-executive directors in any financial year, may fix compensation

paid to non-executive directors.

Whistle Blowers should not be subject to unfair or prejudicial employment

practices.

A peer group comprising the entire board of directors, excluding the director

being evaluated, should make the performance evaluation of non-executive board

members.

Naresh Chandra Committee

On 21 August 2002, the Department of Company Affairs (DCA) under the Ministry of

Finance and Company Affairs appointed a committee under chairmanship of Shri Naresh

Chandra to examine various corporate governance issues. The committee has been

entrusted with analyzing and recommending changes if necessary, in various areas, like,

statutory auditor-company relationship, independence of auditing functions, certification

of accounts and financial statements by managers and directors, adequacy of regulation

of chartered accountants, company secretaries, and cost accountants, and other similar

statutory oversight functionaries, the role of independent directors, etc. The committee

recommended detailed regulations on auditors independence, working of audit

committees, board composition and governance. The recommendations have also been

drawn from The Sarbanes-Oxley Act, 2002, of the U.S.A. These recommendations have

been widely debated in public domain. If implemented, they may bring sweeping changes

in governance systems in Indian corporates. The same committee is also examining

governance issues related to private companies in India.

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6.3 Government Initiatives

From the governments side, there have been swift moves through law and regulations

made by the Department of Company Affairs (DCA) and Securities and Exchange Board

of India (SEBI) to hasten the process of bringing improvements in the Corporations

functioning. The DCA has amended Companies Act at short intervals for this purpose.

Numbers of provisions in the Companies Act 1956 concerning corporate governance

have been inserted in the Act through Companies (Amendment) Act 2000. Important

changes to improve corporate governance in this act are:

Providing for Directors Responsibility Statement (Section 217(2A))

Board to report in cases where buyback was not completed within the time

specified in sub-section (4) of section 77.

Small shareholders to get representation through Director (Section 252)

Limitations in Directorship in companies (Section 274 & 275)

Constitution of Audit Committees (Section 292A)

Providing for higher penalties (tenfold increase) for offences provided in various

sections of the Companies Act etc.

The Amending Act of 2000 thus increased manifold, the duties and responsibilities of the

Directors in the companies as a step to improve the corporate governance.

6.4 National Award initiated by the Government of India

Realizing the significance of efficient financial markets in achieving higher growth rates

in economy, The Honorable Union Finance Minister Shri Yashwant Sinha initiated

several measures to promote corporate governance among Indian companies and for

12
orderly development of Indian financial markets. While presenting the Budget for 1999-

2000, he mentioned:

Lately, there has been considerable debate on the importance of good governance of

Indian corporates. It is increasingly being realized that if investors have to be drawn

back to the capital market, companies have to put their houses in order by following

internationally accepted practices of corporate governance. This is necessary to enhance

investor confidence. To help promote this trend, I propose to institute a National Award

for Excellence in Corporate Governance (Para. 36).

In order to promote good governance practices in Indian companies and enhance

investors confidence in the market, the Government of India awards the National Award

for Excellence in Corporate Governance every year. The Award is recommended by a

Panel consisting of eminent persons from financial markets and corporate world. The

Ministry of Finance (Department of Economic Affairs) in the Government of India

constitutes the panel. Unit Trust of India has come forward to sponsor the award. UTI

Institute of Capital Markets also provides research support to the Panel.

In the year 1999 the panel constituted for the purpose initially short- listed the following nine

criteria for evaluation. Two criteria were subsequently added to the list later. The broad criteria

prescribed by the first panel for screening the companies for excellence in corporate governance

were as under:

1. Adequate representation of independent directors on the Board.

2. Existence of institutions, like audit committee, which enable the Board to adequately guide the

management.

13
3. Adherence to prescribed accounting standards and quality of disclosures relating to financial

and other information provided to shareholders in the Annual Reports.

4. Frequency and content of communication of financial and operating data to the shareholders

and to the public.

5. Investor- friendly procedures and practices.

6. Enhancement of shareholder value vis- - vis the industry performance.

7. Discharge of social obligations and obligations related to employee welfare.

8. General concern for the environment.

9. Ethical code of conduct.

In the later years, the following two criteria were added to the list:

1. HRD policies for succession, delegation, and empowerment of employees.

2. Innovative practices to improve quality of life for other stakeholders of the company.

Based on these criteria the following Companies were nominated for the consideration

for the Award;

1 Agrevo (India) Ltd. 33 Hindustan Lever Ltd.

2 Archies Greetings and Gifts Ltd. 34 HPCL
3 Asea Brown Boveri Ltd. 35 ICICI Ltd.
4 Asian Paints Ltd. 36 Indian Hotels Company Ltd
5 Bajaj Auto Ltd. 37 Indian Oil Corporation
6 BFL Software Ltd. 38 ITC Ltd.
7 Bharat Forge Ltd. 39 Larsen & Toubro Ltd.
8 BPCL 40 Lupin Laboratories Ltd.
9 Britannia Industries Ltd. 42 Mahindra & Mahindra
10 BSES Ltd. 43 Mphasis BFL Ltd.

14
 11 Cadbury India Ltd. 43 Motor Industries Company Ltd.
12 Castrol India Ltd. 44 MRF Ltd.
13 Cipla Pharma 45 Nicholas Piramal India Ltd.
14 Colgate India Ltd. 46 NIIT Ltd.
15 Container Corporation of India Ltd. 47 Novartis India Ltd.
16 Corporation Bank 48 ONGC
17 CRISIL 49 Pidilite Industries Ltd.
18 Dabur India Ltd. 50 Procter & Gamble India Ltd.
19 Digital Equipment India Ltd. 51 Punjab Tractors Ltd.
20 Dr. Reddys Laboratories Ltd. 52 Ranbaxy Laboratories Ltd.
21 E I H Ltd. 53 Reckitt & Coleman India Ltd.
22 Finolex Cables Ltd. 54 Reliance Industries Ltd.
23 Finolex Industries Ltd. 55 Satyam Computers Ltd.
24 GACL 56 SmithKline Beecham India Ltd.
25 Glaxo India Ltd. 57 State Bank of India
26 Global Telesystem Ltd. 58 Sun Pharmaceuticals Ltd.
27 HCL Infosystems Ltd. 59 Sundaram Fastners Ltd.
28 HCL Technologies Ltd. 60 TVS Suzuki Ltd.
29 HDFC Bank Ltd. 61 VSNL
30 HDFC Ltd. 62 Wipro Ltd.
31 Hero Honda Motors Ltd. 63 Wockhardt Ltd.
32 Hindalco

The assessment process is divided into three phases.

I) Quantitative
II) Quasi-quantitative
III) Qualitative

List of broad criteria for Phase I analysis

(Figures in parentheses are scores assigned to that item)

15
No. Criteria and selection Individual Total scores
scores
1. 1 Governance structure 30%
1.A. Composition of the board (15%)
1.B. Committees of the board (15%)

2. 2 Disclosures in the annual report 20%

2.A. Statutory disclosure (10%)
2.B. Non-statutory disclosures (10%)

3. 3 Timeliness and content of information 20%

to the investors and the pubic
3.A. A compliance with the Listing Agreement (6.67%)
3.B. Contents on website (6.67%)
3.C. Grievance resolution ratio (6.66%)

4. 4 Enhancement of shareholder value 30%

4.A. Share prices (10%)
4.B. Return on net worth (20%)

Total 100%

Phase II analysis: Fine-tuning Phase I analysis

Suggested items for fine-tuning the result of Phase I analysis

1. Governance structure

a. Number of meetings of the board during the year

b. Attendance record per meeting

c. Attendance record of individual directors

d. Number of meetings of the committees of the board

e. Do the directors receive:

All quarterly and annual production & sales plans

Budgets

Internal audit reports

Any process or product liability claim on the company

16
 Any Joint Venture or collaboration that the company proposes to enter into

Labour policy changes and disputes

Any defaults by the company

Any show cause considered materially important

Important economic and market developments

Disclosure of directors shareholding and interests in contracts

Agenda papers with adequate notice

f. Whether the Chairman and the Managing director are different?

g. Whether remuneration policy for directors is in place?

h. Ratio of remuneration of promoter-related director to the next level professional

director.

i. Do non-executive directors examine the performance of the management?

j. Existence of committees such as project management committee, capital

investment committee, consumer redressal committee, etc.

k. Does the nomination committee have a right to short- list candidates for the board?

l. Is there a well-defined process for selection of executive and non-executive

directors?

m. Does the audit committee have all the powers and authority as envisaged?

n. Does the audit committee review the interim and annual financial statements

before submission to the board?

o. Is there an internal audit department?

p. Is there a policy of limiting the number of terms a director can serve on the board?

17
2. Disclosure in the annual report

Does the annual report contain a statement of remuneration policy and details of the

remuneration of a director?

3. Timeliness and content of information to the investors and public

How long (within statutory limit) does company take to disclose material

information?

Time period between last day of financial year of the company and date of AGM.

What is the quality of content in communication with investors and public?

4. Enhancement of shareholder value

Growth in assets

Growth in sales

Solvency ratio

Margins

Phase III analysis: Qualitative criteria

Items for which detailed information were sought from company through personal interviews and

administering informal questionnaire

1. Employees

Discharge of obligations relating to employee welfare

HRD policies for succession, delegation and empowerment of employees

2. Stakeholders

18
 Innovative practices with respect to the other stakeholders including the customers (for example,

customer grievance resolution mechanism) and the vendors (wherever applicable).

3. Government and regulatory authorities

FERA/FEMA violations

Excise and custom raids

Show-cause notices from Income Tax Authorities and other regulatory authorities

4. Society

Discharge of social obligations

General concern for environment

5. Ethical code of conduct

Code of ethical behaviour for employees

Rules for insider trading

Based on these criteria companies are rated F, A, AA, AAA. Infosys and TISCO were awarded National

Award for Excellence in Corporate Governance in the year 1999 and 2000 respectively.

Activity
Discuss the feasibility of the National Award initiated by Government to promote good corporate
governance.

6.5 Recent developments in other markets

19
Implementation of Sabarnes-Oxley Act, 2002 in the U.S. A. In response to the public

outcry against the recent corporate scandals like, Enron, World Com, etc., a new

legislation viz., the Sarbanes-Oxley Act has been enacted on July30, 2003 in the U.S.A.

in order to protect investors by improving the accuracy and reliability of corporate

disclosures made pursuant to the securities laws. The legislation initiated major reforms

in the following areas.

1. Public Company Accounting Oversight Board

2. Auditors independence

3. Conflict of interest

4. Corporate responsibility

5. Enhanced financial disclosures

6. Analyst conflict of interest

7. Corporate and criminal fraud accountability

8. White-collar crime penalty enhancements

9. Corporate fraud and accountability

10. Studies and reports

European Union

The European Commission recently completed a study of 43 different corporate

governance codes and proposed to merge all of them to create a single, consistent code.

20
Germany

The German government had announced details of comprehensive new voluntary

guidelines to improve their corporate governance practices. The code aims at

strengthening the rules concerning auditor and supervisory board independence, gives

shareholders a limited role in takeovers, recommends that companies disclose board

remuneration individually, and requires a company to disclose whether or not they

comply with the code.

Ireland

Irish Association of Investment managers revealed a high level of compliance amongst

Irish corporates with the Combined Code on governance implemented by LSE. 97% of

firms allow shareholders to vote on re-election of directors every three years. 85% and

79% of them have remuneration and audit committees respectively comprised fully of

non-executive directors. 79% of them have separate role for the chairman and the chief

executive officer.

Asian and Latin American markets

S&P carried out a survey of 350 Asian and Latin American companies on 10 points based

on 98 information attributes grouped into 3 categories: financial transparency and

information is closures; investors relation, and ownership structure; and board and

management structure and practices. 19 out of 43 Indian companies managed to get score

of 4; Infosys scores 7.

Kenya

Kenyas Capital Market Authority has introduced new guidelines to imp rove corporate

governance practices. The guidelines include: appointment of independent directors,

21
constitution of nomination committee, the role of CEO and Chairman to be separated;

limiting the term of director on the board subject to shareholders approval and frequent

appraisal of the board.

Thailand

Stock exchange of Thailand is set to introduce a new committee to strengthen corporate

governance and make best corporate practice a national priority. Of the 580000

companies, nearly half do not report balances-sheet and a quarter of them do not pay even

taxes. Thailands SEC has drafted a framework for corporate governance ratings aimed at

protecting shareholders rights, the quality of directors and the efficiency of internal

controls. The Thai SEC will offer highly rated firms bunch of incentives, including a fast-

track review of their corporate filings to issue new shares.

Russia

Russias Federal Commission for Securities Markets introduced new code of corporate

governance which includes a number of tax incentives and investor friendly regulations.

Hong Kong

Hong Kongs SFC proposed a rule that executives who intentionally or recklessly,

provide false or misleading information in public disclosures, shall face up to two years

in prison and a HKD 1 million fine.

Philippines

Philippines SEC has requested that all listed firms establish an evaluation system to track

performance of their boards and executive management. The recently approved code of

corporate governance recommends that all public entities and fund raising entities shall

22
adopt the same. Philippines SEC is likely to extend new corporate governance code to

require even non-listed firms to place at least one independent director on the board.

6.6 Summary

It would have been very clear by now as to the importance that has been laid in good

corporate governance. Government, corporates and the civic societies have been doing

their bit to improve upon the existing level of governance. Corporate governance goes

beyond the realms of law. It comes from the culture, ethos and the mindset of

management. However due emphasis must be given to the role of legislation also. Need

of the hour is to build an atmosphere of mutual trust, responsibility and accountability

that makes the governing team enthusiastic and makes them aspire for excellence.

Procedural refinements and innovation are no substitute for good men, while good men

are never short of capacity to innovate. Thus, it is men more than measures that make

good corporate governance for that matter the governance give its true result.

23
 Appendix I

Ethical Complacency: The Recipe for Failure

) We are good people

) We just wrote a new code of ethics

) We have never had a problem

Appendix II

Kashmir: A case of Governance Failure

Facts:

Four hundred and seventy four officers and men of the Indian Armed Forces laid
down their lives in Kargil to protect the integrity of the country
Many innocent civilians too lost their lives and property and found their livelihood
disrupted, as had tens of thousands earlier through years of proxy war.
The entire nation united in grief with widows and parents across the land to mourn
the blood, tears and treasure invested in Kargil.

Why?

The findings showed many grave deficiencies in India's security management

system.
Lord Ismay formulated and Lord Mountbatten recommended was accepted by a
national leadership unfamiliar with the intricacies of national security management.
There has been very little change over the past 52 years despite the 1962 debacle,
the 1965 stalemate and the 1971 victory, the growing nuclear threat, end of the cold
war, continuance of proxy war in Kashmir for over a decade and the revolution in
military affairs.
24
Reason:
 6.7 Self-Assessment Questions

1) What are themajor recommendationsof Kumar Manglam Birla Committee report.?

2) Discuss the issues, which result in bad corporate governance. Suggest some measures to curb

them.

3) Develop a case of an organization where good corporate governance has resulted in the increase in

performance of the organization.

6.8 Further Readings

Gopalasamy N, (1998) Corporate Governance : The New Paradigm, Wheeler Publishing,

Allahabad.

Balasubramanium N. (January-March, 1997) Towards excellence in board performance, Management

Review.

.www.sebi.gov.in

www.dca.nic.in

5.Shri Kumara Mangalam Birla Report

6.Other committee reports.

25
Unit 7: Strategies for Dynamic and Stable Industry Environments.

Objectives

After reading this unit you should be able to:

understand the difference between dynamic and stable industry environments

know how the concept of life cycle predicts the events and explains the dynamics in the
environment
identify the characteristics of a dynamic environment and know the different strategies
applied in a dynamic environment
finally, understand the various strategies adopted by firms in a stable environment

Structure

7.1 Introduction
7.2 Concept of Product Life Cycle
7.3 Dynamic Environment
7.4 Strategic Choices in a Dynamic Environment
7.5 Decision to Enter Dynamic Markets
7.6 Stable Environment
7.7 Strategies in a Stable Industry Environment
7.8 Summary
7.9 Self-Assessment questions
7.10 Keywords
7.11 Further Readings
7.1 Introduction
The dynamics of an industry plays a critical role in the formulation of a firms strategy. It can
increase or decrease opportunities or a threat for a firm and it often force the firm to make
strategic adjustments. A basic understanding of the process of evolution is essential since correct
response to the change in the competitive environment can mean the difference between success
and failure of a firm. The first part of the unit will present the concept of product life cycle to
explain the process of industry evolution and its significance for the formulation of strategy. In
the latter part of the unit, growth strategies in dynamic and stable environments will be dealt in
detail.
7.2 Concept of Product Life Cycle
In todays business environment, it is not clear what changes are taking place currently, much
less predict which changes will occur in the future. Given the importance of predicting the
business environment accurately, it is desirable to have a robust technique which will help in
anticipating the pattern of industry changes that one can expect to occur.
One of the most well-known and reliable tools for predicting the probable course of events in the
future is the product life cycle (PLC) concept. The basic hypothesis of this concept is that an
industry passes through a number of phases starting with introduction followed by growth,
maturity and decline phases. Product life cycle theory predicts that industry growth follows an S-
shaped curve because of the process of innovation and diffusion of a new product. The

1
introduction phase is often characterized by a flat curve reflecting the difficulty of overcoming
the buyers inertia and their initial reluctance to try unknown and untested product. However, the
product enters a rapid growth phase once the product proves successful. This rapid growth phase
reaches a plateau once the product reaches all the potential buyers. This phase is called the
maturity phase. In the final phase of the product life cycle the growth tapers off and the demand
for the products starts declining as new substitutes start appearing in the market. The predictions
of product life cycle theory about the strategies, competition and performance are explained in
the table below.
Table: 7.1 Strategy, Competition and Performance in Different Phases of Product life Cycle
Introduction Growth Maturity Decline
Product Poor quality, no Good quality, Superior quality, Very little product
standards, frequent product standardization, less differentiation
design changes, improvements, product changes,
basic product design technical and less product
performance differentiation
differentiation
Buyer behaviour Buyer inertia, buyer Buyers will accept Repeat buying, Buyers are
need to be persuaded uneven quality, saturation, mass sophisticated
to try the product widening buyer market
groups
Marketing High advertising Higher advertising Broaden product Low advertising and
expenditure and high costs but as line, market marketing costs
marketing costs, percentage of sales it segmentation,
skimming pricing will be lower than service is important
introduction and deals are quite
common
Strategy Increase market Change price and Competitive cost is Cost control key
share quickly, R&D quality image. key. Bad time to
and engineering Marketing is a key increase market
capabilities are key area share. Also bad time
factors to change price or
quality image
Competition Few competitors Many competitors Price competition, Exits and fewer
shakeout competitors
Risk High risk Growth covers risk Cyclical trend sets in
Margins and profits High margins and Highest profits and Lower profits, lower Falling prices, low
low profits fairly high prices margins, falling prices and margins.
prices. Increased Price may rise in
stability of market later stages of
shares decline phase
One major limitation of the PLC concept as predictor of industry evolution and dynamics is that
it attempts to describe one pattern of evolution which will invariably occur. And except for the
industry growth rate, there is little or no underlying explanation provided by this concept as to
why the competitive changes associated with life cycle will happen. Moreover, the industry
evolution can have so many different paths, the life cycle pattern may not always hold good.
Nevertheless, the PLC is a robust model of industry evolution and it predicts the strategy,
competition and the performance of a firm in different business environments. Generally,
industries which have products in the introduction and growth phases operate in a dynamic
environment, while those with products in the mature phase operate in a more stable
environment. The stable and dynamic industry segments differ from one another due to the
difference in speed and direction of the following industry dimensions:

2
 Long-term changes in growth
Changes in buyers segments
Buyers learning
Diffusion of proprietary knowledge
Product innovation
Marketing innovation
Process innovation
Government policy change
Entry and exit of competitors
A good understanding of all the above dimensions that can shape the industry dynamics will
assist a firm to face and in some cases even influence the structural changes. A firms ability to
predict the future events will provide a valuable head start to direct environmental forces in ways
appropriate to the firms position. In fact, successful firms do not view environment change as
fait accompli, to adjust to, but as an opportunity.
Industry environments vary in their basic strategic implications along a number of important
dimensions, namely:
Industry concentration
State of industry maturity
Exposure to international competition
The following sections will discuss the industry environment and the strategies based on these
dimensions. In addition, in each of these environments, the structure of the industry, strategic
issues and strategic alternatives are also discussed. Two important business environments are
selected for discussion, namely dynamic environment characterized by very dynamic changes
and stable environment typified by steadier and stable variations.
7.3 Dynamic Environment
Generally dynamic environment is characterized by newly formed or re-formed industries
that has been created by technological innovations, emergence of new consumer needs/
segments, or other socio-economic changes that elevate a new product or a service to the level of
potentially viable business opportunity. Dynamic environment is also created when
old/traditional industries experience fundamental shifts in competitive rules coupled with growth
in scale by orders of magnitude, caused by some of the factors mentioned earlier. The essential
characteristic of a dynamic environment is the absence of any rules of the game which may
pose a risk or provide an opportunity. In either case it must be managed from the strategic
management point of view. The following section outlines the common characteristics of
dynamic industry environment.
Characteristics of Dynamic Industry Environment
Embryonic and Spin-off Firms: Dynamic environment has a greater proportion of newly formed
companies compared to more stable industry environment. Related to the presence of these
companies is that of many spin-off firms or firms created by personnel leaving firms in the
industry to create their own firms.

Technological and Strategic Uncertainty

Usually there is s great deal of technological uncertainty in a dynamic industry environment.
Alternate production technologies may be at R&D stage or experimental stage, all of which not
be tried on a large scale. Related to the technological uncertainty, but on a broader scale, are a
wide variety of strategic approaches often tried by the industries in dynamic environment. There

3
is great deal of uncertainty about the strategies of the competitors with different firms following
different approaches to product/market positioning, marketing, etc.
High initial costs coupled with steep cost reduction
Small production volumes coupled with newness of technological/production process produce
high costs in a dynamic environment relative to a more stable environment. But the steep
learning curve is followed rapidly by a succession of ideas related to improved production
procedures, plant layout, and employee productivity and so on. Additionally, increasing sales
make major additions to the scale and accumulated volume of output produced by firms. If the
gains due to learning are combined with increasing market opportunities, the initial high costs
are eclipsed by the rapid decline in costs.
First-Time Buyers
Most of the buyers of the new product/services produced by embryonic industries in a dynamic
market are first-time buyers. The task of a firm in a dynamic environment is thus of convincing
the buyers and persuading them to try the new products or services instead of the existing ones.
Short-Time Horizons
The pressure to develop customers or produce products to meet the demand is so great that
problems are dealt expeditiously rather than relying on comprehensive analysis of future
conditions.
The other features of a dynamic industry environment include inability of firms to obtain raw
material and components, absence of required infrastructure, absence of product or technological
standardization, erratic product quality, customers confusion, etc. In an environment described
above, firms will have to craft a strategy to survive and thrive which radically differs from
strategies adopted by firms in more stable conditions. The following are some of the generic
strategic alternatives available to a firm.
7.4 Strategic Choices in a Dynamic Environment
Industries operating in a dynamic environment have to cope with the uncertainty and risk
inherent in the industry environment. The industry structure is highly amorphous, unsettled and
rapidly changing and the rules of the game are largely undefined. Despite these factors, the
dynamic phase of an industry is perhaps the time when there is a tremendous amount of latitude
and freedom to experiment with new strategies and when the leverage from good choice is the
highest in determining performance.
One of the strategic choices in a dynamic environment available to a firm is shaping and
influencing the industry structure. A firm can set the rules of the game in areas such as product
policy and new product development, marketing approach, and pricing strategy. The firm can
seek to define the rules within the constraints dictated by the economics of the industry and its
own resources in a way that yields the strongest position in the long run.
Another strategic choice available to a firm to compete in a dynamic environment is changing
the orientation of its suppliers and channel partners. A firm must be willing to shift the
orientation of its suppliers and distributors as the industry grows and starts maturing. Suppliers
should be encouraged (sometimes coerced) to respond to the firms special needs in terms of
varieties, service and delivery. Similarly the distribution channels should be made more receptive
in terms of investing in distribution facilities and infrastructure, advertising, etc and cooperate
with the firm in all its marketing endeavours. Exploiting the supply chain in the early stages of
the industry can provide strategic leverage to the firm.
Given the dynamic nature of the industry environment and the fast pace of change, firms can
adopt the strategy of exploiting their innovations and building an enduring long run competitive

4
advantage based on low cost or differentiation. Three variants of innovative strategy are
available for a firm: i) to develop and market the innovation itself, ii) to develop the market and
innovation jointly with other companies through a strategic alliance, and iii) to license the
innovation to others and let them develop the market. The optimal choice of the strategy depends
on three factors, namely, the possession of complementary assets to exploit its innovation and
create a competitive advantage, the height of barriers to imitation by the competitors and the
presence of capable competitors that can rapidly imitate the innovation.
Complementary assets are those required to exploit an innovation such as competitive
manufacturing facilities capable of maintaining high product quality while ramping up the
volume to meet the rapidly growing customers demand and state-of-the-art manufacturing
facilities that enable the firm to move quickly down the experience curve without encountering
any hitches and bottle-necks in the production process. Complementary assets also include
marketing know-how, adequate and competent sales force, access to good distribution channels,
and an after-sales service and support network. These assets, in particular, can develop brand
loyalty and help the firm penetrate the market rapidly.
Barriers to innovation are factors that prevent the competitors from imitating a firms distinctive
and unique competencies. These barriers particularly are effective in preventing second and late
entrants from imitating the innovation. Ultimately, all innovations are susceptible to imitation,
but the higher the barrier the more difficult it is for the rivals to imitate.
Capable competitors are firms that can rapidly imitate the pioneering company. A rivals ability
to imitate an innovation essentially depends on its R&D skills and access to complementary
assets. In general, the greater the number of rivals with such capabilities, the more rapid is the
imitation likely to be.
The strategy of going alone with the innovation makes sense when i) the innovator has the
necessary complementary assets to develop the innovation, ii) the barriers to imitation are high,
and iii) the number of capable competitors is limited. The second variant of the innovation
strategy, namely, developing and marketing the innovation jointly through a strategic alliance
makes sense when i) the innovator does not possess complementary assets, ii) barriers to
imitation are high and iii) there are quite a few capable competitors. Such an alliance is expected
to prove mutually beneficial and each partner can share in high profits which neither of them is
capable of earning on their own. The final variant of the strategy which involves licensing makes
most sense when the i) innovating company lacks the complementary assets, ii) barriers to
imitation are low, and ii) there are several capable competitors.
A vital strategic decision for competing in a dynamic industry is the appropriate timing of entry.
While entry barriers are low in an emerging or embryonic industry, the risk can be quite
substantial. Entering early is generally recommended when:
Image and reputation are important to buyer and the firm is confident of developing a
good reputation by being a pioneer.
Customer loyalty is valuable and being first to the market helps build customer loyalty
Being early puts the firm ahead of others on the learning curve, experience is difficult to
imitate and it will be neutralized by future technological generations.
Absolute advantage can be gained by early commitment to suppliers, channel partners,
etc.
However, early entry is risky when:
Cost of opening up the market such as customer education/awareness, regulatory
approvals, etc. is great

5
 Technological change will make early investments obsolete and the second and late
comers can gain advantage by having access to more advanced and newer technologies.
Early competition with small firms will be replaced bigger and more formidable
competition at a later stage.
7.5 Decision to Enter Dynamic Markets
A dynamic and developing industry is attractive to enter if it has the potential to provide above
average returns and if the firm is confident that it can create a defendable position in the long
run. Quite often firms enter dynamic and risky industries whom the existing firms are going
rapidly and making good profits or the ultimate size of the industry promises to be large. These
are valid reasons to enter the market, but a firm has to ultimately carry out a structural analysis of
the industry/environment (Porters five forces model) before leaping into the fray.
Activity 1
You work for a company in the IT Industry (software) that has developed new software for
banking industry. There are several other competitors who are also on the verge of introducing
software products for the same industry. You need to do the following:
i) Give a report to the management about the external environment. and the strategies to
compete in this environment.

ii) On the basis of this report, recommend strategies to compete in this environment.

7.6 Stable Environment

A the industry traverses the dynamic phase, the intense competition during this stage leads to a
shake-out phase. As consolidation takes place, the industry enters a stable phase characterized by
a small number of large companies. And though the stable industry may have some medium and
small enterprises, the large companies dictate the competition because they can influence the
Porters competitive five forces. In fact, these are the companies that developed the most
successful generic strategies in the industry. The transition to stable environment is nearly
always a critical period for companies in an industry. It is a period during which fundamental
changes often take place in companies' competitive environment, requiring difficult strategic
responses. Many firms have trouble perceiving these environmental changes clearly; even when
they do, responding to them may require changes in strategy that firms may shy away from. A
shift to a more stable or mature industry environment can often bring about a number of
important changes in an industry's competitive environment. These are discussed below.

With companies unable to maintain past growth rates merely by holding market share,
they turn their attention to attacking the shares of the others. This may lead to outbreaks
of price, service, and promotional warfare.
The product is no longer new and buyers are more knowledgeable and experienced,
having already purchased the product, sometimes repeatedly. The buyers' focus shifts

6
 from deciding whether to purchase the .product at all to making choices among brands.
As a result of slower growth, more knowledgeable buyers, and usually greater
technological maturity, competition tends to become more cost- and service oriented.
As the industry adjusts to slower growth, the rate of capacity addition in the industry
slows down. Firms need to monitor competitors' capacity additions, closely time its
capacity additions with precision. This is rarely done and overshooting of industry
capacity relative to demand is, therefore, common.
As a result of technological maturity, often accompanied by product standardization and
increasing emphasis on costs, transition to stable environment is often marked by the
emergence of significant international competition. International rivals have different cost
structures and different goals compared to domestic firms.
Slowing growth, more sophisticated buyers, more emphasis on market share, and the
uncertainties and difficulties of the required changes usually mean that industry profits
fall in the short run from the previous levels. Some firms may be more affected than
others, the smaller firms generally the most. Falling profits reduce cash flow during a
period when they are needed the most.

Rapid growth in the dynamic stage tends to hide errors and allow most companies in the
industry to survive and even to prosper financially. Experimentation is high, and a wide variety
of strategies can coexist. Carelessness and negligence are, however, generally exposed by stable
industry, however. Maturity may force companies to meet head-on the need to choose among
the various strategies described in the next section.

7.7 Strategies in a Stable Industry Environment

In a stable industry environment, strategic group of industries follow similar generic strategies.
Companies follow the same strategies as their rivals because any change during this phase is
likely to stimulate a competitive response from their rivals. In fact, the main issue that firms need
to contend in a stable industry environment is to adopt a strategy that simultaneously allows the
firms to protect its competitive advantage while preserving industry profitability. In other words,
in stable industry environment, competitive strategy hinges on how large companies collectively
try to reduce the strength of the five forces of industry competition to preserve both individual
and industry profitability. In the next section, the various price and non-price strategies adopted
by firms in a stable environment to deter entry of rivals into an industry and to also reduce the
level of rivalry within an industry are discussed.
Firms can generally use three strategies to prevent rivals from entering an industry. They are
product proliferation, price cutting and excess capacity.
Product proliferation
Most companies produce a range of products instead just one product. This is done to target
different segments with different products. Sometimes, companies expand their product range to
fill a wide range to market niches, which creates an entry barrier for potential entrants sine they
will now find it harder to break into an industry in which all the gaps or niches filled. This
strategy of plugging market niches is called product proliferation.
Rationalizing the Product Mix
Although a broad product line and frequent introduction of new varieties and options may often
be necessary and desirable, cost competition and fights for market share are too demanding
sometimes to follow a product proliferation strategy. As a result, pruning of unprofitable items

7
from the line and focusing attention on items that have some distinctive advantage (technology,
cost, image, etc.) is more desirable.
Process Innovation
The importance of process innovations usually increases in stable and mature industry
environment, as does the advantage of designing the product and its delivery system to facilitate
lower-cost manufacturing. The success of the Japanese industry in industries such as electronics,
automobiles, etc. is attributed to this strategy.
Price Cutting
In some situations, price cutting can be used as a strategy to deter entry of other companies,
thereby protecting the profit margins of the incumbents in the industry. For instance, a firm can
charge a high price for the product initially to seize short term profits and then cut prices
aggressively to build market share and deter new entrants at the same time. The current players
in the industry can thus send a signal to the potential entrants that if they enter the industry, the
incumbent players will use their competitive advantage to drive down prices to a level which will
make it unviable for new entrants to compete at that level.
Excess Capacity
A third strategy that firms use to discourage entry of potential rivals involves maintaining excess
capacity that is, producing products much more in excess of the demand. The incumbent
companies may intentionally develop excess capacity to warn potential new entrants that if they
enter the industry, existing firms will strike back by increasing the output and putting a
downward pressure on prices until the entry would become unprofitable.
Buying Cheap Assets
Sometimes assets can be acquired very cheaply as a result of the distress sale of assets by
companies unable to make successful transition to stable environment. A strategy of acquiring
distressed companies or buying liquidated assets can improve margins and create a low-cost
position if the rate of technological change is not too great.
Competing Internationally
A firm may break out of the stifling stable environment by competing internationally where the
industry is more favourably structured. Sometimes equipment that is obsolete in the home market
can be used quite effectively in international markets, significantly lowering the costs of entry
there. Or industry structure may be a great deal more favourable internationally, with less
sophisticated and powerful buyers, fewer competitors, etc. The shortcomings of this strategy are
the usual risks involved in international competition.
Apart from discouraging new entrants, firms also use strategies to manage their competitive
interdependence and decrease rivalry. Several options are available to companies to manage
rivalry within the industry. Product differentiation is one such option. It allows a firm to compete
for market share by offering different products or by using different marketing techniques. The
four competitive strategies based on product differentiation are based on different combinations
of product and market segments (not markets as in Ansoffs matrix) are as follows:
Market Penetration
When a company expands market share in its existing product markets, it is said to follow
market penetration strategy. This strategy involves heavy advertising to promote and create
product differentiation. In a stable and mature industry the major objective of promotion is to
influence consumers choice for the companys brands and products. A company can thus
increase its market share by attracting customers.
Product Development

8
This strategy involves creation of new or improved products to replace existing ones. Product
development strategy is vital for maintaining product differentiation and building market share.
Market Development
Market development strategy involves finding new market segments for a companys products.
A firm following this strategy will try to capitalize on its brand reputation in one market segment
by looking for new market segments in which to compete.
Product Proliferation
This strategy is used to manage rivalry within an industry and to deter entry. Product
proliferation strategy essentially involves having a product in each market segment or niche and
compete face-to-face with rivals for the customers.
Activity 2
Search the Web for a company which is in a stable environment. Based on the information
available about the company and the industry it is operating in, try to explain and comment on
the current strategy it is pursuing.

7.8 Summary
In this unit we have discussed the various strategies that firms can use in different industry
environments. Developing an appropriate strategy to suit the needs of different industry
environments is crucial for a firms survival. Companies must always be prepared for changes in
the conditions in their environment if they are to respond to these changes in a timely manner.
In dynamic markets, developing a strategy to exploit technical innovations is a crucial aspect of
competitive strategy. The three strategic choices for a firm in a dynamic industry are i) to
develop and market the technology by itself, ii) to do so jointly with another company, or iii) to
license the technology to existing companies.

Stable environment is characterized by a few large companies whose actions are so highly
interdependent that the success of one companys strategy depends upon the responses of its
competitors. The principal actions initiated by companies to deter entry of competitors are i)
product proliferation, ii) price cutting, and iii) maintaining excess capacity. The principal actions
initiated by companies to manage rivalry in a stable and mature industry include market
penetration, product development, market development and product proliferation.
7.9 Self Assessment Questions
1) What are the characteristics of a dynamic environment? List some industries which are
facing this situation and describe the features of the environment in which they operate.
2) For a firm which is operating in an industry listed in the answer to the previous question,
suggest some strategies to survive and thrive.
3) How is stable industry environment different from a dynamic environment? Mention a
few industries which in your opinion are operating in a stable environment. Explain briefly the
characteristics of a stable industry environment.
4) Suggest suitable strategies for industries which you believe are operating in a stable
environment.

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7.10 Keywords
Dynamic Environment: Dynamic environment is characterized by newly formed or re-formed
industries that has been created by technological innovations, emergence of new consumer
needs/segments or other socio-economic changes that elevate a new product or a service to the
level of potentially viable business opportunity.
Excess Capacity: A strategy that firms use to discourage entry of potential rivals by maintaining
excess capacity that is, producing products much more in excess of the demand.
Market Development: Market development strategy involves finding new market segments for
a companys products.
Market Penetration: When a company expands market share in its existing product markets, it
is said to follow market penetration strategy.
Product Life Cycle: An industry passes through a number of phases starting with introduction
followed by growth, maturity and decline phases. This concept is called product life cycle.
Product Proliferation: Most companies produce a range of products instead just one product.
This is done to target different segments with different products. This strategy of plugging
market niches is called product proliferation.
Price Cutting: In some situations, price cutting can be used as a strategy to deter entry of other
companies, thereby protecting the profit margins of the incumbents in the industry.
Stable Environment: As the industry traverses the dynamic phase, the intense competition
during this stage leads to a shake-out phase. As a result, the industry enters a stable phase
characterized by a small number of large companies.
7.11 Further Readings

John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, International Business: Environments

and Operations, Prentice Hall; 10 edition, 2003.

Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management:

Competitiveness and Globalization, Concepts and Cases, South-Western College Pub; 6 edition,
2004.

10
Unit 8 Strategies for Global Markets

Objectives

After reading this unit, you should be able to:

explain the global business environment and the need for companies to go global;
discuss the various strategic choices available for a company to go global; and
discuss the various modes of entry into global environment and the merits and demerits of
each mode of entry.

Structure

8.1 Introduction
8.2 Need for Global Expansion
8.3 Unique Competencies
8.4 Location Advantages
8.5 Experience Curve
8.6 Compulsions for Cost Reduction and Responsiveness
8.7 Responsiveness to Local Needs
8.8 Strategic Choice
8.10 Approaches to Global Entry
8.11 Summary
8.12 Self-Assessment Questions
8.13 Key words
8.14 Further Readings
8.1 Introduction

In this unit we look at the strategies companies adopt when they expand outside their domestic
marketplace and start to compete on a global scale. One alternative available for companies is to
follow the same strategy worldwide, which is referred to as a global strategy. Selling the same
product the same way in every nation allows a company to realize substantial cost savings from
greater economies of scale. These cost savings can then be passed on to consumers in the form of
lower prices, enabling firms to gain market share from competitors. However, to succeed in a new
marketplace, it may have to customize its product offering to cater to the tastes and preferences of
local consumers. While this may help, the shorter production runs associated with such a strategy
sometimes raise the costs of competing and lower a firms profit margins.
The decision to standardize or customize is a classic dilemma that confronts global companies. In
this unit, we consider the different strategies that companies use to compete in the global
marketplace and discuss the advantages and disadvantages of each. In this unit we also examine
the different approaches that companies employ to enter foreign markets-including exporting,
licensing, setting up a joint venture, and setting up a wholly owned subsidiary. The unit ends with
a discussion of the benefits and costs of entering into strategic alliances with global competitors.
8.2 Need for Global Expansion

Expanding globally allows companies to increase their profitability which is not possible to purely
domestic enterprises. Companies that operate internationally can i) earn a greater return from their
unique competencies; ii) realise location advantages by dispersing different value creation
activities to those locations where they can be performed most efficiently; and iii) come down the

1
experience curve faster than the competitors, thereby offering more competitive products to the
consumers.

8.3 Unique Competencies

Unique competencies are defined as "unique strengths that allow a company to achieve superior
efficiency, quality, innovation, or customer responsiveness." Such strengths are typified by product
offerings that other companies find difficult to match or imitate. Thus, unique competencies are
vital for a company's competitive advantage. They enable a company to lower costs and also
differentiate its product offerings. Companies with valuable distinctive competencies can often
realise huge returns by applying those competencies and the products they produce to foreign
markets, where indigenous competitors lack similar competencies and products.

8.4 Location Advantages

Location advantages are those that occur from performing a value creation activity in the most
advantageous location for that activity- in whichever part of the world that might be (transportation
costs and trade barriers permitting). Locating a value creation activity in the most favourable
location for that activity can have one of two effects. It can i) lower the costs of value creation,
helping the company achieve a low-cost position or ii) enable a company to differentiate its
product offering and charge a premium price. A company that realises location economies by
dispersing each of its value creation activities to its optimal location should have a competitive
advantage over a company that concentrates all its activities at a single location. It should be better
able to differentiate its product offering and lower its cost structure than its single-location
competitor. The basic assumption is that by dispersing its manufacturing and design activities, a
firm will be able to establish a competitive advantage for itself in the global marketplace.

8.5 Experience Curve

Experience curve refers to the systematic decrease in production costs that occur over the life of a
product. Learning effects and economies of scale lie behind the experience curve and moving
down that curve allows a company to lower the costs. A company that moves down the experience
curve more quickly will have a cost advantage over its competitors. Most of the sources of
experience-based cost economies are generally found at the plant level. Dispersing the fixed costs
of building productive capacity over a large output reduces the cost of producing a product. Hence
the answer to riding down the experience curve as rapidly as possible is to increase the
accumulated volume produced by a plant as quickly as possible. Global markets are larger than
domestic markets and, therefore, companies that serve a global market from a single location are
likely to build up accumulated volume faster than companies that focus primarily on serving their
home market or on serving multiple markets from multiple production locations.

For more details on experience curve, refer to Unit 7, Block 3 of MS 11 : Strategic Management.

8.6 Compulsions for Cost Reduction and Responsiveness

Companies that compete globally generally face two types of competitive pressures: pressures for
cost reductions and pressures to be locally responsive. International companies must cope with
pressures for cost reductions. This is more so for industries producing commodity-type products
such as bulk chemicals, petroleum, steel, sugar, etc. for which price is the main competitive
weapon. Pressures for cost reductions are also severe in industries in which the competitors are
based in low-cost locations. Liberalisation of the world trade environment is also expected to

2
generally increase cost pressures because of greater international competition. Countering
pressures for cost reductions requires that a company minimise its unit costs. To attain this goal, a
company may have to base its value creating activities at the most favourable low-cost location
anywhere in the world and offer a standardised product globally in order to ride down the
experience curve as quickly as possible.

In contrast, responding to pressures to be locally responsive requires that a company differentiate

its product offering and marketing strategy from country to country in an effort to cater to the
different consumers' tastes and preferences, business practices, distribution channels, competitive
conditions, and governmental policies. Since differentiation across countries can involve
significant duplication and a lack of product standardisation, it may raise costs. Dealing with these
conflicting and contradictory pressures is a difficult challenge for a company, mainly because
being locally responsive tends to raise costs.

8.7 Responsiveness to Local Needs

Pressures for local responsiveness crop up due to differences in consumers' tastes and preferences,
differences in infrastructure, differences in distribution channels, and the demands of the host
government. Consumers' tastes and preferences differ significantly between countries due to
historic or cultural reasons. Hence, the product and marketing messages have to be customised to
appeal to the tastes and preferences of local consumers in such cases. This typically requires
entrusting the production and marketing decisions to local subsidiaries. Pressures for local
responsiveness also crop up due to differences in infrastructure and/or traditional practices among
countries, creating a need to customise products suitably. This may again require the delegation of
manufacturing and production functions to local subsidiaries.

Differences in distribution channels among countries may require adopting different strategies.
This may necessitate the delegation of marketing functions to national subsidiaries. Finally,
economic and political demands imposed by host governments may necessitate a degree of local
responsiveness. Generally, threats of protectionism, economic nationalism, and local content rules
all dictate that international businesses manufacture locally. Pressures for local responsiveness
restrict a firm from realizing full benefits from experience-curve effects and location advantages.
In addition, pressures for local responsiveness imply that it may not be possible to transfer from
one nation to another the skills and products associated with a company's distinctive competencies.

8.8 Strategic Choice

Companies use four basic strategies to enter and compete in the international environment which
are discussed below. Each of these strategies has its advantages and disadvantages.

International Strategy

Companies that pursue an international strategy create value by transferring valuable skills and
products to foreign markets where local competitors lack those skills and products. Most
international companies have created value by transferring differentiated product offerings
developed at home to new markets overseas. Consequently, they tend to centralise product
development functions in their home country. However, they also tend to establish manufacturing
and marketing functions in each major country in which they do business. Although they may
undertake some local customisation of product offering and marketing strategy, this tends to be
limited in scope. Ultimately, in most international companies the head quarters retains tight control
over marketing and product strategy.

3
An international strategy makes sense if a company has valuable unique competencies that local
competitors in foreign markets lack and if the company faces relatively weak pressures for local
responsiveness and cost reductions. In such situations, an international strategy can be very
profitable. However, when pressures for local responsiveness are high, companies pursuing this
strategy lose out to companies that place a greater emphasis on customising the product offering
and market strategy to local conditions. Furthermore, because of the duplication of manufacturing
facilities, companies that pursue an international strategy tend to incur high operating costs.
Therefore, this strategy is often unsuitable for industries in which cost pressures are high.

Multidomestic Strategy

Companies pursuing a multidomestic strategy orient themselves toward achieving maximum local
responsiveness. As with companies pursuing an international strategy, they tend to transfer skills
and products developed at home to foreign markets. However, unlike international companies,
multidomestic companies extensively customise both their product offering and their marketing
strategy to different national environments. Consistent with this approach, they also tend to
establish a complete set of activities including production, marketing, and R&D in each major
national market in which they do business. As a result, they generally do not realise value from
experience-curve effects and location advantages and, therefore, often have a high cost structure.

A multidomestic strategy makes most sense when there are high pressures for local responsiveness
and low pressures for cost reductions. The high cost structure associated with the replication of
production facilities makes this strategy inappropriate in industries in which cost pressures are
intense. Another limitation of this strategy is that many multidomestic companies have developed
into decentralised groupings in which each national subsidiary functions in a largely autonomous
manner. As a result, after some time they begin to lose the ability to transfer the skills and products
derived from distinctive competencies to their various national subsidiaries around the world.

Global Strategy

Companies that follow a global strategy focus on increasing profitability by reaping the benefits of
cost reductions that come from experience-curve effects and location economies. That is, they are
pursuing a low-cost strategy. The various activities such as production, marketing, and R&D of
companies pursuing a global strategy are concentrated in a few favourable locations. Global
companies do not tend to customise their product offering and marketing strategy to local
conditions. This is because customization raises costs because it involves shorter production runs
and the duplication of functions. Instead, global companies prefer to market a standardised product
worldwide so that they can reap the maximum benefits from the economies of scale that lie behind
the experience curve. This strategy makes sense in those cases in which there are strong pressures
for cost reductions and where demands for local responsiveness are minimal. These conditions
exist in many industries manufacturing industrial goods.

Transnational Strategy

Companies whose operations are not confined to any country or a region and which pursue low
cost and product differentiation at the same time are referred to as transnational companies. In
essence, transnational companies operate on a global level while maintaining a high level of local
responsiveness. A transnational strategy makes sense when a company faces high pressures for
cost reductions and high pressures for local responsiveness. Companies that pursue a transnational
strategy basically try to achieve low-cost and differentiation advantages simultaneously. Although
this strategy looks attractive, in practice it is a difficult strategy to pursue. Pressures for local

4
responsiveness and cost reductions place conflicting demands on a company. Local responsiveness
raises costs, which clearly makes cost reductions difficult to achieve. Although a transnational
strategy apparently offers the most advantages, it should be remembered that implementing it
raises difficult organisational issues. The appropriateness of each strategy depends on the relative
strength of pressures for cost reductions and for local responsiveness.
Activity 1
Search the Web for a company site where there is a description of that company's international
operations. Based on this information, try to explain how the company entered foreign markets and
what overall strategy it has pursued (global, international, multidomestic, or transnational).

8.10 Approaches to Global Entry

There are five main modes of entering a foreign market: exporting, licensing, franchising, entering
into a joint venture with a host country company, and setting up a wholly owned subsidiary in the
host country. Each entry mode has its advantages and disadvantages, and companies must weigh
these carefully when deciding which mode to use.

Exporting

Many manufacturing companies begin their quest for global expansion as exporters and then
switch to other modes. Exporting has two distinct advantages. First, it avoids the costs of
establishing manufacturing facilities in the host country, which are often quite substantial. Second,
by manufacturing the product in a centralised location and then exporting it to foreign markets, the
company may be able to realise substantial economies of scale from its worldwide sales. For
instance, many Indian companies in the floriculture business export their entire production to
Europe to take advantage of the lower cost of production and the favourable climatic conditions in
the country.

On the contrary, there are a number of negative aspects to exporting. First, exporting from the
company's home base may not be appropriate if there are low-cost manufacturing locations abroad.
A second drawback is that high transport costs can make exporting uneconomical, particularly for
bulk products. One way of overcoming this problem is to manufacture bulk products locally. This
strategy allows a company to realise economies from large-scale production and at the same time
minimise transport costs. Thus, many multinational companies manufacture their products from a
base in a region and serve several countries in that regional base. Third, tariff barriers can make
exporting uneconomical. In fact the threat of tariff barriers by a country may sometimes force a
company to set up manufacturing facilities in that country. Finally, the practice of delegating
marketing activities to a local agent among companies that are just beginning to export also poses
risks since there is no guarantee that the agent will act in the company's best interest. Moreover,
many foreign agents also deal with the products of competitors leading to divided loyalties.
Therefore, company would perform better if it manages marketing on its own. One way to do it is
to set up a wholly owned subsidiary in the host country to handle marketing locally. This can lead
to huge cost advantages arising from manufacturing the product in a single location and controlling
the marketing activities in the host country.

5
Licensing

Licensing is an arrangement by which a foreign licensee buys the rights to produce a company's
product in the licensee's country for a negotiated fee. The licensee then invests major share of the
capital required to commence the operations. The advantage of this arrangement is that the
company need not bear the development costs and risks associated with launching foreign
operations. Hence, licensing is a very attractive choice for companies that can not invest capital to
develop overseas operations or for companies unwilling to take the risk of committing substantial
financial resources in unfamiliar or politically volatile foreign environment. In high technology
areas it is quite common for companies to provide know-how through licensing arrangements. For
instance, Ranbaxy Laboratories Ltd. is seeking partners for out-licensing its urology, respiratory
and anti-infectives technologies.

Licensing as a mode of entry into global arena has three serious drawbacks. First, companies do
not reap the benefits of cost economies and location economies since licensees typically set up
their own manufacturing facilities. And in cases where these economies are important, licensing
may is not the best mode to go overseas.

Second, in a global marketplace it is necessary to coordinate all the operations across all the
countries in order to use the profits earned in one country to support competitive attack in another.
Licensing severely restricts a company's ability to do this. A licensee will not let a multinational
company to take its profits to support competitive moves of the company in other countries.

A third and a very major problem with licensing is the risk associated with licensing and sharing
technological know-how with foreign companies. Technological know-how provides a formidable
competitive advantage for many technology based companies and licensing its technology can
quickly erode its competitive advantage.

Franchising

Franchising is a strategy employed mainly by service companies. The advantages of franchising

are similar to those of licensing. The franchiser does not bear the development costs and risks of
commencing the operations in a foreign market on its own since the franchisee typically assumes
those costs and risks. Thus, a service company can build up a global presence quickly and at a low
cost, using a franchising strategy. The disadvantages, however, are less prominent than in the case
of licensing. Since franchising is a strategy used by service companies, a franchiser need not
coordinate manufacturing activities in order to realise experience- curve effects and location
advantages. McDonald Restaurants have entered India through the franchising and so is Kentucky
Fried Chicken of US.

A major disadvantage of franchising is the lack of quality control. A basic notion of franchising
arrangements is that the company's brand name conveys a message of quality to the consumers.
The geographic distance from the franchisees and the large number of franchisees make it difficult
for the franchiser to maintain quality and hence quality problems generally persevere. To
overcome this handicap, companies set up a subsidiary, which is wholly owned or a joint venture
with a foreign partner in each country and region in which they plan to operate. Closeness and the
limited number of independent franchisees to be monitored reduce the problem of quality control.
This type of arrangement is well accepted in franchising.

Joint Ventures

6
 Joint venture with a foreign partner to enter foreign markets has been the vogue in recent times. A
50:50 venture is quite common, in which each party takes a 50 percent ownership stake and
operating control is shared by a team consisting of managers from both parent companies. Some
companies, however, prefer joint ventures in which they have a majority shareholding since this
allows tighter control by the principal partner. As mentioned earlier, joint venture is a very mode
of entry into foreign markets. In our country we have seen a spate of joint ventures in various
sectors, particularly in automobile and pharmaceutical sector. Honda Companys joint venture with
Hero Cycles, Suzukis JV with TVS, Suzuki with Maruti Udyog, Wipro with GE are the examples
of a large number of JVs that have come up in recent years.

Joint ventures have a number of advantages, the first one being the benefit a company can derive
from a local partner's knowledge of a host country's business ecosystem. Second, a company might
gain by sharing high costs and risks associated with opening of a new market with a local partner.
Finally, political considerations in some countries make joint ventures the only practical way of
entering those markets.

Despite these advantages, joint ventures are difficult to establish and run because of two reasons.
First, as in the case of licensing, a company risks losing control over its technology to its venture
partner. To minimize this risk, the dominant company can seek a majority ownership stake in the
joint venture to exercise greater control over its technology provided the foreign partner is willing
to accept a minority ownership. The second disadvantage is that a joint venture does not give a
company the tight control over its subsidiaries needed to realise experience- curve effects or
location advantages or to engage in coordinated global attacks against its rivals.

Wholly Owned Subsidiary

A wholly owned subsidiary offers three advantages. First, when a company's competitive
advantage is based on its technological superiority, a wholly owned subsidiary makes sense, since
it reduces the company's risk of losing control over this critical aspect. For this reason, many high-
tech companies prefer wholly owned subsidiaries to joint ventures or licensing arrangements.
Second, a wholly owned subsidiary gives a company the kind of tight control over operations
required for global coordination to take profits from one country to support competitive strategy in
another. Finally, a wholly owned subsidiary may be the best choice if a company has to realise
location advantages and experience-curve effects. The entry of a number of South Korean
companies such as LG, Samsung, Hyundai into India by setting up subsidiaries without a local
partner are examples of wholly owned subsidiaries.
Activity 2
Assume that you work for a company in the pharmaceutical industry that has developed a new
anti-diabetic drug. You have already established a significant presence in your home market, and
now you are planning the global strategy development of the company. You need to decide the
following:
i) What overall strategy should you pursue a global strategy, a multidomestic strategy, an
international strategy, or a transnational strategy?

ii) What entry mode would you prefer (for example, franchising, joint venture, wholly owned
subsidiary)? What information do you need in order to make these kinds of decisions? On the basis
of what you do know, what strategies would you recommend?

8.11 Summary

In this unit we examined the various ways in which companies can benefit from global expansion.
We also discuss the optimal choice of entry mode to serve a foreign market. International
expansion represents a way of earning greater returns for companies by transferring the skills and
product offerings derived from their unique competencies to markets in which indigenous
competitors lack those skills. Due to national differences, a company can benefit by basing each of
activity it performs at the location where factor conditions are most favourable to the performance
of that activity. This is referred to as location advantage. By increasing sales volume rapidly,
global expansion can assist a company in the process of moving down the experience curve.

The best choice of strategy for a company to pursue is affected by two kinds of pressures:
pressures for cost reductions and pressures for meeting the needs of local markets (local
responsiveness). Pressures for cost reductions are greatest in industries producing commodity-type
products, for which price is the main competitive weapon. Pressures for local responsiveness arise
from differences in consumers' tastes and preferences in national infrastructure and/or traditional
practices, in distribution channels, and in demands by host governments.

Companies following an international strategy transfer the skills and products derived from unique
competencies to foreign markets and at the same time undertake some limited local customization.
Companies pursuing a multidomestic strategy customise their product offering, marketing strategy,
and business strategy to national conditions. Companies pursuing a global strategy focus on
deriving benefits from cost reductions that come from experience-curve effects and location
advantages. There are five different ways of entering a foreign market-exporting, licensing,
franchising, entering into a joint venture, and setting up a wholly owned subsidiary. The optimal
choice among entry modes depends on the company's strategy.

8.12 Self-Assessment Question

1) Discuss the need for companies to go global. What compels companies to go global?

2) Having decided to go global, what are the strategic alternatives available for a company?

3) List the various modes of entry into global markets. Discuss the merits and demerits of
each mode.

8.13 Keywords

Unique Competencies: are defined as unique strengths that allow a company to achieve superior
efficiency, quality, innovation, or customer responsiveness.

Location Advantages: are those that occur from performing a value creation activity in the most
advantageous location for that activity- in whichever part of the world that might be.

Experience Curve: refers to the systematic decrease in production costs that occur over the life of
a product.

8
International Strategy: A strategy to create value by transferring valuable skills and products to
foreign markets where local competitors lack those skills and products.

Multidomestic Strategy: A company is said to follow a multidomestic strategy if it extensively

customises both its product offering and its marketing strategy to different national environments.

Global Strategy: A company following global strategy focuses on increasing profitability by

reaping the benefits of cost reductions that come from experience-curve effects and location
advantages. The various activities such as production, marketing, and R&D of companies pursuing
a global strategy are concentrated in a few favourable locations.

Transnational Strategy: A company whose operations are not confined to any country or a
region and which pursues low cost and product differentiation at the same time is said to follow a
transnational strategy.In essence, transnational companies operate on a global level while
maintaining a high level of local responsiveness.

Licensing: Licensing is an arrangement by which a foreign licensee buys the rights to produce a
company's product in the licensee's country for a negotiated fee.

Franchising: Franchising is a strategy similar to licensing. The only difference is that franchising
is employed mainly by service companies. The advantages of franchising are similar to those of
licensing. The franchiser does not bear the development costs and risks of commencing the
operations in a foreign market on its own since the franchisee typically assumes those costs and
risks.

Joint Ventures: A joint venture is an arrangement in which each party takes a ownership stake
and the operating control is shared by a team consisting of managers from both parent companies.

8.14 Further Readings

John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan, International Business: Environments and
Operations, Prentice Hall; 10 edition, 2003.

Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson, Strategic Management: Competitiveness

and Globalization, Concepts and Cases, South-Western College Pub; 6 edition,2004.

9
UNIT 9 MARKET STRUCTURES AND NET WORK EXTERNALITIES

OBJECTIVES

After reading this unit, you should be able to:

understand various market structures and their impact on competition;

review the strategies related to various types of market structures;
analyse the relevance of sustainable competitive advantage in these situations; and
evaluate the influence of pricing on different market structures.

STRUCTURE

9.1 Introduction
9.2 Classification of Market Structures
9.3 Perfect Competition
9.4 Monopoly
9.5 Monopolistic Competition
9.6 Duopoly and Oligopoly
9.7 Market Structures and Competition
9.8 Market Structures and Sustainable Competitive Advantage
9.9 Market Structures and Pricing Strategies
9.10 Summary
9.11 Self Assessment Questions
9.12 Further Readings
9.1 INTRODUCTION
A firm operates in complex environment, which has social, political, cultural, legal and
economic facets. The decision making process of the firm is influenced by identifying
opportunities and threats from these factors. Further internal capability factors in terms of
strengths and weaknesses decide the extent of sustainable competitive advantage. The
externalities influence the pricing strategy and competition level. The entry and exit of
any firm is being decided on the basis of its external environment. Market forces tend to
follow competition and they determine firms potential buyers. Market competition tends
to be different for different firms. When a market has large number of buyers and sellers,
the competition level at that situation will be distinct. The external forces also affect the
firm in terms of its production, sales, pricing etc. In this unit, first the classification of
market structure is discussed. Subsequently, the description of each type of market
structure along with issues of competition, sustainable competitive advantage, entry/exit
policy etc. is dealt with. In the end, these issues are discussed at macro level so that
competitive position of various market structures and network externalities may be
related to each other for effective strategic decision.
9.2 CLASSIFICATION OF MARKET STRUCTURES
Market means a place where people gather to carry out transaction and exchange
something for value. Market is an essential part of any economy and provides the sellers
and buyers a meeting place to facilitate exchange. Different experts have defined market
as follows:

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According to Jevons, The word market has been generalised so as to mean any body of
persons who are in intimate business relations and carry on extensive transactions in any
commodity.
In the words of Benham Market is an area over which buyers and sellers are in close
touch with one another, either directly or through dealers, that the price obtainable in one
part of the market affects the prices paid in other parts. Market is also described as an
organisation whereby buyers and sellers of goods are kept in close touch with each other.
Market can be classified according to the following bases:
Area
Market can be classified as local, regional, national and international markets.
Volume of Business
Market is classified on the basis of volume of business as wholesale and retail markets. In
the wholesale market quantities exchanged are large and in bulk while in retail they are
exchanged in smaller lots.
Time
On the basis of time, markets are divided as very short period markets, short period
markets and long period markets. Very short period markets are for commodities which
are perishable and here, supply is fixed. In short period markets, supply can be increased
but to a limited extent and in long period markets supply can be increased to any extent.
Status
According to status of sellers, markets are classified as primary, secondary and terminal
markets. Manufacturers are part of primary markets, wholesalers constitute secondary
market and retailers form part of terminal market.
Nature of Transactions
One can classify the market on the basis of nature of transactions as spot market and
future market.
Regulation
When the government stipulates certain regulations on the transactions then such a
market is called regulated market and when transactions are left to the market forces then
such a market is called unregulated market.
Structure
According to market structure, markets are of the following types:
a) Pure or Perfect Competition
b) Monopoly
c) Monopolistic Competition
d) Duopoly, Oligopoly
9.3 PURE OR PERFECT COMPOSITION
In this section, we shall discuss perfect competition.
Characteristics
A perfectly competitive market has a very large number of relatively small buyers and
sellers.
The product is homogeneous.
There is free entry and exit in the industry.
Every firms action is independent of the other firm.
In this market there is perfect mobility of factors.
The sellers operate in conditions of certainty having complete knowledge of costs,

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 demand, price and quantities.
Equilibrium of the firm is attained where Marginal revenue is equal to marginal cost, i.e.,
MR=MC (MC curve cuts the MR curve from below).
Competition Level
If a firm in a perfectly competitive market raises the price of its product above the going
price, then it will not be able to sell its products. Therefore, each firm is insignificant.
Also, the firm is not able to earn profit by cutting the price because it can sell any
quantity of goods at the going rate.
When faced with competition, all the firms sell their product at the same price. The
average and marginal revenues would be consistent and equal.
Strategy
The firm should adjust its output in relation to the prevailing price so that it could
maximize its profit. The entry or exit is not possible in the short run, so the firm may
either earn a profit or suffer a loss in the short run.
In the long run, the firms operating in the market are free to enter or exit. So, if there is a
situation of profit, new firms would enter the market and compete with existing firms.
Supply would increase and price would shift downwards, thus eliminating the excessive
profit. However, if there is loss, some firms would exit, there would be shortage and
supply would decline leading to an upward shift in the price, thus elimination in the
losses.
Price Determination
Price is determined at a point where the demand of a commodity equals its supply. The
determination is different in different time periods i.e. very short run, short run and long
run.
a) Price Determination In Very Short Run
Supply of commodity is fixed.
Input supply is fixed
The demand varies and determines the price.
For perishable goods, the entire supply has to be sold at the earliest and for durable
goods, this is not the case.
For durable goods, supply can be adjusted with demand accordingly.

b) Price Determination In Short Run

The firm can change its supply by changing the variable factors.
The firm is not in a position to change the scale of its plant.
Also supply can be changed to a limit as per the capacity of the firms.
The number of firms can neither increase nor decrease in the short run.
An increase in demand will lead to a rise in both quantity and price and vice versa.
c) Price Determination in the Long Run
In the long run, it is possible to change the supply.
Shift in demand takes place with greater adjustment in supply and smaller
adjustments in price.
It is not necessary that the new price would go in the same direction as the demand.
The new price may be equal to, less than or more than the initial price and this
depends on the industry cost conditions.

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Activity 1
1. State the impact of perfect competition.
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2. How are prices determined under perfect competition?
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9.4 MONOPOLY
There will be a single seller in monopoly. This is exactly opposite to perfect competition.
Characteristics
There is only one firm selling the product.
The firm has no rivals or direct competitors.
Substitutes may exist. However, close substitutes are non existent.
Difficult entry for other firms.
The monopolist is the price maker and tries to take the best of whatever demand and
cost conditions exist without the fear of new firms entering to compete.
Monopoly is not a permanent situation. Due to reasons like emergence of close
substitutes, entry of new firms, etc. a firm which is a monopoly now may not be a
monopoly in the future.
Price Determination under Monopoly
The price and output under monopoly are determined by taking into consideration
certain assumptions which include that the monopoly firm does not set discrimination
price. It aims at maximization of profits. The individual buyer is just a price taker and the
monopolist firm operates in the condition of no restrictions in terms of price.
The monopolist firm controls both the price and the supply of the commodity but one
at a time.
The firms demand curve is same as the demand curve of the industry.

a) Price Determination in the Short Run

The monopolist tries to maximize the profits by increasing the output to a level where
additional revenue exceeds additional cost. A monopolist could either earn profit or incur
losses in the short run.
Strategy
The firm can incur profit by keeping the price more than its cost and meeting the demand
by supplying specified units of the commodity.
However the firm can incur losses as well, due to its misjudgment in fixing the price or
determining demand. Also the danger of entry of competitors may lead to setting of
prices below the cost which may end up in a loss.
The monopolist in the short run can either fix the price or the quantity. He cannot fix both
at the same time. The firm has to develop a strategy which leads to maximisation of
profits or minimisation of losses. The firm has to be alert about the potential entry of its
competitors.

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b) Price Determination In The Long Run
The profits in the short run would definitely attract other firms to enter the market. With
the entry of new firms the market would change from a monopoly to a oligopoly or
perfect competition.
If the firm has control over the scarce resources, it can bar the entry of new firms and
enjoy its monopoly position. In the long run, it is not necessary for the firm to use its
existing plant at an optimum capacity due to lack of competition.
It is, however, necessary that the firm does not make losses in the long run. The size of
plant and the extent to which it can be utilized is dependent upon demand of the
commodity.
A monopoly firm is in a better position to exploit the market and it can limit the entry of
outside firms into the industry. There is concentration of economic power in the market
wherever monopoly exists.
9.5 MONOPOLISTIC COMPETITION
Monopolistic competition refers to a situation where the product to be sold is
differentiated and there are many sellers operating to sell it. The competition is not
perfect and is between firms making similar products (not substitutes).
Characteristics
There are many sellers and no seller is big enough to influence the market price.
Each seller has an independent price-output policy.
Product is heterogeneous due to differentiation. Product of each firm is a close
substitute of the product of other firm.
Patent rights, advertising, quality differentiation, etc. are used as the main
instruments of product differentiation.
There are no restrictions on the entry and exit of firms.
Each individual firm enjoys some monopoly power due to product differentiation
and hence, the demand curve is more elastic than that of the monopoly firm.
Price Determination in the Short Run
In the short run it is assumed that entry and exit is not possible for firms. The aim of
every firm is to maximize its profits.
Three conditions may be present in the short run, either the firm could earn super normal
profits or incur a loss or earn a normal profit.
Strategy
In the short run, it is not necessary that all the firms would earn super normal profits.
Some may incur losses or some may earn a normal profit.
Firms compete mostly on the basis of price they charge for their product. Each firm
charges different price and each firm produces different quantities. In case of losses, the
firm decreases its price so that it can at least cover its variable cost. It has to continue the
production till it starts recovering its fixed cost.
Though the products are not perfect substitutes, they are close substitutes and hence the
price changed by each firm is likely to be approximately equal to the others producing
similar products.
Price Determination in the Long Run
If industry seems to be profitable new firms would be attracted to enter it. But in lieu of
product differentiation they have to incur costs on R&D, advertising, promotion, etc. to
penetrate the market. Because of the entry of new competitors, the supply would increase

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and the market share of firms already existing would decline. This would shift the
demand curve and abnormal profits would be reduced. Due to the existence of profits,
there would be continuous entry of new firms till they bring the demand curve to a
position where the excess profits do not exist. As the profits touch normal level, the entry
would stop. The equilibrium would be stable and the firm tends to lose if it either raises
or lowers its price. Besides the competition based on price, monopolistic competition can
also be characterised by non price competition where the strategy of the firm would be
product differentiation, heavy advertising, quality, services, design guarantees, etc. A
monopolistic firm can use other distinct kinds of strategy to stay different from other
firms in the industry.
9.6 DUOPOLY AND OLIGOPOLY
In this section, duopoly and oligopoly are briefly discussed.
Duopoly
The duopoly market structure has the following characteristics.
Characteristics
The number of sellers in this market structure is only two.
The decision of the sellers is not independent of each other.
The change in price and output by one seller affects the other seller who reacts to
the change.
The product can be homogenous or differentiated.
The decision variables include price, product differentiation, selling expenses, etc.
but the decisions depend upon the strategies of the competitor.
Product differentiation is the entry barrier and also the firm dominating the market
can pose as an entry barrier.
The price is determined in the market by demand and supply forces. The competition is
between the two firms operating in the market. They respond to each others strategies.
Oligopoly
Oligopoly is a situation where a few large firms compete against one another and are
interdependent with respect to decision making.
Characteristics
There are small number of large sellers.
The product they sell can be differentiated or homogeneous.
The policies of each seller have a noticeable impact due to the extent of influence
of each seller.
The element of interdependence.
Cross elasticity of demand is very high due to the close substitutes of the product.
Existence of price rigidity.
The firms may enjoy some monopoly power.
Strategies available to an oligopolist include advertising, quality improvement,
etc. as the firms suffer from rigidity of prices.
Oligopoly can be classified as perfect and imperfect oligopoly on the basis of
product differentiation, open or closed oligopoly on the basis of entry of firms,
partial or full depending upon presence or absence of market leader.
When the firms follow a common price policy, it is known as collusive oligopoly.
Strategy

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Because of the element of interdependence, oligopolist market is characterised by price
wars. The oligopoly firms may decide to collude in order to avoid price wars. In a cartel,
firms collude in setting prices and output levels. The necessary conditions for collusion
include:
Control of firms on supply in the market.
Not a very price elastic product.
Mechanism to detect and punish cheaters among the firms.
MRTP Laws do not allow collusion and collusion would result in higher price. Because
each firm has an incentive to secretly lower its prices and expand its market share, no
firm would like to change its price resulting in the rigidity of prices. Implicit collusion in
the form of price leadership may be done by the oligopolisitic firms.

Activity 2

1) State the strategy with respect to market structure of oligopoly.

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2) Explain competitive strategy with respect to monopolistic competition.

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9.7 MARKET STRUCTURES AND COMPETITION
As discussed in the preceding section, competition varies widely in different market
structures. Perfect competition and monopoly are the two extremes. At one end, we find
intense competition. While, no competition exists in case of monopoly. A monopolist
produces a product which is distinct and which cannot be produced by any competitor.
He himself will set the price at which he will sell his output. The demand curve of the
firm and the industry are the same. The monopolist firm controls both the price and
supply of the commodity. Depending upon the categories of customer, the monopolist
may decide different prices in discriminating monopoly.
In monopolistic competition, each seller has an independent price-output policy. Patent
rights, quality differentiation, packing, advertising, etc. are used to differentiate product.
Each individual firm enjoys some monopolistic power due to product differentiation. No
seller is big enough to influence the market price.
In duopoly, the two sellers in the market compete with each other. They respond to each
others strategies. This competition normally leads to strategic alliance as they start
feeling that their survival depends on cooperation and not on confrontation.
In oligopoly, the firms go for advertising, product differentiation, quality improvement,
etc. Competition amongst them bring the element of interdependence. There may be two
possible scenarios:
One in which an oligopolist eliminates a few other competitors.
Alternatively, there may be collusion amongst competing firms. MRTP laws regulate
collusions as this would result in higher price.
9.8 MARKET STRUCTURES AND SUSTAINABLE COMPETITIVE ADVANTAGE

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The different market structures have different view points with respect to competition. In
monopoly, competition is not fierce as the monopoly firm has an advantage over other
firms. This advantage may be in terms of product, process, technology, etc. In case of
monopolistic competition, all the firms try to achieve this advantage so that they could
be more successful than their competitors. Firms operations in oligopoly and duopoly
market structures also aim for sustainable competitive advantage to survive in the
market.
In the short run, a firms competitiveness derives from pricing or application attributes of
the products but in the long run, a firms competitiveness derives from its ability to
develop and grow at low cost and at a faster pace than its competitors. The most
important point about competitive advantage is that management must be able to
integrate corporate wide technologies and processes into competencies that provide a
solid ground to the individual business so that it could adopt quickly to the ever changing
opportunities. Core competence has been regarded as an effective way to help the
organisation in the task of restructuring its products, markets, management,
organisational setup and technology in the complex and dynamic environment.
According to Prahalad and Hemal, core competence is the collective learning in the
organisations, especially how to coordinate diverse production skills and integrate
multiple streams of technologies. When the organisation is faced with competition in the
market, it is the core competence which proves to be an asset and which can be enhanced
through application and sharing.
In all the market structures, price determination is an important strategy to win
competition but it is the core competence concept which focuses on the preservation of
firms existing superior skills. For instance, a monopolist would always like to remain a
monopolist by continuously improving and enhancing the product or service because of
which it has hold over the market. On the other hand, in monopolistic competitive
market every firm tries to compete through new ideas and strives to develop core
competencies. With respect to core competencies, Prahalad and Hemal provide the
following key issues:
A core competence is one that provides access to various markets. For example, a
firm can operate as a monopolist in one business and can operate in a monopolistic
competitive market at the same time in other business.
A core competence should make a significant contribution to the perceived customer
the benefits of the end product.
A core competence should be difficult for competitors to initiate. For instance, a firm
entering a monopoly market may acquire some of the processes that comprise core
competency but it will not be easier to duplicate monopolists pattern of internal
coordination.
In any market, sustainable competitive advantage plays a major role and core
competencies are nurtured so as to meet the turbulent environment and improve and grow
by grabbing the right opportunity at the right time.
Apart from core competence, the possible strategic alternative to have sustainable
competitive advantage for different market structures are as follows:
Monopoly- Stability is the best strategic alternative. For strengthening the position,
vertical integration (either forward or backward) will be most effective. If any competitor
enters, mergers and acquisitions may be the appropriate option.

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Perfect Competition- The firm should not go for advertising or price differentiation.
Concentration strategy will improve the economics of scale and firms sustainable
competitive advantage will increase.
Monopolistic Competition- Advertising, quality control and branding are the
appropriate measures. Strategic alliances with respect to price may work. Differentiation
strategy may work. Diversification strategy may further enhance the competitive strength.
Duopoly and Oligopoly- Wide variety of options are available. They may go for
diversification, integration, mergers, etc. They may look into promotional strategies for
better competitive advantage.
9.9 MARKET STRUCTURES AND PRICING
The different market structures adopt different pricing strategies. A few pricing strategies
help deterring the entry of competitors. They may also enhance competitive strength and
force some of the competitors to go for exit promoting strategies. Various pricing
strategies used by the firms in different market structures have different implications. A
few pricing strategies are narrated below:

1) Price Lining Strategy

In this kind of pricing strategy, the firm fixes the price of one product in the total line of
its products. For example, a firm producing dresses fixes up the price of particular size
and price of rest of the sizes is then fixed on the basis of differences in sizes. This
strategy eliminates those competitors who can not compete on price.
2) Limit Pricing Strategy
For this strategy, some sort of collusion is necessary among existing firms. In this, the
firm may try to establish a price that reduces or eliminates the threat of entry of new
firms into the industry in which the firm operates. Normally, oligopolist and firms
operating in monopolistic competition go for this alternative.
3) Stay-out Pricing Strategy
When a firm is not able to ascertain the price of the product, it introduces the product at a
very high price. If it is not able to sell its product at this price, it would lower the price
and go on lowering it till it meets the targeted sales. With the help of this strategy, the
firm gets to know the maximum possible price it can charge from its customers.
Monopolists experiment this strategy to have maximum profits. They are also not having
any fear from competitors.
4) Psychological Pricing Strategy
Here, a firm fixes the price of its product in a manner which gives the impression of
being low. For example, if the price of the product is fixed at Rs.199.99 rather than Rs.
200, it has psychological impact on consumers that price is in 100s rather than in 200s.
This strategy may influence sales sometimes. In monopolistic competition, this
alternative may give better results.
5) Skimming Price
This strategy could be used in a market with sufficiently large segment whose demand is
relatively inelastic i.e. not sensitive to a high price. Another condition for this strategy is
that high price is unlikely to invite competition and unit costs are relatively unaffected by
small volume. The strategy implies skimming the cream by taking advantage of the target
markets willingness to pay a high price. This strategy is discriminatory. It enhances the

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quality image. In monopolistic competition and monopoly, this pricing strategy gives
results.
6) Penetration Price
This strategy requires a highly price sensitive market with high price elasticity. It is
characterised by low price which is likely to discourage competition. The policy is to
charge low price so as to stimulate demand and capture large share of the market.
There are various other strategies as well like sliding down the demand curve, premium
pricing, fraction below competition, price discrimination and put-out pricing. A firm can
use any of these strategies to compete in the market. Different strategies could be used at
different time periods by the same firm as per the conditions.
Activity 3
1) Discuss alternative strategies for sustainable competitive advantage in different
market structures.
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2) State alternative pricing strategies to be used in different market structures.
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9.10 SUMMARY
The markets in which the firms operate can be classified according to nature of
transaction, time, volume, status, regulation, area and structure. According to structure
markets are classified as perfectly competitive market, monopolistic competitive market,
monopoly, duopoly and oligopoly. The price determination is different in different
market structures. It also differs in the long run and in the short run. Economic theory
suggests that there lies a continuum of market structure that comprises of perfect
competition at one end and monopoly at the other. Between these two extremes lie
monopolistic competition, oligopoly and duopoly. There are large number of buyers and
sellers in a perfectly competitive market. The firms have to determine the quantity to be
produced because price is fixed at the market rates. In the short run the firm in a perfectly
competitive market can earn profit or loss. In a monopoly, there is a single seller whose
product has non close substitutes. There is no free entry in its case. In monopolistic
competition firms deal in differentiated products and take independent decisions. They
may earn supernormal profits or normal profits or incur losses as well. Duopoly is a
situation where in homogeneous or differentiated products are sold by only two firms.
Each firm has to see how its actions are likely to affect its rivals and how they are likely
to react. Oligopoly is a situation where there are small number of large sellers. The
element of interdependence exists in this market. To avoid price wars, the oligopoly
firms may decide to collude. For sustainable competitive advantage, various strategic
alternatives may be used. Several pricing strategies are used by the firms. These include
price lining strategy, limit pricing strategy, stay-out pricing strategy, psychological
pricing, skimming and penetration pricing strategies.
9.11 SELF ASSESSMENT QUESTIONS
1) Differentiate between the different market structures and their impact on competition.

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2) Discuss strategy for sustainable competitive advantage in the monopolistic
competitive market.
3) What are the various pricing strategies available to the firms? Discuss each one of
them with reference to different market structures.
4) What are the strategies for firms operating in an oligopoly? What can they do to
avoid price wars? Suggest appropriate pricing and competitive strategies.
5) Write an essay on different market structures and network externalities i.e.
competition, pricing, etc.
9.12 FURTHER READINGS
Baumol, W.J. (2002). Economic Theory and Operations Analysis, Englewood Cliffs,
N.J. Prentice Hall, 2002.
Haynes, W.W. (1962). Pricing Decisions In Small Business, Lexinaton: University of
Kentucky Press, 1996.
Mehta, P.L., (1996)..Managerial Economic: Sultan Chand Sons, New Delhi, 2003.
Ghosh, P.K., Business Policy Strategic planning and Management , Sultan Chand
& Sons, New Delhi.
Kazmi, Azhar (2002). Business Policy and Strategic Management, Tata Mcgraw
Hill Publishing Co, Ltd., New Delhi.
Miller, A. A. and G. G. Den, (1996). Strategic Management Mcgraw hill, New
York.
Prashad, L.M., (2002). Business Policy: Strategic Management, Sultan Chand &
Sons, New Delhi.
Thompson, J.L. (1997). Strategic Management: Awareness and Change,
International Thompson Business Press, London.
Shrivastava, R.M., (1995). Corporate Strategic Management, Pragati Prakashan,
Meerut.

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 Block 4 Strategic Enablers

Unit 10: IT and Strategy

Objectives
The objectives of this unit are to familiarlise you with
the importance of IT in strategy
the various factors, which influence the choice of IT architecture and infrastructure
role of IT innovation and performance of a firm
e-business and steps in e-business plan
the role of IT in service quality
Structure
10.1 Introduction
10.2 Information Technology and Strategy
10.3 Use of IT in strategy implementation
10.4 It for Innovation and Performance
10.5 e-Business
10.6 IT in Service Sector
10.7 Summary
12.8 Self-Assessment Questions
12.9 Further Readings
10.1 Introduction
Increasing competition, higher performance levels, globalization, and liberalization are
examples of the immense changes that most of the organizations are face today.
Companies are forced to continuously and organically re-organize and re-shape
themselves, meanwhile changing functional hierarchies into flexible, high performance
network organizations. To cope with these challenges, organizations need to consider
information technology (IT) as an important factor; not only to strengthen operational
efficiency and effectiveness, but also to quickly and constantly respond to customer
needs and competitive pressures with IT-enabled products, services, and distribution
channels, and IT-enabled links with customers, suppliers, and other stakeholders.
The rapid growth of technological innovations and the synthesis of information
technology and computer networks are radically changing the way companies compete.
Many business enterprises are making strategic commitments to technology for the
purpose of gaining and sustaining competitive advantage in their industry. The creation
of a competitive advantage through the use of information technology (IT) requires
business executives to control this vital corporate resource and manage its use.
Over the last two decades, information technology has progressed from a purely
academic topic to the point where it has been absorbed into the mainstream. There is
hardly a company of any size that does not depend on information technology for its
operational success. In spite of this success, information technology is often regarded as
necessary evil consuming vast amount of resources yet having little strategic impact on
an organization. Information technology is transactional and operational; it aids an

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organization to automate many of the main operational processes; it enhances efficiency
but its effectiveness is often a suspect.
Organizations see information technology as contributing to some of their goals - but
they tend to be those associated with financial performance rather than with performance
on the key and core strategic aspects. The nature and role of information technology has
developed over the years. The original notion and practice involved the automation of
simple, and single, existing manual and pre-computer mechanical processes. The next
stage saw information technology deployed to achieve integration and rationalization of
these separate, single systems. In each of these approaches, IT was (and largely still is)
used primarily as an operational support tool.
By contrast with other waves of new technology, IT has a number of distinctive features
that make its potential to influence social change very significantly. These features
include:
Ubiquitous application: Users irrespective of the type of business or role they
perform can apply information technology in many different ways. An e-mail
system, access to the Internet and data processing capability are just as relevant
for a hospital as for a component manufacturer. In fact it is highly likely that they
use similar hardware and software and could communicate and exchange data
quickly and easily should they need to.
Dramatic rate of cost decline: The price of processing power, data storage and
transmission has fallen drastically. Today a simple electronic toy contains more
processing power than was used on the Apollo space programme.
Universal ownership: The increasing utility and ever lower cost of hardware and
software means that they are now almost universally adopted. However the
availability of bandwidth to enable rapid communication and transmission of data
remains problem in India and is, therefore, a block to further development.
Exponential growth: Continuous, rapid development and innovation means that
the trends to cost reduction and capacity increase continue. The earliest telegraph
equipment, using movable arms, had a capacity of 0.2bits per second while a fibre
optic cable has a capacity of more than 10 billion bits per second. These
developments suggest that the pace of change is going to be least at maintained
and almost certainly increase due to endogenous growth.
A review of the literature suggests that many factors independently and collectively
influence a firm's competitiveness (Porter, 1980). However, a growing stream of research
since 1980 has examined the concept of IT as a powerful competitive factor for
organizations (Porter and Miller, 1985;Barney, 1999). Recent research has suggested the
need for a more integrative approach between IT objectives and business strategy. Other
research has examined the value of IT as a viable competitive factor resulting is increased
productivity, improved profitability, and value for customers. Studies on the role of IT in
competitiveness have been primarily focused on large organizations. Few studies have
emphasized the strategic importance and the value of IT in competitiveness. However, in

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today's global market, and with the use of Internet and electronic business, even small
and medium-size enterprises (SMEs) employ IT to increase their competitive position
along with their large counterparts. This is believed to be due to fewer obstacles
associated with systems integration and more flexibility to implement change.
In order to take full advantage of IT and to compete in the global business environment,
the top management must recognize the strategic value of IT and exploit it. However,
very few understand technology issues to incorporate them into their strategic plans. For
this reason, IT professionals must identify information needs of the organization and
develop an IT strategy that is in line with the overall corporate strategic plan. User
departments and top management should participate in the development of an IT plan and
communicate their needs to IT professionals. An IT plan includes factors such as: a
computer hardware and software requirement, systems definition, changes to the existing
systems and procedures, and the schedules and resource requirements for each project.
10.2 Information technology and Strategy
Information technology (IT) in every organization normally evolves from a means to
improve the efficiency and effectiveness of as organization to a means to influence the
strategic position of the company. The way in which management controls IT has
changed simultaneously. In the first stage of IT implementation, efficiency is the primary
goal and the attention of management is mainly focused on technology. In this stage, the
IT professional is generally an outside consultant, who decides what is best for the
organization. In subsequent stages, the effective functioning of the organization becomes
as important a goal as efficiency. The management then becomes conscious of the fact
that, next to technology, the design and structure of the organization is a decisive factor.
User participation, information planning and the appointment of steering committees are
indications of this. These organizations increasingly recognize the need for a methodical
approach to IT planning, as a result of disruptions in management, reorganization, cost
increase, or new usage possibilities.
To a large extent, organizations which have more experience with automation realize that
IT can, not only improve the efficiency and effectiveness, but also that it is of decisive
importance to the company's success. IT planning, subsequently, acquires a strategic
quality in these organizations and, in fact, functions as a catalyst in all this. These
organizations set up business architecture and IT architecture, based on an objective,
qualitative and quantitative analysis into the current use of information technology.
A good strategy cannot easily be copied by competitors, because of the organizational,
financial, social and technical cost and the trial period involved in attaining the strategy.
Every organization has its own profile, environment and aims. Strategy indicates how the
organizational structure should be designed and what the use of IT should be and should,
therefore, be sufficiently concrete and specific. A specific strategy leads to a unique
interpretation of the architecture and the infrastructure.
A good strategy focuses less on the product or the service itself and more on the delivery
of services, reputation, etc. This is especially important for products that have been
"commoditized". That is the reason why strategies differ in the same sector to a high

3
degree. For example, difference in strategy arises when the focus of a company is either
the top or the bottom of the market. For instance, quality, product features and product
innovation are applied in a very different ways in different segments of the same market.
This leads to very different information needs and to a unique use of IT within the same
sector. For example, quality, customization and product innovation are of vital
importance to a premium car such as Mercedes while standardization, quality and low
cost/price are vital to a budget car such as Maruti 800. In both cases, IT should strongly
support these business processes and constantly provide the management with
appropriate information.
Steps in Designing IT Architecture and infrastructure
In practice the realization of strategy, architecture and infrastructure is an interactive
process . The development of an IT architecture starts with the business strategy. The
business strategy will determine the business architecture" the organization structure
and the organization processes and the business architecture in turn will determine the
IT architecture" and IT infrastructure.
Business Vision
The business strategy should be precise and unambiguous for proper design and
implementation of IT architecture. A good strategy starts with a clear business vision and
it clearly spells out the direction the company is expected to follow in the years to come.
A good business vision should be inspiring enough to cause people to consider that it is
worthwhile to give it their time and energy. A business vision should be a challenge: not
vague, but specifically focused on the organization. This is vital since it provides a
framework for strategy formulation.
Business objectives
A business objective can be defined as the choice of policy that the company wishes to
pursue to realize the business vision. The choices may concern the well-known "Ps": of
marketing, namely, product, price, promotion and place and also strategic factors such as
competition, clients, suppliers and replacement products. For example, the business
objectives may deal with policy alternatives such as, market share versus profitability;
short-term versus long-term orientation or; growth versus consolidation. Though the
objectives provide overall direction for the organizations, they still provide specific
direction for IT architecture and infrastructure.
Business Processes and operations
The business vision and the objectives by themselves do not sufficiently explain which
aspects of the business should be reinforced, or what competencies the company should
possess to perform well. Competencies can be of an economical, technological and an
organizational nature, as well as of a social nature. By identifying the required
competencies and establishing a set of performance measures, a firm can now translate
the business vision into a number of concrete items of which it should be capable. The
existing organization and IT will have to be modeled on this basis. Performance measures
specify the capabilities, which should be developed. The design criteria are the essential

4
attributes required for success on the basis of which the organization and the IT are
modeled. Performance measures can be very simple statements such as; "An important
client should have a contact point within the bank and, therefore, we should appoint a key
account manager." In practice this means a total transformation and it is quite natural that
the senior management must guide such reorganization.
Business Architecture
Strategy has important organizational and technological consequences. Therefore,
formulating a business strategy is insufficient to make the organization perform. The first
step, after developing the business strategy is to, therefore, determine the business
architecture required to operate business processes. The effects of the improved use of IT
can only be expected when the company processes have also been effectively structured
and when the responsibilities are well defined. This has consequences for the
organization structure. In the business architecture, attention has to be, therefore, paid to
the redesign of the organization and the way in which the organization should function in
the future.
The business architecture is divided into three closely related blueprints. These three
together constitute the business architecture:
Business function blueprint: This blueprint describes the dividing of company
processes into responsibility fields and how they are put into practice (centralized-
decentralized).
Data access blueprint: In order to implement the company positions, all information is
necessary. That is why the information needs are described.
Application access blueprint: In order to approach the information, applications are
necessary. In the application access blueprint the necessary applications are described.
IT Architecture
The distinction between business architecture and IT architecture is of major importance.
In many organizations the architecture is mainly determined by technical and economical
considerations. The organizational aspects are, therefore, mainly realized by means of the
technical opportunities (technology push) and not on the basis of strategic and/or
organizational considerations. Within the scope of the business needs, the business
architecture offers the possibility to choose the best IT solutions. In this way, the IT
architecture fulfils a "bridge" function between, on the one hand, business demands on
information supply and, on the other, technological opportunities.
In the business architecture, the way in which the organization should function in the
future is indicated, along with which information needs are important in this. The
business architecture describes this in a more functional sense. The IT architecture
translates the more functional description into technical solutions. The difference
between business architecture and IT architecture is, in fact, comparable with the
distinction between functional and technical design, which has been used by system
development methodologies for years.

5
The business architecture is dominated by managerial and organizational questions
(what). The answers to these questions are translated, in the IT architecture, into
automation directions (how) and eventually in the choice of specific makes and types of
technical means: the IT infrastructure (with what).
IT Infrastructure
The IT infrastructure is described as the setting-up and management of the whole
hardware, software and data communication supply, in such a way that the business
architecture and IT architecture can be implemented successfully. The IT infrastructure
distinguishes itself from the IT architecture in that the concrete services and products are
specified. At first it was sufficient to indicate that there was a need for mini-computers
and workstations. In this phase it is determined which specific requirements the systems
should meet, in terms of speed, distributed databases and the corresponding machines,
local/long-distance communication opportunities, co-operative processing and user
interfaces. Also, specific brands and types of products are determined.
Components of IT Infrastructure
The IT infrastructure is not only a matter of hardware, but also a complete integration of
the information technology supply. Within this scope, the following components are
recognized in the IT infrastructure:
IT components: The components are formed by the various hardware components,
consisting of computers, displays, personal computers, printers, data communication
connections and disk units. The software for the steering of all these components is
included. In the choice of hardware components other factors prevail, such as
compatibility (to what extent can computer systems of different makes and models
actually exchange data), data communication possibilities, speed of processing, the
price/output-relation and the ease of operation.
IT services: IT services are services, which execute specific assignments for
applications. In the past, application programmers had to set up and develop their file
organization on their own. Nowadays, the database management systems take over a
large part of these activities. The same applies to the network management. The software
involved takes care of the accurate operation and control of the data communication
facilities and offers many facilities for management.
IT control instruments: The previous components, services and facilities cannot be put
in, in a sufficiently effective and efficient way, if attention is not paid to control
instruments as well. These instruments consist of: procedures, methods, techniques and
tools for system development and the quality and experience of the automation personnel.
The IT infrastructure will function better if the products and services are connected and
are in tune with each other. The company will profit more, and more directly by this. The
more one is capable of putting in the IT infrastructure, the better one can do in the
primary business processes. The IT infrastructure should not only support the most
obvious business processes, it is precisely the support of strategically important business
processes, which can lead to the greatest success. Therefore, it is important to select the

6
components and services in such a way that there is sufficient material for a fast and
effective creation of new company facilities.
Factors in the IT infrastructure
In developing the IT infrastructure, other factors play a role as well. These factors are,
among other things:
User-friendliness: An example of user-friendliness is the requirement that for every use
at every place of work, the same meaning should apply to function-tests. This can also go
in the direction of graphic presentations of data, the use of a mouse and the use of pull-up
and down menus for the entering of data coding. User-friendliness requires computer
capacity and may have consequences for the filling-in of blueprints.

Cost control: Cost control depends on the question as to whether intelligent terminals
are being used, or not, at the workstation, on the installation of applications and the data
storage at the workstation. The costs of hardware, communication and control should be
weighed against each other.

Hardware policy: If different computer suppliers are employed, it should be questioned

whether it is sufficient to deal with just one specific supplier, because of the desired
functionality and the choices made in the IT architecture. Products of different suppliers,
however, cannot always be linked.
Safeguarding: When information becomes more and more valuable, it becomes
necessary to describe the requirements for the logical and concrete access to, and the use
of, applications.
All the factors mentioned influence the parts of the IT infrastructure, and these are
decisive in the IT policy. To sum up, the importance of establishing the IT infrastructure
is that the IT architecture is defined, in a concrete sense, in the shape of:
Descriptions of the necessary computer systems: from mainframes to personal
computers and workstations;
Descriptions of the local and central database management systems to be used:
relational, distributed, data directory/dictionary;
Descriptions of the program packets to be used: word processing, electronic mail,
spreadsheets, desk-top publishing;
Enquiry languages to be used: CASE tools, object-oriented languages, executive
applications, image systems, expert systems;
Descriptions of telematic products and services, among which are also client
server concepts, videotex systems, local/long-distance networks and voice mail
systems, EDI message processors, direct dialing from the workstation.
The total end result of the IT infrastructure also indicates that the IT architecture is
judged in terms of:

7
 Technological feasibility, where attention is paid to what might be feasible, in the
short and in the long term;
Complexity, e.g. which products and services exclude each other (possibly in the
short term);
Controllability, e.g. knowledge and experience of the employees;
Economic feasibility e.g. cost of acquisition and development and the operating
costs.
Activity 1
Name any five companies, which have recently adopted technology as a part of
the company strategy.
a
b
c
d
e
10.3 Use of IT in strategy implementation
Competitive Strategy and IT
Competitive strategy is an organizations approach to achieving sustainable competitive
advantage over, or reducing the competitive advantage of, its competitors. Porter (1980;
1985) suggests that the success of organizations depends on how well they cope with and
manage the five key "forces, namely, the bargaining power of suppliers; the bargaining
power of buyer; the threat of new entrants; the threat of substitute products; and rivalry
among existing firms, which shape an industry.
Successful organizations both react to, and influence, the five forces and by doing so,
influence the nature and shape of their own industry - to their own advantage, naturally in
promoting growth. To fuel this growth, there are two basic commercial strategies that
organizations can adopt: product differentiation (directly related to a number of the
options above); and low cost/price. These two basic strategies rely for their success on a
whole platform of "second order" strategies concerned with, for example, product range
and distribution. They are: cost leadership; differentiation; cost focus; and focused
differentiation.
Strategic cost measures which result in cost leadership are aimed at:
Reducing the total costs of the organization by reducing or avoiding specific
costs;

8
 Working with suppliers, distribution channels, or customers to reduce or avoid
some of their costs so that the organization establishes a "preferential
partnership"; or
Increasing the cost-profiles of competitors.
If these are the activities, resulting in strategic advantage, they must be supported by
appropriate technology and IT. All activities, which form part of differentiation
strategy and which is a variant of the competitive strategy should be supported by
appropriate IT. Traditional data processing relates to accounting, order processing and
other administrative responsibilities. Things are now starting to change - partly as a result
of changes in technology and partly because senior managers are beginning to understand
the nature of their businesses and the importance of a few core processes and key tasks.
Thus IT is being aimed at the frontline, customer- oriented processes and activities
relating to the production, marketing, delivery, and servicing of the product.
The Value Chain and IT
All components of the value chain are interrelated. When addressing IT, it should be
designed to cut across the functional boundaries and integrate the various elements of the
chain. This should lead to both cheaper systems - and, much more importantly, higher
quality, more strategic information through improved linkages in the chain. IT can be
used to redesign and reconfigure the system by reordering, regrouping, and restructuring
the activities within the value chain.
Value Systems and IT
This value chain of an individual organization, which is competing in a particular
industry, is embedded in a larger stream of activities that Porter terms it "value system".
This relates to the external relationships with suppliers at one end, distributors at the
other and competitors in the middle. Again, competitive advantage stems from an ability
to manage these relationships more effectively than competitors. Certainly, in these days
of extensive - if not ubiquitous and total - networking, interoperability of systems is vital.
This extends outside of the organization so that it is certainly preferable for suppliers to
share common EDI systems - and even data structures - to facilitate simpler data
interchange with them. Again, this can lead to co-operative purchasing and economies of
scale. It may even extend to risk management and disaster recovery agreements between
organizations with similar standards and similar-sized technical installations.
For many organizations - especially small- and medium-sized enterprises (SMEs) -
competitors may be a source of assistance. In many industries, co-operation with
competitors is very common - through trade organizations, for example. Sometimes,
small organizations have to group together in alliances to compete against a dominant
large player. This cooperation may include a shared approach to, or at least experience
exchange in relation to, IT.
Cooperation among organizations in relation to IT usually takes the form of (a) vertical
integration, (b) outsourcing, and (c) quasi-diversification, whereby organizations
cooperate across markets or across industries in order to better exploit their key

9
resources. Adopting parallel or compatible IT means that relationships with other
organizations that were previously not possible due to high coordination costs or high
transaction risk may become feasible.
Occasionally, there is very wide co-operation on IT within a sector or industry. This
normally relates to infrastructure components such as networking and messaging but can
apply to transaction-based IT. Such co-operation may be to the benefit of all if it
produces lower costs or better quality service. EDI is an example of a shared technology -
offering economy of information. Few firms have investigated the issue of shared IT -
though the use of packaged software is obviously a form of this. All the strategies
discussed above require the organization to change. IT can be a supportive facilitator of
change - extending and enhancing organization choice and improving the quality of
decision making.
Activity 2
Give one example each of cast leadership:
Differentiation:
Cost focus:
Focused differentiation:
10.4 IT for innovation and performance
Businesses are increasingly finding themselves in business environments facing rapid
increases in both turbulence and complexity, leading to enhanced uncertainty and
increased competition, which in its most extreme form, is termed as hyper-competition
(D'Aveni, 1994). This has also led to an increased focus on innovation as a means of
creating and maintaining sustainable competitive advantages (Nonaka and Takeuchi,
1995). In the wake of this development, efficiency and rapid access to knowledge and
information (Barton, 1995; Grant, 1996) is becoming paramount. Consequently, spending
on information technology (IT) has surged during the last two decades.
One type of benefit that managers attribute to IT is speed and responsiveness
(Brynjolfsson, 1993). Speed is important in the development of successful innovations
(Kessler and Chakrabarti, 1996). There is a positive relationship between using IT to
increase effectiveness and the successful implementation of innovations. Grant (1996a;
1996b) focuses on knowledge integration within companies as important for creating
sustainable competitive advantages. Huber (1990) further argued that the use of IT leads
to more available and more quickly retrieved information. The importance of knowledge
integration and availability of information may be linked to the positive relationship
between using IT to improve internal communication and successful innovations,
facilitating a higher degree of coordination and integration of activities. Also, by using
IT, it is likely that the speed of the processes increases, leading to lower costs of
development and providing an earlier introduction to the market (Kessler and
Chakrabarti, 1996), which in turn will have a positive effect on the successful
implementation of innovations. Use of IT can also lead to new ways of managing the
company and enhancing productivity. This can be explained by the fact that IT has an

10
inherent potential in terms of improving coordination of cost reducing activities in the
company and thus raising cost efficiency.
Customer satisfaction
Berkley and Gupta (1994) found a positive relation between the use of IT to improve
service quality and customer satisfaction. This was also found by and pointed out as
being of significant importance for many firms by Quinn (1996). The positive link
between the use of IT to ease the work and customer satisfaction may be attributed to the
inherent time saving, which could be transformed into more attention directed towards
the customers, thus increasing customer focus and in turn customer satisfaction. The
positive relation between the use of IT and lower costs, and customer satisfaction may be
caused by customers benefiting from cost reductions in the way of price reductions,
which will lead to increased customer satisfaction.
10.5 E-Business
The use of the term e-business implies that it is distinct from business per se. There have
been arguments proposed that would suggest that the underpinnings of e-business are of
such significance that it can be regarded as discontinuously different. If this is so, then it
could be argued that a new business paradigm has emerged. The recent reversal of
fortunes of the dot.com businesses has graphically emphasized the fact that they, and e-
business, operate within the same business environment and context as conventional
bricks and mortar businesses (Porter, 2001). However, fundamental to this is the
technology that has enabled the e-business phenomenon to take place.
Web based Business Models
The rapid expansion of the worldwide web and e-Commerce has created a number of new
business paradigms. The array of business relationships which have emerged in recent
times include:

Business-to-Business (B2B)
Business-to-Consumer (B2C)
e- Market Places

The business-to-business space includes the various upstream and downstream

transactions that enhance channel coordination and customer relationships. In B2B
commerce, business partners and customers are connected via the Internet to participate
in commercial trading and participate in communications and interaction. JC Penny, for
example, shares packing, shipping, inventory and product movement with suppliers. In
B2C, business are connected to their customers through the net and the various activities
in the B2C space include, product ordering, sharing product information, creating display
space, providing customer information, co-developing products and customer service. An
example of B2C commerce is the product-tracking information offered by Federal
express to the customers through its B2C activities. E-Market Place involves linking the
company, its partners and its customers via the Web to provide opportunities for
developing communication and interactions, including customer surveys and information

11
exchange on such things as product warranty and service capabilities. Figure 10.1
explains the web models and this interrelationship.

Figure 10.1: Web-based Business Models

In the context of e-business the business to consumer sector (B2C) can be considered as
secondary to the potential within the business-to-business (B2B) sector. For example, one
of the largest supermarket businesses in Europe, Tesco, also has the largest B2C e-
business in Europe and one of the few profitable ones. However, despite this the revenue
from this business is only approximately 300 million, from a total turnover of 23
billion.
The opportunity to link B2B network members and co-ordinate their activities by the
quicker and more effective transmission of information relating to stock, order
administration etc. has considerable potential for cost saving and service improvement.
The often-quoted example of Wal-Mart and Procter & Gamble suggests that early and
more immediate benefit can be gained by working through and interconnecting the
supply chain (Christopher, 1998). Again, Tesco offers a further example with their
leadership in this context using TIES (Tesco information exchange system) to link with
their suppliers. The company also leads a forum of retailers with the aim of standardizing
systems used by retailers and their suppliers.
Impact of e-Business on Organizations
The diffusion of Internet-based information systems throughout the workplace is
changing the manner in which the firms work and the way they interact with their
customers and suppliers. According to McKenna (1997), technology is transforming
business environment in profound ways. Almost all technology today is focused on
compressing to zero the time it takes to acquire and use information, to learn, to make
decisions, to initiate action, to deploy resources, to innovate. When action and response
are simultaneous, the firms are said to operate in real time.
This shift in time-demands and resulting competitive pressures are changing
organizational structures: Increasing competition, information that could be outdated in
the next hour and customers demanding immediate responses to product and service
requests (customized to their needs) mean a major adjustment in company structure. To
meet the challenges effectively, many companies have adopted reorganization strategies

12
that include downsizing, restructuring, re-engineering, outsourcing, and merging or
spinning off companies.
The transition of operations in many businesses to real time operation has begun to churn
up huge creative chaos inside corporations (McKenna, 1997). The Twenty-first century
Corporation must adapt itself to management via the Web. It must be predicted on
constant change, not stability, organized networks, not rigid hierarchies, built on shifting
partnerships and alliances, not self-sufficiency. Internet-based technologies are creating
information overloads where "a major task of practitioners is to help mobilize those
frozen by the overload of information". Web-based information systems are also causing
profound organizational changes: It seems logical to assert that Internet-based
information systems have created profound changes throughout organizations.
Researchers have begun to document the impact of these changes. One common thread
appears to be that applications should be Web-based in their design, and that they support
distributed collaboration and decision-making.
Organizational Change
In most organizations, few people possess all the information required to make optimal
decisions. By taking advantage of Web-based information systems, associates can access
information from many sources at any time and from any place. This has created more
team-based decisions and new organizational structures. Thus, the inference is that Web-
based information systems can lead to organizational changes by facilitating
organizations that are more organic in structure and can adapt more easily to share
information in a timely and coordinated fashion. Web-based technologies have similarly
created performance improvements in organizations by changing roles and patterns of
communication. Electronic networks open up new possibilities for reducing barriers to
communication and sharing organizational knowledge and electronic collaboration tools
can tap into expert knowledge and resources throughout an organization where
productivity, flexibility, and collaboration will reach new, unprecedented levels. Success
in increasingly competitive marketplaces will depend on effective communications and
knowledge sharing among members using collaborative electronic networks.
Time
In terms of the impact of Web-based information systems on time, Byrne asserts,
"Employees will increasingly feel the pressure to get breakthrough ideas to market first".
He further contends, "that rapid flow of information will permeate the organization.
Orders will be fulfilled electronically without a single phone call or piece of paper. The
`virtual financial close' will put real-time sales and profit figures at every manager's
fingertips via the click of a wireless phone or a spoken command to a computer". He
further contends, "It is about speed. All this work will be done in an instant". "The
Internet is a tool, and the biggest impact of that tool is speed", says Andrew S. Grove,
chairman of Intel.
The speed of actions, the speed of deliberations, and the speed of information have
increased, and it will continue to increase. That means the old, process-oriented
corporation must radically revamp. With everything from product cycles to employee

13
turnover on fast-forward, there is simply not enough time for deliberation or bureaucracy.
While this sounds like a positive impact, the shrinking time demands may cause
increased problems in other areas, for example, employee stress.
Web-based information systems will have a profound impact on the organization and its
structure. Organizational chart of large-scale enterprise had long been defined as a
pyramid of ever-shrinking layers leading to an omnipotent CEO at its apex. The twenty-
first century corporation, in contrast, is far more likely to look like a web: a flat,
intricately woven form that links partners, employees, external contractors, suppliers, and
customers in various collaborations. The players will grow more and more
interdependent. Fewer companies will try to master all the disciplines necessary to
produce and market their goods but will instead outsource skills - from research and
development to manufacturing - to outsiders who can perform those functions with
greater efficiency.
Therefore, as Web-based information technologies diffuse throughout organizations,
there may be profound impacts on organizational changes, including the general
flattening of organizational structures and the need to develop middle management teams
that operate effectively within this new environment. Web-based electronic networks
have been shown to have both positive and negative consequences. Anticipated, desirable
consequences have included timely savings, improved productivity, and improved
decision making via increased access to timely information. Innovation and creativity
were also shown to improve when workers could share ideas and knowledge. On the
other hand, researchers have demonstrated that Web-based information systems can also
have a negative impact on workers. People feel pressurised by the real-time demands
created by the non-stop presence of the Internet. They also sense loss of communication
and relationships created by virtual communities and meetings, relationships based on
physical and face-to-face meetings and conversations.
Identifying e-business application Areas
When examining the company for the possible application of e-business, one can focus
either on internal processes and systems or on the externally oriented processes. If the
main focus is to reduce costs or prepare systems for future e-business applications, the
internal perspective might fit best. If the aim is to improve the customer's perceived
value, one can best investigate the company's buying and selling processes.
Internal e-business Value Chain
Taking the value chain (Porter and Millar, 1985) and placing e-business technologies into
the framework gives an insight into the reach of these technologies into the value
activities. The exact meaning of all prevalent "e-" applications is less relevant as new
applications arise every day and definitions vary widely. Linkages already exist between
activities; some of these linkages have been integrated by using e-business technologies,
ultimately providing a fully integrated e-business process. It is important to realize that
these new applications have to be integrated with supporting and, if applicable, primary
processes to prevent creating islands of automation.

14
The physical processes might have to be rearranged to better align the original value
chain to the new e-business oriented value chain. Integration of the physical processes
and e-business applications is essential to achieve maximum results. It is said, "a business
is profitable if the value it creates exceeds the cost of performing the value activities"
(Porter and Millar, 1985). Analyzing the e-business value chain can help in lowering the
costs and increasing the value of activities. It has to be kept in mind that the supporting
processes should be prepared for future e-business developments before embarking into
large-scale "e-" systems.
Taking the Web marketplace as an example, one can see that, if a marketplace requires
sound estimates for the delivery time of a product, e-fulfillment systems have to be in
place and the factory floor automation has to be capable of providing this information.
Supporting processes are not only the technical infrastructure, but also the databases
holding all information and people capable of working with the systems.
Formulating an e-business Plan
Having identified the portfolio of specific e-business applications that need to be
developed from a strategic perspective, these applications have to be brought into line
with the existing IT architectures. Commonly identified IT architectures encompass the
following:
Information architecture;
Systems architecture;
IT infrastructure; and
Organizational architecture.
As a first step, the impact of the identified e-business applications on the information
architecture has to be assessed. The e-business applications can be integrated into the
information architecture, taking the customary view of information architecture as the
description of information systems areas in terms of the business processes they support
and the data they use. Three possible situations can occur at this architectural level:
(1) A e-business application fits well within one information systems area. This means
that the original information architecture is still valid.
(2) A e-business application covers two or more information systems areas. A decision
needs to be made whether to merge the affected areas or to rearrange them in such a way
that the e-business application falls into one new information systems area, together with
possibly existing or projected other applications. The relationships between information
systems areas have to be redefined in order to arrive at consistent information
architecture for the new situation.
(3) An e-business application does not fit in any information systems area. A new
information systems area has to be defined in terms of the business processes supported
and data items created and used by the e-business application. Careful analysis of
possible relationships with other information systems areas within the information
architecture is needed.

15
A similar process has to be followed through for the systems architecture. Specific
attention has to be given to the stewardship of the data items (who controls the creation of
data, which mechanisms have to be in place to control any occurring redundancy?) and
the integration of applications (how can we provide a consistent interface to the users?).
The consequences for the IT architecture might be more severe, as e-business
applications often call for substantially higher degrees of scalability and security.
Accordingly, the required capacities and skills for the supporting organizational
architecture may be very different from existing ones, which often gives rise to a renewed
outsourcing discussion.
Through assessing the impact of e-business applications on existing architectures, several
consequences are identified. Plans have to be made to properly incorporate these
consequences within the IT architectures, describing what changes are needed to existing
information systems, infrastructure, new developments or organizational layout. These
consequences give rise to projects within the overall IT project portfolio of the
organization. As a result, the project portfolio is populated with both e-business
application projects and projects that need to be carried out in order to properly integrate
the e-business applications with the business structures and IT architectures of the
organization. Standard project portfolio management techniques can be employed to
render a specific e-business plan for the organization.

10.6 IT in Service Sector

Past investments in service sector information technology have been aimed primarily at
productivity or efficiency gains, and this is the measure that most firms use to gauge the
benefits. Service firms have followed the lead of manufacturers in making great strides in
getting work done with fewer employees mainly because of advances in technology.
Competitive pressure is making service companies eliminate costs (mostly people) and
new easy-to-use software is allowing the full application of computer power. On the other
hand, little attention has been given to using information technology to improve customer
service and long-run business effectiveness. Perhaps this is because the benefits of
improved service are often qualitative rather than quantitative. Standard accounting
systems can measure labour costs, but not the costs of poor customer service.
Consequently, managers must justify new investments in information technology on the
basis of efficiency gains and labour savings (Berkley and Gupta, 1994).
Input information
The input function in services includes forecasting customer demands so that necessary
service capacities can be planned. Once customers arrive, expected services must be
specified by questioning customers or by relying on service histories or observations of
market trends.
Most service firms have rush or peak periods and are not able to provide quality service
unless they plan and prepare for these times. Unlike manufacturers, service firms cannot
maintain inventory of their products as a hedge against fluctuations in demand. At any
given time a service may have excess demand or excess capacity and service quality can
suffer in both cases. When demand exceeds capacity some potential customers may be

16
disappointed because they are turned away. There is also a risk that the accepted
customers may receive inferior service. For many customers, even if it is good service, it
is no good when it is late or slow. Armed with the proper information, service firms may
be able to adjust capacity to match fluctuating demand levels. When peaks in demand are
predictable, forecasting and capacity management systems can be used to construct
detailed staff schedules that match capacities to demand.
In services, information must be secured from the buyer to specify the expected service.
This is important because the more complete the information, the easier it will be to
perform the other process functions. Customers also need to be made aware of the
various services available and the likely costs of each alternative. Such information
ensures that the needs and expectations of the customer are fulfilled and the
organization's time and resources are not wasted in dealing with customers whose needs
and expectations it cannot, or should not, fulfill.
Service errors are often caused by a misspecification of the service. For example, Federal
Express found that wrong ZIP codes, wrong street addresses and even wrong names
cause most of its routine mistakes. Often, a package misadventure begins when a clerk
misreads a customer's handwriting. To improve service specification, Federal Express has
introduced new self-serve kiosks, called FedEx Online, using bank automatic teller
machine (ATM) technology. Each kiosk has a touch-screen video display for customers
to price packages and print their own address labels (Ramirez, 1993). Major ocean
shipping companies now use a Windows-based electronic data interchange software
package called Ocean for customers to book and confirm their own orders. Ocean is
expected to reduce data errors because the information keyed in by customers is fed
directly into the carriers' systems (Radosevich, 1993a).
Service requires a long memory. With a computerized customer database, a firm can
attach a detailed personal service history to the names of its customers. A record of each
new service transaction can then be added to existing customer files. These updates help
sketch an increasingly detailed profile of each customer's preference and expectation and
create opportunities for more personalized and enhanced service. For example, Marriott's
guest recognition system allows personnel to call up information about guests who have
stayed at a Marriott hotel before. Marriott's system can predict that a particular guest will
want a non-smoking room, a king-sized bed, an iron and a hair dryer. Customer service
histories that are easily accessible allow frontline service providers to know on the spot
which customers are first-time clients and which are loyal repeat customers. Such
information allows service staff to acknowledge and personally reward the valued repeat
customer and to solicit feedback and other important information from new customers.
Customer files enhance service consistency and server competence. Customer service
records also ensure that service is personalized and consistent for repeat customers, even
after their regular service-delivery person moves on to another job. The Nordstrom
department store chain depends on its sales associates to provide individualized service to
its loyal customers. Currently, individual customer preferences are resident only in the
memory of a sales associate and the firm is working to convert this personal memory to
corporate memory. An information system that allows customer files to be called up at
many different locations would allow the firm to direct customers to different company

17
stores providing individual sales or services of special customer interest. This in turn will
help build a customer-company relationship that is stronger and more valuable than a
simple customer-store or customer-employee relationship. Customer service histories can
speed service. In the medical field, computerized patient records speed service, cut costs
and save lives. For example, computerized systems can warn physicians of potential
problems such as allergic reactions or duplicated tests.
Customer service expectations are a moving target. To deliver superior service, a
company must monitor customer expectations and customer response to the services it
offers. While market research can be used to determine customer expectations, often the
required information can be obtained at a significantly lower cost by listening to
customers and employees. Most of the good service providers have a communication
process to ensure that customer suggestions and requests are communicated up and down
the organization to the people who need this information.
Although customers are the best source of information, they will rarely volunteer the
necessary information. In industries characterized by large numbers of relatively small
transactions, such as financial services and retailing, computerized point-of-sale and bar-
code scanning devices can now record every customer service encounter. For example, in
supermarkets, scanners speed checkout and provide customers with detailed receipts.
Moreover, scanner systems provide management with continuous inventory updates and
a detailed analysis of performance by product, by department and by store. The intended
result is fewer inventory stock outs of popular items and improved customer satisfaction.
Knowledge
Service providers must possess the required skills and knowledge to perform service.
Greater knowledge allows frontline service workers the better to help their customers and
makes them capable of important judgements on matters that previously would have been
handled by managers. Because employees can experience intense frustration when facing
a customer and not having the answers, knowledge also supports employee job
satisfaction, motivation and confidence in dealing with customers.
Knowledge databases allow relatively inexperienced people to perform very sophisticated
tasks quickly. Whereas service providers, unaided by databases, are limited to their own
knowledge, those with access to fast-response decision-support systems effectively
possess the knowledge of many. This is particularly important when service firms rely on
entry-level, part-time or relatively inexperienced workers. Information systems can also
be used to reduce the knowledge required to deliver customized services and to improve
service consistency. If the most relevant customizing variables can be specified and
programmed in advance, the firm becomes less dependent on frontline personnel to
perform the customizing tasks. For example, employment agencies try to identify job
openings offering the desired salary, location, type of work and level of responsibility.
Computer programmes can be written to search the job-opening files and automatically
generate a list of feasible matches. Not only is the market knowledge institutionalized,
but also much of the necessary expertise.

18
Quality in services depends heavily on the ability of employees to share their knowledge.
Service expertise can be captured in either expert systems or group conferencing systems
that provide electronic bulletin boards for sharing problems and ideas. Many professional
service firms now find the core of their distinctive competence to lie in the accumulated
knowledge in their databases and the capacity of their members to access and build
solutions on these databases. For example, American Home Shield, a company providing
service contracts for electrical, plumbing and heating systems in individual homes, has
used the database it constructed to improve its service and learn as much as anyone about
the performance patterns of equipment supplied by major manufacturers (Heskett, 1986).
A number of software companies maintain textual databases of reported software
problems and solutions. As solutions to particular problems are found, they are added to
the database and become widely available to the technical support staff that takes calls
from users. By recording problems and solutions centrally, these databases give leverage
to the learning of each technical support person.
Job status
The longer it takes for service delivery to be completed, the more likely it is that
customers will require information on work-in-progress (such as estimated completion
times and projected costs). For example, Federal Express uses package barcodes that are
scanned six times during the shipping process to maintain real-time records on package
location. Recognizing customer concerns about whether the package actually arrived on
time, there is a money-back guarantee if a package cannot be located within 30 minutes
of a customer call. Many firms have developed customer information systems that allow
customers direct access to production and shipping files. These systems reduce customer
uncertainty and allow customers to measure firm performance. Frequent airline
passengers expect occasional delays. What upsets these passengers is the lack of
explanation and apology for delays. To be more responsive, Northwest Airlines passes
information from its flight monitoring system to co-coordinators located in each airport
who make sure passengers know the reasons for delay.
Quality control
Quality control consists of collecting data, monitoring (comparing the existing state with
the service standard) and corrective action. The objective is to make corrections to the
process before problems are created and customers complain. Many service problems can
be identified before customers experience them. Consider patients who arrive at their
doctor's office on time only to be told the doctor is running an hour late, or airline
passengers who, on arrival at the airport, are informed that their flight was cancelled
hours earlier. In situations like these, management could anticipate customer frustration
and take steps to alleviate it, including calling customers to warn them of the problem.
Quality control begins with data collection to determine the current state of the process.
This information is then compared to the service standard to determine if corrective
action is required. When service standards are subjective (e.g. courteous service) or when
the data are qualitative (e.g. employee behaviour, customer treatment, customer reaction),
qualities data are ordinarily collected by direct management observation. On the other

19
hand, objective performance data, such as customer waiting and service times or system
response times, can be collected and processed by information systems.
Complaints management
Customer complaints provide valuable information regarding service quality problems. A
problem resolution situation should be viewed as an opportunity to learn how to improve
service. The greatest risk is that customers will not bother to complain, but will simply
generate negative word-of-mouth advertising and take their business elsewhere. Service
firms should welcome complaints and make it easy for customers to complain. For
example, British Airways has installed what it calls Video Point booths at Heathrow
Airport in London so travelers can videotape their reactions on arrival. Customer service
representatives then view the tapes and respond.
The closer to the point of service delivery a complaint is made, the better is the service
recovery. Experience in many companies indicates that it takes longer to handle an
escalated complaint at the head office than it does at the point of service. Once a
complaint is lodged, fast response is the key. Customers should not have to wait weeks to
get an answer or to get a problem resolved. At Coca-Cola complaints are logged into a
complaint handling system and shared with all departments for analysis of likely causes
and appropriate corrective action. As soon as the investigation is complete and an
effective corrective action has been found, the customer receives a complete report of the
root cause and the actions taken, usually within 48 hours.
Successful service firms track complaints by type (e.g. poor employee attitude, slow
service), by frequency and by department. This is done because many service problems
are not so obvious and, without adequate tracking systems, often go undetected. Some
service companies also use complainant satisfaction tracking systems to measure the
success of their complaint handling systems. These systems generally send customers
who have complained a postage-paid reply card for evaluating the way their complaints
were handled. Customer replies can then be tabulated by individual customer service
representative, by location or by teams of complaint handling personnel.
Customer feedback is not always bad. Service firms also receive compliments. Customer
compliments provide an opportunity to increase employee motivation and improve
service quality. Unfortunately, many companies do not have an organized system for
routeing compliments back to employees. This is particularly true for geographically
widespread organizations where a compliment might be received in Singapore about
service delivered in Paris. Verbal compliments should be recorded (the format is not
important) and, with written comments, passed on to all employees who contributed to
the service complimented and to their immediate supervisors. Typically, the effort and
money spent on using compliments to motivate and encourage superior performance are
returned many times over.
Service recovery
The best service is preventive rather than reactive. But, despite one's best efforts,
mistakes are a crucial part of every service. The fact is, in services - often those delivered

20
in the customer's presence - errors are inevitable. But dissatisfied customers are not. A
good service recovery can turn angry, frustrated customers into loyal customers. Good
recoveries can, in fact, create more goodwill than if things had gone smoothly in the first
place.
Service failures are best resolved when and where they happen, before they become
costly to resolve and before they create lost revenue. To resolve problems when they
occur, frontline personnel must be trained and encouraged to use their judgment.
Employees need enough data to solve problems and make decisions while the customer is
still present. In many cases (such as billing problems), recovery efforts require customer
account histories and data from several company departments. If problems are to be
solved on the customer's first call, this information must be readily available to customer
service personnel. For example, image processing of credit card slips at American
Express allows customer service representatives to find image records of customer
transactions in seconds.
Nothing could be worse than saving a customer only to have the same mistakes repeated
because other employees who needed to know were not informed. To prevent problems
recurring, and to prevent weak recovery efforts that fail the customer twice, some firms
use recovery-tracking systems that capture information pertaining to each instance of
recovery service. This information is available so that all employees who deal with a
particular customer will know what occurred, what recovery methods were used and what
commitments were made. For instance, if a restaurant matre d'htel seats a patron with a
reservation very late and promises a free dessert, the waiting-on staff should not later add
this dessert to the customer's bill. To ensure accurate data, customer service
representatives should be able to input information directly into the recovery tracking
system. Direct access also facilitates retrieval of information helpful to recovery efforts.
Customer defections
Measuring service quality objectively through conformance to standards and subjectively
through customer surveys is not enough. These techniques miss former customers who
have left over the company's handling of an irregular situation. Identifying defecting or
lost customers and measuring defection rates can provide a way to measure and improve
service quality. The idea is to identify those customers who stopped doing business with
the firm, then find out why. Defections can then direct managers' attention to the specific
things that are driving customers away.
To measure defections one must have a defections scanning system to identify customers
who have ended their relationship with the firm. If service or billing histories of
customers are available, scanning the dates of last account activity easily identifies
defections. Alternatively, many service firms, such as airlines, hotels, restaurants, rental
car agencies, retail stores and even grocery stores, now have membership programmes
and customer databases.
Often, customers are given a membership card that entitles them to discounts, and all
subsequent purchases are logged against the card number. These databases then provide

21
service managers with an easy way to identify inactive customers and, often, clues as to
why customers are no longer buying.
10.7 Summary
The rapid growth of technological innovations and the synthesis of information
technology and computer networks are radically changing the way companies compete.
Many business enterprises are making strategic commitments to technology for the
purpose of gaining and sustaining competitive advantage in their industry. The creation
of a competitive advantage through the use of information technology (IT) requires
business executives to control this vital corporate resource and manage its use.
Organizations seek to gain competitive advantage in their selected markets via a number
of competitive approaches - based primarily on product, service, differentiation and
pricing policies. To understand the environment and customer behaviour they need
robust, reliable information. In order to deliver to their chosen strategy, they must
configure the organization (including extended configuration within the industry sector
through alliances and collaborative ventures) and the various functional processes to
deliver reliably and efficiently. Information Systems (IS) is used to configure the
organization appropriately and to ensure communication between the various
components. IS is then used to ensure effective communication within the extended value
chain involving suppliers and the distribution network. Organizations hoping to make
strategic use of IS must understand the nature of the inter-relationships of the above
elements, and understand the nature of the information flows between them. IS activity
and expenditure should be prioritized where it is clear that strategic information will
result or where the activity is not effective without an underpinning IS.

Organizations, which are at the beginning of the use of IT often, focus on efficiency.
They can do without a formal information planning method. The periodic drawing up of
priorities and action plans per system is often sufficient. In this organization, IT is often
placed in the existing procedure, without great changes in assignments or in the
organization structure. In a later stage, automation is applied to solve bottlenecks, in the
information supply and to improve effectiveness. For this purpose, it is necessary to chart
the company processes and the information needs. The (often functionally designed)
process structure of the organization usually remains intact. Most of the well-known
information planning methods are extremely suitable for this type of information
planning.

Increasingly more organizations, because of their complexity and the complexity and
competitiveness of the market, are compelled to function in a more client-oriented way.
In this case, information supply without bottlenecks is a necessary, but not a sufficient
condition. It is even more important to choose the right strategy, process structure and
responsibility, and in association with these, the right set of applications and the right
infrastructure. These organizations discover that the functional organization structure
involves obstacles and that information planning should not merely involve the
establishing of priorities for individual system development projects.

22
In high customer-contact services, a firm's ability to deliver quality service depends on its
capacity to collect, process and distribute information. The input function in services
includes assessing customer expectations, specifying the expected service and setting
corresponding service standards. Good service providers have communication processes
to facilitate the collection of customer data, suggestions, requests and transactions into
customer databases. These databases can then be used to construct detailed customer
profiles, eliminate service-specification errors, speed service and improve service
consistency. Output information is used to determine whether customer expectations are
met. While customers are the best judges of quality, many service firms lack adequate
systems for collecting and acting on customer data. Customer complaints provide
valuable information on service quality problems. If customers complain, employees
need enough information to solve problems and make decisions while the customer is
still present. Complaints should be tracked by type, frequency and department to identify
recurring problems that otherwise might go undetected. To prevent weak recovery efforts
that fail the customer twice, some firms use recovery-tracking systems to capture and
distribute information pertaining to each instance of recovery service.

10.8 Self-Assessment Questions

1) Explain the role of information Technology (IT) in strategy implementation. How can
IT assist in enhancing the competitiveness of a firm?

2) What are the various components of IT architecture? What factors influence the
choice of a particular IT infrastructure?

3) What is e-business? Briefly explain the various web-based business? Explain the
steps involved in implementing an e-business plan?

4) How does IT improve innovative capacity and performance of a firm? Illustrate this
with an example by scanning various sources of information such as web, journals,
business dailies, etc.

5) IT is being extensively used by various service organizations to improve service

delivery. Choose any service organization and explain how IT has enhanced the
quality of service of this firm.

10.9 Further Readings

Porter, M.E, Millar, V.E. (1985). "How information gives you competitive advantage",
Harvard Business Review, 149-60.

Porter, M.E. (1980). Competitive Strategy, The Free Press, New York.

Barney, J. (1991). "Firm resources and sustainable competitive advantage, Journal of

Management, 17, 1, 99-120.

23
Barton, D.L. (1995). Wellsprings of Knowledge: Building and Sustaining the Sources of
Innovation, Harvard Business School Press, Boston, MA
Berkley, B.J., Gupta, A. (1994). "Improving service quality with information technology
International Journal of Information Management, 14, 2, 109-21
Brynjolfsson, E. (1993). "The productivity paradox of information technology", Comm.
ACM, 35, 66-77.
Brynjolfsson, E. (1994). "Technology's true payoff'", Informationweek, 10, 34-6.
D'Aveni, R. (1994). Hypercompetition: The Dynamics of Strategic Maneuvering, Basic
Books, New York, NY.
Grant, R.M. (1996a). "Prospering in dynamically competitive environments:
organizational capability as knowledge integration", Organizational Science, 7, 4, 375-
87.
Grant, R.M. (1996b). "Toward a knowledge-based theory of the firm", Strategic
Management Journal, 17, special issue, 109-23.

Huber, G.P. (1990). "A theory of the effects of advanced information technologies on
organizational design, intelligence, and decision making", Academy of Management
Review, 15, 1, 47-91.

Kessler, E.H., Chakrabarti, A.K. (1996). "Innovation speed: a conceptual model of

context, antecedents, and outcomes", Academy of Management Review, 21, 4, 1143-91.
Quinn, J.B. (1985). "Managing innovation: controlled chaos", Harvard Business Review,
63, 3, 73-84.
Quinn, J.B. (1996). "The productivity paradox is false: Information technology improves
services performance", Advances in Service Marketing and Management, 5, 71-84.
Berkley, B.J., Gupta, A. (1994). "Improving service quality with information
technology", International Journal of Information Management, 14, 2, 109-21.
Heskett, J.L. (1986). Managing in the Service Economy, Harvard Business School
Press, Boston, MA
Radosevich, L. (1993b) "Network holds sway on life, death", Computerworld, 24 May
57-62.
Christopher, M.G. (1998) Logistics and Supply Chain Management, Financial Times
Pearson, London.
McKenna, R. (1997). Interactive Marketing, Harvard Business School Press, Boston,
MA.

24
25
Unit 11 R& D and Strategy
Objectives

The objectives of this unit are to

highlight the importance of R&D Strategy to the competitiveness of a firm
assess he contribution of R&D activities to the competitive strategies of the firm
discuss the steps involved in developing R& D Strategies
state the reasons for limited progress process made by firms in R&D Strategy
Structure
11.1 Introduction
11.2 Competitive Strategy and Competitiveness.
11.3 Competitive Advantage and R&D
11.4 Value Chain and Value Chain Analysis
11.5 Research and Development
11.6 Development of R& D Strategy
11.7 Steps Involved in Developing R&D Strategy
11.8 Progress of R&D Organizations in Strategy Development
11.9 Summary
11.10 Self-Assessment Questions
11.11 Further Readings

11.1 Introduction
An essential component of competitive strategy is recognizing the role that Research and
Development plays (R&D) in the competitive success of a firm, and acting to ensure that
technology decisions and policies contribute to the firm's competitive advantage. This
unit provides a framework, which can be used to analyze and understand the linkages
between R&D and competitive strategy and/or competitive advantage of a firm.

11.2 Competitive Strategy and Competitiveness.

The conventional approach to strategy has emphasized setting goals and developing the
means to achieve them by matching the resources of the firm (strengths and weaknesses)
with opportunities and threats in the external environment, which includes, especially,
customers and competitors, and deciding which industries, businesses, or product-market
segments to compete in. At the highest corporate level, there is the multi
industry-business firm, conglomerate or the diversified firm, such as Reliance Group,
Tata Group, etc. At this level, corporate strategy addresses issues like as choosing a
balance among the industries or businesses chosen, and-in the case of a firm-achieving
synergy among the industries or businesses chosen.

Moving down a notch, there is the single industry-business firm such as -- cement, or the
division of the multi industry-business firm such as Aditya Birla Group. At this level, the
issue of which business or industry to be in is important and the only issue is how to enter
or exit of a business or industry. This chosen the level at which competitive strategy
operates. Developing a competitive strategy essentially involves building a broad
framework for a firm on how it is going to compete, what its goals should be, and what
policies will be needed to carry out those goals. Moving down to the next level, there are
the functions of the firm-the engineering, manufacturing and production, marketing,
sales, service, personnel, human resources, purchasing, accounting, finance, planning,
etc. The term functional strategy is widely used at this level. The important point to
note is that functional strategies must all support, reinforce, and contribute to the
competitive strategy of the firm in order for the firm to effectively compete. In a
free-market economy, the generic goal of any firm is to enhance its competitiveness,
which can be defined as the ability of a firm to get customers to choose its product or
service over competing alternatives on a sustainable basis. Competitiveness is measured
by market share trends over time, and can be described in terms such as increasing,
decreasing, or stable. There means an important stipulation contained in the definition
described above, however, which is that competitiveness must be built on a sustainable
basis. It is possible, in the short run, for a firm to get customers to buy its products or
services over competing alternatives on an unsustainable basis by, for example,
mortgaging its assets and using the proceeds to subsidize and lower prices, thus attracting
customers until the earnings run out and the firm collapses.

11.3 Competitive Advantage and R&D

A firm can enjoy competitive advantage in several ways. For instance, a firm may gain
competitive advantage because:

The price of its product is lower.

The quality of its product is higher.
Availability of its product is sooner, or more dependably just in time.
Customer service is better.
Attractiveness of its product is greater.
Awareness of its product is greater.
Other social, psychological, and ideological factors.
In practice, customers shop around amongst competitive alternatives by setting
parameters for some of these advantages and then making the final choice on the basis of
the key or critical advantage. Customers today expect high reliability and low prices and
these are mutually reinforcing attributes that a supplier is expected to achieve just to be
in the competition. But these are not often enough. The winning competitor must have
both the lowest price and highest reliability or achieve one of the other competitive
advantages that customers value. A firm, which has a strong R&D programme, can
influence all these factors positively and contribute to the competitive advantage of a
firm. Competitive advantage views R&D activities as a way of improving a process, thus
reducing costs, or providing customers with a best-of-class benefits.
Porter defined and discussed three types of generic strategies: cost leadership,
differentiation, and focus. Low cost leadership means essentially what it says ; achieving
the lowest-cost position possible in each operation of the firm, not just manufacturing,
through such means as vigorous cost reduction programmes, strict cost and overhead
controls, economies of scale, and learning curve efficiencies. Differentiation refers to
unique feature of a product or service as perceived by a customer, which directs the
customer to prefer it over competing alternatives. A differentiating uniqueness is
typically achieved through such means as design features, establishing a brand-name
identity, or offering superior customer service. The linkage between the earlier list of
competitive advantages and Porter's strategies should be obvious; low-cost leadership
corresponds to a potential competitive advantage; differentiation corresponds to
uniqueness in terms of quality, sooner availability, better customer service, etc.

11.4 Value Chain and Value Chain Analysis

This now the unit has dealt with competitive strategy by emphasizing customers and
their ultimate role in determining competitiveness by collectively choosing to buy the
products or services of one firm over competing alternatives. In this section the focus
shifts to firms and what firms do to achieve competitive advantage in implementing their
competitive strategies. To address this set of issues, the value chain analysis, a tool
developed by Michael E. Porter is utilized. According to Porter, the value chain is "a
systematic way of examining all the activities a firm performs and how they interact for
analyzing the sources of competitive advantage."

The value chain can be used to organize all the activities of a firm into categories of
primary and support activities. value chain Activities are processes or things that are done
in a firm. In order to be identified and categorized, they must be distinct; they must have
a beginning and an end, which distinguishes them from other activities or operations.
Primary activities constitute the processes by which firms receive inputs (inbound
logistics), convert those inputs into outputs (operations), get those outputs to customers
(outbound logistics), persuade customers to buy the outputs (marketing and sales), and
support customers in using the outputs (service). Support activities are processes which
provide support to the primary activities and to each other in terms of purchasing inputs
(procurement); improving existing products or developing new products (research and
development); dealing with personnel (human resource management); and general
management, accounting, finance, and other activities which support the entire
organization rather than individual activities (firms infrastructure).

Using the value chain and focusing on categories, of activities enables one to see the firm
as a collection of activities rather than as an organization chart and administrative units
such as the purchasing department, the R&D, the manufacturing division, and the
personnel department. This is important because the value chain activities be analysed
much more effectively by using the value-chain analysis, firms can then create
competitive advantage in the following three ways:
1) By placing greater or lesser emphasis (allocation of resources, management time and
attention) on specific activities than competitors do.
2) By performing specific activities better (better management, more highly trained
people, better-maintained equipment) or differently (using an alternative-presumably
new or improved-technology) than competitors do.
3) By managing linkages among activities better than competitors do.
R&D and Competitive Advantage
On the basis of the previous discussion, the choice of which value chain activity should
a firm focus on should be governed by the competitive advantage(s) that the firm is
pursuing in implementing its competitive strategy. In other words, if low cost-low price
is the strategy, then low-cost technologies should be used, consistent with maintaining
acceptable levels of quality, availability, attractiveness, and so forth. (obviously,
technology choice interacts with other strategic variables. For example, low unit costs
are often achieved through economies of scale which in the past have depended on
mass-production technologies and large customer markets demanding standardized
products and services.) Similarly, if differentiation is the strategy, then activities such as
R&D which maximize the specific competitive advantage in terms of providing
products capable of higher performance, innovative products, etc, should be used,
consistent with the price premium customers are willing to pay for the uniqueness.
Activity 1. Think of an organization of your choice and apply the value choice analysis
by categorizing the fine in to organization into primary and second support
activities.

11.5 Research and Development

One standard definition of research and development states that research is an undirected
basic science or a directed or applied science where development in research can result in
innovative products and processes from either of these sources. Research differs from
development of a product in that it is an exploration of ideas rather than a tangible output
to be marketed. There is no guarantee that a new idea will be successful. R&D must
provide a high degree of insurance so that future gaps can be closed to meet corporate
goals, such as profitability. Therefore, many innovations are necessary and should be
allowed to flourish to assure the achievement of these goals. Invention is an idea that
must be converted to practice, i.e., one must show that the technical idea is feasible and
can be demonstrated. The payoff of a timely invention can make a firm gain a market
edge by lowering price, even with a strategy that places it below production cost. The
belief is that increased sales would ensure future cost reductions from increased volume
of output due to increased sales.

11.6 Development of R& D Strategy

The selection of R&D projects is the most important of all the R&D management
activities. Unless an R&D department is working on the right R&D projects, all its
efforts could come to zero. Consequently, most R&D organizations spend a great deal of
time trying to select the right projects. What is rarely seen in these efforts to select the
right R&D projects, however, is the value of having an overall R&D strategy before
selecting R&D projects. A R&D strategy is important because it helps a R&D
organization select projects in terms of a broader outlook rather than just bit by bit.
When a R&D department has an overall strategy and has some strategic goals, it will
more likely select projects that are in tune with its technical strengths, the capabilities of
the company, and the demands of the marketplace. In order to develop a sound R&D
strategy, certain prerequisites must be in place.
Preconditions for Effective Development of an R&D Strategy
In order to develop a R&D strategy, a R&D organization first must make sure that
certain conditions are in place. There are seven prerequisites for developing a R&D
strategy:
1) A belief that a R&D strategy can solve problems
2) Creation of a planning staff within a large R&D department or the establishment of a
strong commitment by the R & D line managers in a small R &D organisation to
devote enough effort to doing R&D strategic planning
3) A method of linking R&D strategic planning to R&D operations
4) A mode of getting strategic marketing done
5) The active support from senior management
6) Prior efforts to develop a R&D strategy
7) A series of substantial and solid efforts that produce tangible results on their own,
but allow R&D people to get better at R&D strategic planning

11.7 Steps Involved in Developing R&D Strategy

A) Belief that R&D Strategy solve Problems
Although the idea of developing a R&D strategy may be accepted, usually development
of an R&D strategy will not come about unless a R&D strategy is used for solving a
problem. Which means, the effort that goes into developing a R&D and the conflicts that
may occur about how R&D resources should be allocated are so great that unless a R&D
organization has a clear R&D strategy it rarely will make the effort or face the conflicts.
On the whole, R&D organizations require a strategy when they wish to use new
technologies for future products. If, on the other hand, a R&D organization relies solely
on utilizing existing technology to develop new products, then it may not need a R&D
strategy.
Usually, R&D managers recognize that a R&D strategy will help them when they have
doubts about how R&D resources are being used. For instance, the R&D managers of a
FMCG company perceived the for need R&D strategy when they were forced to
consolidate all the R&D on coffee that previously was carried out in several laboratories.
To accomplish this task, they recognized that they had to have a R&D strategy to
prioritise and coordinate all the R&D being done on coffee. Later they perceived the need
to develop a R&D strategy related to R&D being done on beverages in a few laboratories.
In short, although developing a R&D strategy is a nice idea, this idea will not be put into
practice unless R&D managers perceive that a R&D strategy can solve a problem.
B) Creating Planning Staff within a R&D Organization
Creating a planning staff or establishing a strong commitment by the R&D managers in
a small R&D organization to devote enough effort to R&D strategic planning is
necessary. Although line managers within a large R&D organization by themselves can
develop a R&D strategy, in practice, if there is no planning staff to facilitate the
development of a R&D strategy, there will never be a R&D strategy. Although some
companies have a R&D strategy, it was not easy to develop one. The R&D planners
normally run into two types of problems: analytical and organizational problems. The
analytical problems surface when the R&D planners first attempt to facilitate the
development of a R&D strategy. They find that there is no accepted methodology for
developing a R&D strategy. Although R&D managers in some companies, consultants,
and academicians all had their opinions on what a R&D strategy should be and on how it
should be formulated, almost none of them have a complete picture of the process. In
addition, the opinions of these various R&D managers, consultants, and academicians
often were in conflict with each other or were irreconcilable. Thus, the R&D planners
have to develop their own methodology. In addition, R&D planners also find that
members of the R&D staff are generally not interested in developing a R&D strategy.
Because of this, R&D planners have to spend majority of their time during the first few
years persuading the R&D staff to do R&D strategic planning and then educating them
with regard to how a R&D strategy can be developed.

The experiences of these R&D planners are typical. Someone usually has to develop the
methodology to be used in doing R&D strategic planning. Someone also has to be the
champion of R&D strategic planning, or it will not get done. In theory, R&D managers in
a large R&D organization can handle these responsibilities. In practice, R&D line
managers in a large R&D organization normally have so many other responsibilities that
they neglect R&D strategic planning. Thus, a R&D planning group usually proves to be
necessary to getting R&D strategic planning done.

In a small R&D organization, on the other hand, R&D line managers are the only ones
who can develop an R&D strategy because staff positions rarely exist. Thus, to get R&D
strategic planning done, the R&D line managers in a small R&D organization must add
the responsibilities of an R&D planning group to their normal responsibilities. These
R&D managers usually will not be able to devote much time to developing a planning
methodology. On the other hand, because they have responsibility for managing the R&D
groups, if the R&D managers in a small R&D organization do develop an R&D strategy,
they should have less difficulty in getting this strategy accepted and implemented. The
key to planning in either situation is that the doers, not the planners, must do the
planning. The role of the planners is to facilitate the planning process, which is an
important, although seldom appreciated, role.

C) Connecting R&D Strategic Planning to R&D Operations

To get a R&D staff to develop a R&D strategy, R&D planners (or R&D line managers)
have to find ways to relate R&D strategic planning to R&D operations. This connection
between R&D strategic planning and R&D operations has two aspects.
Members of the R&D staff have to be able to see that their interests are served through
developing a R&D strategy. Thus, R&D planners must find a mechanism that involves
R&D strategic planning and at the same time the R&D staff. One of the primary purposes
of such forums is to get these R&D people to talk with each other. This cross disciplinary
forum can turn out to be a useful mechanism not only for improving communication, but
also for getting R&D strategic planning accepted. Once involved in interdisciplinary
forum, these R&D people can get interested in technical activities as well.
The R&D projects that are actually selected and the R&D strategy need to be meaningful.
In other words, a R&D strategy is not meaningful if it does not influence which R&D
projects are selected and carried out. A R&D organization in a household products
company addressed viewing the development of a R&D strategy as involving two phases.
In the first phase the senior R&D managers defined the overall direction of the R&D
strategy. During the second phase, middle-level R&D managers defined the R&D
strategy through the projects they selected and carried out.
D) Linking R&D Efforts/Strategy to Customers Needs
Although it is important for a R&D organization to link its strategic operations, this is not
enough. For a R&D organization's strategic plans, this strategic plans must be clearly
linked to customers' future needs. Therefore, besides doing R&D strategic planning, a
R&D organization must also get marketing done in its company. Two of the hard
questions that must .be addressed in a strategic marketing are
1) Who will the company's customers be in the future?
2) What will those customers need in the future ?
In answering these questions well, one must understand economic, regulatory,
geographic, and social trends and opportunities.

E) Active Support of the Senior Management

To get its R&D strategy integrated with business plans, an R&D organization must have
the active support of senior business managers. To gain the active support of senior
business managers, an R&D organization must explain the value of R&D in business
terms-for example, with regard to how R&D will help the company (1) satisfy
customers' needs, (2) cut costs, (3) expand into new markets, or (4) minimize
distribution problems.

Those R&D organizations that have been able to gain the active support of senior
business managers for their R&D strategy were helped by organizational factors. For
example, in a chemical company the R&D organization was able to gain the active
support of senior business managers because the chief executive officer is one of the
major proponents of R&D in the company. As opposed to most of the other senior
business managers in this company, this chief executive previously managed the division
of the company that sells to industrial customers. Because the customers of this division
are more knowledgeable about what R&D can contribute, this CEO realized how
valuable R&D can be and thus has not only supported R&D strategic planning but also
has actually encouraged the R&D organization to do it.

At another company, a key factor that allowed the R&D organization to first gain and
then maintain the support of senior business managers was leadership among senior
business managers. Stability and continuity in leadership was important because it took a
few years for the senior business managers of having a R&D strategy. By learning year
after year what the R&D was trying to accomplish with a R&D strategy, the senior
management was able to appreciate the benefits. The R&D department, in turn, could
build progress that it had made with these senior business managers in previous years.

The key to taking each of the steps discussed above is picking a problem that the R&D
organization is facing that also calls for a more systematic analysis of the use of R&D
resources. The value of carrying out a series of concrete steps is that together they serve
as stepping-stones to improve R&D strategic planning. Moreover, because they produce
tangible results along the way, they also help elicit support for the R&D strategic
planning process.
One way in which a R&D organization can maintain the vitality of planning process is
through carrying out a series of concrete efforts that produce tangible results on their
own, but also allow R&D people to improve planning expertise. A second method
involves benchmarking studies in which the R&D people compare the strengths and
weaknesses of their company's technologies in relation to the strengths and weaknesses
of their competitors' technologies. The R&D people can gain two things through this
effort: 1) they gain a much better understanding of how their company stands in relation
to competitors and 2) they learn how to analyze their technologies. For example, they
learn how to think more precisely about how their technical work could improve the
performance of the company's products. A third effort that the R&D organization can
consider involves using the techniques of portfolio management to evaluate the potential
and payoffs of various technologies.

11.8 Progress of R&D Organizations in Strategy Development

Few R&D organizations in India have a R&D strategy or have established the conditions
required for developing a R&D strategy. For example, few R&D organisations have
perceived a R&D strategy as a way to solve a problem. Many large R&D organisations
do not have a R&D planning group, and organizations do not do R&D strategic planning.
Also, few R&D found a way to get strategic marketing done. Finally, in most companies
R&D strategic planning do not have the active support of senior management. In
addition, if one looks closely at the strategic goals of those R&D that have them, one also
finds that many of these goals were arrived analytically. That is, many of the strategic
goals of such R&D organisations have are intuitively obvious. For example, most of the
strategic goals that organizations have formulated are similar and quite predictable 1) to
ward out fundamental threats to the company's businesses. (2) to comply with government
regulations.
Few R&D organizations have conducted benchmarking their technologies to competitors'
technologies. Few R&D organizations carry out technology forecasting studies aimed at
understanding 1) what technological changes may be occurring in the next 5 to 10 years
and 2) what those technological changes may mean. Even those R&D organizations that
have made significant progress in an R&D strategy admit that they still have much to do
to improve the planning process. For example, the R&D organization may have a R&D
strategy, but the top management does not accept this R&D strategy. Many R&D
departments develop a R&D strategy, but they do not find a way to integrate their R&D
strategy with the marketing and manufacturing strategies in the companies. In addition,
the R&D strategy can be altered at the whim of anyone who at a later date becomes
involved in the planning process without necessarily informing any one else about the
changes in the plans.

In summary, some R&D organizations have made significant progress in developing an

R&D strategy. Most R&D organizations, however, have barely started developing an
R&D strategy. The immediate challenge facing most R&D organizations, therefore, has
to do with first establishing the preconditions required for developing an R&D strategy.
After doing this, they will then be able to meaningfully deal with issues as to what the
R&D priorities should be and how R&D resources should be allocated. Activity 2. Give
examples of any five fines (in the Indian context), which have adopted R&D strategy as a
post of this competitive strategy.
1)
2)
3)
4)
5)
11.9 Summary
An essential component of competitive strategy is recognizing the role that Research and
Development plays in the competitive success of a firm, and acting to ensure that
technology decisions and policies contribute to the firm's competitive advantage. A firm,
which has a strong R&D programme, can influence all these factors positively and
contribute to the competitive advantage of a firm. Competitive advantage views R&D
activities as a way of improving a process, thus reducing costs, or providing customers
with a best-of-class benefit.

The selection of R&D projects is the most important of all the R&D management
activities. Unless an R&D department is working on the right R&D projects, all its
efforts could come to naught. A R&D strategy is important because it helps an R&D
organization select projects in terms of a broader outlook rather than just bit by bit.
When a R&D department has an overall strategy and has some strategic goals, it will
more likely select projects that are in tune with its technical strengths, the capabilities of
the company, and the demands of the marketplace. In order to develop a R&D strategy,
certain prerequisites must be in place such as belief in R&D strategy as a tool to solve
problems, establishing a dedicated strategic planning group within the R&D department
and the top management commitment's to the R&D strategy.

Some companies in India have made significant progress in developing a R&D strategy.
Most companies, however, have barely started developing a R&D strategy. The
immediate challenge facing most firms, therefore, has to do with first establishing the
preconditions required for developing an R&D strategy. After doing this, they will then
be able to meaningfully deal with issues as to what the R&D priorities should be and how
R&D resources should be allocated.

11.10 Self-Assessment Questions

Q1. Explain the importance of R&D strategy in enhancing the competitiveness of a
firm?
Q2. How does R&D Strategy support the Porters generic competitive strategies?
Q3. Discuss the various steps involved in development of R&D strategy.
Q4. Give reasons for R&D strategies not taking root in the Indian context.

11.11 FURTHER READINGS

Allio, Robert J. and Desmond Sheehan (1984), Allocating R&D Research Effectively,
Research Management, (July-Aug.), 14-20
Bachman, Paul W. (1972), The Value of R&D in Relation to Company Profits,
Research Management, 15, (May), 58-63.
Bitando, Domenic and Alan L. Frohman (1981), Linking Technological and Business
Planning, Research Management, (Nov.), 19-23.
Boer, John Seely (1991), Research that Reinvents the Corporation, Harvard Business
Review, (Jan-Feb), 102-111.
Chester, Arthur N. (1994), Aligning Technology with Business Strategy, Research
Technology Management, (Jan-Feb), 25-32.
Cohen. W.M. and D.A. Levinthal (1989), Innovation and Learning: The Two Faces of
R&D, Economic Journal
Menke, Michael M. (1994), Improving R&D Decisions and Execution, Research
Technology Management, (Sept-Oct), 25-32.
Mitchell, Graham R. and William F. Hamilton (1988), Managing R&D as a Strategic
Option, Research Technology Management, (May-June), 15-22.
Porter, E. Michael. (1985). Competitive Advantage Creating and Sustaining Superior
Performance. The free press
Unit 12 Knowledge Management
Objectives
The objectives of this unit are to:

introduce you to the concept of Knowledge Management (KM)

acquaint you with the sources and types of knowledge
provide a framework for developing KM systems
explain the benefits and challenges of implementing KM
Structure
12.1 Introduction
12.2 Knowledge and Knowledge Management
12.3 A Few Facts of Knowledge Management
12.4 Sources and Types of Knowledge
12.5 Knowledge Creation
12.6 Knowledge Management Framework
12.7 Benefits of Knowledge Management
12.8 Pioneers in Knowledge Management
12.9 KM Initiatives in Indian Organizations
12.10 Software For Knowledge Management
12.11 Trends and Challenges in Knowledge Management
12.12 Summary
12.13 Keywords
12.14 Self-Assessment Question
12.15 Further Readings
12.1 Introduction
Present days organizations, large or small, gather vast amount of knowledge during the
course of regular their normal operations. This knowledge remains in the minds of
organizational members conducting the operations- be it research, design, development,
manufacturing, or services. This wealth of organizational knowledge (generally referred
to as knowledge assets, knowledge capital, intellectual capital etc.) disappears, when
these persons leave the organization. The effects of losing organizational knowledge is
especially noticeable and can have far reaching implications when people occupying
important positions such as Chief of Designs or Chief of Marketing leave since all the
knowledge they gathered over long years of experience is lost permanently to the
organization, along with them. A significant amount of time must be invested in
relearning and reinventing the work processes. Most organizations do have some manual
system of compiling knowledge to create a corporate memory but they have not been
effective mainly due to difficulties in careful organization and accessing of the compiled
knowledge. Computers have not played a significant role in this area, till recently,
having mainly concentrated in the data processing field: obviously due to the faster pay
back period for the money invested. However, things are changing and this field is
receiving due attention from developers and organizations.
12.2 Knowledge and Knowledge Management
According to Peter F. Drucker in The New Realities, Knowledge is information that
changes something or somebodyeither by becoming grounds for actions, or by making
an individual (or an institution) capable of different or more effective action.
Knowledge is viewed as a collection of facts, ideas, learnings and policies, practices and
a lot more. Knowledge can also be defined more narrowly as agreed- upon explicit or
formal facts, rules, policies and procedures, whereas skills are seen as information
processing competencies that can generate explicit knowledge. Skills are learned by
doing; knowledge is learned by studying or investigating. Knowledge can be classified
as tacit knowledge that is personal (i.e. knowledge that cannot be expressed and
communicated) and explicit knowledge that can be codified and expressed in a human
or formal language.

Although the terms information and knowledge are often used interchangeably, there
is a clear distinction between information and knowledge. Information is a flow of
messages, while knowledge is created by that very flow of information and is anchored in
the beliefs and commitment of its holder. Traditional management models focus on how
to control the information flow and information processing within the organization. This
view, however, fails to capture the essence of organization as knowledge-creating entity.
What knowledge management should achieve is not a static management of
information or existing knowledge, but a dynamic management of the process of creating
knowledge out of knowledge. Hence one can argue that organizational knowledge
creation is a continuous self-transcending process, which requires a new kind of
management that goes beyond the traditional models of management.
Knowledge management is such a preposterous, pretentious and profoundly confusing
phrase that many of those who really understand KMincluding some of the fields
pioneers-refuse to use the term. If there is anything that those experts do agree on, it is
that knowledge management is not about managing people in any traditional sense. Nor
is knowledge management really about managing knowledge. They prefer terms such as
knowledge sharing, information systems, organizational learning, intellectual asset
management, performance enhancement, etc.
Knowledge management refers to strategies and structures for maximizing the return on
intellectual and information resources. Because intellectual capital resides both in tacit
form (human education, experience and expertise) and explicit form (documents and
data), KM depends on both cultural and technological processes of creation, collection,
sharing, recombination and reuse. The goal is to create new value by improving the
efficiency and effectiveness of individual and collaborative knowledge work while
increasing innovation and sharpening decision-making.
KM is the collection of processes that govern the creation, dissemination and utilization
of knowledge. In one form or another, knowledge management has been around for a
very long time. Practitioners have included philosophers, priests, teachers, politicians,
scribes, librarians, etc. The importance of knowledge as a key source of competitive
advantage is now well established in management studies. Knowledge is undoubtedly an
indispensable resource to create value for the next generation of society, Industries, and
companies. Yet, despite all the discussions and attentions in both the academic and
business worlds, very few have articulated how organizations actually create and manage
knowledge. Many companies still seem to remain locked in the phase of building
efficient and effective information technology (IT) systems when they try to manage
knowledge.
Ultimately, knowledge management is really just a way of looking at the world of
business. Its a realization that who and what are assets of the organization. And just
like building, operating and managing physical assets, knowledge assets need to be
managed for the greatest possible return on investment.
Knowledge Management (KM) is a management technique to effectively manage
knowledge in organization. It comprises of-

Construction (compilation/collection /collation) of knowledge generated within

the organization (and from external sources) into a Knowledge Repository (KR)
Organize the knowledge so constructed in the organization in such a way that it is
easily accessible to all those in the organization, who need it, on time
A management system that maintains the KR up-to-date and relevant
A set of tools, including computer systems that facilitates ease of accessing the
KR as well as building and maintaining it.
12.3 A Few Facts of Knowledge Management
KM is not useless
The entire idea sits on the fact that its a long-term strategy to maintain the existing
knowledge of the person/organization and also to harvest the new knowledge, which a
person acquires during his process of learning. Debating what knowledge management
is not is pointless. People intuitively know whether they are managing their own
knowledge well and whether their organization helps them to work without stress and
inefficiency.
People and technology
People should not have to choose between knowing a little about lot or a about a little.
They should be able to concentrate most on what they need to know most and, when
needed, find out a lot about related things. This requires a browseable knowledge
environment designed the way people think. People want to solve problems, think, and
collaborate. They do not want to use technology. Technology is a means, not an end.
Technology must serve people, not the other way around. Technology creates knowledge
management problems faster than it creates knowledge management solutions. If
knowledge management were intuitive, organization would have perfected it by now.

Financial factor

The cost of not managing knowledge greatly exceeds the cost of managing important
knowledge. Organizations have the habit of externalizing the cost of not managing the
knowledge to their customers.

Future trends

Those who want to think and act in integrated, creative ways and solve complex
problems need rich, integrated, up-to-date knowledge management environments to
support them. The gulf between traditional and knowledge-driven organizations is
growing as knowledge-driven organizations concentrate not only on present success but
their own evolution so they can better take advantage of the new knowledge-intense
environment.

The paradoxical image

Call it the knowledge management paradox: those who are so busy putting out fires
that they have no time to tackle knowledge management are those who most need to
manage their knowledge better. While many CEO put KM as the top priority, few
companies are still at a stage of implementation: Its the mind shift of the organizational
heads to add knowledge to the balance sheet. What we know now is that, those
companies that crack strategic knowledge management will be those most likely to
succeed in the new economy. The new economy is always termed as the knowledge
economy. Hence a company with higher knowledge quotient makes it big!

12.4 Sources of Knowledge

The two sources of Knowledge are:

Internal sources emerging from the operations of the organization- internal sources
include the organizational operations such as design, development, engineering, sales,
marketing, manufacturing, customer contact, etc. This is the basic source of
organizational information, which is controllable and can be easily canalized to KR. In
the absence of any formal mechanism, this knowledge remains in the minds of
organization members and usually, disappears with them.

External sources such as Industry/Professional Associations, Commercial web sites etc.-

there are many professional bodies such as IEEE, academic bodies such as universities,
research institutions, industry associations such as NEMA, and commercial
organizations. These sources usually make the knowledge available through web sites
and some times through publications. Some of them could be free services and some
could be for a fee. A well-designed KM should be able to take advantage of both the
sources to create and maintain a KR and allow members to easily access the knowledge
stored inside it.

Types of Knowledge

There are two kinds of knowledge- explicit knowledge and tacit knowledge.

Explicit knowledge can be expressed in words and numbers and shared in the form of
data, scientific formulae, specifications, manuals and the like. This kind of knowledge
can be readily transmitted across individuals formally and systematically. Tacit
knowledge, or the other hand, is highly personal and hard to formalize, making it
difficult to communicate or share with others. Subjective insights, intuitions, and
hunches fall into this category of knowledge. Difficult to. verbalize, such tacit
knowledge is deeply rooted in an individuals actions and experience, as well as in the
ideals, values, or emotions he or she embraces.
These two types of knowledge are complementary to each other, and both are crucial to
knowledge creation. They interact with and change into each other in the creative
activities of human beings. Understanding this reciprocal relationship between explicit
knowledge and tacit knowledge is the key to understanding the knowledge-creating
process. The interaction between the two types of knowledge can also be called as the
knowledge conversion. Knowledge is created through such interactions among
individuals with different types and contents of knowledge.

Knowledge creation in organizations takes place primarily through the dynamic process
of four different modes of conversion between the two dimensions of knowledge.

Socialization: Tacit knowledge to conversion takes place when tacit knowledge within
one individual is shared by another through training.

Combination: Explicit knowledge to explicit knowledge conversion takes place when an

individual combines discrete pieces of explicit knowledge into a whole new concept.

Externalization: Tacit knowledge to explicit knowledge conversion can be said to take

place when an individual is able to articulate the foundations of his and her tacit
knowledge.

Internalization: Explicit knowledge to tacit knowledge conversion takes place when new
explicit knowledge is shared throughout the firm and other members begin to use it to
broaden, extend and reframe their own tacit knowledge.

The Factors that Constitute the Knowledge-conversion Process :

Socialization: From Tacit to Tacit

Tacit knowledge accumulation
Extra-firm social information collection
(wandering outside)
Intra-firm social information collection
(wandering inside)
Transfer of tacit knowledge.
Managers gather information from sales and production
sites, share experiences with suppliers and customers
and engage in dialogue with competitors.
Managers engage in bodily experience through
management by wandering about and get ideas for
corporate strategy from daily social life, interaction with
external experts, and informal meetings with
competitors.
Managers find new strategies and market opportunities
by wandering inside the firm.
Managers create a work environment that allows peers
to understand craftsmanship and expertise through
practice and demonstrations by the master.

Externalization: From Tacit to Explicit

(Creating Concepts)
Managers perform facilitation of creative and essential
dialogue, the use of adductive thinking, the use of
metaphors in dialogue for concept creation.
 Combination: From Explicit to
Explicit
Acquisition and integration
Synthesis and processing
Dissemination
Managers engage in planning strategies and operations,
assembling internal and external existing data by using
published literature, computer simulation and
forecasting.
Managers build and create manuals, documents, and
databases on products and services and build up material
by gathering management figures and /or technical
information from all over the company.
Managers engage in planning and in implementation of
presentations to transmit newly created concepts.

Internalization: From Explicit to Tacit

Personal experience: real-world
knowledge acquisition
Stimulation and experimentation; virtual-
world knowledge acquisition
Managers engage in enactive liaisoning activities with
functional dept. by using cross functional development
teams. Search and share new values and thoughts: share
and try to understand management visions and values
through communications with fellow members in the
organization.
Managers engage in facilitating prototyping and
benchmarking and facilitate the challenging spirit within
the organization; managers form teams as a model and
conduct experiments and share results with the entire
dept.

Source: Adapted from Nonaka, Byosiere, Borucki, and Konno (1994).

Give examples of any three organizations is the Indian contest which, in recent times have become success
stories as a result of knowledge conversion
a.
b.
c.

12.5 Knowledge Creation

Most, if not all, firms in developing countries are engrossed in activities to catch up with
advanced countries. Even the majority of firms in advanced countries are engaged in
catching up, as not all firms can be pioneers of novel breakthroughs even in these
countries. Nonetheless, research on organizational knowledge creation and innovation is
concentrated mainly in advanced countries and is focused mostly on the pioneering
process. Research on those subjects in the catching up process, particularly in developing
countries, is, however, scanty. Table 12.1 shows the average amount spent on the
knowledge management by the companies in specific industries.
Table 12.1. Average amount, the companies in specific industries have spent on knowledge Management

INDUSTRY 2000 2001 2002

Business Services $344,184 $415,658 $492,493
Communication $244,657 $455,727 $413,681
Government $108,444 $472,765 $523,529
Education $87,111 $224,632 $386,444
Financial services $1,072,351 $717,168 $1,439336
Discrete manufacturing other $239,688 $436,313 $803,571
process
 Manufacturing $797,500 $729,583 $941,818
Healthcare/Pharmaceuticals $294,000 $253,333 $273,889
Insurance $158,335 $236,113 $127,781
Retail/wholesale $4,159 $19,136 $10,455
Transportation $75,000 $150,250 $140,200
Utilities/Energy/Chemical $800,040 $918,417 $2,200,100
Technology $315,075 $390,871 $483,407
Others $275,974 $373,533 $476,784

Source: IDC, 2001.

Knowledge creation, whether for imitation or innovation, takes place at two levels-
individual and organization. The prime actors in the process of knowledge creation are
individuals within the organization. Knowledge creation in organizations is not,
however, the simple sum of knowledge creation by individuals. Rather it is the process
that creates knowledge, which is distributed across the organization, is communicated
among its members, has consensual validity, and is integrated into the strategy and
management of the organization. Individual knowledge creation is, therefore, an
indispensable condition for knowledge creation in the organization but cannot be the
sufficient one. Organizations create knowledge only when individual insights and skills
become embodied in organization routines, practices, and beliefs. Only effective
organizations can translate individual knowledge creation into organizational knowledge
creation.

Knowledge creation is a function of an organizations absorptive capacity. Absorptive

capacity requires a learning capability and develops problem-solving skills. Learning
capability involves the development of capacity to assimilated existing knowledge (for
imitation). While problem-solving skills represent a capacity to create new knowledge
(for innovation).

Absorptive capacity has two important elements: prior knowledge base and intensity of
effort. First, the prior knowledge base refers to existing individual units of knowledge
available within the organization. Accumulated prior knowledge increases the ability
both to make sense of and to assimilate and use new knowledge. Relevant prior
knowledge base includes basic skills and general knowledge in the case of developing
countries, but it includes the most recent scientific and technological knowledge in the
case of industrially advanced countries. Thus prior knowledge base should be assessed in
its relation to the task difficulty involved. Second the intensity of effort refers to the
amount of energy expended by organizational members to solve problems. Learning how
to solve problems is usually built up over many practice trials involving related problems.
Such effort intensifies interaction among organizational members that facilitates
knowledge conversion and creation at the organizational level. The following case gives
an insight to the concept of knowledge creation.

Case: Samsungs Knowledge Creation Is Catching Up

Despite the skepticism, that it lacked the technological capability to enter and remain
competitive in the semiconductor industry. Samsung Electronics Company has
leapfrogged from a mere producer of discrete devices to the most vibrant producer of
dynamic random access memory (DRAM) chips in only a decade. Samsung has emerged
as the largest memory chipmaker and the seventh largest semiconductor maker in the
world. Samsungs production increased from $83 million in 1985 to $5.2 billion in 1994.
In memory chips, already dominant in 4 megabyte and 16-megabyte DRAM
semiconductors, Samsung is ahead of Japan in 64-megabyte and 256-megabyte
generations, while also attempting to crack more profitable applications-specific
integrated circuits (ASICs).

It was in 1974 when the first local semiconductor firm was established by a Korean-
American scientist with a Ph.D. from Ohio State University and semiconductor design
experience at Motorola. Samsung bought out the company during a financial crisis that
occurred in the companys first year. With a large stake in consumer electronics,
Samsung made the acquisition turned-entrepreneur provided Samsung with an even
higher tacit knowledge base. His tacit knowledge was effectively transferred to Samsung
engineers. This enabled the firm to progressively produce various transistors and
integrated circuits on a small scale, largely for house consumer electronics. Samsung
also established its semiconductors R&D laboratory in 1982.

Samsung set up an R & D outpost in Silicon Valley in 1983 and hired five Korean-
Americans with doctorates in electronics engineering from Stanford, Michigan,
Minnesota, and Notre Dame Universities with semiconductor design experience at IBM,
Honeywell, Intel and National semiconductors. These scientists, plus about three
hundred American engineers, including several designers who left Mostek, brought to
Samsung the crucially important tacit knowledge to crack VLSI technology. Silicon
Valley was a strategic location for the development of the 64k DRAM. A high density of
scientists and engineers in the vicinity offered the rich source of critical information and
expertise that Samsung needed. The outpost also provided opportunities for engineers in
Korea to participate in training and research in USA and enabled them to learn
significantly about VLSI technology.

Samsung organized another R&D task force in Korea with Samsung engineers who were
experienced in LSI and trained on VLSIs at technology suppliers and two Korean-
American scientists. The scientists had 64k DRAM development experience at American
companies and gave Samsung a significantly higher level of tacit knowledge. Active
interaction between the outpost in Silicon Valley and the team in Korea, through training,
joint research, and consulting, elevated significantly both the tacit and explicit knowledge
within the Korean team in a very short period of time resulting in the effective transfer of
knowledge from silicon valley to Korea. This made Samsung engineers better equipped
to assimilate VLSI technologies from Micron Technology and Zytrex. In short, Samsung
had deliberate strategy to upgrade its prior tacit and explicit knowledge, expanding its
prior knowledge base.
The goal was clear to all members. Personal dedication and long working hours
expedited knowledge conversion at the individual level. The shared awareness of a crisis
and determination to solve problems within the assigned time frame intensified close
interaction among members. This, together with high prior knowledge, led to rapid
knowledge conversion among the individual members and to a high rate of knowledge
creation at the organizational level enabling Samsung to have a high absorptive capacity.
Samsung managed the crisis to become creative.

Samsung hit the market with a 64K DRAM in early 1984, some forty months after the
American pioneer and about eighteen months after the first Japanese version became
commercially available. Korea became the third country in the world to introduce
DRAM chips and significantly narrowed the technological gap with Japan and USA.

12.6 Knowledge Management Framework

All mid sized and bigger organizations need to look at KM seriously- It is not just a fad
anymore nor a far of concept- it is real and here and is now available- it is of strategic
importance and we cannot afford to postpone it any longer except at the cost of survival.
Each industry has its own KM system evolved to suit its needs. Though the entire
process starts with a bang, but somewhere down the line the entire process stands still.
Following on the CMM Working model, we can devise a similar model for effective
working of a KMS in the organization as depicted below in figure 12.1.

Ever-Growing
Organization
Level 5
Corporate and Individual
Performance

Level 4
Delivery of Knowledge

Level 3
Grouping of Knowledge

Level 2
Technical Infrastructure and Knowledge
Resources

Level 1
Creation of Strategy for KMS
Figure 12.1: Working of a KMS in an organization.
Level 1: Creation of a Strategy for KMS

Termed as the creation of a strategy for KMS. This level involves a process where the
Best Practices of the organization are listed and accumulated. A strategy is evolved for
accumulation of entire gamut of the organizational and personal knowledge. Identify
organizational needs/objectives in line with the systems needs/ objectives. Establish
policies, which are to be adhered to.

Instead of putting the entire process to be unpredictable, we create a process, which

makes the organization run on a particular schedule. Performance of the system is
gauged by the capability of the individuals and the organization collectively with their
innate skills, knowledge and motivations. Policies for managing the system,
implementation procedures are established. An effective process can be characterized as
practiced, documented, enforced, trained, measur, and able to improve.

Level 2: Technical Infrastructure and Knowledge Resources

This level would involve the design of repository, collaboration, dissemination, and
hardware specifications. Technology requirements as in Capture, Store, Search, Retrieve,
Message, Structure, Navigate, Share, Collaborate, Synthesize, Solve, Recommend,
Integrate, Maintain in Detail the process and functionality scope of the system, Process
would/may overflow as the input as the input of another process. Hence knowledge
could not necessarily be sequential. After knowledge is acquired, synthesized, or created,
it needs to be codified, accessed and transferred again. The knowledge cycle is supported
by collaboration.

Functional scope would include the technology, comprising of KM. Functionality as in

semantics collaboration, visualization and scale. Semantic functionality utilizes
technologies such as clustering, categorization, linguistics analysis, data extraction, and
knowledge maps. It would also include functionality filters identification of experts, and
alignment of users into communities (net groups threaded conversations, network
directories). Visualization addresses navigation and retrieval. Scale addresses the range
of data types and physical locations available to KM users.

Technology requirement scope lists technologies that collectively comprise full function
KM. Not every enterprise needs all functions, and no KM vendor/tools fulfill all of these
requirements. The selection of technologies is preceded by the clear definition of KM
strategy and scope. KM deals with enterprise-wide structured/unstructured data source,
representing multiple data types and formats. KM must bridge knowledge resources to
be accumulated as in the process of existing knowledge, knowledge sharing, knowledge
discovery, identification of intellectual assets of the personnel of the organization and
implementation of KM framework.
The level 2 of the system should allow us to summarize the planning and tracking of the
entire process. The process is under the control of a knowledge office and each
knowledge worker has the right to make the necessary contribution to the system.

Level 3 Grouping of knowledge

This level would involve the proper grouping of all the knowledge accumulated during
level 2. Knowledge can be classified in the following groups: Individual
Group/Project/Corporate.

Individual Knowledge: Acquisition of knowledge would involve the following, search,

filter, integrate, capture, store, validate and personalize the entire process. It would also
let the user learn, analyze, interpret, comment, evaluate, explore and classify the
intellectual asset of the person.

Groups/Project Knowledge: Individualistic knowledge to be integrated with the group.

What counts here are the integration, management and recording capability of the group
knowledge. Each individual should be competent enough to know whats happening in
his/her group.

Corporate knowledge: This would cover the knowledge of the organization, policies,
practices, market trends, industry trends and the like, integration of external sources in
the knowledge base. Monitor, comment and synchronize the entire process of the
organizational knowledge. At the end of this level, all these three groups are to be in sync
with each other. Attention should also to be given to peer groups, inter-group
coordination, intra-group coordination, training program, organization process, and
organization process focus. This level should also ensure that the process is based on a
common, organization-wide understanding of the activities, roles, and responsibilities in
a defined process.

Level 4: Delivery of Knowledge

The level would start with the strategy of identifying audience for all the resources
accumulated. Personalization of the knowledge acquired would be done here. Audience
identified would have to be summarized and the entire visual to be presented to them for
proper usage. Establish a common bond and provide seamless access.

Level 5: Corporate and Individual Performances

This level would require the knowledge office to measure the performances of the
corporate and the individual performances after effective dissemination of knowledge
through the KMS. The information, which has been gathered, has to be used effectively
for better performance of the organization and the individual.

An effective KM should have the following feature: acquisition, creation, packaging, or

application of internal and external knowledge as a primary objective of the work. The
inputs and the outputs will have high levels of variability and to a certain extent some
degree of uncertainty equivocally, and incompleteness. The process of knowledge work
tends to be variable, and difficult to analyze as a set of procedures or steps. Characterized
by exception rather than routine, it is performed by professional or technical workers with
a high level of skill and expertise. Knowledge and work processes include such
activities.

Any KM project should essentially have the following four components-

Create KR (Knowledge Repository) involves finding and collecting internal

knowledge and best practices. Some of the knowledge may be found in
organizational documents such as memos, reports, and presentations and can be
easily stored in a repository. Other knowledge is discovered through discussion.
Discussion databases are another form of knowledge repository. Tools like Lotus
Notes and Microsoft Exchange Server facilitate these discussion databases.

Improve knowledge Access- involves determining ways to facilitate finding the

person with the required knowledge and then transferring the knowledge to
another person. Sometimes, simply storing the knowledge in a repository is not
sufficient. Face to face transfer of knowledge can be more effective. Technology,
such as desktop video conferencing, can enable face-to-face knowledge access.

Enhance knowledge Environment- involves changing the way people work.

Employees are encouraged to share knowledge as well as reuse existing
knowledge. Coaching and training in learning and sharing practices will probably
be necessary. This may be a very difficult task if the organizations culture does
not currently share information.

Manage Knowledge as an Asset- involves demonstrating that effectively using the

knowledge management repositories or face-to-face transfer of knowledge has
allowed the organization to save or make money. This is currently difficult, but
will probably become more accepted as knowledge management becomes more
widely used.

12.7 Benefits of Knowledge Management

Some of the tangible benefits of knowledge management are directly related to their
bottom line savings. In todays information-driven economy, companies continuously
tap most of the opportunities and ultimately derive most value from intellectual rather
than physical assets. According to many experts, to get the most value from a companys
intellectual assets, knowledge must be shared and served as the foundation for
collaboration. Consequently, an effective KM program should help a company leverage
the assets and provide the following benefits:
Fostering innovation by encouraging free flow of ideas
Improving customer service by streamlining response time
Boosting revenues by getting products and services to market faster
 Enhancing employee retention rates by recognizing the value of employees
knowledge and rewarding them for it.
Streamlining operations and reducing costs by eliminating redundant or
unnecessary processes.
A creative approach to KM can result in improved efficiency, higher productivity
and increased revenues in practically any business function.

Knowledge Managements (KM) role is to connect knowledge owners with knowledge

seekers. The knowledge of one is transferred to the mind of the other, so that a new
decision can be made or situation can be handled. KM provides a means to capture and
store passing knowledge and broker it to the appropriate individuals.

Examples where Knowledge Management can offer greatest benefit

KM is beneficial especially in both social and business segments. Here are to few
examples where KM could provide great benefits:

Social (Governmental)

1. Coping with natural disasters

2. Safety in aviation/railways
3. Research and education

Business

1. Research and Development faster solutions and reduction of redundant research

2. Design and Development- by allowing easier access to past design documents,
best practices and better designs become available, faster, making faster deliveries
gaining a competitive edge for the organization
3. Operations- problems reported from the field greatly aid in improving
manufacturing practices and add to product quality
4. Cultural Change- from striving to create and own ideas and objects- to sharing
improving and reusing, in addition to create new ideas and objects.

12.8 Pioneers in Knowledge Management

1. Anderson Consulting- created a system called knowledge Exchange to facilitate

the sharing of problem resolutions and project documents.
2. USAA Insurance Firm- created a customer feedback system which increased
customer loyalty, cut marketing costs, in addition to raising profit .
3. GE- GE has since 1982 collected all customer complaints in a database that
supports telephone operators in answering customer calls. GE has programmed
1.5 million potential problems and their solutions into its system.
 4. Ritz CarltonAll staff members are required to fill in cards with information from
every personal encounter with a guest. These data plus all guest requirements are
stored and printed out to all staff when the guest arrives again, so that each guest
receives a personal treatment.
5. Agro Corp USASells fertilizers and seed. Data on farmers soils are combined
with weather forecasts and information crops. Analyses are fed back to the farmer
via sales representatives to help farmer select best combinations of crops.
6. Dow Chemical USAHas put all its 25000 patents into a database, which is used
by all divisions to explore how existing patents can gain more revenues. The
experience from this application is now being transferred into other intellectual
assets, like brands.
7. Boeing 777 USAFirst paperless development of aircraft included customers in
constructed sub parts, rather than usual organization design team, construction
team. Suppliers worldwide used same digital databases as Boeing.
8. Beckman Labs USAA biotech firm has reorganized itself to optimize knowledge
sharing. Has created Knowledge Transfer Department to co-ordinate efforts.
Employees best at knowledge sharing gain both financial rewards and
management positions.
9. McKinsey and Bain and CoThese two management-consulting firms have
development knowledge databases that contain experiences from every
assignment including names of team members and client reactions. Each team
must appoint a historian to document the work.
Activity 2: Give real world examples in the following areas where KM has been
beneficial.
Company name Product name
R&D ..................... ......................
Dedign & Development ...................
Cultural change.......... .....................
There are many others in the field now in India, all the leading software development
organizations have some kind of KR. Especially those organizations that have been
assessed at level 5 of CMM model of SEI have initiated KM activity in their
organizations. Some of those KM initiatives are discussed in the following section.

12.9 KM Initiatives in Indian Organizations

Knowledge Management Initiatives at Infosys

Infosys provides consultancy and software services worldwide to 500 companies. It

employs approximately 10,200 employees and executes nearly 100 software projects at
any given point of time in diverse areas such as telecom, manufacturing, insurance,
finance, etc. Powered by intellect and driven by values, KM at infosys is founded on
Learn once and Use anywhere concept. Needless to say, managing knowledge at infosys
is a huge challenge. Infosys manages organization-wide knowledge using three centrally
operated Knowledge Shop (K-Shop); Process Assets Database (PAD) and People
Knowledge Map (PKM).
Knowledge Shop

Infosys built the k-shop architecture on Microsoft site serve technology, and all
employees can access it through a web interface. The company encourages people to
submit papers related to technology, domain, trends, culture, project experiences, internal
or external literature, etc. They can submit the articles in any format that the web
supports, and designed templates for various content types to ensure uniformity. In
addition, the K-shop has an excellent search facility that offers search through multiple
parameters. K-shop documents are available to all infosys employees and are segregated
based on the users selected keywords and content type.

Process Assets Database

Process assets database is a database which capture the as is projects deliverable. This
database contains the employees experiences on projects, projects artifacts such as
project plans, design documents, and test plans. Users can search the documents, based
on domain, technology, project type, project code, customer name, and so on. This helps
provide new project with information on similar, previously executed projects and helps
set quantitative goals.

People Knowledge Map

The People Knowledge Map is a directory of experts in various fields. It is an internet-

based system where employees can search and locate experts. It serves as the bridge
between knowledge workers: the user and the provider. Infosys intranet portal SPARSH
serves as the window for all systems and acts as the central tool. The companys quality
system documentation is a repository of all process-related guidelines, checklist, and
templates. These serve to standardize the projects outputs. Infosys also has electronic
bulletin boards for discussing technical and domain-related topics. In addition, there are
news groups and newsletters brought out by various departments that discuss technology
and business trends.

The distinguishing feature, however, is KM with project level focus. Ready reaction to
customer request, improved productivity through rework, and teamwork are some of the
benefits of this approach. Dynamic KM, which takes the form of web sites to manage
knowledge content, training plan with material to tackle project attrition, weekly
knowledge sharing sessions, defining the KM activities in the project plan (2%-3%) etc, -
are some project related KM activities.

Incentive for knowledge sharing is another feature of KM at infosys. When an infosys

submits a document to the K-shop, experts review the document in detail. If found
acceptable, the K-shop publishes it. The reviewer and author are rewarded with
Knowledge Currently Units (KCU) when an employee reads or uses a document for the
K-shop, he or she is encouraged to give KCU, for that document based on the benefits
gained from reading it. Authors can accumulate KCUs for their documents and redeem
them for cash or other gifts. Thus, KCU serve twin objectives: they act as a mechanism
both for rewarding knowledge sharing and rating the quality of assets in the repository.

Infrastructure supporting KM includes LAN/WAN/RAS facilities, E-mail, internet,

intranet, extranets. Voice/Fax Networking/Chat, Video Conferencing, Real
Audio/Video/Web-cast, Business Solutions Hosting, Systems Management, Technology
Enabled Help-desk, Customer Connectivity, etc. Recognizing and Rewarding Innovation
and KM is done through funding for presentation at conferences, Publications on web
sites, Ideas beget wealth- the syslabs awards for technical innovation, best practice
sharing, KCU- the Knowledge Currency Unit, innovation is a criterion for the infosys
Excellence Award, Innovation management- a key result area in the infosys KMM
(knowledge management maturity) model.

The K-shop owns around 12,600 documents. Knowledge Management has helped
infosys increase its productivity and reduce defect levels. A rough estimate shows that
infosys reduced its defects level by much as 40%, thus significantly reducing the
associated rework and the cost of detecting and preventing defects. Also, effective reuse
has increased productivity by 3%. All of this has been possible due to faster access to
accurate information and reuse of knowledge. A team of eight full time employees
designated as Brand Managers help build and maintain the KM infrastructure in
infosys.

Knowledge Management Initiatives at Satyam

Knowledge people make the difference goes the vision statement of Knowledge
Management at Satyam. Satyam declares, As we take our first steps into the new
millennium, organizations everywhere are beginning to see that knowledge is indeed the
foundation upon which all things grow. Business excellence does not come about
without a strong base in knowledge. Therefore those that will stay ahead in the new
economy are those who act upon this realization, and build their funds of knowledge.

Satyams knowledge initiative, apart from managing the existing knowledge resources of
the company, also fosters a culture of creating sharing knowledge across the organization.
Associates have access to a query-based KMS- the Knowledge Repository- that allows
them to gain the advantage of collective experience, thus optimizing their own time on
activities that build upon rather than repeat this experience.

The culture is one of effective communication and knowledge sharing across the
organization via exchange of information, ideas, thoughts, solutions, technologies and
best practices- and leveraging this combined intelligence to offer winning solutions to
global customers.

A by-product of the knowledge initiative is the automation of certain routine query-based

tasks, leading to a considerable saving of talent and time, which is put to the search for
more creative and efficient solutions. Satyam is committed to being a learning
organization. Associates continuously improve their skill-sets and knowledge levels in
technical areas and work on all round personality development.

Satyams learning centre is a world-class mini-varsity of sorts, where technologists,

academics and behavioral researchers provide high-quality training to associates. State-
of the art multimedia laboratories and a panel consisting of distinguished in- house as
well as visiting faculty from reputed educational institutes across the world, make for a
rich educational resource base. Short-term training programmes keep associates
intellectually stimulated and updated on the latest in their fields. The Satyam Learning
Centre has received the Government of Indias National Golden Peacock Award for
contribution to Human Resource Development.

Given the high-velocity knowledge spiral of the present times, it becomes imperative for
knowledge-based organizations to continuously stay at the forefront of know-how and
technology. Satyam provides direct training and helps Associates become independent
learners.

Knowledge Enhancement (KE)

Associates are encouraged to take the initiative to further their own learning. Knowledge
Enhancement provides multiple avenues for this purpose. Associates can take up to a
year of paid sabbatical leave to teach or conduct research. In addition to this Knowledge
Enhancement provides for reimbursement of tuition fee and certification programme
expenses-thereby facilitating knowledge acquisition through multiple means.

Partnering with Pioneers in Teaching

Satyam has links with institutions such as Harvard Business School, Massachusetts
Institute of Technology and Project Management Institute. Associates are exposed to the
latest knowledge through the best and most effective teaching methodologies. Satyam
has a strategic partnership with MIT that provides access to MITs knowledge base.

Knowledge Management Initiatives at BaaN

BaaN is a world leader in powerful, innovative, easy-to-use business software. They are
at the cutting edge of business technology used by industry leaders all over the world-
promoting collaboration between customers and suppliers, linking people and processes
across the world, and using the internet to make business faster and more cost-effective.

They have turned towards knowledge management, in keeping with the demands of time.
Two departments, namely, Knowledge Transfer and Knowledge Development are
projected for this purpose. Their main objective is to empower the members with skills
necessary to meet the external world. They have a centralized database system and it is
christened as SCOPUS. Intranet facility is provided for the members with their identity
and password to use the system.
One of the features of BaaN is the encouragement provided to the employees for
Knowledge management. ASK HR is one such technique that provides a chance to the
employees to make use of public folders and register their doubts and genuine problems.
Longer duration training programmes are provided for new recruits. The others receive
short or mini programmes to update their knowledge.

Baans attempts to multiply knowledge could be seen in the well-maintained library for
the purpose. They contain technical as well as non-technical printed material and is used
by those employees who crave for knowledge.

SPANDANA known as reaction is keenly felt in their monthly meetings. The people
talk and they talk openly and freely with the management. They are helpful in extending
the sharing of the knowledge, which is considered as rich source of knowledge. The
meetings also make the people to come out of their shell and express their genuine
concern for aspects that the organization stands for. Sharing of knowledge, beyond doubt
highlights the brighter side of the employees vast experiences in particular fields, their
updated knowledge, their concern for the system and their sense of responsibility.
Periodic Seminars and discussions help both in documentation and multiplying the
knowledge thus leading to an effective knowledge management.

12.10 Software For Knowledge Management

KM suites provide solutions for creating centralized repositories for storing and sharing
data (knowledge) as well as providing solutions and tools for searching, retrieving and
managing this data.

1. Retrieval ware by Convera- www.convera.com - Retrieval ware creates a

complete inventory of all enterprise assets, then enables users to search more than
200 document types on file servers, in groupware systems, relational databases,
document management systems, web servers and more while respecting access
rights- all from a common user interface.

2. Rightnow Technologies- www.rightnow.com - Knowledge Management Software

The self-learning-knowledge base completely integrates all communication
channels resulting in customers and agents accessing information -whether they
use self-service, submit an email or initiate a live chat session.

3. IBM-Lotus-Knowledge Discovery Products- a discipline providing the strategy

process, and technology to share and leverage information and expertise to do just
that knowledge discovery products and solutions can help rapidly achieve KM by
capturing and organizing knowledge in the form of content, expertise and
communication so it can be easily managed, located, evaluated and reused to
drive responsiveness, innovation, efficiency and learning. this is shown in figure
12.2.
 Figure 12.2: Technology Architecture

Data Warehouse Discussion Database

Communication Layer
(Managing/Groupware/Intranet/Internet
Intelligence /Logical Layer
Agents/Filters/Data Mining/Work Flow)
User Interface Layer

USERS

12.11 Trends And challenges In Knowledge Management

Many software development organizations have been assessed for SEIs Capability
Maturity Model (CMM) in India and many had been assessed at level 5. This mandates
that the organization have a KR- and thus most of these organizations have instituted a
KR in their respective organizations. These are not accessible for public but are
accessible to their organizational members.

Presently the emphasis is being focused on Information Technology related KM-creating

tools and techniques that facilitate creation of KR and effectively utilizing it.

Groupware (IBM-Lotus Notes, Microsoft Exchange Servers-Outlook) has become the

more popular tool. Reasons are not hard top guess-

It facilitates Discussion Groups very effectively

It is very economical and cost effective
Familiarity- they are the most popular e-mail tools
Easy to use for creation of KR and using it
 Robust and reliable tools
However, analytical tools are absent

Data warehouse aids creation of KR. Data Warehousing has grown from data repository
to Knowledge Repository. Tools like, OLAP and data mining techniques facilitate
effective utilization of KR. These facilitate not only extraction of information but also
analysis. However, the costs are high in this segment.

ETL (Extraction Transformation and Loading) tools facilitate extraction of information

from external sources including web pages, transforming them to desired format and
loading them into the organizational KR. Business intelligence (BI) tools facilitate
interpretation and form inferences, BI coupled with KM is fast emerging as a very
powerful Decision Support System (DSS). This trend may, in near future, provide the
success and impetus to DSS, which it has been lacking so far.

Issues and Challenges in KM

Organizations have dispersed for real and critical reasons, says Chad Weinstein,
Director of Knowledge Management consultant for Sopheon PLC, a Minneapolis-based
professional services and software company. It lets them get the best talent, the best
resources and close proximity to potential clients or crucial suppliers. Along with the
opportunities that come with dispersion, a globetrotting, telecommuting workforce
presents challenges in managing and disseminating a corporations collective knowledge.

The first of those challenges is merely getting individuals within the company to
communicate with each other wherever they are located, according to Daniel Rasmus,
vice president and KM research leader for Giga Information Group Inc. in Aliso Viejo,
Calif. Ridiculous as it may sound, many organizations have trouble getting people to
share information who arent on the same floor, so adding remote workers or those in
other geographical locations can prove difficult, he says.

Enterprises are realizing how important it is to know what they know and be able to
make maximum use of the knowledge. This knowledge resides in many different places
such as: databases, knowledge bases, filing cabinets and peoples heads and are
distributed right across the enterprise. All too often one part of an enterprise repeats
work of another part simply because it is enterprise impossible to keep track of, and make
use of, knowledge in other parts. At Tata Steel, one incident more than any other drove
home this point. In 1999, a foreign technical consultant was summoned to the Indian steel
giant to solve a problem. He replied that he had already been engaged and solved it the
year before. In other words, the company, despite having a sophisticated IT
infrastructure, did not seem to systematically know what its problems were and how it
had been solving them.
Enterprises need to know:

What their knowledge assets are?

How to manage and make use of these assets to get maximum return?
Knowledge assets are the knowledge regarding markets, products, technologies and
organizations, that a business owns or needs to own and which enable its business
processes to generate profits, add value, etc. Knowledge management is not only about
managing these knowledge assets but also about preserving knowledge; using
knowledge, and sharing knowledge. Therefore, knowledge management involves the
identification and analysis of available and required knowledge assets and knowledge
asset related processes, and the subsequent planning and control of actions to develop
both the assets and the processes so as to fulfill organizational objectives. Success in an
increasingly competitive marketplace depends critically on the quality of knowledge,
which organizations apply to their key business processes. For example, the supply chain
depends on knowledge of diverse areas including raw materials, planning, manufacturing
and distribution. Likewise product development requires knowledge of consumer
requirements, new science, new technology, marketing, etc.

The challenge of deploying the knowledge assets of an organization to create competitive

advantage becomes more crucial as:

The marketplace is increasingly competitive and the rate of innovation is rising.

So that knowledge must evolve and be assimilated at an ever-faster rate.
Corporations are organizing their businesses to be focused on creating customer
value. Staff functions are being reduced, as are management structures. There is a
need to replace the informal knowledge management of the staff function with
formal methods in customers aligned business processes.
Competitive pressures are reducing the size of the workforce, which holds this
knowledge.
Knowledge takes time to experience and acquire. Employees have less and less
time for this.
There are trends for employees to retire earlier and for increasing mobility,
leading to loss of knowledge.
There is a need to manage increasing complexity as small operating companies
are transnational sourcing operations. A change in strategic direction may result in
the loss of knowledge in a specific area. A subsequent reversal in policy may
then lead to a renewed requirement for this knowledge, but the employees with
that knowledge may no longer be there.

Another reason for the difference between tacit and explicit knowledge is more than
academic is that, by and large, the distinction determines who owns the knowledge.
Explicit knowledge is most likely the property of the firm. One way or another it is either
data or work product. But since tacit knowledge cannot be codified, it effectively
remains the property of the knowledge worker. Companies have certainly tried to own
this knowledge. While the company employs them, knowledge workers are ethically
and sometimes contractuallyprohibited from sharing their knowledge with competitors.
But if the knowledge workers leave the firm they take that knowledge and its inherent
value with them.
Making this distinction between knowledge and the knowledge worker makes it easier to
account for knowledge assets. A knowledge worker is an asset that appreciates over
time. Knowledge itself is more often a depreciating asset. Patents, for example, quickly
lose their value if not licensed quickly. A sales lead becomes worthless if the contact
chooses a competitors product or leaves the customers company for another job. Unlike
other resources, however, knowledge is not subject to the law of diminishing returns; it is
not depleted through use.

KM technology solutions themselves pose a challenge to implementation. Existing

solutions often require customization that puts a significant burden on implementers.
A survey with IT executives also said that they are waiting for some collaboration and
communication tools to fully develop, such as voice recognition technology. The process
approach allows an end-to end view of how best to structure, sequence, and measure
work activities to reach the targeted outcomes. Processes are described as specific
ordering of work activities across time and place, with a beginning, an end, and clearly
identified inputs and outputs: a structure for action. The process approach promotes an
examination of what and how things are done from a viewpoint of producing value for a
customer. The capabilities of information technology (IT) also promote an explicit
management of knowledge processes. IT can be used to capture, codify, distribute, and
apply the firms best knowledge.

Getting employees on board is a major issue in an environment where an individuals

knowledge is valued and rewarded. Establishing a tradition that recognizes tacit
knowledge and encourages employees to share their knowledge are ways companies
motivate employees to participate in KM. Incentive programme is another way. However,
theres the danger that employees will participate solely to earn incentives, without
regard to the quality or relevance of the information they contribute.

KM is not a technology-based concept. It needs careful planning and analysis. While

technology can support KM, it is not the be all and end all of KM. KM decisions should
be based on who (people), what (knowledge) and why (business objectives). Also a KM
programme should be in sync with the business goal. While sharing best practices is a
good idea, there must be an underlying business reason to do so. Without a solid
business case, KM is a futile exercise.

Knowledge is not static. As with many physical assets, the value of knowledge can erode
over time. Since knowledge can get stale fast, the content in a KM programme should
constantly updated be amended, and deleted. Further, the relevance of knowledge at any
given time changes, as do the skills of employees. Therefore, there is no endpoint to a
KM programme. Like product development marketing and R and D, KM is constantly
evolving business practice. Another most important fact is that not all information is
knowledge. Companies diligently need to be on the lookout for information explosion
and overload. Here quality is the key and not quantity.

12.12 Summary
The importance of knowledge as a key source of competitive advantage is now well
established in management studies, as suggested by the growing literature focusing on
knowledge creation and transfer. Knowledge is undoubtedly an indispensable resource to
create value for the next generation of society, industries, and companies. Yet, despite all
the discussions and attentions in both the academic and business worlds, very few have
articulated how organizations actually create and manage knowledge. Many companies
still seem to remain locked in the phase of building efficient and effective information
technology (IT) systems when they try to manage knowledge.

It is imperative for todays progressive organizations to integrate Knowledge

Management (KM) in their routine operations. Incentive for this is the falling cost of
hardware and availability of appropriate software tools to capture and manage corporate
knowledge. Now the sources of knowledge are moving from paper to soft copy form and
on to the web- thus- available to all, either freely or through payment of a nominal fee.
This soft copy form of information/knowledge lends itself to automatic collection,
transformation and manipulation besides being amenable to fast distribution to all
concerned- all these can be accomplished automatically without human intervention. KM
progresses through four stages namely, create Knowledge Repository, improve
knowledge access, create knowledge environment and manage knowledge as an asset.
Challenges in effective implementation of KM in organization stem from new forms of
acquiring information, new tools to store and manipulate information, new tools for
transformation of information, new ways of working over distance and time, and to shift
from information access and sharing to knowledge networking. KM has been
progressing from Groupware and Data warehousing to Business Intelligence thru usage
of sophisticated software tools. KM can give significant benefits to organizations by
assisting them to improve quality of service delivery, avert disasters and reduce costs
through early recognition patterns, alerts and probable actions.

12.13 Keywords

Knowledge is collection of facts, ideas, learnings and policies, practices and a lot more.
Knowledge can also be defined as agreed- upon explicit or formal facts, rules, policies
and procedures.

Skills are information processing competencies that can generate explicit knowledge.
Skills are learned by doing; knowledge is learned by studying or investigating.

Knowledge Management is the collection of processes that govern the creation,

dissemination and utilization of knowledge.

Tacit Knowledge is highly personal and hard to formalize, making it difficult to

communicate or share with others.

Explicit Knowledge can be codified and expressed in a human or formal language. It can
be expressed in works and numbers and shared in the form of data, scientific formulae,
specifications, manuals and the like. This kind of knowledge can be readily transmitted
across individuals formally and systematically.

Socialization- Tacit knowledge to conversion takes place when tacit knowledge within
one individual is shared by another through training.

Combination- Explicit knowledge to explicit knowledge conversion takes place when an

individual combines discrete pieces of explicit knowledge into a new whole.

Externalization- Tacit knowledge to explicit knowledge conversion can be said to take

place when an individual is able to articulate the foundations of his and her tacit
knowledge.

Internalization- Explicit knowledge to tacit knowledge conversion takes place when

new explicit knowledge is shared throughout the firm and other members begin to use it
to broaden, extend and reframe their own tacit knowledge.

12.14 Self-Assessment Questions

1. What is Knowledge Management and how does it enhance the competitiveness of

a firm?
2. Describe the various steps involved in a KM framework. What are the essential
components of a KM project?
3. Search for articles and information about Indian companies that have taken KM
initiatives. Highlight some important issues discussed in those articles.
4. What are the problems and challenges in the implementation of a KM system?

12.15 Further Readings

Van Krough, George. (1998). Care in Knowledge Creation, California Management

Review, Special Issue on the Knowledge and the Firm (pages 135-53).

Noneka, Ikujiro. The Knowledge Creating Company, Harvard Business Review, Vol
34 (6).

Duffy, (2000). Knowledge management to be or not to be? Information Management

Journal, Vol 34 (1), 2000.

Civi E. (2000). Knowledge Management as a competitive asset: A Review, Market

Intelligence and planning Vol 18 (40).

Eisenhart. (1989). Knowledge Management- Building Theory from Case Study

Research, Academy of Management Review, Vol 14.
 UNIT 13 INNOVATION
The objectives of this unit are to:

acquaint you with the concept of innovation and creativity;

discuss the various factors influencing innovation and creativity;

explain the characteristics of innovative organizations; and

familiarize you with the techniques for enhancing creativity.
Structure
13.1 Introduction
13.2 Concept of Innovation and Creativity
13.3 Factors Influencing Creativity and Innovation
13.4 Characteristics of Innovative Organizations
13.5 The Individual and Innovation Culture
13.6 Fostering Creativity and the Creative Process
13.7 Techniques for Enhancing Creativity
13.8 Building Creative Organizations
13.9 Company Programmes to Enhance Creativity
13.10 Summary
13.11 Key Words
13.12 Self Assessment Questions
13.13 Further Readings

13.1 INTRODUCTION
Post-industrial organizations today are knowledge-based organizations and their
success and survival depend on creativity, innovation, discovery and inventiveness.
An effective reaction to these demands leads not only to changes, in individuals and
their behaviour, but also to innovative changes in organizations to ensure their
existence (Read, 1996). It appears that the rate of change is accelerating rapidly as
new knowledge, idea generation and global diffusion increase (Chan Kim and
Mauborgne, 1999; Senge et al., 1999). Creativity and innovation have a role to play in
this change process for survival.
The challenge for companies is to be innovative and creative to bring to the market a
stream of new and improved, added value, products and services that enable the
business to achieve higher margins and thus profits to re-invest in the business.
Innovation can be defined as the successful exploitation of new ideas.

13.2 CONCEPT OF INNOVATION AND CREATIVITY

The concepts of creativity and innovation are often used interchangeably in the
literature. Consequently, it is important to analyze these concepts in the context of this
research. Some definitions of creativity focus on the nature of thought processes and
intellectual activity used to generate new insights or solutions to problems. Other
definitions focus on the personal characteristics and intellectual abilities of
individuals, and still others focus on the product with regard to the different qualities
58 and outcomes of creative attempts (Arad et al., 1997; Udwadia, 1990).
Creativity as a context-specific evaluation can vary from one group, one organization Innovation
and one culture to another and it can also change over time. Evaluating creativity
should, therefore, be considered at the level of a person, organization, industry,
profession, etc. (Ford, 1995). In this unit, the context of creativity is discussed at the
level of the organization and hence, the concept of creativity can be defined as the
generation of new and useful/valuable ideas for products, services, processes and
procedures by individuals or groups in a specific organizational context.
Definitions of innovation found in the literature vary according to the level of
analysis, which is used. The more macro the approach (e.g., social, cultural) the more
varied the definitions seem to be (West and Farr, 1990). Some definitions are general
and broad, while others focus on specific innovations like the implementation of an
idea for a new product or service. In an organizational environment, examples of
innovation are the implementation of ideas for restructuring, or saving of costs,
improved communication, new technology for production processes, new
organizational structures and new personnel plans or programmes (Kanter, 1983 cited
in West and Farr, 1990; Robbins, 1996).
West and Farr (1990) define innovation as follows: the intentional introduction and
application within a role, group or organization of ideas, processes, products or
procedures, new to the relevant unit of adoption, designed to significantly benefit the
individual, the group, organization or wider society. It appears that the context in
which a new idea, product, service or activity is implemented determines whether it
can be regarded as an innovation within that specific context.
Innovation is often associated with change. Innovation is regarded as something new,
which leads to change. However, change cannot always be regarded as innovation
since it does not always involve new ideas or does not always lead to improvement in
an organization (CIMA Study Text, 1996; West and Farr, 1990). An example of
change that cannot be regarded as an innovation is changing office hours in an
exceptionally hot summer season.
Although innovation is intangible, it is probably best described as a pervasive attitude
that allows business to see beyond the present and create the future. In short,
innovation is the engine of change and in todays fiercely competitive environment
resisting change is dangerous. Companies cannot protect themselves from change
regardless of their excellence or the vastness of their current resource base. Change,
while it brings uncertainty and risk, also creates opportunity. The key driver of the
organizations ability to change is innovation. However, simply deciding that the
organization has to be innovative is not sufficient. That decision must be backed by
actions that create an environment in which people are so comfortable with innovation
that they create it.
Culture is a primary determinant of innovation. Possession of positive cultural
characteristics provides the organization with necessary ingredients to innovate.
Culture has multiple elements that can serve to enhance or inhibit the tendency to
innovate. Moreover the culture of innovation needs to be matched against the
appropriate organizational context. To examine culture in isolation is a mistake and to
simply identify one type of culture and propose it as the panacea to an organizations
lack of innovation is to compound that mistake.

13.3 FACTORS INFLUENCING CREATIVITY AND

INNOVATION
Virtually all companies talk about innovation and many may actually attempt to do
it, but only a few actually succeed in doing it. The reality is that innovation, for the 59
Strategic Enablers most part, frightens organizations because it is inevitably linked to risk. Many
companies pay lip service to the power and benefits of innovation. To a large extent
most remain averse to the aggressive investment and commitment that innovation
demands. Instead they dabble in innovation and creativity. Even though innovation is
debated at senior level meetings as being the lifeblood of the company, and occasional
resources and R&D funds are thrown at it, often the commitment usually ends there.
However, becoming innovative demands more than debate and resources- it requires
an organizational culture that constantly guides organizational members to strive for
innovation and a climate that is conducive to creativity.
The dimensions/factors of organization culture that influence creativity and
innovation in an organization are discussed below. Each of these dimensions is
discussed briefly to describe their influence in promoting or hindering creativity and
innovation.
Strategy
An innovation strategy is a strategy that promotes the development and
implementation of new products and services. The origin of creativity and innovation
lies in a shared vision and mission, which are focused on the future. Furthermore, the
vision and mission of a creative and innovative organization are also customer and
market oriented- focusing on solving customers problems among other things. An
example of a vision that emphasizes creative and innovative behaviour is: Our
company will innovate endlessly to create new and valuable products and services and
to improve our methods of producing them (Lock and Kirkpatrick, 1995).
It is also important that employees should understand the vision and mission (which
support creativity and innovation) and the gap between the current situation and the
vision and mission to be able to act creatively and innovatively. Having a clear
corporate philosophy enables individuals to co-ordinate their activities to achieve
common purposes, even in the absence of direction from their managers. One effect of
corporate statements is their influence in creating a strong culture capable of
appropriately guiding behaviours and actions. However there is also a degree of doubt
as to whether statements of principles have any value in driving the organization
forward. Most statements encountered often are of little value because they fail to
grab peoples attention or motivate them to work toward a common end.
Judge et al. (1997) describe successful innovation as chaos within guidelines; in other
words top management prescribes a set of strategic goals, but allows personnel great
freedom within the context of the goals. Organizational goals and objectives reflect
the priorities and values of organizations and as a result may promote or hinder
innovation (Arad et al., 1997). Personal and organizational goals that emphasize
quality rather than effectiveness improve the levels of innovation. It appears that
reflecting the value of purposefulness in the goals and objectives of organizations has
an influence on creativity and innovation.
Structure
In the innovation literature, much has been written about the structural characteristics
of organizations and it has been suggested that a flat structure, autonomy and work
teams will promote innovation, whereas specialization, formalization, standardization
and centralization will inhibit innovation. As regards the influence of organizational
culture on a structure that supports creativity and innovation, values like flexibility,
freedom and cooperative teamwork will promote creativity and innovation. On the
other hand, values like rigidity, control, predictability, stability and order (mostly
associated with hierarchical structures) will hinder creativity and innovation (Arad
60 et. al., 1997).
A high level of responsibility and adaptability accompanies an organizational Innovation
structure that allows for flexibility. Examples of flexibility in organizations include
making use of job rotation programmes or doing away with formal and rigid job
descriptions. Freedom as a core value in stimulating creativity and innovation is
manifested in autonomy, empowerment and decision-making. This implies that
personnel are free to achieve their goals in an automatic and creative way within
guidelines. Personnel, therefore, have the freedom to do their work and determine
procedures as they see fit within the guidelines provided. Management should also
believe in personnel and encourage them to be more creative by allowing them more
freedom, in other words empowering them instead of controlling them (Judge et al.,
1997, p. 76).
Research revealed that the degree to which employees have freedom and authority to
participate in decision making in solving problems determines the level of
empowerment, which is positively related to the level of creativity and innovation in
an organization (Arad et al., 1997). The speed of decision-making can also promote or
inhibit creativity and innovation. Tushman and OReilly (1997) claim that cultural
norms that lead to quick decision- making (e.g. that speed is important and that the
work rate is fast) should promote the implementation of innovation.
Co-operative teams are identified by some authors as having an influence on the
degree to which creativity and innovation take place in organizations. Well-
established work teams, which allow for diversity and individual talents that
complement one another, should promote creativity and innovation (Arad et al., 1997;
Mumford et al., 1997). Cross-functional teams that encourage social and technical
interaction between developers and implementers can improve and promote creativity
and innovation. Another important aspect is that team members should be able to trust
and respect one another, understand one anothers perspectives and style of
functioning, solve differences of opinion, communicate effectively, be open to new
ideas and question new ideas. Such effective teamwork is partly based on team
members skills and abilities and partly on the shared values within the group (e.g.
values about shared trust and solving differences) (Tushman and OReilly, 1997).
In summary, organic structures that promote innovation are:

Freedom from rules;

Participative and informal;

Many views aired and considered;

Face to face communication; little red tape;

Inter-disciplinary teams; breaking down departmental barriers;

Emphasis on creative interaction and aims;

Outward looking; willingness to take on external ideas;

Flexibility with respect to changing needs;

Non-hierarchical;

Information flow downwards as well as upwards;

Decision making responsibility at lower levels;

Decentralized procedures;

Freedom to act; 61
Strategic Enablers
Expectation of action;

Belief the individual can have an impact;

Delegation;

Quick, flexible decision making;

Minimize bureaucracy;
The structures that hinder innovation include:

Rigid departmental separation and functional specialization;

Hierarchical;

Bureaucratic;

Many rules and set procedures;

Formal reporting;

Long decision chains and slow decision making;

Little individual freedom of action;

Communication via the written word;

Much information flow upwards; directives flow downwards.
Support Mechanisms
Support mechanisms should be present in an organization to create an environment
that will promote creativity and innovation. Rewards and recognition and the
availability of resources, namely time, information technology and creative people,
are mechanisms that play this role. Behaviour that is rewarded reflects the values of
an organization. If creative behaviour is rewarded, it will become the general,
dominant way of behaving (Arad et. al., 1997). The problem is that many
organizations hope that personnel will think more creatively and take risks, but they
are rewarded for well-proven, trusted methods and fault-free work. Personnel should
also be rewarded for risk taking, experimenting and generating ideas. Intrinsic
rewards like increased autonomy and improved opportunities for personal and
professional growth may support the innovation process. It is also important to reward
individuals as well as teams (Tushman and OReilly, 1997). Management should be
sensitive to which methods of reward and recognition will inspire personnel in their
specific organization to be more creative and innovative (Tushman and OReilly,
1997).
The key attributes of organizations that reward innovation include:

Ideas are valued;

Attention and support of Top Management;

Respect for new ideas;

Celebration of accomplishments, e.g. awards;

Implementation of suggestions;

Encouragement.
62
An organizational culture that promotes creativity and innovation should give Innovation
employees time to think creatively and experiment (Shattow, 1996). In organizations
where creativity and innovation are encouraged, personnel are, for example, allowed
to spend 15 percent of their time on generating new ideas and working on their
favourite projects. Emphasis on productivity and downsizing, which leads to more
pressure on employees to work harder, is not conducive to creativity and innovation in
organization (Filipczak, 1997).
Information technology as a support mechanism is an important resource for
successful innovation (Shattow, 1996). In organizations where it is part of the culture
to use computer technology such as the Internet and Intranet to communicate and
exchange ideas, the chances of creativity and innovation taking place are improved
(Bresnahan, 1997; Khalil, 1996).
Recruitment, selection and appointment and maintaining employees are an important
part of promoting the culture of and specifically creativity and innovation in an
organization. The values and beliefs of management are reflected in the type of people
that are appointed. Apart from personality traits like intelligence, knowledge, risk
taking, inquisitiveness and energy, a value like diversity is of utmost importance in
the appointment of creative and innovative people. Appointing people of diverse
backgrounds should lead to richer ideas and processes that should stimulate creativity
and innovation (Bresnahan, 1997; Gardenswartz and Rowe, 1998).
Behaviour that Encourages Innovation
Values and norms that encourage innovation manifest themselves in specific
behavioural forms that promote or inhibit creativity and innovation. The way in which
mistakes are handled in organizations will determine whether personnel feel free to
act creatively and innovatively. Mistakes can be ignored, covered up, used to punish
someone or perceived as a learning opportunity (Brodtrick, 1997). Tolerance of
mistakes is an essential element in the development of an organizational culture that
promotes creativity and innovation. Successful organizations reward success and
acknowledge or celebrate failures, for example, by creating opportunities to openly
discuss and learn from mistakes (Tushman and OReilly, 1997).
An organizational culture, in which personnel are encouraged to generate new ideas,
without being harmed, and where the focus is on what is supported instead of on what
is not viable, should encourage creativity and innovation (Filipczak, 1997). Fair
evaluation of ideas will also support and encourage creativity (Amabile, 1995). An
organizational culture that supports a continuous learning orientation should
encourage creativity and innovation. By focusing on being inquisitive, encouraging
personnel to talk to one another (e.g., to clients within and outside the organization to
learn from them), keeping knowledge and skills up to date and learning creative
thinking skills, a learning culture can be created and maintained.
Taking risks and experimenting are behaviours that are associated with creativity and
innovation. A culture in which too many management controls are applied will inhibit
risk taking and consequently creativity and innovation (Judge et. al., 1997). The
assumption that risks may be taken as long as they do not harm the organization will
not encourage personnel to be creative and innovative by experimenting and taking
risks (Filipczack, 1997, p. 37). It is important that a balance should be reached in the
degree to which risk taking is allowed. This can be achieved by spelling out expected
results, assigning the responsibility of monitoring and measuring risk taking to
someone in the organization, creating a tolerant atmosphere in which mistakes are
accepted as part of taking the initiative, regarding mistakes as learning experiences,
and assuming that there is a fair chance of risks being successful.
63
Strategic Enablers Most creative and innovative departments in an organization regard competitiveness
as an important aspect of their culture. According to Read (1996, p. 226),
competitiveness in organizations has shifted to the creation and assimilation of
knowledge. In creating a culture of competitiveness managers should reach out to
internal and external knowledge, encourage debating of ideas, create an environment
in which constructive conflict will lead to information flow, support projects based on
information flow and actively manage the choice of organizational design. Support for
change is a value that will influence creativity and innovation positively (Arad et al.,
1997; Tushman and OReilly, 1997). Managers can create a culture that supports
change by looking for new and improved ways of working, creating a vision that
emphasizes change and revealing a positive attitude towards change (Arad et al.,
1997; Tushman and OReilly, 1997). An example of a culture in which change is
supported is to expect personnel, when stating their annual objectives for the year, to
indicate how they intend changing their work methods.
Tolerance of conflict and handling conflict constructively are values that support
creative and innovative behaviour in organizations (Mumford et al., 1997; Robbins,
1997; Judge et al., 1997). When there is conflict between different ideas, perceptions
and ways in which information is processed and evaluated, the process of handling
conflict should be handled constructively to promote creativity and innovation.
Understanding different individual thinking styles and training personnel in the
process of constructive confrontation will create a culture supportive of creativity and
innovation.
Communication
An organizational culture that supports open and transparent communication, based
on trust, will have a positive influence on promoting creativity and innovation (Barret,
1997; Robbins, 1996). Teaching personnel that disagreement is acceptable, since it
offers the opportunity to expose paradoxes, conflict and dilemmas, can promote
openness in communication. At the same time personnel must feel emotionally safe to
be able to act creatively and innovatively and should therefore be able to trust one
another, which in turn is promoted by open communication. An open-door
communication policy, including open communication between individuals, teams
and departments to gain new perspectives, is therefore necessary to create a culture
supportive of creativity and innovation (Filipczak, 1997).
Leadership
Leading edge organizations consistently innovate, and do so with courage. It is the
task of organizational leaders to provide the culture and climate that nurtures and
acknowledges innovation at every level. Notwithstanding the fact that leadership is
critically important, it is nevertheless insufficient on its own to build a culture of
continuous improvement and innovation. To build a culture of innovation, many
innovation champions must be identified, recruited, developed, trained, encouraged
and acknowledged throughout the organization.
In order to build a successful and sustainable culture of innovation, leadership needs
to accomplish two broad tasks. First leaders need to be acutely sensitive to their
environment and acutely aware of the impact that they themselves have on those
around them. This sensitivity enables them to provide an important human perspective
to the task at hand and is critical because it is only within this awareness that the
leader can begin to bridge the gap between leader speak and the real world of
organizational culture. The second factor is the ability of leaders to accept and deal
with ambiguity. Innovation cannot occur without ambiguity, and organizations and
individuals that are not able to tolerate ambiguity in the work place environment and
64
relationships reproduce only routine actions. Innovative structures, for example, Innovation
cannot have all attendant problems worked out in advance. Leaders need to build a
deep appreciation of this fact; otherwise there will be a tendency to create cultures of
blame. Tolerance of ambiguity allows space for risk taking, and exploration of
alternative solution spaces, which do not always produce business results. This hedges
against constant deployment of tried and tested routines for all occasions. Tom Peters
comes close to the mark in highlighting that most successful managers have an
unusual ability to resolve paradox, to translate conflicts and tensions into excitement,
high commitment and superior performance.
Characteristics that distinguish highly innovative firms against less innovative
companies are as follows:

Top management commits both financial and emotional support to innovation,
and they promote innovation through champions and advocates for innovation.

Top management has to ensure that realistic and accurate assessments of the
markets are made for the planned innovation. Highly innovative firms are close
to the end users, and are accurately able to assess potential demand.

Top management ensures that innovation projects get the necessary support from
all levels of the organization.

Top management ensures that structured methodology/systems are set in place so
that each innovation goes through a careful screening process prior to actual
implementation.
The above suggests that senior management play a pivotal role in enhancing or
hindering organizational innovation. If senior management is able to install all of the
above types of procedures and practices then they effectively seed a climate
conducive to innovation. It is important to note that it is not sufficient to only
emphasize one or few practices.
Box 13.1: Ten Practical Steps to Keep your Innovation System Alive & Well
1) Remove fear from your organization. Innovation means doing something new,
something that may fail. If people fear failing, they will not innovate.
2) Make innovation part of the performance review system for everyone. Ask
them what they will create or improve in the coming year and then track their
progress.
3) Document an innovation process and make sure everyone understands it as
well as his or her role in it.
4) Build in enough looseness into the system for people to explore new
possibilities and collaborate with others inside and outside the organization.
5) Make sure that everyone understands the corporate strategy and that all
innovation efforts are aligned with it. However, also create a process for
handling the outlier (new and innovative ideas) ideas that dont fit the strategy
but are too good to throw away.
6) Teach people to scan the environment for new trends, technologies and
changes in customer mindsets.
7) Teach people the critical importance of diversity of thinking styles, experience,
perspectives and expertise. Expect diversity in all activities related to
innovation.
8) Good criteria can focus ideation; however, overly restrictive criteria can stifle
ideation and perpetuate assumptions and mindsets from the past. Spend the time
necessary upfront to develop market and success-related parameters that will 65
take you into the future.
Strategic Enablers
9) Innovation teams are different from regular project teams. They need
different tools and different mindsets. Provide enough training and coaching so
that when people are working on an innovation team, they can be successful.
10) Buy or develop an idea management system that captures ideas in a way that
encourages people to build on and evaluate new possibilities.
Source: Joyce Wycoff (http://www.thinksmart.com)

13.4 CHARACTERISTICS OF INNOVATIVE

ORGANIZATIONS
Despite the interest in the field of innovation, much of the research evidence
concerning management practices about innovation cultures and creative climate
remains unsystematic and anecdotal. As mentioned earlier, the importance of culture
has been emphasized by organizational theorists such as Burns and Stalker (1961),
who present a case for organic structures as opposed to mechanistic structures. In
popular literature, Peters and Waterman (1982), similarly present arguments, which
suggest that in order to facilitate innovation, work environments must be
simultaneously tight and loose. Burlgeman and Sayles (1986) highlight the
dependency of innovation with the development and maintenance of an appropriate
context within which innovation can occur. Judge et al. (1997) in presenting findings
from a study of R&D units compare cultures and climates between innovative and
less-innovative firms and argue that the key distinguishing factor between innovative
and less innovative firms is the ability of management to create a sense of community
in the workplace. Highly innovative companies behave as focused communities
whereas less innovative companies units behave more like traditional bureaucratic
departments. They suggest four managerial practices that influence the making of
such goal-directed communities.
Balanced Autonomy
Autonomy is defined as having control over means as well as the ends of ones work.
This concept appears to be one of central importance. There are two types of
autonomy:

Strategic Autonomy: the freedom to set ones own agenda;

Operational Autonomy: the freedom to attack a problem, once it has been set
by the organization, in ways that are determined by the individual self.
Operational autonomy encourages a sense of the individual and promotes
entrepreneurial spirit, whereas strategic autonomy is more to do with the level of
alignment with organizational goals. It appears that firms that are most innovative
emphasize operational autonomy but retain strategic autonomy for top management.
Top management appears to specify ultimate goals to be attained but thereafter
provide freedom to allow individuals to be creative in the ways they achieve goals.
Giving strategic autonomy, in the sense of allowing individuals a large degree of
freedom to determine their destiny, ultimately leads to less innovation. The results of
strategic autonomy are an absence of guidelines and focus in effort. In contrast,
having too little operational autonomy also has the effect of creating imbalance. Here
the roadmaps become too rigidly specified, and control drives out innovative flair,
leading eventually to bureaucratic atmospheres. What works best is a balance between
operational and strategic autonomy.

66
Personalized Recognition Innovation

Rewarding individuals for their contribution to the organization is widely used by

corporations. However, while recognition can take many forms there is a common
distinction: rewards can be either extrinsic or intrinsic. Extrinsic rewards are things
such as pay increases, bonuses and shares and stock options. Intrinsic rewards are
those that are based on internal feelings of accomplishment by the recipient. For
example, being personally thanked by the CEO, or being recognized by the peer
group, being awarded an award or trophy.
Innovative companies appear to rely heavily on personalized intrinsic awards, both for
individuals as well as groups. Less innovative companies tend to place almost
exclusive emphasis on extrinsic awards. It appears that when individuals are
motivated more by intrinsic desires than extrinsic desires then there is greater creative
thought and action. Nevertheless, it has to be stated that extrinsic rewards have to be
present at a base level in order to ensure that individuals are at least comfortable with
their salary. Beyond the base salary thresholds it appears that innovation is primarily
driven by self-esteem level rather than external monetary rewards. It appears that
extrinsic rewards often yield only temporary compliance. Extrinsic rewards promote
competitive behaviours, which disrupt workplace relationships, inhibit openness and
learning, discourage risk-taking, and can effectively undermine interest in work itself.
When extrinsic rewards are used, individuals tend to channel their energies in trying
to get the extrinsic reward rather than unleash their creative potential.
Integrated Socio-Technical System
Highly innovative companies appear to place equal emphasis on the technical side as
well as the social side of the organization. In other words, they look to nurture not
only technical abilities and expertise but also promote a sense of sharing and
togetherness. Fostering group cohesiveness requires paying attention to the
recruitment process to ensure social fit beyond technical expertise, and also about
carefully integrating new individuals through a well-designed socialization
programme. Less innovative firms on the other hand appear to be more concerned
with explicit, aggressive individual goals. Less innovative firms tend to create
environments of independence, whereas innovative ones create environments of co-
operation. Highly innovative companies also appear to place much more reasonable
goal expectations, and try not to overload individuals with projects. The prevalent
belief being that too many projects spread effort too thinly, leading individuals to step
from the surface of one to the next. These conditions create time pressures, which
militate strongly against innovativeness.
Continuity of Slack
Slack is the cushion of resources, which allows an organization to adapt to internal
and external pressures. Slack has been correlated positively to innovation. Judge et al.
(1997) note that it is not just the existence of slack but also the existence of slack over
time that appears to have positive impact upon innovation. They find less innovative
firms have slack but these firms appear to have experienced significant disruptions or
discontinuities of slack in their past or were expecting disruptions in the future.
Therefore innovativeness seems to be linked with both experience and expectations of
slack resources. It can be hypothesized that slack, and future expectations of
uninterrupted slack, provide scope for the organization and its members to take risks
that they would not take under conditions of no slack, or interruptions in slack.
Organizationally, this would appear to indicate the need for generating a base-line
stock of slack in a variety of critical resources (such as time and seed funding for new
projects). Figure 13.1 depicts the characteristics of an innovative/creative
67
organization.
Strategic Enablers
Stable, Secure Internal
Environment

Separation of Creative Open Channels o

from Productive Functions Communication

Not run as a Tight Encouragemen

Ship Contacts
Creative
Risk Taking Ethos Organization Idea Units fre
Responsibility

Decentralized and Heterogeneous Personn

Diversified Policy

Investment in Basic
Research

Figure 13.1: Characteristics of an Innovative/Creative Organization

13.5 THE INDIVIDUAL AND INNOVATION

CULTURE
People play a role in organizational culture. Organizations need to consider the type of
employees that can most effectively drive innovation. From a diverse range of
research (psychology to management) it has been found that a core of reasonably
stable personality traits characterizes creative individuals. A select few of these are
listed below.

High valuation of aesthetic qualities in experience

Broad interests

Attraction to complexity

High energy

Independence of judgement

Intuition

Self-confidence

Ability to accommodate opposites

Firm sense of self as creative

Persistence

Curiosity

Energy

Intellectual honesty

Internal locus of control (reflective/introspective)
Although there appears to be general agreement that personality is related to
creativity, attempts to try and use this inventory type of approach in an organizational
68 setting as predictor of creative accomplishments is fraught with dangers, and is hardly
likely to be any more useful than attempts at picking good leaders through the use of Innovation
trait theory approaches. Nevertheless it does highlight the need to focus on individual
actors, and to try and nurture such characteristics or at least bring them out, if
necessary, in an organizational setting.
Cognitive Factors and Innovation
Cognitive factors also appear to be associated with the ability to innovate. Research
appears to indicate that a number of cognitive factors are associated with creativity.
For example, medical psychology indicates differences in cognitive processing,
ascribing left cerebral cortex to rational thinking, and the right brain to intuition.
Cognitive parameters affecting idea production are given below:

Associative fluency

Fluency of expression

Figural fluency

Ideational fluency

Speech fluency

Word fluency

Practical ideational fluency

Originality

Fluency

Flexibility

Originality
Personal Motivational Factors Affecting Innovation
At the individual level numerous motivation-related factors have been identified as
drivers of creative production. The key ones are presented below:
Intrinsic versus Extrinsic Motivation
Intrinsic motivation is a key driver of creativity (Amabile, 1990; Baron and
Harrington, 1981). In fact extrinsic interventions such as rewards and evaluations
appear to adversely affect innovation motivation because they appear to redirect
attention from experimenting to following rules or technicalities of performing a
specific task. Furthermore, apprehension about evaluation appears to divert attention
away from the innovation because individuals become reluctant to take risks since
these risks may be negatively evaluated. On the contrary, in order to be creative,
individuals need freedom to take risks, play with ideas and expand the range of
considerations from which solutions may emerge.
Challenging Individuals
Open ended, non-structured tasks engender higher creativity than narrow jobs. This
occurs by virtue of the fact that people respond positively when they are challenged
and provided sufficient scope to generate novel solutions. It appears that it is not the
individual who lacks creative potential but it is the organizational expectations that
exert a primary debilitating effect upon the individuals inclination to innovate
(Shalley and Oldham, 1985).
Skills and Knowledge
Creativity is affected by relevant skills such as expertise, technical skills, talent etc.
However such domain-related skills can have both positive as well as negative 69
Strategic Enablers consequences. Positively, knowledge enhances the possibility of creating new
understanding. Negatively, high domain-relevant skills may narrow the search
heuristics to learnt routines and thereby constrain fundamentally new perspectives.
This can lead to functional fixedness.
At a more macro-level Schneider et al. (1996) suggest that organizations may attract
and select persons with matching styles. Organizational culture, as well as other
aspects of the organization, may be difficult to change because people who are
attracted to the organization may be resistant to accepting new cognitive styles. When
a change is forced, those persons attracted by the old organization may leave because
they no longer match the newly accepted cognitive style. Among other things, this
culture-cognitive style match suggests that organizational conditions (including
training programmes) supportive of creativity will be effective only to the extent that
the potential and current organizational members know of and prefer these conditions.
Box 13.2: List of Qualities that Describe Innovators

Challenges status quo : Dissatisfied with current reality, questions authority
and routine and confronts assumptions.

Curious : Actively explores the environment, investigates new possibilities,
and honours the sense of awe and wonder.

Self-motivated : Responds to deep inner needs, proactively initiates new
projects, intrinsically rewarded for efforts.

Visionary : Highly imaginative, maintains a future orientation, thinks in mental
pictures.

Entertains the fantastic : Conjures outrageous scenarios, sees possibilities
within the seemingly impossible, honours dreams and daydreams.

Takes risks : Goes beyond the comfort zone, experimental and non-
conforming, courageously willing to fail.

Peripatetic : Changes work environments as needed; wanders, walks or travels
to inspire fresh thinking; given to movement and interaction.

Playful/humorous : Appreciates incongruities and surprise, able to appear
foolish and child-like, laughs easily and often.

Self-accepting : Withholds compulsive criticism of their own ideas,
understands perfection is the enemy of the good unattached to looking
good in the eyes of others.

Flexible/adaptive : Open to serendipity and change, able to adjust game plan
as needed, entertains multiple ideas and solutions.

Makes new connections : Sees relationships between seemingly disconnected
elements, synthesizes odd combinations, distills unusual ideas down to their
underlying principles.

Reflective : Incubates on problems and challenges; seeks out states of
immersion; ponders, muses and contemplates.

Recognizes (and re-cognizes) patterns : Perceptive and discriminating, notices
organizing principles and trends, sees (and challenges) the Big Picture.

Tolerates ambiguity : Comfortable with chaos, able to entertain paradox,
doesnt settle for the first right idea.

Committed to learning : Continually seeks knowledge, synthesizes new input
quickly, balances information gathering and action.
70
 Innovation

Balances intuition and analysis : Alternates between divergent and convergent
thinking; entertains hunches before analyzing them; trusts their gut, uses their
head.

Situationally collaborative : Balances rugged individualism with political
savvy, open to coaching and support, rallies organizational support as needed.

Formally articulate : Communicates ideas effectively, translates abstract
concepts into meaningful language, creates prototypes with ease.

Resilient : Bounces back from disappointment, learns quickly from feedback,
willing to try, try again.

Persevering : Hardworking and persistent, champions new ideas with tenacity,
committed to follow-through and bottom-line results.
Source: Free the Genie series, a set of 12 creative thinking booklets, by Mitchell Ditkoff,
President, Idea Champions.

13.6 FOSTERING CREATIVITY AND THE CREATIVE

PROCESS
Good problem solving occurs when managers have many viable, creative alternatives
to consider. To inspire employees to approach problems creatively and to nurture a
creative environment, organizations follow three general approaches. These include
hiring creative individuals, applying specific creativity-enhancement techniques, and
developing a creative organization.
Creative behaviour is defined as production ideas that are both new and useful.
Creative ability is the ability to produce ideas that are both new and useful. These
definitions may seem constraining, since the usefulness of some truly creative
alternative might not be immediately evident. One scholar has addressed this dilemma
by differentiating between originality and creativity. Both motivation and a proper
setting may be necessary if innate creative ability is to blossom into creative output.
Creativity involves more than the sudden moment of inspiration in which an idea
suddenly flashes in the brain. Instead, as shown in figure 13.2 below, there are four
stages to the creative process: preparation, incubation, insight, and verification.

Preparation Incubation Insight

Figure 13.2: The Creative Process

Preparation involves gathering, sorting, and integrating information and other

materials to provide a solid base for a later breakthrough. The discoveries of
penicillin, the benzene ring, or gravity, while each involved a moment of insight,
would have been impossible without a firm grasp of related information. During the
incubation stage, the mind is not consciously focused on the problem. The individual
may be relaxed, asleep, reflective, or otherwise involved. The insight (Eureka!)
stage is the familiar, sudden moment of inspiration. While this is what we often think
of as creativity, it is only one step in the creative process.
Finally, verification is necessary. Here, the individual carries out the chores involved
in carefully checking facts to support the insight, carrying out research to determine
that the DNA molecule is in fact a double helix or that a meteorite did really create a
dust cloud that led to the extinction of the dinosaurs. This process further supports the
contention that creativity does not just happen. It is a thorough and often-painstaking
activity. 71
Strategic Enablers
13.7 TECHNIQUES FOR ENHANCING CREATIVITY
A wide variety of popular techniques have been developed to enhance creativity, as
described in this section.

Gordon Technique

William J.J.Gordon worked with creative-thinking groups and had a creative variety
of other pursuits. He was concerned that people, when asked to come up with a
creative new idea, would instead incrementalize. That is, they would take an available
alternative and improve it bit by bit. While this might lead to marginally better
alternatives the alternatives probably would not be real breakthroughs. Gordon
decided that one way to avoid this problem would be simply not to tell people what
they were inventing. Thus, the Gordon technique uses an initial focus on function.
Rather than being told to build a better mousetrap, the group might first be told that
the focus was capturing. Instead of the group being instructed to design an improved
knife, the function could be given as severing.

Synectics

Gordon also developed a well-known technique called synectics. Synectics means,

the joining of apparently unrelated elements. First, very different sorts of people are
put together in synectics groups in order to get a real diversity of perspectives.
Second, synectics relies heavily on the use of analogies. Synectics techniques have
been widely adopted by both businesses and educational institutions. Three synectics
tools according to Gordon are direct analogy, personal analogy, and fantasy analogy.
Direct Analogy: This involves looking for parallel facts, knowledge, or technology in
a different domain from the one being worked on. For instance, can we think of
anything similar that occurs in nature?
Personal Analogy: With this approach, synectics group members try to identify
psychologically with key parts of the problem. In one case, for example, the group
was asked to design a mechanism that would run a shaft turning at 400 to 4000 rpm so
that the power-takeoff end of the shaft would turn at a constant 400rpm. To address
this question, members of the group metaphorically entered the box and tried to use
their bodies to attain the required speed without undue friction.
Fantasy Analogy: Sigmund Freud saw creativity as the fulfillment of a wish or
fantasy. Fantasy analogy asks how in many wildest dreams can I make this happen?
Gordon gives the example of a synectics group with the task of inventing a vapour-
proof closure for space suits. Their solution was a spring mechanism based on the
fantasy analogy of rows of trained insects clasping claws to hold shut the closure.
There is more to synectics than just the use of analogy. The technique follows a
structure problem-solving sequence in which a client and other participants interact to
develop a workable solution to the clients problem. For instance, after the problem
has been introduced and discussed, there is a Springboards stage in which the
problem is opened up by asking the client to convert concerns, opinions, and desires
into statements such as I wish or How to . Later, after an initial idea has been
developed and refined, an itemized response stage requires the client to think of
three useful aspects or advantages of the idea and to generate key concerns. Still later,
after the group works to modify the suggestion to overcome these concerns, the
possible solution is checked for elements of newness and feasibility and whether
there is sufficient commitment to the solution to take additional steps. Finally, the
client lists actions to be taken to implement the solution, including timing and the
72 personnel to be used.
Betsy Means, vice president and director product management for the values product Innovation
group of Citibank regularly uses analogies to name a new product. She first
brainstorms with a group to come up with a new fraction of an idea and then builds on
it by bringing together ideas from unrelated disciplines. Through her efforts, Means in
a single year signed up more than 2 million new customers for Citibanks Visa and
MasterCard.

Idea Checklists

Several idea checklists have been developed to enhance creativity. These involve
asking a series of questions about how we might use something that we already have.
For example, one checklist of idea-spurring questions is called SCAMPER
(Substitute? Combine? Adapt? Modify or magnify? Put to other uses? Eliminate or
reduce? Reverse or rearrange?). Heres an example of adapting: Clarence Birdseye
worked as a fur trader in Labrador before World War I. He noted that Inuit preserved
fish by quick-freezing and that the fish, when thawed, were flaky and moist. Birdseye
adapted this process to make quick-frozen food available to the general public. This
replaced the old slow freeze process that left food dry and tasteless. The huge success
of quick frozen food led to the creation of General Foods.

Kiichiro Toyoda, the founder of Toyota, sought ways to eliminate large inventories
and the need for warehouses. American supermarkets fascinated him, and he noted
that they require vast amounts of food that cant be stored on site because of spoilage
and space considerations. When supplies run low, the staff contacts the appropriate
supplier and items arrive just in time. Toyota adopted this concept and streamlined
its operation, eliminating waste and warehouses and reducing costs dramatically.
Toyotas just-in-time approach gave it a huge competitive edge. Just in time is now
being adopted worldwide.

George Washington Carver asked the question How can peanuts be put to other uses?
And came up with over 300 applications. Many creative ideas have resulted from
asking how waste products could be put to other uses. Rubber bands are made from
surgical tubing; garbage is compressed into construction blocks; petrochemical waste
is sold as silly putty. The Goodyear Tire Company has a pollution-free heating plant
in Michigan that uses discarded tires as its only fuel.

Perhaps the best-known listing technique is the 73 idea-spurring questions devised

by Osborn. This checklist can be applied to any alternative. Here are some of the
questions.

Put to other uses? New ways to use as is? Other uses if modified?

Adapt? What else is like it? What other ideas does this suggest? Does past offer
parallel? What could I copy? Whom could I emulate?

Minify? What to subtract? Smaller? Condensed? Miniature? Lower? Shorter?

Lighter? Omit? Streamline? Split up? Understate?

Substitute? Who else instead? What else instead? Other ingredient? Other
material? Other process? Other power? Other place? Other approach? Other tone
of voice?

Rearrange? Interchange components? Other pattern? Other layout? Other

sequence? Transpose cause and effect? Change pace? Change schedule?

Combine? How about a blend, an alloy, an assortment, an ensemble? Combine

units? Combine purposes? Combine appeals? Combine ideas?
73
Strategic Enablers Attribute Listing
According to the developer of attribute listing, Robert Crawford, Each time we take a
step we do it by changing an attribute or a quality of something, or else by applying
that same quality or attribute to some other things. There are two forms of attribute
listing: attribute modifying and attribute transferring.
With attribute modifying, the main attribute of the problem object is listed. Then ways
to improve each attribute are listed. For instance, the technique might be used to
concentrate on ways to improve the running shoe attributes of weight, stability,
cushioning, and durability. Attribute transferring is similar to direct analogy in
synectics. Attributes from one thing are transferred to another.
Checkerboard Method
The checkerboard method, also called morphological analysis, is an extension of
attribute modifying. Specific ideas for one attribute or problem dimension are listed
along one axis of a matrix. Ideas for a second attribute are listed along the other axis.
If desired, a third axis (and attribute) can be added. Figure 13.3 shows the
checkerboard.
Shape Square

Round

Thick
Thickness

Thin

Metal Plastic

Material

Figure 13.3: The Checkerboard

The cells of the matrix then provide idea combinations. For instance, the axes for a
vehicle might be type of energy source (e.g., rollers, air, water, rails), and type of
vehicle (e.g. cart, chair, sling, bed). The above figure shows a simple application of
the checkerboard method to the design of paper clips. The benefit of the checkerboard
method of analysis is that it makes us aware of all possible combinations of the
attributes. Many, of course, will prove to be little value, but others may be
worthwhile. Like other creativity enhancement techniques, the checkerboard method
makes us view the world from a different perspective. It is very useful for producing
large numbers of new ideas.

Retroduction

We are the slaves of our assumptions; they dictate the way we behave. Retroduction
involves changing an assumption. This may serve two purposes. First, our
assumptions may be wrong. Second, even if our assumptions are correct we may gain
valuable new perspectives from looking at things from a different angle. Albert
Einstein, for instance, revised Isaac Newtons assumption that space is flat to the
assumption that space is curved and developed a new perspective on time and space.

As a simple example of the power of assumptions, consider paper clips, the subject.
The standard Gem paper clip, invented in 1899, accounts for most of the 20 billion
74 paper clips sold every year. More than 100 alternative designs have patented, varying
in size, material, and shape. Ring clips, owl clips, arrowhead clips, butterfly Innovation
clips, and many others have been offered, and their inventors present compelling cases
for their superiority. Nevertheless, they havent made a noticeable dent in Gems
market superiority. The reason is that inventors share a common and incorrect
assumption, that paper clips are used to clip sheets of paper. In fact, research shows
that only 20 percent of paper clips are used to hold papers. The rest are twisted or
broken by people during phone conversations, unwound to clean pipes, nails, or ears,
used to reinforce eyeglasses, or put to other creative uses. The Gem, unlike its
competitors, can easily be taken apart and reshaped.

One retroduction technique says, Suppose X were Y. For instance, suppose

custodians were chief executives. Another technique pairs apparently distinct
concepts, such as power and satisfaction or perception and structure, and sees what
new alternatives might be suggested. Yet another asks What if? for example, what if
employees could design their own jobs? What if we viewed customers as owners of
the firm? One individual who applied these retroduction techniques generated such
questions as what are the structural irregularities of semiconductors? and can
arteries have rashes? Each of these questions is now the subject of study and debate,
the first among physicists and the second among researchers and disease processes.
Henry Ford questioned the practice of moving workers to material asking What if we
moved the work to the people? This questioning led to the birth of the assembly line.
Retroduction offers new perspectives and helps free people from mental ruts.

Heres a final example: For years, bankers assumed that customers preferred human
tellers. In the early 1980s Citibank felt that installing automotive tellers would help it
cut costs. However, since Citibank executives assumed people would prefer not to use
machines, they reserved human tellers for people with large accounts and relegated
smaller depositors to the machines. The machines proved unpopular and Citibank
stopped using them, taking the failure as proof that its assumption was correct. Later,
another banker challenged this assumption. He asked, in effect, What if people really
like to use automatic teller? What if the Citibank customers who used the machines
simply resented being treated as second class citizens? He brought back the
automatic tellers with no class distinction and they were an immediate success.

13.8 BUILDING CREATIVE ORGANIZATIONS

Venture Teams
A venture team is a temporary grouping of organization members for generating new
ideas. So that creative thinking is not stifled, team members are freed of the
organizations bureaucracy and in many cases have a separate location and facilities.
These separate entities are known as skunk works. Major corporations such as IBM,
3M Company, Dow Chemical, and Texas Instruments have used venture teams to
solve technical problems and promote change. For Motor Company used skunk works
to keep the new mustang alive. Faced with tight budgets, tough time constraints, and
an uncertain vision of the new mustang, Ford formed the 400 members Team
Mustang Team members thought of themselves as independent stockholders of the
Mustang Car Company in converted furniture warehouse, got approval to move
Ford into Chunk teams with responsibility for every chunk of the car. Mustang
Car Company did away with many elements of the traditional hierarchy and many
restrictive rules and procedures. The result: the fundamentally redesigned new
Mustang was completed in three years and for about $700 million-25 per cent less
time and 30 per cent less money than for any comparable new car programme in
Fords recent history.
75
Strategic Enablers Idea Champions
An idea champion is a member of the organization who is assigned responsibility for
the successful implementation of a change. The idea champion may be a senior
manager or a non-manager, such as the inventor of the idea that has prompted the
change. An idea champion will fight resistance to change and will actively pursue
resources necessary to carry out the change. Idea champions may be critical to the
success or failure of change. For example, Texas instruments reviewed 50 successful
and 50 unsuccessful technical projects. One consistent finding was that every failure
also lacked an idea champion. As a result, Texas instruments set up as its number one
criterion for project approval the presence of an idea champion.
Intrapreneurship
Many people have praised the flexibility creativity risk taking, and energy that are
often associated with small firms and intrapreneurship and have asked how these
elements might be instilled in larger organizations. Intrapreneurship is the name given
to intrapreneurial activities within a larger organization, and intrapreneurs are
essentially internal entrepreneurs.
Intrapreneurs and entrepreneurs have many things in common. For instance, they
value creativity and autonomy and have strong desire to achieve. On the other hand,
since intraprenuers work within a corporate system, they face the benefits and
constraints of that system. Unlike entrepreneurs, they operate under a corporate
accounting system and must report to hierarchical superiors. They do not personally
face the financial risks that entrepreneurs do, nor do they enjoy the same rewards.
They can draw on the rich financial resources of the corporation.
Intrapreneurs may need different competencies to succeed than do entrepreneurs. For
instance, intrapreneurs must be somewhat skilled at organizational politics, something
that entrepreneurs may find reprehensible and that may, in fact, motivate them to
work for themselves. Further, while entrepreneurs must provide their own goals and
rewards, intrapreneurs are within the reward system of the formal organization.
Two major factors foster intrapreneurial success. First, sponsorship of intrapreneurs is
important. Sponsors ensure that the intraprise gets the required resources, and they can
help tamper the grievances of those who feel threatened by the innovation. Many
intrapreneurs have several sponsors. Lower-level sponsors to fend off threatening
strategic attacks. Second, there must be suitable rewards for intrapreneurship.
Traditional rewards for success do not match the risks of innovating or intrpreneuring.
Also, the basic reward in most companies is promotion, which does not work well for
most intrapreneurs; they seek freedom to use their intuition, take risks, and invest the
companys money in building new businesses and launching new products and
services. For this reason, a key reward for intrapreneurs is intracapital. Intracapital is a
discretionary budget earned by the intrapreneur and used to fund the creation of new
intra prizes and innovation for the corporation.
Hoping to grow and compete in a fast paced market, Bell Atlantic turned to
intrapreneurship, with great success. Within a few years, more than 130 intrapreneurs
had championed more than 100 projects, at least 15 products were on or near the
market, and 15 patents had been awarded. Potential revenues estimated from the
projects total a minimum of $100 million within five years. Similarly, at Xerox, many
creative ideas were lost before being turned into marketable products. As a result
Xerox recognized the need to merger intrapreneurs within the corporation. The
company formed Xerox Technology Ventures (XTV), and a venture capital group that
allows Xerox to bring creative products to the market through intrapreneurships. XTV
76 has become so successful that it is now a role model for other firms.
Creativity and Diversity Innovation

People referring in gender, age, race, disability, status and sexual orientation bring to
organizations a variety of attitudes, values, and perspectives as well as a broad and
rich base of experience to address a problem. As a result as the group became more
diverse, the potential for creativity is enhanced. Innovative organizations have
generally done a better job than others in eradicating racism and sexism, and they tend
to employ more women and nonwhite men than do less innovative firms. In addition,
brainstorming groups made up of diverse ethnic and racial groups produce higher-
quality ideas than do homogeneous groups. Further, the presence in groups of
individuals holding minority views lead to critical analysis of decision issues and
alternatives, resulting in consideration of a larger number of alternatives and more
thorough examination of underlying assumptions. And because homogeneous groups
tend to value conformity and agreement and their members are sometimes afraid to
rock the boat, such groups often discourage critical thinking. Because of this,
diversity may foster more open, honest, and effective decision-making. Taken
together, this all suggests that diversity can yield many benefits for decision-making
creativity. However, diversity may also increase the potential for misunderstandings
and increase conflict and anxiety among members. The challenge is to manage
cultural diversity in such a way as to capture its benefits while minimizing potential
problems.

13.9 COMPANY PROGRAMMES TO ENHANCE

CREATIVITY
Firms are using special programmes to foster their employees creativity. Many send
their employees on retreats and outings to jolt them out of routine ways of thinking.
Quaker Oats Co. executives go horseback riding when they need fresh approaches to
budget and marketing problems. American Greeting Co.s licensing unit, the
characters from Cleveland, which created Strawberry shortcake and the care Bears, go
for half a dozen weekend retreats in the woods each year, where their creative
personnel brainstorm, play games, and sketch to come up with creative ideas.
At Omron Corp., a maker of electronic controls, midlevel employees attend a monthly
juku, or cram school, where they try to think, plan as if they were 19th century
warlords, private detective, or formula one race car drivers. Fuji film asks its senior
managers to study topics such as the history of Venice and the sociology of apes.
While such exercise may sometimes appear bizarre or even humorous, they encourage
the employees to break out of their corporate shells and think in different ways.
Management at the Polaroid Corporation faced situation in which it needed to find a
way to develop new photographic products that would enable the company to grow
and regain profitability.
Activity 1
1) Read the background information on Polaroid in the real world management
challenge and then indicate what would be done to handle situation if you were
the CEO of Polaroid later you can compare your recommendations with what
management actually did in that situation.
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
77
Strategic Enablers 2) Think of any two Indian companies, which have developed special programmes
to enhance the creativity of their employees.
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
3) Explain giving illustration, how creativity and innovation can play an important
role in the success of an organization .
..................................................................................................................................
..................................................................................................................................
..................................................................................................................................
4) Give the name of the company under the given industry heads, which have
adopted innovation strategy and have succeeded to a large extent.
Industry Company
Petroleum ...............
Textile ..............
Pharmaceutical .............
Telecom ................

13.10 SUMMARY
The success and survival of companies in todays marketplace depend on creativity,
innovation, discovery and inventiveness. The challenge, therefore, for many
companies is to be innovative and creative to bring to the market a stream of new and
improved, added value products and services that enable the business to achieve
higher margins and thus profits to re-invest in the business. Innovation can be defined
as the successful exploitation of new ideas.
Virtually all companies talk about innovation and many may actually attempt to do
it, but only a few actually succeed in doing it. To be creative, an organization
requires an innovation strategy, a strategy that promotes the development and
implementation of new products and services. The origin of creativity and innovation
lies in a shared vision and mission, which are focused on the future. Furthermore, the
vision and mission of a creative and innovative organization are also customer and
market oriented- focusing on solving customers problems among other things. In
addition, a structure that supports creativity and innovation, values like flexibility,
freedom and cooperative teamwork is required to promote creativity and innovation.
Support mechanisms should be present in an organization to create an environment
that will promote creativity and innovation. Rewards and recognition and the
availability of resources, namely time, information technology and creative people,
are mechanisms that play this role.
The key distinguishing factor between innovative and less innovative firms is the
ability of management to create a sense of community in the workplace. Highly
innovative companies behave as focused communities whereas less innovative
companies units behave more like traditional bureaucratic departments. The concept
of autonomy appears to be one of central importance for building creative
78
organizations. Operational autonomy encourages a sense of the individual and Innovation
promotes entrepreneurial spirit, whereas strategic autonomy is more to do with the
level of alignment with organizational goals. It appears that firms that are most
innovative emphasize operational autonomy but retain strategic autonomy for top
management.
Innovative companies appear to rely heavily on personalized intrinsic awards, both for
individuals as well as groups. Less innovative companies tend to place almost
exclusive emphasis on extrinsic awards. Extrinsic rewards are things such as pay
increases, bonuses and shares and stock options. Intrinsic rewards are those that are
based on internal feelings of accomplishment by the recipient. Highly innovative
companies appear to place equal emphasis on the technical side as well as the social
side of the organization. In other words, they look to nurture not only technical
abilities and expertise but also promote a sense of sharing and togetherness. Slack is
the cushion of resources, which allows an organization to adapt to internal and
external pressures. Slack has been correlated positively to innovation. Moreover, it is
not just the existence of slack but also the existence of slack over time that appears to
have positive impact upon innovation.
Creativity involves more than the sudden moment of inspiration in which an idea
suddenly flashes in the brain. There are four stages to the creative process:
preparation, incubation, insight, and verification. Good problem solving occurs when
managers have many viable, creative alternatives to consider. To inspire employees to
approach problems creatively and to nurture a creative environment, organizations
follow three general approaches. These include hiring creative individuals, applying
specific creativity-enhancement techniques, and developing a creative organization. A
wide variety of popular techniques have been developed to enhance creativity, which
include Gordon Technique, Synectics, Idea Checklists, Attribute Listing,
Checkerboard Method and Retroduction.

13.11 KEY WORDS

Attribute Listing : In this technique, each time we take a step we do it by changing
an attribute or a quality of something, or else by applying that same quality or
attribute to some other things.
Checkerboard Method : The checkerboard method, also called morphological
analysis, is an extension of attribute modifying. Specific ideas for one attribute or
problem dimension are listed along one axis of a matrix. Ideas for a second attribute
are listed along the other axis.
Gordon Technique : Gordon technique is a popular technique developed to enhance
creativity. It uses an initial focus on function. For instance, instead of the group being
instructed to design an improved knife, the function could be given as severing.
Idea Champions : An idea champion is a member of the organization who is
assigned responsibility for the successful implementation of a change.
Idea Checklists : Several idea checklists have been developed to enhance creativity.
These involve asking a series of questions about how we might use something that we
already have.
Innovation : The intentional introduction and application within a role, group or
organization of ideas, processes, products or procedures, new to the relevant unit of
adoption, designed to significantly benefit the individual, the group, organization or
wider society. Innovation and Creativity are often used interchangeably in the
literature. 79
Strategic Enablers Intrapreneurship : Intrapreneurship is the name given to intrapreneurial activities
within a larger organization, and intrepreneurs are essentially internal entrepreneurs.
Retroduction : People are the slaves of their assumptions; they dictate the way they
behave. Retroduction involves changing an assumption.
Synectics : Gordon also developed a well-known technique called synectics.
Synectics means, the joining of apparently unrelated elements.
Venture Teams : A venture team is a temporary grouping of organization members
for generating new ideas.

13.12 SELF ASSESSMENT QUESTIONS

1) Explain the concept of creativity/innovation? How does creativity contribute to
the success of an organization? Give an example of a creative organization in the
Indian context.
2) What are the various characteristics, which distinguish a creative organization
from the others? What are the characteristics of creative individuals and how can
a company tap their potential?
3) Discuss the various steps involved in creative process. How can creativity be
encouraged within an organization?
4) Explain the various techniques available to foster creativity.

13.13 FURTHER READINGS

Amabile, T.M. (1995). Discovering the Unknowable, Managing the
Unmanageable, Ford, C.M., Gioia, D.A., Creative Action in Organizations: Ivory
Tower Visions & Real World Voices, Sage, London, 77-81.
Arad, S., Hanson, M.A., Schneider, R.J. (1997). A Framework for the Study of
Relationships between Organizational Characteristics and Organizational
Innovation, The Journal of Creative Behavior, 31, 1, 42-58.
Barret, R. (1997). Liberating the Corporate Soul, HR Focus, 74, 4, 15-16.
Bresnahan, J. (1997). The Elusive Muse, CIO, 11, 2, 50-6.
Brodtrick, O. (1997). Innovation as Reconciliation of Competing Values, Optimum,
27, 2, 1-4.
Burgleman, R.A., Sayles, L.R. (1986). Inside Corporate Innovation: Strategy,
Structure and Managerial Skills, Free Press, New York, NY.
Burns, T., Stalker, G.M. (1961). The Management of Innovation, Tavistock
Publications, London.
Chan Kim, W., Mauborgne, R. (1999). Strategy, Value Innovation, and the
Knowledge Economy, Sloan Management Review, 41-54.
CIMA Study Text (1996). Organisational Management and Development, 3rd ed.,
BPP Publishing, London.
Filipczak, B. (1997). It Takes all Kinds: Creativity in the Workforce, Training, 34,
5, 32-40.

80
Ford, C.M. (1995). Creativity is a Mystery: Clues from the Investigators Innovation
Notebooks, Ford, C.M., Gioia, D.A., Creative Action in Organizations: Ivory Tower
Visions & Real World Voices, Sage, London, 12-52.
Gardenswartz, L., Rowe, A. (1998). Why Diversity Matters, HR Focus, 75, 7, S1-
S3.
Judge, W.Q., Fryxell, G.E., Dooley, R.S. (1997). The New Task of R&D
Management: Creating Goal-directed Communities for Innovation, California
Management Review, 39, 3, 72-85.
Khalil, O.E.M., 1996, Innovative Work Environments: the Role of Information
Technology and Systems, SAM Advanced Management Journal, 61, 3, 32-6.
Lock, E.A., Kirkpatrick, S.A. (1995). Promoting Creativity in Organizations, Ford,
C.M., Gioia, D.A., Creative Action in Organizations: Ivory Tower Visions & Real
World Voices, Sage, London, 115-20.
Mumford, M.D., Whetzel, D.L., Reiter-Palman, R. (1997). Thinking Creatively at
Work: Organization Influences on Creative Problem Solving, The Journal of
Creative Behavior, 31, 1, 7-17.
Peters, T., Waterman, R. (1982). In Search of Excellence: Lessons from Americas
Best Run Companies, Warner Books, New York, NY.
Read, W.H. (1996). Managing the Knowledge-Based Organization: Five Principles
Every Manager Can Use, Technology Analysis and Strategic Management, 8, 3,
223-32.
Robbins, S.P. (1996). Organizational Behavior: Concepts, Controversies,
Applications, 7th ed., Prentice-Hall, Englewood Cliffs, and NJ.
Robbins, S.P. (1997). Essentials of Organizational Behavior, 5th ed., Prentice-Hall,
Upper Saddle River, NJ.
Senge, P., Kleiner, A., Roberts, C., Ross, R., Roth, G., Smith, B. (1999). The Dance of
Change: The Challenges of Sustaining Information in Learning Organizations, A
Fifth Discipline Resource, Nicholas Brearley, London.
Tushman, M.L., OReilly, C.A. III. (1997). Winning through Innovation: A Practical
Guide to Leading Organizational Change and Renewal, Harvard Business School
Press, Boston, MA.
Udwadia, F.E. (1990). Creativity and Innovation in Organizations: Two Models and
Managerial Implications, Technological Forecasting and Social Change: An
International Journal, 38, 1, 65-80.
West, M.A., Farr, J.L. (1990). Innovation at Work, West, M.A., Farr, J.L.,
Innovation and Creativity at Work: Psychological and Organizational Strategies,
Wiley, Chichester, 3-13.

81
UNIT 14 STRATEGY AND SOCIAL
RESPONSIBILITY
Objectives
After reading this unit you should be able to:
! explain the meaning of Corporate Social Responsibility (CSR);
! define and understand the scope of CSR for business;
! explain CSR and its importance for business;
! differentiate the philanthropic and the business integrated views of CSR;
! know CSR and companies in India; and
! explain measurement of CSR
Structure
14.1 Introduction
14.2 CSR and Historical Developments
14.3 Business Importance of CSR
14.4 CSR and Companies in India
14.5 The Measurement of CSR
14.6 Future of CSR
14.7 Summary
14.8 Self Assessment Questions
14.9 Further Readings

14.1 INTRODUCTION
Corporate social responsibility (CSR) is an evolving concept which is yet to command
a standard definition or a fully recognized set of criterion. With the given
understanding that businesses have a key role of job and wealth creation in society,
CSR is generally understood to be the way an organization achieves a balance
between economic, environmental, and social imperatives while they address the
expectations of the shareholders and the stakeholders. While businesses try to comply
with laws and regulations on social, environmental and economic objectives set by the
legislations and legal institutions, CSR is often understood as involving the private
sector commitments and activities those extend beyond this foundation of compliance
with laws. In fact the key feature of the concept is the way businesses engage or
involve the shareholders, employees, customers, suppliers, governments, non-
governmental organizations, international organizations, and others into the
organization.
CSR is generally seen as the business contribution to sustainable development which
has been defined as development that meets the present needs without compromising
the ability of future generations to meet their own needs, and is generally understood
as focusing on how to achieve the integration of economic, environmental, and social
imperatives. CSR also overlaps and often is synonymous with many features of other 5
Corporate Social related concepts such as corporate sustainability, corporate accountability, corporate
Responsibility
responsibility, corporate citizenship, corporate stewardship, etc.
Today it is generally accepted that business firms have social responsibilities that
extend well beyond what in the past was commonly referred to simply as the business
economic function. In earlier times managers in most cases had only to concern
themselves with the economic results of their decisions. Today managers must also
consider and weigh the legal, ethical, moral and social impact and repercussions of
each of their decisions.

14.2 CSR AND HISTORICAL DEVELOPMENTS

Corporate Social responsibility has its roots of thinking in the twentieth century where
the theologians and the religious thinkers suggested the application of religious
principles to business activities. First was the principle of in which the wealthy and
generous individuals contributed to the resources for aiding the unfortunate. The next
was the stewardship principle, a biblical doctrine which requires business and wealthy
individuals to see themselves as stewards or caretakers not just of shareholders but
also of societys resources for the benefit of the society as a whole. Similarly different
authors see corporate social responsibility from different angles.
Although the topic rose to prominence in 1970s ( Caroll, 1979; Wratick and Cochran,
1985), the first publication specifically on the field dates back to 1953, with Bowens
social responsibilities of the businessman. In this work Bowen argues that industry
has an obligation to pursue those policies and to make those decisions, or to follow
those lines of actions which are desirable in terms of the objectives and values of
society (Bowen, 1953), which means;
! That businesses exist at the pleasure of society and that their behaviour and
methods of operation must fall within the guidelines set by society.
! Businesses act as moral agents within society.
Wood (1991) expanded these ideas encapsulating them into three driving principles of
social responsibility , which are
! Business is a social institution and thus obliged to use its power responsibility;
! Businesses are responsible for the outcomes relating to their areas of
involvement with society; and
! Individual managers are moral agents who are obliged to exercise discretion in
their decision-making.
A growing number of scholars take the view that firms can no longer be seen purely
as private institutions but as social institutions instead. The benefits flowing from
firms need to be shared collectively. This thesis is similar to the stakeholders model
and claims that a firm is not responsible only to its shareholders but to all stakeholders
whose contribution is necessary for a firms success.
However Friedman differed from these and felt that the corporation is an economic
institution and thus should specialize in the economic sphere alone and the socially
responsible behaviour will be rectified by the market through profits.
Opinions differ in terms of the basis or scope of CSR and even the very definition of
the term. As a consequence different aspects of a firms operations can be seen to
come under its way. What can be conceived as social responsibility can range from
6
simply maximization of profits to satisfaction of stakeholders social needs or
fulfillment of social contractual obligations, achievement of a social equilibrium, etc. Strategy and Social
Responsibility
depending on the stance taken. World Business Council for Sustainable Development
in its publication Making Good Business Sense by Lord Holme and Richard Watts
define CSR as, Corporate Social Responsibility is the continuing commitment by
business to behave ethically and contribute to economic development while improving
the quality of life of the workforce and their families as well as of the local
community and society at large.
History
The view that a business can have obligations that extend beyond economic role is not
new in many respects. Throughout recorded history the roles of organizations
producing goods and services for the marketplace were frequently linked with and
include political, social, and/or military roles. For example, throughout the early
evolutionary stages of company development in England (where organizations such as
the Hudson Bay Company and the East India Company received broad mandates),
there was a public policy understanding that corporations were to help achieve
societal objectives such as the exploration of colonial territory, setting up settlements,
providing transportation services, developing bank and financial services, etc.
During the nineteenth century, the corporation as a business form of organization
evolved rapidly in the US. It took on a commercial form that spelled out
responsibilities of the board of directors and management to shareholders (i.e.
fiduciary duty). In this later evolutionary form, public policy frequently addressed
specific social domains such as health and safety for workers, consumer protection,
labour practices, environmental protection, etc. Thus, corporations responded to social
responsibilities because they were obligated to be in compliance with the law and
public policy. They also responded voluntarily to market demands that reflected
consumer morals and social tastes. By the mid-point of the twentieth century,
corporate social responsibility was being discussed in the US by business
management experts such as Peter Drucker and in business literatures CSR emerged
and continues to be a key business management, marketing, and accounting concern
in the US, Europe, Canada, and other nations.
Traditionally in the United States, CSR has been defined much more in terms of a
philanthropic model. Companies there made profits unhindered except by fulfilling
their duty to pay taxes. Then they donated a certain share of the profits to charitable
causes. It is seen as tainting the act for the company to receive any benefit from the
giving. The first generation of CSR this way showed how companies can be
responsible in ways that do not detract from and may contribute to commercial
success. Corporate philanthropy is the practice of companies of all sizes and sectors
making charitable contributions to address a variety of social, economic and other
issues as part of an overall corporate citizenship strategy.
The second generation is now developing where companies and whole industries see
CSR as an integral part of the long term business strategy. Now a days lot of
companies are taking it seriously for good of business. From a progressive business
perspective, CSR usually involves focusing on new opportunities as a way to respond
to inter-related economic, societal and environmental demands in the marketplace.
Many firms believe that this focus provides a clear competitive advantage and
stimulates corporate innovation.
In the last decade, CSR and related concepts such as corporate citizenship and
corporate sustainability have expanded. This has perhaps occurred in response to new
challenges such as those emanating from increased globalization on the agenda of
business managers as well as for related stakeholder communities. It is now more a
7
part of both the vocabulary and agenda of academics, professionals, non-
Corporate Social governmental organizations, consumer groups, employees, suppliers, shareholders,
Responsibility
and investors.
A third generation of CSR is needed in order to make a significant contribution to
addressing poverty and environmental degradation. This will go beyond voluntary
approaches by individual companies and will involve leadership companies and
organizations influencing the market in which they operate and how it is regulated to
re-mould whole markets towards sustainability.

14.3 BUSINESS IMPORTANCE OF CSR

Corporations are motivated to involve stakeholders in their decision-making and to
address societal challenges because todays stakeholders are increasingly aware of the
importance and impact of corporate decisions upon society and the environment. The
stakeholders can reward or punish corporations. Corporations can be motivated to
change their corporate behaviour in response to the business case which a CSR
approach potentially promises. This includes: 1) stronger financial performance and
profitability (e.g. through eco-efficiency), 2) improved accountability to and
assessments from the investment community, 3) enhanced employee commitment, 4)
decreased vulnerability through stronger relationships with communities, and 5)
improved reputation and branding.
CSR is about how companies manage the business processes to produce an overall
positive impact on society. Figure 14.1 may help you understand the above.

Figure 14.1: The Business Society

Here we find that companies need to answer two aspects of their operations:
1) The quality of their management - both in terms of people and processes (the
inner circle).
2) The nature and quantity of their impact on society in the various areas.
Outside, stakeholders are taking an increasing interest in the activity of the company.
Most look to the outer circle - what the company has actually done, good or bad, in
8 terms of its products and services, in terms of its impact on the environment and on
local communities, or in how it treats and develops its workforce. It is believed that Strategy and Social
Responsibility
this model may be more sustainable because here social responsibility becomes an
integral part of the wealth creation process, which if managed properly should
enhance the competitiveness of business and maximize the value of wealth creation to
society. When times get hard, there is the incentive to practice CSR more.
Since the early 1980s, a significant body of CSR research has centred around the
debate over whether there is a relationship between good Corporate Social
Performance ( CSP) and strong financial performance and what kind of relationships
exist. Today businesses are becoming increasingly interested in the idea of the Triple
Bottom Line (TBL). This idea focuses not just on the economic value of the
businesses that they may gain from acting in certain way, but also on the value that
they may accrue to the companys bottomline by engaging in environmentally and
socially beneficial practices. The three line represent the economy, the environment
and the society and are all dependent on each other. Whether companies do actually
take each line into account is difficult to measure as the arguments surrounding
financial benefits of the company from being socially responsive are not clear cut.
Although positive relationships have been found, there are several difficulties inherent
in measuring these linkages. One problem is that it is not clear whether social
responsibility leads to increased financial performance or whether better profits lead
to more funds being available to devote to CSR activities. The other issue is that profit
is an incomplete measure of social performance (Lantos 2001). Yet another is the
difficulty of developing a consistent set of measures that define CSR or CSP.
The following factors are taken into account for understanding the importance of
CSR:
! Globalization and the associated growth in competition
! Increased size and influence of companies
! War for talent, companies competing for expertise
! Increased importance of intangible assets
Improved Financial Performance: While it remains difficult to determine a direct
causal relationship between increased accountability and financial performance, a
variety of studies suggest that such a link exists. For example, according to 2002
Global Investor Opinion Survey released by McKinsey & Company, a majority of
investors are prepared to pay a premium for companies exhibiting high governance
standards. Premiums averaged 12-14 percent in North America and Western Europe;
20-25 percent in Asia and Latin America; and over 30 percent in Eastern Europe and
Africa. The study also found that more than 60 percent of investors state that
governance considerations might lead them to avoid individual companies with poor
governance.
Heightened Public Credibility: Companies that demonstrate a willingness to provide
information that is credible, verifiable, and accessible can garner increased trust
among stakeholders. Forthright and candid reporting about company achievements as
well as performance shortfalls helps companies create a public reputation for honesty.
At the same time, companies that make a public commitment to increase
accountability and transparency need to ensure that they have robust systems for
implementation, lest the company risk negative public backlash for failing to live up
to its commitments.
Reduced Costs: The enhanced communication that is often part of corporate
accountability efforts can help build trust between companies and stakeholders, which
9
can reduce costly conflict and improve decision-making. Companies that proactively
Corporate Social and effectively engage shareholders and address their concerns can reduce the costs
Responsibility
associated with shareholder proposals. In addition, social and environmental reporting
efforts can help identify the effectiveness of various programmes and policies, often
improving operating efficiencies and reducing costs. Reporting information can also
help identify priorities to ensure that company is achieving the greatest possible
impact with available resources.
Increased Attractiveness to Investors: Investors whether shareholders invested in
socially responsible funds that screen companies for social and environmental
attributes, or large institutions welcome the increased disclosure that comes with
corporate accountability. A growing number of investors are including non-financial
metrics in their analysis of the quality of their investments. New metrics cover labour
and environmental practices; board diversity, independence, and other corporate
governance issues; and a wide variety of other social and environmental criteria.
Research suggests investors may be willing to pay higher prices for the stock of
companies considered to be accountable. For example, a 2000 survey of 200 large
institutional investors conducted by McKinsey & Co., the World Bank, and
Institutional Investors regional institutes found that three-quarters of stackholders
consider board practices as important as financial performance when evaluating
companies for investment. The study also found that more than 80 percent of investors
would be willing to pay more for the shares of a well-governed company than for a
poorly governed company with comparable financial performance.
Improved Relationships with Stakeholders: Companies that make an effort to be
transparent and accountable for their actions and decisions are better able to build
trust among their stakeholders. This engagement helps companies understand how
community groups and other stakeholders perceive them, and educates them about
future issues and concerns that may affect their operations. The information gained
can help companies better define priorities and ensure business activities align with
professed business principles or ethical codes. Many government agencies and
stakeholders look favourably at companies that self-identify and publicly disclose
accountability challenges and demonstrate that they are working to solve them. Best
practice solutions include the development of management systems that reduce the
likelihood of recurrence.
Early Identification of Potential Liabilities: The strategic information that can
come from efforts to develop a more accountable company including social and
environmental auditing and reporting and stakeholder dialogue can identify
practices or situations that could pose liabilities to a company. Early identification can
provide companies with the opportunity to resolve problems before they result in
costly legal actions or negative public exposure. Issues that might surface more
quickly in an accountable company include: environmental problems that could
endanger public health, workplace discrimination or harassment that could result in
lawsuits, marketing practices that do not price products or services equitably, or hiring
practices that inadvertently give unfair advantage to certain populations. Social and
environmental auditing and reporting can also identify where company practices may
be in violation of government regulations or the standards or expectations of key
stakeholder groups.
Marketplace Advantages: Accountability can make entry and success in new
markets easier by helping establish direct relationships with key customers and
business partners. These relationships can contribute to innovation in product
development or delivery, help mitigate potential negative media coverage, and
enhance market presence. Some companies have used dialogue with stakeholders to
help make decisions on overseas investments and operations, or to overcome the
10 challenges of operating in markets with different cultures, laws, and languages. For
example, Unilevers Indian subsidiary, Hindustan Lever, has worked with local Strategy and Social
Responsibility
stakeholders to develop a new delivery system for laundry detergent in Indian
villages. The company was experiencing difficulty in selling its product until it was
suggested by stakeholders that the company package its product in single-use
quantities that would be affordable to local residents with limited disposable incomes.
Improved Overall Management: Many companies that have developed clear CSR
performance and accountability systems inside their organizations report experiencing
an improvement in their management practices overall. Increasingly, companies are
finding that the impact of systems designed to increase accountability for CSR
performance is not limited to the CSR realm, but can also impact performance in other
areas as the culture of the organization undergoes change. An analysis of Fortune 500
companies conducted at the Boston College, Carroll School of Management found
that companies judged as treating their stakeholders well are rated by peers as also
having superior management.
Improved Organizational Effectiveness: The process of self-assessment and
evaluation, which is part of increasing accountability can have beneficial impact on
company operations. For example, social and environmental auditing and reporting
give companies the opportunity to assemble and assess more comprehensive
information on operations and impacts. This information can help coordinate and
maximize efficiencies and collaborations across departments, facilities, and business
units. Through this process, companies compile examples of successful programmes
from various parts of their organizations and share the learnings throughout the
company, leading to more effective and efficient policies and practices. Dialogue and
partnerships with stakeholder groups can help companies build skills and
competencies, or align company operations with overarching mission and values.
Decreased Risk of Adverse Publicity: Accountable companies may be better
prepared to address the concerns of customers or other stakeholders who might
otherwise take negative action on social issues. For example, by engaging in a
dialogue with stakeholders about their interests and concerns, and addressing those
concerns in business implementation processes, companies may be able to head off or
minimize the impacts of boycotts organized by consumer groups. Similarly,
companies that proactively address the concerns of shareholders can reduce the risk of
adverse publicity stemming from high-profile shareholder disputes.
Activity 1
a) Explain with examples the nature of activities of a company which would qualify
for under its CSR initiatives as the concept of CSR evolved since the beginning
of 20th century with charity principle.
..
..
..
..
b) Suggest some more benefits/importance of CSR for business allover.
..
..
..
11
..
Corporate Social
Responsibility 14.4 CSR AND COMPANIES IN INDIA
In India, most of the work done by companies is still in nature of philanthropy.
Consider that of the six short listed companies for the Business World FICCI CSR
award for year 2003, five ( Lupin, Canara Bank, Indal, Gujrat Ambuja and Wipro ) are
involved in community development work. This means building roads, running
schools and hospitals, creating income-generating schemes and similar projects . Only
ITCs CSR its e-choupal project and others - has direct linkages with its business.
This is understandable given that many of the traditional development indicators life
expectancy, infant and child mortality, sanitation facilities and access to primary
education are still abysmal for India. In fact even the government expects Corporate
India to participate in welfare programmes even though it is a tacit admission that the
state has failed to deliver even the most basic amenities. But of late experts argue that
as India gets integrated into the global economy, companies should pick up projects
that are business centric. The CSR initiatives should become a part of the business
process.
In an era of no free lunches , the attraction that the business centric model of CSR
holds is obvious. But if more Indian Companies are to adopt that, some other things ,
too, need to change besides mindsets and developmental needs. The links between
good CSR and good business have to be established clearly. Sure even overseas there
is still no way that the capital markets reward good CSR practices directly or are
willing to ovelook other flaws in lieu of good CSR. But experience shows that
substantial benefits do flow in different ways.
Research in West shows that investors are increasingly questioning companies on
corporate social practices and are allying with those that have high respect for CSR. In
fact there is a whole eco-system being built around this concept with outfits like
Ethical Investment Research Service, a U K based independent researcher of ethical,
social and environmental practices advising outfits like Goldman Sachs, J P Morgan,
Redit Suisse, Merill Lynch and Standard Life on CSR practices of companies.
Moreover the likes of FTSE and Dow Jones are coming up with indices such as the
FTSE 4 Good and the DOW Jones Sustainability World Index. The FTSE 4 Good is
an index comprising stocks of companies with good practices. To be a part of FTSE 4
good family of indices one need to apply to the FTSE 4 Good applications committee.
In the absence of all these , its quite unlikely that CSR in India will change from
being more philanthropic to more business centric in the near future. Yet such
developments taking place worldwide and also because India is developing as back
office centre, movement towards business centric CSR models is possible.
Taking clue from the Business World FICCI CSR Awards, still it is not clear how
much Indian companies invest in CSR but from the list of the companies that applied
and evidence on ground suggest that time has come and is important for large
companies to enter into business centric CSR models. However, considering India
where so much is to be done, it doesnt matter whether companies take business
centric view or the philanthropic centric view.

14.5 THE MEASUREMENT OF CSR

Briefly, CSR is measured following a systems model of a business into three levels:
! Principles of social responsibility
! Processes of social responsiveness
! Outcomes as they relate to the firms societal relationships
12
Level I Principles of Social Responsibility Strategy and Social
Responsibility
This level of the CSR model is about the relationship between business and society at
large and it has three major elements:
! Legitimate concerns of business as a social institution and it frames the
analytical view of the interrelationship between business and society.
! Public responsibility concerns of the individual firm and its processes and
outcomes within the framework of its own principles.
! Managerial discretion whereby managers and other organisational members are
moral actors. Within every domain of corporate social responsibility, they are
obliged to exercise such discretion as is available to them, towards socially
responsible outcomes.
Level II Processes of Social Responsibility
Corporate social responsiveness is a businesss capacity to respond to social pressures.
This suggests the ability of a business organization to survive through adaptation to its
business environment. To do so, it must know as much as possible about this business
environment, be capable of analyzing its data, and must react to the results of this
analysis. But the environment of business is not static; it is a complex and ever
changing set of circumstances. This environment can be unchanged for decades, if not
centuries, and then it falls apart and is reformed like a kaleidoscope with increasing
rapidity. The ability to successfully scan, interpret, and react to the business
environment requires equally complex mechanisms. Three elements are identified as
basic elements of this level of the CSR model:
! Business Environment Scanning: indicates the informational gathering arm of
the business and the transmission of the gathered information throughout the
organization.
! Stakeholder Management: A stakeholder is defined as any group or individual
who can affect or is affected by the achievement of the firms objectives. For
example, owners, suppliers, employees, customers, competitors, governments;
nonprofit organizations, environmental and consumer protection groups and
others. Stakeholder Management refers to mapping the relationships of
stakeholder to the firm (and among each other) whilst finding, listening and
meeting their expectations and seeking to balance and meet legitimate concerns
as a prerequisite of any measurement process.
! Having identified the motivating principles of a firm and having determined the
identities, relationships, and power of stakeholders, attempt then is to turn to the
main issues which concern stakeholders.
Level III Outcomes
The main focus of measurement is the third level of the CSR model. To determine if
CSR makes a difference, all of the stakeholders relevant to an issue or complex of
issues must be included in any assessment of performance. There are, again, three
main categories:
! Internal stakeholder effects those that affect stakeholders within the firm. An
examination of these might show how a corporate code of ethics affects the day
to day decision making of the firm with reference to social responsibility.
Similarly, it can be concerned with human resource policies such as the positive
or negative effects of corporate hiring and employee benefits practices.
13
Corporate Social ! External stakeholder effects concern the impact of corporate actions on persons
Responsibility
or groups outside the firm. This might involve such things as the negative effects
of a product recall, the positive effects of community related corporate
philanthropy, or assuming the natural environment as a stakeholder, the effects
of toxic waste disposal.
! External institutional effects refer to the effects upon the larger institution of
business rather than on any particular stakeholder group. For example several
environmental disasters made the public aware of the effect of business decisions
on the general public. This new awareness brought about pressure for
environmental regulation which then affected the entire institution of business
rather than one specific firm.
The Global Reporting Initiative
The Global Reporting Initiative (GRI) is a multi-stakeholder process and independent
institution whose mission is to develop and disseminate globally applicable
Sustainability Reporting Guidelines. These Guidelines are for voluntary use by
organizations for reporting on the economic, environmental, and social dimensions of
their activities, products, and services. The GRI incorporates the active participation
of representatives from business, accountancy, investment, environmental, human
rights, research and labour organizations from around the world. Started in 1997 by
the Coalition for Environmentally Responsible Economies (CEREs), the GRI became
independent in 2002, and is an official collaborating centre of the United Nations
Environment Programme (UNEP) and works in cooperation with UN Secretary-
General Kofi Annans Global Compact. The GRIs Sustainability Reporting
Guidelines (last revised in July 2002) address a broad range of corporate social
responsibility issues related to an organizations (1) economic performance (e.g.,
wages and benefits, training, research and development), (2) environmental
performance (e.g., energy, water and materials use; greenhouse gas emissions, land
use/biodiversity), and (3) social performance (e.g., labor and human rights, workplace
health and safety, employee retention). In addition to the core GRI guidelines, GRI is
also leading the development of a series of sector supplements to the guidelines, e.g.,
for the finance and mining communities. While the GRI promotes itself as a reporting
framework/guideline only, it is having increasing influence in the debate on the ways
and means a company should structure and govern its transparency and reporting, and
general sustainability efforts.
Global Sullivan Principles
Introduced in 1999, the Global Sullivan Principles expand upon the original Sullivan
Principles, developed by The Reverend Leon H. Sullivan in 1977 as a voluntary code
of conduct for companies doing business in apartheid South Africa. The principles
cover areas of accountability, human rights, community engagement, environmental
performance, marketplace practices, ethics and value chain responsibility. Endorsing
companies and organizations are asked to take part in an annual reporting process to
document and share their experiences in implementing the principles.

14.6 FUTURE OF CSR

CSR pessimists predict:
! Increasing inconsistencies between corporate actions and stated CSR
commitments; companies will become astute at shielding their actual
performance.
! CSR will be a technical fix.
14
! Real substantive issues wont be addressed by CSR.
Most businesses will hold back waiting for the business case to develop - however, Strategy and Social
Responsibility
they may never be satisfied by the evidence of business case and may use this as an
excuse for inaction.
! The business case will not be clear enough for companies to take up en masse,
unless it is legislated or there are other incentives.
! CSR will not be on the publics radar screen and there wont be any clarity about
what CSR is and why it is important.
! CSR will become too prescriptive and get labeled as needless red tape increasing
the cost of business.
! Companies that once embraced CSR will lose interest and pursue other
objectives.
! Those engaged in CSR shift to minimal CSR activities, never moving beyond
baseline CSR.
! Pressures on business to cater to shareholders at the expense of all other
stakeholders will continue if not increase; the imbalance of power will not
change unless the membership on company boards changes to include
stakeholder interests or until government legislation is brought to bear.
CSR optimists believe that the pessimists are only looking at the gap of where we are
and where we need to be, without acknowledging that mindset change takes time and
recognizing that the slow incorporation of these ideas is underway in business. They
believe that the disillusionment is a function of the hope for too much too quickly.
CSR optimists believe that:
! In the future a significant number of companies will be convinced its in their
strategic interest to incorporate CSR substantively into their operations.
! There is a crisis in industrial capitalism, which lacks in trust and social
responsibility. Therefore, a rethinking should be done to decide the role of
companies in society.
! CSR is at crossroads, in a time of real discontinuity, enormously in flux.
! The crisis in global markets is broadening the discussion of accountability and
transparency - in this climate there is more openness to CSR ideas. CSR will be
seen as good corporate governance.
! There will be pressure through competition for better CSR performance - this
will impact on suppliers, etc.
! A small group of companies will be moving ahead quickly.
! There will be differentiation between different models and levels of CSR as a
result of continuous improvement and quality assurance.
! CSR will advance, but it will advance inconsistently across sectors, depending on
a companys economic performance, economic downturns, competitiveness of
the market, etc.
! Underlying structural drivers will impact large scale companies, such as the
value of knowledge workers and other intangible assets, driving companies to
take different issues into account.
15
Corporate Social ! We see only a few companies committed to CSR because we are at the beginning
Responsibility
of a long path on this journey; the shift toward sustainable capitalism is a long
term trend and in 5 - 10 years only a few companies will be moving in this
direction.
! Increasingly businesses will see CSR as resulting in increased competitiveness
and profitability.
! CSR is part of a search for a new social contract between business and society.
This new social contract will not necessarily be through the creation of a set of
rules, but about a new set of norms arrived at through experimentation.
In spite of the difference in views of social impact and degree of corporate
commitment, the majority of the optimists and the pessimists agree that 5 - 10 years
from now CSR will nonetheless become increasingly mainstream within business,
even if not within the public consciousness. CSR tools, resources, language - all will
become more aligned with business norms and systems. CSR standards - to greater or
lesser effect - will be part of business basics and not an add-on.
Activity 2
Write a short note on the CSR principles of any one of Indian companies which may
be well organized for its CSR initiative.

14.7 SUMMARY
With the given understanding that businesses have a key role of job and wealth
creation in society, CSR is generally understood to be the way an organization
achieves a balance between economic, environmental, and social imperatives while
they address the expectations of the shareholders and the stakeholders. Companies of
late see CSR as an integral part of the long term business strategy. Now a days lots of
companies are taking it seriously for good of business. Very briefly, the following
strategic steps should be taken by a firm to fulfill its social responsibility.
1) Assessment of economic and social impact
2) Assessment of social environment
3) Appraisal of the firms policies and practices
4) Formulating objectives and strategies
5) Developing operational plans and programmes
6) Monitoring social programmes
7) Summary of the outcomes and performance

14.8 SELF ASSESSMENT QUESTIONS

1) What do you understand by Corporate Social Responsibility and what
16 significance does it have for business?
2) What are the differences you find in the philanthropy centric view of CSR and Strategy and Social
Responsibility
business integrated view of CSR?
3) What are the important benefits which companies foresee in adopting CSR?
Throw some light on the various initiatives of the companies in India?
4) Discuss briefly the measurement aspect of CSR and its performance benefits for
companies.

14.9 FURTHER READINGS

Johnson, Gerry & Scholes, Kevan. (2004). Exploring Corporate Strategy. Sixth
edition, Prentice-Hall of India, New Delhi,
Jr. Thompson, A. Arthur. (2003). III Strickland A J Strategic Management, Concepts
and Cases, Thirteenth edition, Tata McGraw Hill Publishing, New Delhi.
Rao, V.S.P and Hari, Krishna, V. (2003). Strategic Management, Texts and Cases,
First Edition, Excel Books, New Delhi.
Velasquez, G, Manuel. (2002). Business Ethics, Concepts and Cases, Fifth edition,
2002, Prentice Hall of India, New Delhi.
Links
www.mallenbaker.com; www.globalreporting.org; www.nacdonline.org;
www.csr.gov.uk; www.brandchannel.com; www.mhcinternational.com;
www.businessethics.com; www.foodfirst.org; www.thetimes100.co.uk

17
 UNIT 15 ETHICS AND VALUES
Objectives
After reading this unit you should be able to:
! explain the meaning of business ethics;
! understand the concept and scope of business ethics;
! understand ethics and its relation to different stakeholders;
! build the case for ethics in business and new dimensions in the changing
business paradigm;
! discuss on ethics in market place and organizations external and internal
exchanges
! debate towards the objections to bringing ethics into business
Structure
15.1 Introduction
15.2 Concept of Business Ethics
15.3 Scope of Ethics
15.4 Stakeholders and Ethics
15.5 Business and Ethics
15.6 Business Ethics and External Environment
15.7 Business Ethics and Internal Environment
15.8 Ethics and Business : Objections
15.9 Summary
15.10 Self Assessment Questions
15.11 Further Readings

15.1 INTRODUCTION
Every business has an ethical duty to each of its associates namely, owners or
stockholders, employees, customers, suppliers and the community at large. Each of
these affect organization and is affected by it. Each is a stakeholder in the enterprise
with certain expectations as to what the enterprise should do and how it should do it.
Business ethics is applied ethics. It is the application of our understanding of what is
good and right to that assortments of institutions, technologies, transactions, activities
and pursuits that we call business. Ethical behaviour is the best long term business
strategy for company , however this does not mean that occasions may never arise
when doing what is ethical will prove costly to a company nor does it mean that
ethical behaviour is always rewarded or that unethical behaviour is always punished.
On the contrary, unethical behaviour sometimes pay off and the good sometimes lose.
Strategy means merely that over the long run and for most of the part, ethical
behaviour can give a company significant competitive advantages over companies that
18 are not ethical.
 Ethics and Values
15.2 CONCEPT OF BUSINESS ETHICS
A discussion of business ethics must begin by providing a framework of basic
principles for understanding what is meant by the terms good and right, only then we
can proceed to discuss the implications of ethics to our business world.
Managers should hold and develop a deeper knowledge of the nature of ethical
principles and concepts and an understanding of how these apply to ethical problems
encountered in business. This type of knowledge and understanding should help
managers more clearly see their way through the ethical uncertainties that confront
them in their business lives.
According to the dictionary, the term ethics has a variety of meanings. One of the
meanings given to it is, the principles of conduct governing an individual or a
group. We sometimes use the term personal ethics while referring to the rules by
which an individual lives his or her personal life. A second and more important
meaning of ethics according to the dictionary is, ethics is the study of morality.
Although ethics deals with morality, it is not quite the same as morality. Ethics is a
kind of investigation and includes both the activity of investigating as well as the
results of that investigation whereas morality is the subject matter that ethics
investigates.
Now the basic question which arise is what morality is. It is often said that morality is
the standards which individual or group determine about deciding what is right or
wrong and good or evil. Moral standards include the norms we have about the kind of
actions we believe are normally right and wrong as well as the values we place on the
kinds of objects we believe are morally good and morally bad. Moral norms can
usually be expressed as general rules or statements such as Always tell the truth or
it is wrong to kill innocent people
Ethics is the discipline that examines ones moral standards or the moral standards of
the society. It asks how these standards apply to our lives and whether these standards
are reasonable or unreasonable that is whether they are supported by good reasons
or poor ones.
Ethics is however not the only way to study morality. The social sciences such as
anthropology, sociology and psychology also study morality but do so in a way that is
quite different from the approach to morality that is characteristics of ethics. It is a
descriptive study which tries to describe or explain the world without reaching any
conclusions about whether the world is as it should be and does not try to reach any
conclusions about what things are truly good or bad or right or wrong. Ethics in
contrast, is a study of moral standards whose explicit purpose is to determine as far as
possible whether a given moral standard is more or less correct.
The above conveys an idea of what ethics is. Now coming to business ethics, it is a
specialized study of moral right and wrong. It concentrates on moral standards as they
apply to business policies, institutions and behaviour and how these apply to the
systems and organizations through which modern societies produce and distribute
goods and services and to the people who work within these organizations. Business
ethics therefore includes not only the analysis of moral norms and moral values but
also attempt to apply the conclusions of this analysis to that assortment of institutions,
technologies, transactions, activities and pursuits that we call business.
To cope up with their complex coordination and control problems, the officers and
managers of large corporations adopt formal bureaucratic systems of rules that link
together the activities of the individual members of the organization so as to achieve
19
certain outcomes or objectives. So long as the individual follows these rules the
Corporate Social outcome can be achieved, the outcome can be achieved even if the individual does not
Responsibility
know what it is and does not care about it.
Business enterprises are the primary economic institutions through which people in
modern societies carry on the tasks of producing and distributing goods and services.

15.3 SCOPE OF ETHICS

The issues that business ethics covers encompass a wide variety of topics. However,
business ethics briefly investigates three kinds of issues systemic, corporate and
individual. Systemic issues in business ethics are ethical questions raised about the
economic, political, legal and other social systems within which business operates.
These include questions about the morality of capitalism or of the laws, regulations,
industrial structures and social practices within which business operates.
Corporate issues in business ethics are ethical questions raised about a particular
company. These include questions about the morality of the activities, policies,
practices or organizational structure of an individual company taken as a whole. Here
questions about morality would be a companys decision to invest millions of dollars
on a project that the company knew would probably not generate any profits.
Finally, individuals issues in business ethics are ethical questions raised about a
particular individual or particular individuals within a company. These include
questions about the morality of the decisions, actions, or character of an individual.
An example here could be the question whether it is moral for a leader of an
organization to allow its researchers to develop a drug that would probably not
generate any profits.
Though this categorization may be helpful for our understanding, often we come
across decisions that involve a large number of extremely complicated interrelated
kinds of issues that can cause confusion unless the different kinds of issues are first
carefully sorted out and distinguished from each other. Corporate organizations pose
major problems for anyone who tries to apply moral standards to business activities.
Must we say that it makes no sense to apply moral terms to organizations as a whole
but only to the individuals who make up the organization? Organizations are
composed of related human individuals that we conventionally agree to treat as a
single unit and they act only when we conventionally agree to treat the actions of
these individuals as the actions of that unit.
It makes perfectly good sense to say that a corporate organization has moral duties
and that it is morally responsible for its acts. However organizations have moral
duties and are morally responsible in a secondary sense. A corporation has a moral
duty to do something only if some of its members have a moral duty to make sure it is
done and a corporation is morally responsible for something only if some of its
members are morally responsible for what happened. Individuals are the primary
carriers of moral duties and moral responsibilities. However corporate policies,
corporate culture, corporate norms and corporate design can and do have an enormous
influence on the choices, beliefs and behaviors of corporate employees.
Activity 1
1) What do you understand by business ethics?
..
..

20 ..
 .. Ethics and Values

..
2) Explain how ethics is important for business.
..
..
..
..
..

15.4 STAKEHOLDERS AND ETHICS

A companys duty to employees arises out of respect for the worth and dignity of
individuals who devote their energies to the business and who depend on the business
for their economic well being. Principled strategy making requires that employee
related decisions be made equitably and compassionately with concern for due
process and for the impact that strategic change has on employees lives. At best the
chosen strategy should promote employee interests and concerns such as
compensation, career opportunities, job security and overall working conditions. At
worst the chosen strategy should not disadvantage employees. Even in crisis
situations, businesses have an ethical duty to minimize whatever hardships have to be
imposed in the form of workforce reductions, plant closings, job transfers, relocations,
retraining and loss of income.
The duty to the customer arises out of expectations that attend the purchase of a good
or services. However, the questions which still abound are, should a seller voluntarily
inform consumers that its products contain ingredients that though officially approved
for use are suspected of having potentially harmful effect? Is it ethical for cigarette
manufacturers to advertise at all ? Is it ethical for manufacturers to stonewall efforts to
recall products they suspect have faulty parts or defective designs.
A companys ethical duty to suppliers arises out of the market relationship that exists
between them. They are both partners and adversaries. They are partners in the sense
that the quality of suppliers parts affects the quality of a firms own product and in
the sense that their businesses are connected . They are adversaries in the sense that
the supplier wants the highest price and profit it can get while the buyer wants a
cheaper price , better quality and speeder service. A company confronts several ethical
issues in its supplier relationship. The questions that arise are Is it ethical to
purchase goods from foreign suppliers who employ child labour, pay substandard
wages? Is it ethical for supermarket chains to demand slotting fees from food
suppliers in return for placing their items in favourable shelf? Is it ethical to threaten
to cease doing business with a supplier unless supplier agrees not to do business with
key competitors? Is it ethical to reveal one suppliers price quote to a rival supplier?
A companys ethical duty to the community at large stems from its status as a member
of the community and as an institution of society. Communities and society are
reasonable in expecting businesses to be good citizens to pay their fair share of taxes
for fire and police protection , waste removal, streets and highways and so on, and to
exercise care in the impact their activities have on their environment, on society, and
on the communities in which they operate. The questions that arise are for example,
whether it is ethical for a brewer of beer to advertise its products on TV, at slots when
these ads are likely to be seen by underage viewers or not? A companys community 21
Corporate Social citizenship is ultimately demonstrated by whether it refrains from acting in a manner
Responsibility
contrary to the well being of society and by the degree to which it supports
community activities, encourages employees to participate in community activities,
handles the health and safety aspects of its operations, accepts responsibility for
overcoming environmental pollution, relates to regulatory bodies and employee
unions and exhibits high ethical standards.

15.5 BUSINESS AND ETHICS

One way to argue that ethics should be brought into business is simply by pointing out
that, ethics should govern all voluntary human activities and because business is a
voluntary human activity. The other way of looking at it is that business is a
cooperative activity whose very existence requires ethical behaviour. For example,
any individual business will collapse if all of its managers, employees and customers
come to think that it is morally permissible to steal from, lie to, or break their
agreements with the company. Because no business can exist entirely without ethics,
the pursuit of business requires at least a minimal adherence to ethics on the part of
those involved in business.
Second, all businesses require a stable society to carry on their business dealings and
the stability of any society requires that its members adhere to some minimal
standards of ethics. Another persuasive way to argue that ethics should be brought
into business is by showing that ethical considerations are consistent with business
pursuits in particular the pursuits of profit. As we understand, TATA is renowned for
its long standing ethical culture and yet it is one of the most spectacularly profitable
companies of all time.
The Changing Business Paradigm and Ethical Dilemmas
Most of the big corporate houses operate globally and maintain manufacturing,
marketing, service or administrative operations in many different host countries. With
a worldwide presence, these corporations draw capital, raw materials and human
labour from wherever in the world they are cheap, skilled and available, and assemble
and market their products in whatever nations offer manufacturing advantages and
open markets. The fact that these corporations operate in more than one country
produces ethical dilemmas for their managers than the managers of firms limited to a
single country.
The reason to this is that the corporations have operations in more than one country,
and the ability to shift their operations out of any country that becomes inhospitable
and relocate in another country that offers it cheaper labour, less stringent laws or
more favourable treatment. This ability to shift the operations sometimes enables the
multinationals to escape the social controls that a single nation might attempt to
impose on the multinational and can allow the corporation to play one country against
another. Environmental laws for example which can ensure that domestic companies
operate in responsible manner that a country deems right for its people, may not be
effective constraints on a corporation that can simply move or threaten to move to a
country without such laws. The managers therefore are confronted with the dilemma
of choosing between the economic needs and interests of their business, on the one
hand and the local needs and interests of their host country on the other hand.
Another set of dilemmas is created since corporations operate plants in several
countries, it can sometimes transfer raw materials, goods and capital among its plants
in different countries at terms that enable it to escape taxes and fiscal obligations that
companies limited to a single nation must bear. Yet another group of dilemmas is
22 faced by multinationals because they operate in several countries they often have the
opportunity to transfer a new technology or set of products from a developed country Ethics and Values
into nations that are less developed. The multinational wants to carry out the transfer
of course because it perceives an opportunity for profit and the host country wants and
allows the transfer because it perceives these technologies and products as key to its
own development. However, the transfer of technologies and products into a
developing country can create risks when the country is not ready to assimilate them.
Ethics in Market Place
Free markets are justified because they allocate resources and distribute commodities
in ways that are just, that maximize the economic utility of societys members and
that respect the freedom of choice of both buyers and sellers. These moral aspects of a
market system depend crucially on the competitive nature of the system. If firms join
together and use their combined power to fix prices, drive out competitors with unfair
practices or earn monopolistic profits at the expense of consumers, the market ceases
to be competitive and the results are injustice, a decline in social utility and a
restriction of peoples freedom of choice.
In a perfectly competitive free market conditions forces drive buyers and sellers
towards the so called point of equilibrium. In doing so they achieve three major moral
values:
i) They lead buyers and sellers to exchange their goods in a way that is just,
ii) They maximize the utility of buyers and sellers by leading them to allocate, use
and distribute their goods with perfect efficiency, and
iii) they bring about these achievements in a way that respects buyers and sellers
right of consent.
Fairness is getting paid fully in return for what one contributes and it is this form of
justice that is achieved in perfectly competitive free markets. Perfectly competitive
markets embody capitalist justice because such markets necessarily converge on
equilibrium point and the equilibrium point is the one point at which buyers and
sellers on an average receive the value of what they contribute.
In a monopoly market situation, however conditions change as compared to perfectly
competitive market conditions particularly with respect to the number of buyers and
sellers and also the entry is not so easy. Unregulated monopoly markets fall short of
the values of capitalist justice and economic efficiency. The high prices the seller
forces on a buyer in a monopoly situation are unjust and these unjustly high prices are
the source of the sellers, excess profits. The high profits in a monopoly market
indicate a shortage of goods. Other firms are blocked entering the market, their
resources cannot be used to make up the shortages indicated by the high profits. Thus
monopoly market results in a decline in the efficiency with which it allocates and
distributes goods.
Oligopoly markets which are dominated by a few large firms are said to be highly
concentrated i.e. there are relatively small number of firms. It is relatively easy for the
managers of these firms to join forces and act as a unit. By explicitly or implicitly
agreeing to set their prices at the same levels and to restrict their output accordingly ,
the oligopolist can function like a single giant firm. This uniting of force together can
create barriers to entry and result in the same high prices and low supply levels that
are characteristics of a monopoly markets. As a consequence oligopoly market, like
monopolies can generate a decline in social utility and can fail to respect basic
economic freedom.
23
Corporate Social Activity 2
Responsibility
1) Write a brief note on ethics in relation to different stakeholders like customers,
employees, etc.
.
.
.
.
.
2) No business can exist without ethics. Briefly express your viewpoints.
.
.
.
.
.

15.6 BUSINESS ETHICS AND EXTERNAL

ENVIRONMENT
The process of producing goods forces businesses to engage in exchanges and
interactions with two main external environments the natural environment and a
consumer environment. Here you will understand the ethical issues raised by these
exchanges and interactions. The two basic problems related to the natural environment
are pollution and resource depleting. Several consumer issues, including product
quality and advertising are the probables related to consumer environment.
The External Environment
For centuries, business institutions were able to ignore their impact on the natural
environment, an indulgence created by a number of causes. First business was able to
treat air and water as free goods. However in todays context unless business
recognize the interrelationships and interdependencies of the ecological systems
within which they operate and unless they ensure that their activities will not seriously
injure these systems we can not hope to deal with the problem of pollution.
Environmental issues raise large and complicated ethical and technological questions
for our business society. What is the extent of the environmental damage produced by
present and projected industrial technology? How large a threat does this damage pose
to our welfare? What values we must give up to halt or slow such damage? Whose
rights are violated by pollution and who should be responsible of paying for the costs
of polluting the environment? How long will our natural resources last ? What
obligations do firms have to future generations to preserve the environment and
conserve our resources?
Economists often distinguish between what it costs a manufacturer to make a product
and what the manufacturer of that product costs as a whole when a firm pollutes its
environment in any way, the firms private costs are always less than the total social
costs involved. This is a problem because when the private costs diverge from the
24 social costs involved in its manufacture, markets no longer price commodities
accurately. Consequently they no longer allocate resources efficiently. As a result the Ethics and Values
welfare of society declines. The remedy for the external costs is to ensure that the
costs of pollution are internalized that is they are absorbed by the producer and take
into account when determining the price of goods. In this way goods will be
accurately priced, market forces will provide the incentives that will encourage
producers to minimize external costs and some consumers will no longer end up
paying more than others for the same commodities.
Ethics of Consumer Production and Marketing
People are exposed daily to astonishingly high levels of risk from the use of consumer
products. Each year people suffer serious accidental injuries and few others are killed
due to accidents involving consumer products. Examples are often reported of injuries
requiring hospital treatment inflicted on youngsters and adults using toys, nursery
equipment and playground equipment, people using home, workshop equipment,
people requiring treatment for injuries involving home construction materials.
Now the dilemma which arises is where does the consumers duty to protect his or her
own interests end and where does the manufacturers duty to protect consumers
interest begin? Three different theories on the ethical duties of manufacturers have
been developed, each one of which strikes a different balance between the consumers
duty to himself or herself and the manufacturers duty to the consumer the contract
view, the due care view, and the social cost view. The contract view would place
the greater responsibility on the consumer, whereas the due care and social costs
views place the larger measure of responsibility on the manufacturer.
Consumers are also bombarded daily by an endless series of advertisements urging
them to buy certain products. Although sometimes defended as sources of
information, advertisements are also criticized on the grounds that they rarely impart
additional information and only give the barest indications of the basic function a
product is meant to serve and sometimes misrepresent and exaggerate its virtues.
Economists argue that advertising expenditure is a waste of resources while
sociologists bemoan the cultural effects of advertising.
The advertising business is a massive business. The question however is who pays for
these advertising expenditures? In the end, the prices consumers pay for the goods
they buy must cover advertising coststhe consumer pays. What does the consumer
get for his or her advertising rupee? According to most consumers, they get very little.
However, the advertising industry sees things differently. Advertising, they claim is
before all else communication. Its basic function is to provide consumers with
information about the products available to them a beneficial service. The question
to be discussed therefore is whether advertising is a waste or a benefit? Does it harm
consumers or help them?
Discussion of the ethical aspects of advertising can be organized around the various
features like its social effects, its creation of consumer desires and its effects on
consumer beliefs. Studies have shown that advertising frequently fails to stimulate
consumption of a product and consumption in many industries has increased despite
minimal advertising expenditures. Thus advertising appears to be effective for
individual companies not because it expands consumption but only because it shifts
consumption away from one product to another. If this is true then economists are
correct when they claim that beyond the level needed to impart information ,
advertising becomes a waste of resources because it does nothing more than shift
demand from one firm to another.
The moral issues raised by advertising are complex and involve several still
unresolved problems. However there are few factors like its social effects, its effect on 25
Corporate Social desire, effects on belief that should be taken into consideration when determining the
Responsibility
ethical nature of a given advertisement. Advances in computer processing power,
database software and communication technologies have given us the power to
collect, manipulate and disseminate personal information about consumers on a scale
unprecedented in the history of the human race. This new power over the collection,
manipulation and dissemination of personal information has enabled mass invasions
in the privacy of consumers and has created the potential for significant harms arising
from mistaken or false information.
The purpose of rights is to enable the individual to pursue his or her significant
interests and to protect these interests from the intrusion of other individuals. It is also
important because it has several enabling functions. Privacy enables certain
professional relationships to exist. In so far as the relationships between doctor and
patient, lawyer and client, and psychiatrist and patient all require trust and
confidentiality, they could not exist without privacy. It is clear then that our interest in
privacy is important enough to recognize it as a right that all people have, including
consumers. However this right must be balanced against the rights and legitimate
needs of others. For example, consumers benefit from having life insurance available
to them. However there are significant consumer benefits that businesses can provide
but they can provide only if there exists agencies that can collect information about
individuals and make that information available to businesses. Thus consumers rights
to privacy have to be balanced with these legitimate needs of businesses.

15.7 BUSINESS ETHICS AND INTERNAL

ENVIRONMENT
The Internal Environment
The process of producing goods forces businesses not only to engage in external
exchanges, but also to coordinate the activities of the various internal constituencies
that must be brought together and organized into the processes of production.
Employees must be hired and organized, stockholders and creditors must be solicited
and managerial talent must be tapped. Inevitably conflicts arise within and between
these internal constituencies as they interact with each other and as they seek to
distribute benefits among themselves. The ethical issues raised by these internal
conflicts fall into two broad areas of job discrimination and the issue of conflicts
between the individual and the organization. Although many more women and
minorities are entering formerly male-dominated jobs, they still face problems that
they would characterize as forms of discrimination. Experiences suggest that sexual
discrimination and racial discrimination are alive and they do create flutters in the
society.
Regardless of the problems inherent in some of the arguments against discrimination,
it is clear that there are strong reasons for holding that discrimination is wrong. It is
consequently understandable that the law has gradually been changed to conform to
these moral requirements and that there has been a growing recognition of the various
ways in which discrimination in employment occurs. Among the practices now widely
recognized as discriminatory, few of them are recruitment practices, screening
practices, promotion practices and conditions of employment. Women as noted earlier
are victims of a particularly troublesome kind of discrimination that is both overt and
coercive. They are subject to sexual harassment.
Many businesses are aware of these trends and have undertaken programmes now to
respond to the special needs of women and minorities. However it should be clear in
view of the future demographic trends that enlightened self interest should also
prompt business to give women and minorities a special hand. It is for these reasons
that companies have instituted aggressive affirmative programmes aimed at
26
integrating large groups of minorities into their firms where they are provided with
education, job training, skills, counseling and other assistance designed to enable them Ethics and Values
to assimilate into workforce.
The employees main moral duty is to work toward the goals of the firm and avoid
any activities that might harm those goals. To be unethical, basically is to deviate
from these goals to serve ones own interest in ways that if illegal are counted as form
of white collar crime. There are several ways in which the employee might fail to
live up to the duty to pursue the goals of the firm. The employee might act on a
conflict of interest, the employee might steal from the firm or the employee might
use his or her position as a leverage to force illicit benefits out of others through
extortion or commercial bribery.
The ethical issue of misusing proprietary information has become much more
prominent in the last decade as new information technologies have increasingly
turned information into a valuable asset to which employees have regular access. As
information technologies continue to develop, this issue will continue to grow in
importance. Insider trading is also unethical not merely because it is illegal but
because it is claimed, the person who trades or insider information in effect steals
this information and thereby gains as unjust or unfair advantage over the member of
the general public.
In the course of performing a job an employee may discover that a corporation is
doing something that he or she believes is injurious to society. Indeed individuals
inside a corporation are usually the first to learn that the corporation is marketing
unsafe products, polluting the environment , suppressing health information or
violating the law. Employees with a sense of moral responsibility who find their
company is injuring society in some way will normally feel an obligation to get the
company to stop its harmful activities and consequently will often bring the matter to
the attention of their superiors. Unfortunately if the internal management of the
company refuses to do anything about the matter , the employee today has few other
legal option available. In the absence of legal protections of the employees right to
freedom of conscience the practice of whistle blowing is discussed and debated.
Whistle blowing is an attempt by a member or former member of an organization to
disclose wrongdoing in or by the organization. It can be internal or external. If the
wrongdoing is reported only to those higher in the organization it is internal whistle
blowing. When the wrongdoing is reported to external individuals or bodies such as
government agencies, newspapers or public interest groups, the whistle blowing is
said to be external.
However it is for the ethical judgment to decide whether external whistle blowing is
wrong because employees have a contractual duty to be loyal to their employer and to
keep all aspects of the business confidential. When an employee accepts a job, the
argument goes, the employee implicitly agrees to keep all aspects of the business
confidential and to single mindedly pursue the best interests of the employer. The
whistleblower violates this agreement and thereby violates the rights of his or her
employer.
The last point to be mentioned here is the ethics of political tactics in organizations.
Political behaviour in an organization can easily become abusive. Political tactics can
be used to advance private interests at the expense of organizational and group
interests, they can be manipulative and deceptive and they can seriously injure those
who have little or no political power or expertise. However political tactics can also
put at the service of organizational and social goals, they may sometimes be necessary
to protect the powerless and they are sometimes the only defense a person has against
the manipulative and deceptive tactics of others. The dilemma for the individual in an
organization is knowing where the line lies that separates morally legitimate and
necessary political tactics from those that are unethical.
27
Corporate Social
Responsibility 15.8 ETHICS AND BUSINESS : OBJECTIONS
People taking objections to bringing ethics into business argue that persons involved
in business should single mindedly pursue the financial interests of their firm and not
side track their energies or their firms resources into doing good works.
Some argue that in perfectly competitive free markets the pursuit of profit will by
itself ensure that the members of society are served in the most socially beneficial
ways. However what experts like Manuel G Velasquez argue is that often assumptions
behind this argument like perfectly competitive market situation do not exist.
Another argument is that business managers should single-mindedly pursue the
interests of their firms and should ignore ethical considerations.
This argument finds its basis in loyal agents argument, which suggests that a
manager engaged in certain illegal or unethical conduct be excused because he did it
not for himself but to protect the interests of his company. However again the
assumptions behind this argument can be questioned on several grounds.
The third kind of objection is that to be ethical it is enough for business people merely
to obey the law. Business ethics is essentially obeying law. It is wrong however to see
law and ethics as identical. It is true that some laws require behaviour that is same as
the behaviour required by our moral standards. However law and morality do not
always coincide. Some laws have nothing to do with morality because they do not
involve serious matters. These include dress codes, parking laws and other laws
covering similar matters.
Beyond these arguments for and against the role of ethics in business, discussions
happen whether ethical companies are more profitable than unethical ones. There are
many different ways of defining ethical, many different ways of measuring profits and
the findings of different studies remain inconclusive. However studies do suggest that
by and large ethics do not detract from profit and seems to contribute to profits.
Activity 3
1) Discuss any one example from Indian Companies where the case of whistle
blowing was noticed.
.
.
.
.
2) Briefly discuss a case of any advertising compaign of a product which according
to you had a potential of creating an adverse effect on human desire. How?
.
.
.
.
3) Using a case of monopoly firm which may have a contract for testing industrial
pollution norms, list the ethical issues which may arise.
.
.
.
28 .
 Ethics and Values
15.9 SUMMARY
Business ethics is applied ethics. It is the application of our understanding of what is
good and right to those assortments of institutions, technologies, transactions,
activities and pursuits that we call business. Corporate issues in business ethics are
ethical questions raised about a particular company. These include questions about the
morality of the activities, policies, practices or organizational structure of an
individual company taken as a whole. Free markets are justified from ethical point of
view because they allocate resources and distribute commodities in ways that are just,
that maximize the economic utility of societys members and that respect the freedom
of choice of both buyers and sellers.
The duty to the customer arises out of expectations that attend the purchase of a good
or services. The questions which are discussed often are, should a seller voluntarily
inform consumers that its products contain ingredients that though officially approved
for use are suspected of having potentially harmful effect? The dilemma which arises
is where does the consumers duty to protect his or her own interests end and where
does the manufacturers duty to protect consumers interest begin?
The process of producing goods forces businesses not only to engage in external
exchanges, but also to coordinate the activities of the various internal constituencies
that must be brought together and organized into the processes of production. On the
other hand, the employees main moral duty is to work toward the goals of the firm
and avoid any activities that might harm those goals. To be unethical, basically is
understood as to deviate from these goals to serve ones own interest in ways that if
illegal are counted as form of white collar crime. Nevertheless with the emergence
of concepts like whistle blowing employees with a sense of moral responsibility who
find their company is injuring society in some way find an opportunity in stopping the
company from its harmful activities.

15.10 SELF ASSESSMENT QUESTIONS

1) What is Ethics and what do you understand by morality?
2) What do you understand by business ethics and how is it important for the
business?
3) Explain the nature of ethics in context of different stakeholders.
4) Explain the ethical dilemmas in the changing business paradigm?
5) What is ethics of consumer production and marketing?

15.12 FURTHER READINGS

Johnson, Gerry & Scholes, Kevan. (2004). Exploring Corporate Strategy. Sixth
edition, Prentice-Hall of India, New Delhi,
Jr. Thompson. A. Arthur, III Strickland A.J. (2003). Strategic Management, Concepts
and Cases, Thirteenth edition, Tata McGraw Hill Publishing, New Delhi
Rao, V.S.P. and Hari, Krishna.V. (2003). Strategic Management, Texts and Cases.
First Edition, Excel Books New Delhi
Velasquez, G.Manuel. (2002). Business Ethics, Concepts and Cases, Fifth edition,
Prentice Hall of India, New Delhi.

29
 UNIT 16 SOCIAL AUDIT
Objectives
After reading this unit you should be able to:
! explain the meaning of social audit;
! state the scope and objectives of social audit;
! emphasise the need for social audit ;
! identify different types of social audit;
! highlight key developments in social transparency and reporting
Structure
16.1 Introduction
16.2 Scope and Objectives
16.3 CSR and Corporate Accountability
16.4 Types of Social Audit
16.5 Key Developments in Transparency and Reporting
16.6 Summary
16.7 Key Words
16.8 Self Assessment Questions
16.9 Further Readings

16.1 INTRODUCTION
The term social audit may be interpreted in several ways. As far as common
understanding goes, it is an essential assessment of how well a company has
discharged its social obligations. However experts see it as a systematic and
comprehensive evaluation of an organizations social performance which is
interpreted as organizational efforts in enriching the general welfare of the whole
community and the whole society.
The need for social audit arises because of various reasons. In order to reach the
objective of enriching economic wealth for the shareholders, the firm do it at the cost
of social and environmental disorder. And since many would not take into account the
social costs of such negative implications, their prices do not reflect the real cost. The
organizations do it more because of competitive reasons. However if the larger
interest of society is to be preserved, there has to be some consideration for social
good.
The company is expected to behave and function as a socially responsible member of
the society like any other individual. It cannot shun moral values nor can it ignore
actual compulsions. There is a need for some form of accountability on part of the
management which is not only limited to shareholder alone. In modern times, the
objective of business has to be the proper utilization of resources for the benefit of
others. A profit may still be a necessary part of the total picture but it sould not be the
only purpose. The company must accept its obligation to be socially responsible and
30
to work for the larger benefit of the community.
Society expects businesses to share the fruits of progress and growth. Moreover, the Social Audit
social concern by the organization proves to be an asset for them in the long run
especially under environmental distress because of the goodwill and the positive
image earned all through these years.

16.2 SCOPE AND OBJECTIVES

Social audit tries to make the traditional economic and technical values as two sub-
systems within the larger social system. Social audit primarily tries to cover the
following areas:
i) Ethical Issues: They offer a basis for determining what is right and what is
wrong in terms of a given situation. Ethics is best understood when we cite
examples relating to unethical conduct. Few such examples can be price
discrimination, unfair trade practices, cheating customers, pirating employees
ideas, leaving the job without observing job contract.
ii) Equal opportunity: A second relevant social issue which comes under social
audit is the equity of treatment in employment and a fair justice system in the
organization. Employment decisions in an organization should be based on merit
and ability and not on the basis of arbitrary quotas based on gender, race or
religion.
iii) Quality of Work Life: Besides demands for safe, healthy and human work
environment people are seeking greater meaning in their lives. Greater
responsibility, growth, freedom and flexibility, fair reward system are few things
which employees have preference for. There is also a growing demand for
employee assistance programmes keeping in mind the present day stressful
situations they are exposed to.
iv) Consumerism: Business has a special obligation towards the consumer as the
business exists to serve and satisfy the needs of the consumers. It is the principal
duty of business to make available to the consumer items of daily needs in the
right quantity at a right time, price and of the right quality. However many Indian
products are not safe at all and the consumers suffer at hands of corrupt, and
dishonest corporate houses.
v) Environmental Protection: Growing water, air and environmental pollution by
various industries in recent times has led to a public outcry demanding
environmental protection at any cost.

16.3 CSR AND CORPORATE ACCOUNTABILITY

One of the most significant developments in the field of corporate social
responsibility (CSR) over the past few years has been the growth in public
expectations that companies not only make commitments to CSR, but also develop
systems to manage, implement and systematically assess and report on progress
relative to those commitments. Corporate accountability encompasses the systems a
company establishes to develop policies, indicators, targets, and processes to manage
the full range of its activities. The scope of operations for which companies are
expected to be accountable has increased dramatically in recent years to include not
only companies own performance but also that of business partners and other actors
throughout the companys value chain. The mechanism a company uses to
demonstrate accountability are varied and inevitably need to change and grow as a
company evolves, but effective systems for increasing accountability generally allow
a company to be inclusive, responsive, and engaged with its stakeholders.
31
Corporate Social Corporate accountability today spans emerging CSR issues like business ethics,
Responsibility
diversity, marketplace behaviour, governance, human rights, and labour rights as well
as more and more traditional areas of financial and environmental performance.
Interest in the inter-relationships between issues will also increase the complexity of
the corporate accountability debate; in many areas of the world, social issues are now
in ascendance, and these qualitative, complex issues are likely to be the ones against
which companies find it hardest to measure and verify performance.
Effective and accountable management systems help companies shape cultures that
support and reward CSR performance at all levels. As part of this effort, many
companies are working to increase accountability for CSR performance at the board
level. This can lead to changes in who serves on the board, how directors handle
social and environmental issues, and how the board manages itself and fulfills its
responsibilities to investors and other stakeholders. Companies are also seeking to
build accountability for CSR performance at the senior management level, in some
cases by creating a dedicated position responsible for broad oversight of a companys
CSR activities. Finally, many companies are working to integrate accountability for
CSR performance into actions ranging from long-term planning to everyday decision-
making, including rethinking processes for designing products and services and
changing practices used to hire, retain, reward, and promote employees.
Demand for increased corporate accountability today comes from all sectors.
Evidence of this is found in the increasing number of sustainability-related market
indices and by external demands for certification or labeling of certain products.
Underpinning this demand for increased corporate accountability is the expectation
that companies can and should be more transparent, which essentially means
measuring, reporting on, and continuously improving social, environmental, and
economic performance. These increased demands are in part a result of recent events
that have contributed to erosion in the trust extended to companies. Stakeholders now
expect companies to provide access to information on impact of their operations, to
engage stakeholders in meaningful dialogue, and to be responsive to particular
concerns unearthed in the dialogue process. To increase the credibility of what is
disclosed, leadership companies are also investigating carefully the value of various
types of assurance that might support their reporting efforts.
Proliferation of Social and Environmental Reporting Standards: A variety of
organizations and initiatives are attempting to standardize social and environmental
reporting procedures to let stakeholders more easily compare companies performance
across facilities, sectors, and borders. Most noteworthy is the Global Reporting
Initiative (GRI), an international reporting standard for voluntary use by organizations
reporting on the economic, environmental, and social aspects of their activities,
products, and services. The GRI, convened by the Coalition for Environmentally
Responsible Economies (CEREs) in partnership with the United Nations Environment
Programme, incorporates the active participation of corporations, NGOs, accountancy
organizations, business associations, and other stakeholders from around the world
into the ongoing development of the reporting guidelines. Another example of a more
local standard is one launched in Brazil by the Ethos Institute for Social
Responsibility which has produced a set of indicators to help companies integrate
CSR into their management practices and to track and monitor their progress. In 2001,
a total of 71 Brazilian companies submitted reports to Ethos indicating their
performance against 35 indicators in the areas of values and transparency, workplace,
environment, suppliers, consumers/customers, community, and government and
society.

32
Activity 1 Social Audit

Enumerate examples where you see firms calculating the wealth generated, without
taking into account the social and environmental costs.

16.4 TYPES OF SOCIAL AUDIT

The various types of social audit may be listed as below:
1) Social Process Audit
It tries to measure the effectiveness of those activities of the organization which are
largely taken up to meet certain social objectives. Corporate executives in this case
try to examine what they are doing and how they are doing. The method involves four
steps:
i) Find circumstances leading to the starting of the social audit programme
ii) List out goals of the social programme
iii) State how the organization is going to meet such goals
iv) Qualitatively evaluate what is actually done as against what has been planned
2) Financial Statements Format Social Audit
In this type, financial statements show conventional financial information plus
information regarding social activities. About associates a management consultancy
firm proposed that the balance sheet should show a list of social assets on one side and
social commitments, liabilities and equity on other side. The income statement should
reveal social benefits , social costs and the net social income provided by the company
operations to the staff community, general public and clients.
This approach has been criticized as many feel that it may create confusion of
complicating issues further and defying easy understanding.
3) Macro-Micro Social Indicator Audit
This type of audit requires evaluation of a companys performance in terms of social
measures ( micro indicators) against macro social measures. The macro social factors
include the social goals expected by society in terms of health, safety, education,
housing, accidents, pollution control measures, etc. The micro social indicators are
measures of the performance of the company in those areas measured by macro social
indicators.
One of the important problems with this approach is the non-availability of reliable
macro social indicators. Does an increase in family planning clinics indicate better
medical facilities? Further it is not easy to specify whether the individual actions
initiated by a company have actually improved the quality of life of a community,
such individual actions may ultimately be labeled as irrelevant , insignificant and
sometimes , even unnecessary. In any case this approach helps all companies to
evaluate their contributions in improving social life on a rational basis. 33
Corporate Social 4) Social Performance Audit
Responsibility
In developed countries, several interests groups including church groups,
universities, mutual funds, consumer activists regularly measure, evaluate and rank
socially responsive companies on the basis of their social performance. Regular
opinion polls are carried out to find companies that initiate social efforts in a
proactive manner and earn the goodwill of the general public.
5) Partial Social Audit
In this case, the company undertakes to measure a specific aspect of its social
performance ( e.g. environment, energy, human resources) because it considers that
aspect to be very important or because its social efforts for the time being are confined
to the area:
! Environmental Audit: In developed countries people protest violently if the
companies try to pollute the environment and the companies not only comply
with regulations but also proactively explore opportunities to recycle wastes into
useful products. An internal group constituted by the unit concerned prepares a
report about the way the environmental issues of importance are being taken care
of. This report is generally re-examined by an outside auditor to see whether air/
water pollution measures, release of toxic wastes, safety regulations have been
complied with or not.
! Energy Audit: to conserve energy sources, energy audits are undertaken to
investigate how energy is obtained, consumed and preserved.
! Human Resource Accounting (HRA): The basic philosophy of HRA is that
human resources are assets and that the investment in acquiring, training, and
developing these resources should be accounted for as an asset. Conventional
accounting methods write off investments in human capabilities and values as
operating expenses and thereby understate the profit. The current value of a
companys human assets is not considered while computing expenses/revenues
and, as a result, the balance sheet does not portray the true and fair picture of the
companys state of affairs.
6) Comprehensive Audit
It tries to measure, verify and evaluate the total performance of the organization
including its social responsibility activities. It focuses mainly on management systems
rather than on the actions or events which are not so important. It aims at evaluating
the quality of processes and the information on which organizational decisions are
taken.
Difficulties in Social Audit
Social audit presents numerous problems; its scope cannot be determined precisely. If
we go for listing all activities undertaken by an organization, say in an accounting
year it may be difficult to find out which activities are to be treated as social and
which not. After all most of the activities of a company may have some sort of social
relevance somewhere or the other. To avoid this if we take only those activities that
have tangible social advantage, the scope of social audit is severely constrained. The
requirements of various groups such as employees, customers, shareholders, general
public, government, etc. may not be accurately and readily convertible into social
rhetoric always. Another serious problem as explained previously is with regard to
the determination of yardsticks for measuring the cost and accomplishment of
activities shown in the social audit.
34
Activity 2 Social Audit

Illustrate few examples of Indian companies who in your opinion care for
environmental protection or are driven by ethical norms or are conscious of extending
equal opportunity to its employees while pursuing their commercial activity of
generating wealth.

16.5 KEY DEVELOPMENTS IN TRANSPARENCY

AND REPORTING
The Growth of Corporate Social Responsibility: The increased visibility of
corporate social responsibility has encouraged companies to better account for their
actions in a wide range of areas, including corporate governance, labour practices and
employee relations, environmental policies and practices, and community
involvement. Increasingly, a broad range of stakeholder groups is seeking specific,
quantifiable information from companies on these topics. These stakeholders expect
companies to take a deeper look at the nature of their operations, and to publicly
disclose both their progress and problems in addressing these issues.
Increased Demand for Transparency: Government regulators, financial analysts,
employees, nonprofit advocacy organizations, labour unions, community
organizations, and the media are among the groups pressing companies to divulge
greater amounts of information on CSR performance targets, decision-making, and
results. These demands represent concern by stakeholders that companies will not
hold themselves accountable for CSR commitments without public disclosure. For
example, the Publish What You Pay, campaign, a coalition of non-profit groups, is
calling for all publicly traded resource companies to be required by regulators to
disclose aggregate information about taxes, royalties, fees and other transactions with
governments and/or public sector entities for the products of every country in which
they operate.
Growth in Sustainability Reporting: According to current estimates, almost 500
companies now issue comprehensive reports on their social and environmental
activities and impacts, a dramatic increase over the seven reports that were issued in
1990, while thousands of companies produce reports on aspects of CSR performance
like the environment or philanthropy. At the same time that the overall number of
reports issued is increasing, reports are becoming increasingly rigorous in their
methodology, striving for consistency and relevance comparable to that enjoyed by
annual financial reports. For example, to demonstrate the level of importance the
company gives its sustainability report, Shell publishes its 2002 sustainability report
under the same cover as its 2002 financial report. While many companies find that
comprehensive reporting can satisfy many stakeholders informational needs, there is
considerable debate over the relationship between reporting and actual changes in
corporate behaviour. So, while sharing information is an important first step in
creating an accountable culture, stakeholders are now looking at how the process of
reporting creates change in company policies and practices.
35
Corporate Social Greater Government Regulation: Government regulators at all levels are calling on
Responsibility
companies to increase the quantity and quality of information they disclose to the
public about their practices and performance. On the whole, European governments
have been more active in advocating regulatory approaches than the U.S. government.
For instance, newly amended French legislation, called the Nouvelles Regulations
Economiques (NRE), require as of the beginning of 2003 that all companies listed on
the French stock exchanges to report to shareholders and stakeholders on a range of
social and environmental issues. Countries such as Denmark, Sweden, Norway, and
the Netherlands also have enacted legislation requiring specified companies to report
on aspects of their social and environmental performance.
Increased Stakeholder Activism: Many stakeholder groups are engaging companies
more directly, utilizing a wide range of tools, techniques, and technologies to bring
their interests to companies attention. These activists are also working to educate
lawmakers, the media, and the public about companies that are or are not
deemed to be accountable. Among the tactics being used by stakeholder groups are
public information campaigns, public protests, boycotts, and class-action lawsuits
seeking action and redress for perceived company misdeeds. At the same time,
stakeholders are developing new strategies that involve finding commonalities with
other groups to create alliances that cross both geographic boundaries as well as issue-
area divides. In doing so, they are able to directly engage companies with a much
stronger voice and with a much broader agenda.
Increased Shareholder Engagement: Company shareholders, both individuals and
institutions, have become increasingly vocal and aggressive in pressing companies to
be more accountable. Activist shareholders call for increased accountability have
included resolutions promoting greater disclosure of environmental and social
impacts, increased transparency in board actions and decisions, and requisitions for
company commitments to abide by internationally accepted social and environmental
principles. Whereas resolutions over the past few years often called for company
endorsement of specific standards such as SA8000, the CEREs Principles or the
UN Global Compact resolutions today most often use more general language on
adhering to the highest and best social and environmental standards appropriate to the
company so as to have broader/greater shareholder appeal. In addition, shareholder
activists are pushing for public disclosure of companies voting guidelines as well as
proxy votes by mutual funds. For instance, the U.S. Securities and Exchange
Commission recently approved regulation that will require mutual funds to disclose
how they vote on shareholder resolutions, a move that was strongly supported by
shareholder activists. Many companies continue to engage shareholders at annual
meetings or through the resolution process, a mechanism that shareholders use to
access management on issues of concern. However, some companies now meet
directly with shareholder activists and institutional investors in settings other than the
annual meeting. Some companies have developed staff positions or departments
responsible for addressing shareholder concerns on social and environmental issues.
The Growth of Information Technology: The Internet has provided companies and
those seeking greater corporate accountability an unprecedented ability to share and
exchange information both accurate and inaccurate on a large scale. Given the
largely unregulated nature of this form of communication, many companies are
finding that they need to monitor and engage more actively in the information being
disseminated. A number of companies now use the Internet to report proactively on
their social and environmental activities. Increasingly, companies are using the
Internet not only as a place to electronically post information originally developed for
print, but also taking advantage of the medium to provide more periodic, interactive,
and in-depth information about their performance. The Internet also allows companies
36
to receive feedback from stakeholders on the information they are sharing. Some
companies are finding that they can dilute or eliminate the impacts of negative, Social Audit
Internet-driven campaigns by engaging activists and other stakeholders directly,
helping to ensure the information they receive is as accurate as possible. At the same
time, a variety of non-governmental organizations, government entities, and for-profit
enterprises have established Internet sites that provide detailed information about
companies environmental performance, philanthropy, and other social impacts, in
some cases on a facility-by-facility basis. Another growing use of the Internet is to
allow shareholders to vote their proxies online, potentially enhancing the ability of
activist institutions and individuals to mobilize fellow shareholders in order to
influence company policy.
Increased Media Attention: Corporate social responsibility, and accountability more
broadly, have become topics of increased media attention and scrutiny, both in the
business press and the mainstream media. A number of publications now feature
regular articles on such accountability-related issues as board diversity and
independence, CEO compensation, board performance evaluation practices, and
company responses to shareholder concerns. Media attention has forced companies to
examine, and in some cases revise, their policies and practices on a range of CSR
issues. For example, in a case that is poised to set a significant precedent in the area of
corporate transparency, the U.S. Supreme Court has agreed to hear a case against
Nike, in which the company is accused of falsifying commercial speech in defense of
the working conditions at its supplier factories overseas. Allegations against the
companys overseas labour practices have received significant media attention over
the past decade, leading to Nikes assertion that the company should be
constitutionally protected to defend itself and highlight the human rights strides it has
made. Roughly 30 news organizations, including ABC, CBS, NBC and top newspaper
chains as well as organized labour and groups such as the American Civil Liberties
Union, argued in court filings that reporters will not be able to get company
executives to talk freely about the safety of products, racial discrimination or
environmental concerns about their industry, because of the fear of future lawsuits if
the case against Nike should be upheld.
Greater Government Regulation: Government regulators at all levels are calling on
companies to increase the quantity and quality of information they disclose to the
public about their practices and performance. Particularly in the area of the
environment, companies are facing new and growing amounts of regulation and
legislation aimed at increasing their accountability to society.
Activity 3
Discuss whether Indian companies should come forward in helping Tsunami victims.
Do you consider they have any social responsibility towards this natural disaster?

16.6 SUMMARY
Social Audit in business intends to examine an organizations efforts in enriching the
general welfare of the whole community and the whole society. In modern times, the
objective of business is to provide benefits to others and the society expects
businesses to share the fruits of progress and growth. Corporate accountability 37
Corporate Social encompasses the systems which a company establishes in order to develop policies,
Responsibility
indicators, targets and processes to manage the full range of its activities towards
society. Demand for increased corporate accountability today comes from all sectors
and various types of social audit system is being developed in order to take such
accounts. Few key developments enabled by technology and information revolution
has broadened the scope for such an audit to be made within organizations and shared
in public.

16.7 KEY WORDS

Corporate Accountability
Spans emerging CSR issues like business ethics, diversity, marketplace behaviour,
governance, human rights, and labour rights as well as more traditional areas of
financial and environmental performance.
Comprehensive Audit
It tries to measure, verify and evaluate the total performance of the organization
including its social responsibility activities.
Partial Social Audit
In this case, the company undertakes to measure a specific aspect of its social
performance ( e.g. environment, energy, human resources) because it considers that
aspect to be very important.
Social Audit
It is an essential assessment of how well a company has discharged its social
obligations.
Social Process Audit
It tries to measure the effectiveness of those activities of the organization which are
largely taken up to meet certain social objectives.

16.8 SELF ASSESSMENT QUESTIONS

1) What is social audit and what is its relevance for business organization?
2) What is Corporate Accountability?
3) What do you understand by business ethics and how it is important for the
business?
4) Explain the key developments in business environment which calls for better
transparency and a comprehensive reporting from business organizations.
5) How do you differentiate between Partial social audit and Comprehensive audit?

16.9 FURTHER READINGS

Johnson, Gerry & Scholes, Kevan. (2004) Exploring Corporate Strategy, Sixth
edition, Prentice-Hall of India, New Delhi,
Jr. Thompson A Arthur, III Strickland, A.J. (2003) Strategic Management, Concepts
and Cases, Thirteenth edition, 2003, Tata McGraw Hill Publishing, New Delhi
Rao, V S P and Hari, Krishna V. (2003) Strategic Management, Texts and Cases, First
Edition, Excel Books New Delhi.
Velasquez, G.Manuel. (2002). Business Ethics, Concepts and Cases, Fifth edition,
Prentice Hall of India, New Delhi.
38
UNIT 17 PHILANTHROPY AS A STRATEGIC
CHOICE
Objectives
After reading this unit you should be able to:
! know what the concept of corporate philanthropy is all about
! describe the nature of corporate philanthropy
! understand the strategic philanthropy and economic motivations
Structure
17.1 Introduction
17.2 Nature of Corporate Philanthropy
17.3 Strategic Philanthropy and Economic Motivations
17.4 Summary
17.5 Key Words
17.6 Self Assessment Questions
17.7 Further Readings

17.1 INTRODUCTION
The first generation of Corporate Social Responsibility (CSR) showed how companies
can be socially responsible in ways that do not detract from commercial success rather
contribute to it. It was the most traditional and widespread form of CSR and often
manifested itself as corporate philanthropy. It rose to heights in 1990s when huge
amount of money was being donated by individuals. It was not a part of the main
business of the company but may have added commercial value through reputation
enhancement.
However as the concept evolved, corporate philanthropy is considered as a practice by
companies of all sizes and sectors making charitable contributions to address a variety
of social, economic and other issues as part of their overall corporate citizenship
strategy. Historically many businesses played a significant role in their local
communities by providing financial support to a variety of non profit organizations
and charitable causes. In recent years several events and trends have contributed to
companies changing the way they approach their philanthropy. The most prominent
changes include :
! Adoption of a strategic approach to philanthropy in which companies align
charitable giving with the companys core business interests;
! Expansion of the geographic focuses of corporate giving to reflect the needs and
expectations of a global workforce and customer base.
! Development of measurement tools for evaluating the impact of charitable
contributions.
! Innovation in the ways companies incorporate greater stakeholder participation
in philanthropic activities, create long-term relationships with nonprofit
organizations and organize their philanthropic programmes.

39
Corporate Social Activity 1
Responsibility
Mention the prominent changes which have occurred with philanthropy.

17.2 NATURE OF CORPORATE PHILANTHROPY

The term philanthropy is generally understood as giving in the interest of the
recipient. A definition of corporate philanthropy is that it is a voluntary transfer of
resources from the firm to the recipient at below market prices (Fry, Keim, and
Meiners, 1982) (Wokutch and Spencer, 1987). Carroll (1979) speaks of business
philanthropic responsibilities. He uses the term philanthropic in this context as
voluntary or discretionary social activities which are undertaken in response to
societys expectation that businesses be good corporate citizens (Carroll, 1991 p. 42).
Burlingame and Frishkoff characterize the ways in which corporate philanthropy is
undertaken as
! Altruism giving in the interest of others without self- interest
! Shared-benefit giving, giving to the common good with general but not specific
benefit
! Enlightened self- interest the chance to enhance a product or service
promotion, where the donor looks for specific benefit over the long term
! Charitable investment where there is an expectation of short term gain, greater
than that invested
! Stewardship where there is a direct focus on maximizing shareholder wealth and
such activities as tax strategies would be appropriate.
In the past decade or two we increasingly have seen such activities as charitable
contributions, community service programmes, employee voluntarism, environmental
friendly policies , executive loans programmes and various quality-of-life efforts.
Regarding charitable giving, companies increasingly strive to align charitable giving
with hearts of workers and customers. Quality of life issue includes rebuilding inner
cities, providing job training for the hard core unemployed, helping renovate parks,
sponsoring cleanup programmes, providing primary education and primary health care
facilities.
Some management scientists have defined the concept of philanthropic and charitable
dispositions and activities of business enterprises to such cases as promotion of
education and health, removal of poverty, acceleration of rural development and so
on. Andrew Carnegie, founder of the conglomerate U S Steel Corporations, put forth
philanthropic concept of social responsibility in his book, The Gospel of Wealth
published in 1899. Carnegies view was based on two principles: the charity principle
and the stewardship principle. Both were basically paternistic; they saw business as
parents to child like employers and customers who lacked the capacity to act in their
own best interest.
According to the Charity Principle, societys more fortunate members have obligation
40 to help the less fortunate members, including the unemployed, the handicapped etc.
Carnegie himself practiced what he preached by giving away millions of dollars for Philanthropy as a Strategic
Choice
charitable and civil purposes. The Stewardship principle required business and
wealthy individuals to view themselves as the stewards or caretakers of their property.
Cornegies idea was that the rich hold their money in trust for the rest of society and
can use it for any purpose that society deems legitimate. However it is also a function
of business to multiply societys wealth by increasing its own through prudent
investments of the resources under its stewardship.
Activity 2
List the ways in which corporate philanthropy are undertaken.
..
..
..
..
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17.3 STRATEGIC PHILANTHROPY AND ECONOMIC

MOTIVATIONS
When it comes to philanthropy, executives increasingly see themselves as caught
between critics demanding ever higher levels of corporate social responsibility and
investors applying pressure to maximize short-term profits. Increasingly, philanthropy
is used as a form of public relations or advertising, promoting a companys image
through high-profile sponsorships. But there is a more truly strategic way to think
about philanthropy. Corporations can use their charitable efforts to improve their
competitive context, the quality of the business environment in the locations where
they operate.
Using philanthropy to enhance competitive context means aligning social and
economic goals and improving companys long-term business prospects. Addressing
context enables a company not only to give money but also leverage its capabilities
and relationships in support of charitable causes. Taking this new direction requires
fundamental changes in the way companies approach their contribution programmes.
Adopting a context-focused approach requires a far more disciplined approach than is
prevalent today. But it can make a companys philanthropic activities far more
effective.
Scholars indicate a movement in corporate philanthropy towards strategic giving,
for example, giving that improves the firms strategic position (ultimately the bottom
line) while it benefits the recipient of the philanthropic act. Although the existence of
this trend is widely accepted, findings of a survey of corporate giving managers of
U.S. firms that have had an established giving programmes of at least 5 years, with
annual giving totaling at least $200,000 each year, suggest that corporate giving
managers believe their firms are becoming increasingly strategic in their philanthropic
activities. The findings also indicate that institutional- firm and individual-level
influences combine to precipitate strategic philanthropy. These findings lend support
to the belief that the nature of corporate philanthropy is evolving to fit a more
competitive market place.
The new corporate philanthropy encourages companies to play a leadership role in
social problem solving by funding initiatives that incorporate the best thinking of
41
Corporate Social governments and nonprofit institutions. The new approach to philanthropy is best
Responsibility
illustrated by the AT&T Foundation, which has set up a dynamic relationship with the
companys business units to support social causes while advancing AT&Ts business
goals.
In 1935, George Merck II wrote that Merck was inspired by the ideals of
advancement of medical science and of service to humanity. Years later, the
company developed and gave away a drug to cure river blindness; when asked why,
Mercks response was that a failure to go forward would have demoralized the
companys scientists.
After World War II, Merck brought streptomycin to Japan to eliminate tuberculosis.
Although the venture made no money, today Merck is the largest American
pharmaceutical company in Japan. When asked to explain such policies, Merck and
similar corporations cite both self-identity and pragmatic long-term business reasons.
But it seems the ideology of giving would prevail regardless because the companies
assume acts of goodwill somehow pay off.
Corporate values do affect decision-making. A notable Harvard Business School case
points to the importance of Johnson & Johnsons credo, notable in its decision to pull
all Tylenol around the nation when bottles laced with cyanide caused deaths in one
city. Johnson & Johnson also spent money to communicate its warning and policy.
Another company, facing similar dangers, took more limited actions. To take an
example closer to this audience, It was noticed that Roger Beach, the CEO of Unocal,
stresses the corporations commitment to corporate citizenship in its vision statement,
which observes that Unocal strives to improve the lives of people wherever we
work. He points towards the concrete steps the company has taken in East Asia
during the current crisis, including assistance for Asian students in the United States.
The connection of corporate citizenship to the elements of business strategy is
obvious, and there are many examples. In 1987, the Minnesota legislature passed a
law to block a hostile takeover of Dayton-Hudson, citing the companys outstanding
record of corporate citizenship. The Clean Corporate Citizenship programme in
Michigan rewards companies for good environmental records with greater flexibility
in meeting environmental guidelines and reduced regulatory oversight. In less stable
locations, the rewards for good corporate citizenship can be even greater. In Vietnam,
Motorolas work with rural health clinics helped it to become one of the few U.S.
companies to do well there. In South Africa, Consolidated Goldfields arranged and
paid for secret meetings between the ANC and top Afrikaners during the last few
years of apartheid. The sessions are credited with building trust and helping lay the
groundwork for the negotiations to end apartheid. In so doing, the company helped
avoid a descent into anarchy and conflict in a country in which it had long-term
business interests. In Panama, Min-America, Panamas largest mining group, has
invested in a host of social projects to benefit rural and isolated communities affected
by its mining activities in order to build support for a long-term investment presence.
In Hungary in 1989, American Express helped bring together competing Hungarian
ministries to create a conducive environment for tourism and underwrote an education
programme for the industry, in the process establishing American Express leadership
position in tourism in Hungary.
Clearly, good corporate citizenship is not sufficient to guarantee a friendly public
policy environment on its own. But it certainly is a vital element in trying to do so.
Todays business strategist must think globally, but act locally. Global competition
requires companies to benchmark themselves with others around the world; if a
company doesnt, it can get run out of business. At the same time, companies need to
42
be close to all their customers. This means knowing the tastes and interests of local
markets. So corporations must operate effectively at various levels, while integrating Philanthropy as a Strategic
Choice
different functions smoothly. In a world of data overload, businesses also need to
know what information matters.
Surveys show that a companys image and reputation matter. It is important to
customers and good corporate citizenship is a key component of that image around the
world. IBM studies reveal that citizens expectations of corporate responsibility are as
high in Korean and Malaysian cities as they are in the United States. British
Petroleum now publishes a social responsibility report along with its financial
report. One can see how companies are connecting products to causes as a marketing
strategy.
Corporate citizenship is also important to local reputation and knowledge. Successful
companies will need more ties to a greater variety of communities, so as to learn
about local customs, standards, and networks. Local employees will also care about
their employers role in the community. IBM made a special effort in Japan to help
the handicapped through product development, contributions to organizations,
employee volunteerism, and hiring practices. This has helped IBM become one of the
most prestigious companies in Japan. A recent Japanese poll found that the Japanese
public ranks IBM second only to Sony in respect for social responsibility.
McDonalds, in turn, has employed its Ronald McDonald Houses to unify a company
composed of thousands and thousands of retail outlets around the world. The success
of this strategy also applies to firms outside the United States and Europe. In 1992, a
Taiwanese soft drink company, King Kar, organized a huge public relief effort to help
Chinese flood victims. With judicious use of its logo during the flood relief, the
company subsequently moved ahead of Pepsi as the second most popular soft drink in
Taiwan.
Another aspect of a successful business strategy is that it must be based on developing
and supporting a companys people. Because competitors can often also access the
same capital and technology, the competitive challenge is how a workforce applies
these factors more productively. At a time of rapid change and uncertainty, businesses
need managers who can handle more variables, solve problems through flexible
thinking, and are sensitive to the outside environment. Managers who recognize that
their job includes good corporate citizenship are more likely to develop these skills
and insights. They are likely to gain new ideas and to be aware of more resources
outside the company on which they can draw.
For all employees, corporate citizenship will affect their pride, loyalty, and job
satisfaction. These qualities are reflected in dealing with customers and building a
sense of co-ownership. For these reasons, corporate citizenship is increasingly seen by
human resource personnel as a key part of employee development.
These and similar employee skills derived from corporate citizenship can also turn out
to be vital in a crisis. Although the foundation of a large oil company was widely
admired for its many contributions, the work of the foundation had no apparent
connection to the companys corporate strategy. So after an oil spill, senior corporate
management had few ties to environmentalists or others that might have offered
useful advice. The company instead became reactive, making it a target.
In contrast, another large oil company developed a large network of ties with outsiders
who helped the company to respond quickly and openly when accidents occurred. In
turn, the company helped environmental groups by testifying in favour of legislation
that sought to address both environmental and business concerns. This example points
to the importance of a fifth component of business strategy: the development of
effective alliance partners.
43
Corporate Social In todays environment, more than ever, businesses must recognize the numerous
Responsibility
variables and relationships outside their control. Customers are often competitors too.
Connections are more horizontal than hierarchical and can only be managed through a
combination of incentives, shared interests, and negotiated relations. This is a
challenge of alliance management similar to the task facing countries in coalitions or
alliances like NATO. These business alliances should extend beyond the corporate
world. For example, NGOs can offer companies ideas, information, and support.
NGOs may become partners on projects. In some countries, they assist in training and
identifying potential employees. In return, companies that form strategic alliances
with non-profits can offer something other than money: companies may provide
management advice, technical and communication support, employee volunteers, and
other resources. The alliances become two-way streets, where the partners benefit and
learn from one another.
By doing so, a company can go beyond simply donating and transforming corporate
citizenship into strategic philanthropy as an element of a successful business strategy.

17.4 SUMMARY
Historically many businesses played a significant role in their local communities by
providing financial support to a variety of non profit organizations and charitable
causes. In recent years several events and trends have contributed to companies
changing the way they approach their philanthropy. Corporations can use their
charitable efforts to improve their competitive context, the quality of the business
environment in the locations where they operate. Using philanthropy to enhance
competitive context means aligning social and economic goals and improving
companys long-term business prospects which is well illustrated in the examples
discussed.

17.5 KEY WORDS

Altruism
giving in the interest of others without self- interest.
Corporate Philanthropy
is considered as a practice by companies of all sizes and sectors making charitable
contributions to address a variety of social, economic and other issues as part of their
overall corporate citizenship strategy.
Stewardship
where there is a direct focus on maximizing shareholder wealth and such activities as
tax strategies would be appropriate.

17.6 SELF ASSESSMENT QUESTIONS

1) What do you understand by corporate philanthropy?
2) Mention few ways in which corporate philanthropy is undertaken?
3) Discuss few cases suggesting strategic philanthropy and economic motivations?
4) From the above answer, comment on the relevance of strategic philanthropy for
business organizations.

44
 Philanthropy as a Strategic
17.7 FURTHER READINGS Choice

Elko, Ibuki. Innovation in Corporate Philanthropy, adopting balanced scorecard,

Methodologies to build Strategy and Evaluation System , Nomura Research Institute.
Johnson, Gerry & Scholes, Kevan. (2004). Exploring Corporate Strategy, Sixth
edition, Prentice-Hall of India, New Delhi.
Jr. Thompson A Arthur, III Strickland A J. (2003). Strategic Management, Concepts
and Cases, Thirteenth edition, Tata McGraw Hill Publishing, New Delhi .
Rao, V.S.P. and Hari, Krishna. V. (2003). Strategic Management, Texts and Cases,
First Edition, Excel Books, New Delhi.
Robert, B. Zoellick. (January 27, 1999) President and Chief Executive Officer of the
Center for Strategic and International Studies (CSIS), Keynote Address before the
Business- Humanitarian Forum, Geneva, Switzerland.
Velasquez, G. Manuel. (2002). Business Ethics, Concepts and Cases, Fifth edition,
Prentice Hall of India, New Delhi.

45