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Contents

From the Editors Desk Guidelines for Authors


PERSPECTIVES

Economics, Politics, and Governance ....................................................................................... 1


Bimal Jalan
Though India has had good economists, an operational governance structure, and a vibrant and functioning democracy, post-Independence economic development has not been very satisfactory. This paper discusses why this combination of economics, politics, and civil service did not lead to the expected results. The author feels that this may have been due to the fact that, in our country, the political decision-making on economic issues is often driven by special interests rather than the common interest of the general public. The problem, therefore, with the Indian economy is not that its market is less or more free but that its freedom is in the wrong domains. Improving our economic decision-making processes, removing the scope for political discretion, reducing unproductive expenditure, and improving the quality of governance at all levels could rectify this. The author calls for legal reforms focusing on the interest of general public for the administration to work with accountability. According to him, simplifying policies and procedures should be an absolute priority.

RESEARCH

Environment-Strategy-Performance Linkages: ...................................................................... 9 A Study of Indian Firms during Economic Liberalization


Sougata Ray
Firms from emerging economies which transform themselves to adapt to the changing institutional environment during economic liberalization have generated a lot of interest among management scholars and practitioners alike. This paper presents an analysis of the corporatestrategic behaviour of firms in India. Based on existing theories, the author develops a multivariate model to explore the contingency linkages of environment, corporate strategy, and performance. It is observed that environment played a significant role in shaping firm strategies and performance during reforms. Environmental munificence and competitive intensity influenced firm strategies and performance. However, the effect of environment on firm performance was moderated by firm strategies. Among the corporate strategies, scale expansion strategy was found to be most effective as it yielded superior profit and market performance. The study did not find support for the general belief that firms which become more focused and adopt defensive strategic orientation perform better during deregulation.

Measuring Service Quality: SERVQUAL vs. SERVPERF Scales ...................................... 25


Sanjay K Jain and Garima Gupta
Consensus still continues to elude the service quality literature as to which one of the two widely advocated service quality scales, viz., SERVQUAL and SERVPERF, is a better measure of service quality. The preoccupation of past studies has been with evaluation of psychometric soundness of the service quality scales. No empirical work has been done to appraise the diagnostic ability of these scales in providing managerial insights for corrective actions in the event of quality shortfalls. Based on a consumer survey of Indian fast food restaurants, this paper assesses the methodological as well as managerial soundness of the unweighted and weighted versions of both the scales and provides suggestions for their effective use by service firms in future.

Identification of Top Performing Economies ....................................................................... 39


Ravindra H Dholakia and Akhilesh S Kumar
Using seven indicators of economic performance of 187 countries, this paper identifies the top 50 performers during the decades of 1981-90 and 1991-2000. Five of these indicators are the

trend rates of growth over a decade in imports, FDI, capital formation, per capita income, and forex reserves. Average inflation rate and Human Development Index (HDI) are the remaining indicators. A comparison of the top performers of the 1980s and the 1990s suggests that high performance in inflation and HDI are pre-conditions for a consistent high overall performance over time. This paper also examines the inter-relationship among the indicators over time.

INTERFACES

Rekindling the Heart and the Soul of Management ........................................................... 55


J Singh
It is an intriguing paradox. Over the same period that management emerged as a popular discipline for formal study and acquired the status of a profession, there has been a steady deterioration in the quality of life of professionals in modern organizations and a tarnishing of the image of large firms in the society. Contrary to the clich about people being assets, they are increasingly being treated as liabilities. Their work life is full of stress and humiliation. Simultaneously, an unending series of scandals involving financial frauds and other misdemeanours have greatly damaged corporate reputation. Instead of being perceived as creators of wealth, they are more often reviled as crass exploiters pursuing selfish objectives at the expense of the common good. This article argues for a rekindling of the heart to make the work-life for employees an enriching, rather than a demeaning, experience; and a rekindling of the soul to make organizations aim at more altruistic purposes than mere profits for a small band of shareholders.

Does Higher Price Signal Better Quality? .............................................................................. 67


D P S Verma and Soma Sen Gupta
With differentiated products, consumers cannot have perfect information about the quality or characteristics of each product. They are often unable to make a clear quality comparison among brands. Moreover, they engage in relatively little information search even when the financial commitment involved is substantial. The purpose of this study is to examine the influence of the price of the product on the buyers perception of quality of durable, semi-durable, and non-durable products. The study reveals that for a durable product like colour television, the buyers believe that the higher the price, the superior will be the quality of the product. Price is again an important consideration while selecting a brand in case of a T-shirt, a semi-durable product. In case of a non-durable product like the toothpaste, the buyers pay less attention to the price of the product. Brand loyalty, product features, and brand image take precedence over price. Hence, price-quality relationship is found to be somewhat weaker for toothpaste in comparison to the other two products.

Governance of Higher Education Institutions ...................................................................... 79


I M Pandey
This paper is based on the reflections of the author on issues of autonomy, accountability, and governance in higher education institutions (HEIs). Autonomy is the unrestrained freedom of action within the established norms of an institution. No institution can have effective institutional and academic autonomy without financial autonomy. Autonomy means accountability. All institutions, including those of higher education, are accountable to its stakeholders in particular and society in general. The institutions should strive to strike a balance between stakeholders needs, societal demands, and institutional autonomy. Governance includes both internal as well as external factors that affect the functioning of the decision-makers and make an impact on their performance. The author argues that the issues of autonomy and accountability are, in fact, related to the governance of HEIs.

COLLOQUIUM

Social Context of Management Education: Institution Building Experiences at IIMs .............................................................................. 85


I G Patel, Samuel Paul, Pradip N Khandwalla, Amitava Bose, K R S Murthy, N Vittal, Rishikesha T Krishnan, and Arun Kumar Jain Anil K Gupta (Coordinator) ii

This panel discussion addresses the broader issue of institution building in the context of IIMs contributions to its stakeholders and the society in general and focuses on the challenges ahead.

The issues addressed here are: i) What are the processes through which IIMs have defined their goals and directions over the years? ii) Is this impression true that IIMs cater primarily to private large corporate sector? iii) What initiatives have been introduced in the recent years to generate greater social, ethical, and professional accountability among the students and executives trained at IIMs? iv) Is it right to believe that IIMs are elitist because of the life style of faculty, nature of working culture, and kind of outputs that they produce? v) Do IIMs have any role to play in facilitating, empowering or serving the small-scale industries, unorganized/under-managed sectors, and other civil society organizations? vi) What role do IIMs see for themselves in making India a developed nation?

MANAGEMENT CASE

Sarvodaya Samiti ...................................................................................................................... 111


Debasis Pradhan
This case presents the situation faced by Pradip Mohanty, Coordinator of Sarvodaya Samiti, an NGO, which is involved in the production, processing, and marketing of honey. He is concerned about the decision the Samiti should take on joining the proposed consortium as this has implications for its stakeholders. He is also in a dilemma whether the Samiti should retain the brand of honey called Sarvodaya Samiti and market the same independently. The case presents several policy/regulatory, strategic, and marketing issues and aims at sensitizing the discussants to the issues in rural marketing.

DIAGNOSES . . . . . . .............................. ............................................................. . . . . 1 1 9


The diagnoses featured in this issue pertain to the Management Case titled ABC Limited: Agriculture and Domestic Pumps Division by Girish Kumar Agrawal and J Rajasekar which was published in the October-December 2003 issue of Vikalpa.

Case Analysis I
Narendar V Rao S M Mehta

Mark Neal and Richard Tansey

Case Analysis II

Case Analysis III Case Analysis IV


Upinder Dhar

Case Analysis V

Salma Ahmed and Ashfaque Khan

Case Analysis VI

Abhijeet, Ankur, and Satyaprakash BOOK REVIEWS .................................................................................................133

An Encounter with Higher Education: My Years with LSE


Dwijendra Tripathi

An Introduction to Data Envelopment Analysis: A Tool for Performance Measurement


Bharat Bhushan Verma

Managerial Economics: Theory and Applications


Nikhil Kashyab Balaraman and Mukundan Devarajan ABSTRACTS . . . . . ............................................................................................. . . . 1 4 1 Mitali Sarkar BIBLIOGRAPHY .................................................................................................157

Service Quality II
K Manjunatha iii

From the Editors Desk

the case of companies). For the listed companies, the wealth of shareholders is reflected in the market value of their shareholdings. Is there a justification for profit or wealth maximization? In a market economy, price system is the most powerful instrument of signalling what goods and services the society wants. The demand and supply conditions and the competitive forces determine the prices and help allocating economic resources to various productive activities. Would profit maximization and the price system in a free market economy serve the interests of the society? Adam Smith gave the answer many years ago: (The businessman), by directing... industry in such a manner as its produce may be of greater value... intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention... pursuing his own interest he frequently promotes that of society more effectually than he really intends to promote it. Following Smiths logic, it is argued that under the conditions of free competition, businessmen pursuing the objective of profit maximization also serve the interest of the society. It is also assumed that when individual firms pursue the interest of maximizing profits, the societys resources are efficiently allocated and utilized. Profit maximization, as a business objective, developed in the early 19th century when the characteristic features of the business structure were self-financing, private property, and single entrepreneurship. The focus of the entrepreneur was on enhancing his or her individual wealth and personal power which the profit maximization objective could easily satisfy. The modern businesses are characterized by limited liability, a divorce between management and ownership, and widely distributed shareholdings. Managers, who are the agents of owners, command the decision-taking authority. Managers, being subservient to owners, ought to act in the interest of their principals the shareholders. In practice, managers do not necessarily act in the best interest of shareholders and instead pursue their own personal goals (in the form of maximizing their salaries and perks, etc.) at the cost of shareholders, or may play safe and create only satisfactory wealth for shareholders. They may avoid taking iv

hould firms maximize profits ? Finance theory and financial ana-

lysts generally prescribe that firms should aim at profit or (more appropriately) wealth maximization for owners (shareholders in

risky investment and financing decisions that may otherwise be needed to maximize the shareholders wealth. Such satisficing behaviour of managers will frustrate the objective of profit or wealth maximization. Further, a company is a complex organization consisting of multiple stakeholders such as employees, debt-holders, consumers, suppliers, government, and society. Managers in practice may, thus, perceive their role as reconciling conflicting objectives of stakeholders which could mean compromising with the objective of shareholders wealth maximization. Many management thinkers like Robert Anthony consider profit maximization as unrealistic, inappropriate, and immoral. It is also feared that profit maximization behaviour in a market economy may tend to produce goods and services that are wasteful and unnecessary from the larger societys point of view. Also, it might lead to inequality of income and wealth. It is for these reasons that some people make a case for the governments intervention in business. The price system and, therefore, the profit maximization principle may also not work due to imperfections in practice. Oligopolies and monopolies are common phenomena of modern economies. Firms producing the same goods and services differ substantially in terms of technology, costs, and capital. In view of such conditions, it is difficult to have a truly competitive price system, and thus, it is doubtful if the profit-maximizing behaviour will lead to the optimum social welfare. In practice, missions or basic purposes, which include social responsibility, drive the business goals or objectives. They direct the firms actions. The firm designs its strategy around such basic objectives and, accordingly, defines its markets, products, and technology. The first step in making a decision is to see that it is consistent with the firms strategy and passes through the policy screening. The wealth (or profit) maximization is the second-level criterion ensuring that the decision meets the minimum standard of economic performance. A number of management thinkers feel that the company management is not only an agent of owners but also a trustee of the society. It is the responsibility of the management to seriously discharge its responsibility to the society and become a good corporate citizen. Given the importance of thinking beyond profit or wealth maximization, we would like the industry leaders and academicians to debate this issue to get multiple perspectives. Indian Institute of Management Ahmedabad I M Pandey Editor v

Guidelines for Authors


Manuscript
Vikalpa: The Journal for Decision Makers is a peer-reviewed journal. Vikalpa welcomes original papers from both academicians and practitioners on management, business, and organization issues. Papers, based on theoretical or empirical research or experience, should illustrate the practical applicability and/or policy implications of work described. The author should send three copies of the manuscript. The text should be double-spaced on A4 size paper with one-inch margins all around. The authors name should not appear anywhere on the body of the manuscript to facilitate the blind review process. The author should also send a soft copy of the manuscript in MS Word or e-mail the same to Vikalpa Office at vikalpa@iimahd.ernet.in The manuscript should accompany the following on separate sheets: (1) An abstract of 80-100 words; (2) An executive summary of about 500 words along with five key words, and (3) A brief biographical sketch (60-80 words) of the author describing current designation and affiliation, specialization, number of books and articles in refereed journals, and membership on editorial boards and companies, etc. Vikalpa has the following features: Perspectives presents emerging issues and ideas that call for action or rethinking by managers, administrators, and policy makers in organizations. Recommended length of the article: 12,000 words. Research includes research articles that focus on the analysis and resolution of managerial and academic issues based on analytical and empirical or case research. Recommended length of the article: 20,000 words. Interfaces presents articles focusing on managerial applications of management practices, theories, and concepts. Recommended length of the article: 10,000 words. Colloquium includes debate on a contemporary topic. Both academicians and practitioners discuss the topic. Management Case describes a real-life situation faced, a decision or action taken by an individual manager or by an organization at the strategic, functional or operational levels. Diagnoses presents analyses of the management case by academicians and practitioners. The case problems are examined, their causes are analysed, and issues of relevance are discussed. Book Reviews covers reviews of current books on management. Abstracts includes summaries of significant articles of management interest published in Indian and international journals particularly those focusing on emerging economies. (Authors desirous of having their publications considered for inclusion in this feature may please send reprints of their articles to Vikalpa Editorial Office). All tables, charts, and graphs should be given on separate sheets with titles. Wherever necessary, the source should be indicated at the bottom. Number and complexity of such exhibits should be as low as possible. Endnotes, italics, and quotation marks should be kept to the minimum. References should be complete in all respects and arranged in alphabetical order. (a) In the text, the references should appear as follows: Dayal (2002) has shown or Recent studies (Ramnarayan, 2002; Murthy, 2001) indicate... (b) Journal references should be listed as follows: Khandwalla, P N (2001). Creative Restructuring, Vikalpa, 26(4), 3-18. (c) Books should be referred to as follows: Sugandhi, R K (2002). Business to Business Marketing, New Delhi: New Age International. Wherever copyrighted material is used, the authors should be accurate in reproduction and obtain permission from copyright holders, if necessary. Articles published in Vikalpa should not be reproduced or reprinted in any form, either in full or in part, without prior written permission from the Editor. Two or more referees review all contributions by following the double blind system. The review process usually takes about three months to one year. Vikalpa reserves the right of making editorial amendments in the final draft of the manuscript to suit the journals requirements. The author must send an electronic version of the manuscript in MS Word once the paper is accepted for publication. Correspondence and proofs for correction will be sent to the first author unless otherwise indicated. The author will receive 20 reprints free of charge.

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Economics, Politics, and Governance*


Bimal Jalan

presents emerging issues and ideas that call for action or rethinking by managers, administrators, and policy makers in organizations

PERSPECTIVES

Executive Summary

KEY WORDS Governance Development Strategy Economic Policy Post-Independence Planning Bureaucratic Interference

This paper discusses the dynamics of economics, politics, and governance and its implications for the Indian economy in general and the governance issues of educational institutions in particular. Independent India was founded on a democratic framework and an operational governance structure. The vision was to attain the specific economic and social goals that the country had set for itself. What is puzzling is the fact that despite the ideal combination of economics, politics, and civil service, the expected results were not achieved. What might have happened is the development of a substantial gap between the economically sound and the politically feasible policies, on the one hand, and the disharmony between the different levels of the administrative machinery, on the other. The author agrees with the renowned economist, Hanson, who found an answer to the problem not in the theory of planning or the people making the plans but with the unrealistic assumptions about the likely responses of the people. For instance, it was assumed that the people elected to power, the citizens of the country, and the labour and management of the public enterprises would all work selflessly to achieve the economic objectives of the country. In reality, however, regional and sectional interests dominated the political and economic decisions making the Indian economy self-centric, narrow, and wasteful. The channelization of economic benefits to the special interest groups led to the lop-sided distribution of wealth. To add to this was the political corruption which was accepted as an unavoidable feature of the electoral process. Another blow came from the public sector enterprises which, instead of generating public savings, led to the accumulation of internal public debt and lower investment. What is unfortunate is that all this continued for a long time despite the realization that they were going against the basic assumptions of the post-Independence policy framework. Taking the issue of fee determination in the case of IIMs, the author feels that it is again a complex interplay of the three elements economics, politics, and governance. The economic issue from the public policy point of view is: why the larger subsidy from public funds and for whose benefit? While it is a popular political move to grant subsidies, it is a matter of conscious political choice as to which target group should get the benefit. Towards making Indias vision a reality, the author suggests the adoption of pragmatic and flexible approaches with the contemporary realities in mind. The steps would include: simplifying administrative procedures managing fiscal deficit through fiscal policy changes ensuring accountability through legal reforms avoiding bureaucratic interference eliminating administrative discretion. While a lot needs to be done in all these areas, the author is confident that with the economic potential of the country and the innate ability of the people of this country, it would definitely be possible to realize the full potential within the next two decades.
*This paper is based on the Convocation Address by Bimal Jalan on 3rd April, 2004 at Indian Institute of Management, Ahmedabad.

VIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

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ver since Independence, India has been fortunate in having a string of top economists to advise the government in the process of planning and economic policy formulation among them are well known names like Mahalanobis, Pitambar Pant, Lakdawala, Sukhamoy Chakravarty, I G Patel, Raj Krishna, Manmohan Singh, and several others. On the political side, we can rightfully take pride in our vibrant and functioning democracy. India was ruled by a single party with repeated mandates from the people for nearly 50 years after Independence with some brief interruptions. During this period, there were a number of short-lived governments with varying mandates which nevertheless did their best to serve the country under difficult circumstances. Now, we have a multi-party coalition government with vast differences in ideology and political beliefs among its constituents which has been in power for six years. In respect of governance, the administrative structure of India, with the so-called steelframe of a permanent bureaucracy, has been the envy of the post-colonial developing world. Even after allowing for a considerable rusting and weakening of the frame, the governance structure at the centre, states, districts, and panchayats still remains largely intact. Thus, we have had a fine combination of good economists, an operational governance structure, and a functioning democracy all working together. Yet, the results on the ground in terms of social or economic development over the long period since Independence leaving aside the most recent period were rather disappointing. For the first 50 years after Independence, India lurched from one crisis to another. The country also had low growth, low literacy, and an abundance of poverty. The vision outlined in 1956, at the beginning of the Second Plan, of a poverty-free India with full employment in 25 years, i.e., by 1981, still eludes us. The issue here is why this combination of economics, politics, and civil service did not lead to the kind of results that the people of our country could have legitimately expected. This is what I propose to discuss here.

sound and what was found to be politically feasible. Economic strategy seldom reflected our political or social realities. Similarly, the administrative implications of the policies, launched with great conviction, were seldom considered and, even when considered, did not affect the actual evolution of economic policies or programmes on the ground.

Post-Independence Strategization: A Recap


To illustrate the point, let me begin by referring to the Mahalanobis-Nehru development strategy which dominated our post-Independence economic policies for almost 40 years. Several of these policies have undergone a drastic change after 1991. However, it is striking that despite many problems and tribulations, the basic framework of economic policies introduced soon after Independence remained intact for as long as four decades and more. The basic elements of the post-Independence economic strategy are too well known to need repetition. During the colonial period, the Indian nationalist movement had given a very high priority to making India economically independent in addition to political independence through aggressive import substitution and reduction in Indias dependence on foreign trade and foreign investment. Also, based on the Soviet experience, it was believed that economic independence and high domestic savings could be achieved only if the commanding heights of the economy were in the hands of the public sector. It was assumed that if the means of production were owned by the state, all the value added in production will flow to the people. Further, if consumption was discouraged, public savings would automatically increase. These savings could then be used for further investment and growth and India could soon catch up with the developed world. This was the most heart-warming economic vision, supported by the leading economists of that time and widely accepted academic models of savings, investment, and growth. Unfortunately, it did not pay adequate attention to the political and administrative implications of the favoured strategy. The political assumption was that the representatives of the people, freely elected to power, will selflessly promote the greatest good of the greatest number. In public enterprises, in the absence of private capitalists, labour and management were expected to work together in harmony without political interference in line with national priorities
ECONOMICS, POLITICS, AND GOVERNANCE

WHAT WENT WRONG? A DIAGNOSIS


My feeling is that, while on the surface, the three elements were working together, in a more fundamental sense, the reality was vastly different. Despite appearances to the contrary, there was, in fact, a substantial gap between what was considered to be economically

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as laid down by the planners. Another important assumption was that India was one, and as was the case during the struggle for political independence, all Indian citizens will work selflessly without sectional interests to achieve the countrys economic objectives.

The Ground Realities


The reality has proved to be vastly different. The political decision-making on economic issues in our country, as indeed in most democracies, is often driven by special interests rather than the common interests of the general public. These special interests are also more diverse in India than in other more developed and mature economies. Thus, there are special regional interests, not only among states, but also within states, depending on the electoral strength of the party in power in different parts of the state. Economic policy making at the political level is further affected by occupational divide (e.g. farm vs. non-farm), the size of enterprise (e.g. large vs. small), caste, religion, political affiliations of trade unions or asset class of power-wielders, and a host of other divisive factors. As a result, most of the economic benefits of specific government decisions are likely to flow to a special interest group or, as in Mancur Olsons famous phrase, to distributional coalitions. These coalitions are always more interested in influencing the distribution of wealth and income in their favour, rather than in the generation of additional output which has to be shared with the rest of the society. Also, the delivery of government benefits to special groups has given rise to a whole process of bargaining and conflict resolution among various interests. As a result, a large number of middlemen have emerged across the political spectrum. Further, as elections have become more expensive and more frequent with uncertain time period during which funds can be collected in different states, there is a greater tolerance of political corruption as an unavoidable feature of the electoral process. Thus, contrary to what was envisaged by the founding fathers of our republic, and contrary to the vision of our planners, the political-economic balance, in actual practice, has turned out to be self-centric, narrow, and wasteful. There are two interesting questions: How did the stranglehold of special interests last so long? Where were the majority of the people who did not gain sufficiently from the economic bargaining process?
VIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

The answers are not difficult to find. The simple fact is that the so-called majority is fractured into a large number of sub-groups of individuals who are divided among themselves by several factors (such as caste, religion, location or occupation), while special interests are united in protecting their share of the economic output. This is really why the so-called haves are so much more powerful than the have-nots in our society. It is, for example, the trade union of employed persons (or the haves) which is likely to go on strike when its economic interests are threatened rather than the vast majority of the unemployed (or the have-nots) across the country. What I have said so far about the power of special interests in determining political economy outcomes is not an argument in favour of unfettered free markets or the need for an economy without government regulations and laws. The issue here is not markets vs. government. It is that the political priorities are distinct from priorities laid down by the economists and experts. Thus, the problem with the Indian economy is not that its market is less or more free but that its freedom is in the wrong domains. It is common knowledge that, in most parts of India, government permissions, regulatory approvals or licences can be purchased at a price. In these domains, the problem is that of excessive marketization. On the other hand, in other areas where the market ought to be more free (for example, the labour market or international trade), India is strapped in bureaucratic red tape. Two more caveats are necessary in considering the power of dominant coalitions in determining economic policy outcomes in our country. The point is not that these coalitions always emerge as winners in determining the direction of public policy or that all politicians pander only to special interests. There are honourable exceptions and there certainly are leaders who give primacy to the general public interests. But, they are likely to be exceptions rather than the rule. They are also likely to face considerable hurdles in successfully pursuing economic policies that adversely affect the special interests of the organized groups. Similarly, there are situations (such as war, a natural catastrophe or religious conflict) when a unity of purpose emerges among all sections of the people to promote the common good. Another important assumption in the choice of postIndependence development strategy was that the public sector enterprises would generate public savings which

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could be used for higher levels of investment. However, instead of generating savings, the public sector soon became a drain on public savings. Despite commanding the commanding heights, public sector savings are now negative by as much as four per cent of GDP. These negative savings have led to fast accumulation of internal public debt and lower investment than would have been the case otherwise. In the annals of development history, it is hard to find another example of a perfectly sensible idea the need for higher public investment for greater public good leading to exactly the opposite result, i.e., higher public consumption with diminishing returns for the public. I now focus on the third aspect, namely, the governance structure for the delivery of public services to the people. As mentioned above, eminent economists have advised us, from time to time, on what should ideally be the countrys development priorities and elected political leaders have taken their own policy decisions on various economic issues according to their political perceptions. These policy and other decisions, once taken, have to be implemented through the multilevel administrative structure at the centre, states, districts, and villages. The basic premise of Indias plans as well as the early development literature was that the required administrative response would be forthcoming in abundant measure. The system of administration at different levels was expected to work in complete harmony delivering savings and investments as postulated and implementing programmes as scheduled. It must be said to the credit of our planners that the Second Plan did ask itself the question whether the civil service would prove equal to the tasks assigned to it by the Plan. The Third Plan too explicitly recognized that the administrative machinery had become strained and the available personnel to implement the plan were not adequate in quality and number. The subsequent Plans, particularly the Seventh Plan, sounded a note of desperation about widespread administrative inefficiencies and bottlenecks that were slowing down the economy. However, this desperation was not reflected in actual planning. We went on adding newer, larger, and more comprehensive schemes to tackle national problems in virtually every walk of life calling for greater and greater administrative involvement. In fact, as perceived needs and requirements of the economy became greater and resources shrank, the administrative process became even more complex,

requiring more people to perform the same task. As a result, there are more people employed by the government in what statisticians euphemistically call community and personal services than in the public sector manufacturing enterprises or the private organized sector. To bring about this sort of result, some kind of an invisible dominant coalition has certainly been at work. One has to recall the functioning of the exchange control system in the past to appreciate how far removed policy planning was from the administrative realities. Or, consider the urban ceiling laws which were supposed to free excess or surplus land for public housing and other uses. Even after 30 years, hardly anything has been acquired and these laws, instead of increasing the supply of affordable housing, have simply frozen the availability. It is not that the problems were not understood or that people who ran the system were ill-motivated. It is an unfortunate fact of administrative and political life that systems and programmes, once introduced, acquire a momentum of their own because of the benefits and patronage that they provide to some sections of the people, including those who administer the programmes. When implementation problems occur, inefficiencies are identified or misuses are detected, the response normally is to add one more step or one more level to the administrative chain. More than 40 years ago, a well-known economist, A H Hanson, a sympathetic observer of the Indian scene, felt compelled to ask this question: Men are able, the organization is adequate, the procedures are intelligently devised. Why then have the Plans since 1956 so persistently run into crisis? This question was asked in 1963. Many of us are probably still asking the same question. Hansons answer to his own question is also relevant. In his view, the real problem was not with the theory of planning or the people who were making the plans but with the unrea- listic assumptions about the way people and societies were likely to respond. Too many of the governments assumptions about economic behaviour were simply unrealistic and differed from the way in which people acted in their own or in their groups interests.

Drawing a Parallel: The IIM Fee Issue


The IIM fee issue also vividly illustrates the interplay of these three elements economics, politics, and governance. From a purely economic point of view, the
ECONOMICS, POLITICS, AND GOVERNANCE

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critical issue is not the fees that the IIM charges but the entry policy and the cost per student. If the entry is competitive and a particular level of cost, after due scrutiny, is found to be justified, then any teaching institution through pricing, endowment, subsidy or a combination of these has to recover the cost. Otherwise, it will either go out of business or the quality of its output will deteriorate. Now, let us assume that the government, in its wisdom, decides to further subsidize and reduce the fees that a particular institution charges to cover its costs. Then the economic issue from the public policy point of view is: why this larger subsidy from public funds and for whose benefit? This is where political considerations come in. It is always a popular move to say that no one, irrespective of income, should have to pay for the use of water, electricity, food, and education including higher education. However, no government in the world has the ability to subsidize everyone and everything. Therefore, the political leadership has to choose among various kinds of subsidies and target groups. If the government decides to subsidize specialized technical or management education by more than what is necessary, from the public interest point of view, it is legitimate for the public to ask: why should the government increase subsidy even for those who can pay? In the parlance of public choice theory, an across-the-board subsidy of this kind, irrespective of the need for it, leads to perverse equity. Instead of making government expenditure more equitable for the society as a whole, an across-the-board subsidy of this type makes the system more inequitable and less progressive. The economics and politics of the decision are linked also to the governance aspects. Who should govern the IIMs their own managements or the ruling government? How this complex interplay of economics, politics, and governance will affect the IIMs is not yet clear. However, in the light of our past experiences in so many other spheres of our national life, I would be surprised if the outcome of the present controversy turned out to be beneficial, either for students or for the people. Personally, I feel sad at the confrontation among different constituents particularly at the level to which this debate has deteriorated because of excessive intervention. The question is not only whether governmental intervention on an issue of this type is right or wrong. But, the whole tone and tenor of the official position is a matter of concern for the future health of our polity.
VIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

PRAGMATIC PRESCRIPTIONS
Looking at our development experiences, it is established beyond reasonable doubt that our past economic strategy seldom reflected political realities. Similarly, governance or administrative implications of development or public expenditure policies were seldom taken into account in framing those policies. This is about the past. What about the present and the future? Isnt India shining? It has one of the highest rates of growth, highest foreign exchange reserves, relatively moderate inflation, and commanding heights in IT and some other sectors. The process of liberalization and economic reforms, launched in 1991, and pursued actively in recent years, has yielded positive results, removed some of the structural rigidities, and created potential for higher growth. At the same time, it will be a mistake to be complacent about our recent successes. These gains can disappear very quickly unless a stronger programme is launched in the next few years to further improve our economic decision-making processes, remove scope for political discretion, reduce unproductive expenditure, and improve the quality of governance at all levels. The system must be made to work in the interests of the public in general, rather than the few, including those who are supposed to serve the public, namely, government servants and elected representatives. To achieve the above objective, we need to move on a number of fronts. In the area of economic policy, we need to avoid ideological certainty. As pointed out by Hirschman* in a highly perceptive essay on the experiences of Latin American countries, the blame for economic disasters in several of these countries lay not in the use of policies considered by economic theorists to be wrong but in the blind pursuit of policies considered by theorists to be right of the structuralist variety in the 1960s and of the neo-classical persuasion in the 1970s and 1980s.Development economists tended to take ideological positions (both left and right) on such matters as planning, market mechanism, foreign investment, inflation, rule of the state, and so on. Although, in India, in view of our democratic tradition, public policy makers may not have gone to the same extremes as in Latin America, there is little doubt that, as mentioned above, for a very long time after Independence,
* Hirschman, A O (1987). The Political Economy of Latin American Development: Seven Exercises in Retrospection, Latin American Research Review, 22(3).

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there was a strong tendency among our economic thinkers to ignore political and administrative realities. Of late, fortunately, there has been a shift from ideological certainty to a more questioning and pragmatic attitude. This has yielded favourable results, for example, in Indias external sector management. For the first time, after 50 years of Independence, the balance of payments constraint or fear of periodic crises is no longer a factor in determining our economic policy. While framing the economic policies in other areas also, we must adopt similar pragmatic and flexible approaches which take into account contemporary realities.

of the government expenditure is now committed to servicing past debt or meeting salary and other past commitments. We now have a high fiscal deficit without fiscal empowerment. A wholesale change in the governments fiscal policy and making it more responsive to changing requirements are now essential. This is a most difficult task in view of the dead weight of the past but it can no longer be avoided.

Ensuring Accountability through Legal Reforms


For the administration to work with accountability, we urgently need legal reforms to focus sharply on the interests of the public and not only those of the public servant in the functioning of the governmental and public delivery systems. Clear mechanisms for establishing accountability for performance are essential, and all forms of special protection for persons working in government or public sector agencies (except for the armed forces or agencies engaged in the maintenance of law and order) deserve to be eliminated.

Simplifying Administrative Procedures


Final decisions on policy matters must continue to be made by political authorities who are accountable to the people through the Parliament and legislatures. However, there should be a clear distinction between decisions on policy and their implementation. Once policy decisions are made, they have to be left to professional administrators without political interference but with due accountability. To implement such a division of work responsibility, it is essential to avoid governmental micro-management and remove procedural bottlenecks and case-by-case considerations of applications by individuals and organizations. Simplifying policies and procedures is an absolute priority. The scope for political or administrative discretion must be eliminated for all but for the very few large cases which have economywide implications. The detailed case-by-case approach to policy implementation is an important hurdle in the countrys economic life. Although there has been some progress towards simplifying procedures in the last decade, it is not enough. Similarly, in the interest of transparency, there should be full disclosure of financial decisions by multifarious agencies on a daily basis rather than annually in aggregate form. There is no reason why, except in matters of national security, all decisions made at the ministerial or secretarial level cannot be put up on a notice board in the concerned ministry on a regular basis.

Avoiding Bureaucratic Interference


Many of our public institutions including academic institutions and non-governmental organizations (NGOs) have to necessarily depend on the government for annual grants to meet a part of their essential expenditure. As they use public funds, their accountability for performance is essential. However, as the present unsavoury controversy affecting the IIMs has vividly illustrated, it has to be ensured that there is arms length relationship between government and autonomous public institutions of national importance. Damage inflicted by unwarranted political or bureaucratic interference can cause permanent damage to an institution within a very short period and has to be avoided in public interest. The best way of enforcing accountability for performance is to set up appropriate annual audit mechanisms by outside professionals and periodic reviews of academic performance, say, every five years, by a review committee of experts or peer groups.

Eliminating Administrative Discretion


In taxation and other financial areas, administrative discretion or reliance on inspectors and searches has to be eliminated except under well-defined circumstances involving high crimes such as treason, terrorism, and smuggling or money laundering on a scale which affects national security or economic stability. There is clear and
ECONOMICS, POLITICS, AND GOVERNANCE

Managing Fiscal Deficit through Fiscal Policy Changes


It is ironical that higher deficits over time have not resulted in increasing the governments ability to spend where higher expenditure is required, for example, in the maintenance or expansion of public services. Most

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irrefutable evidence from our past experience that administrative discretion has not led to an improvement in fiscal receipts or better compliance with laws. On the other hand, such powers and the impunity with which they can be used have become serious sources of corruption in society.

LOOKING FORWARD
There is a great deal to be done in all these areas. Notwithstanding our past performance, I am sanguine

about Indias economic potential and our ability to achieve high growth with financial stability. The reason for this confidence is that, despite problems in governance, the innate ability of our people is immense and has been demonstrated beyond reasonable doubt. The open, participative, and democratic system ensures that a change, where necessary, can be delayed, but it cannot be avoided altogether. If we act now, and if we are able to realize our full potential in the next 20 years, Indias poverty would become a distant memory.

Bimal Jalan, an Economist by profession, was educated in the Presidency College, Calcutta, Cambridge, and Oxford universities. Currently a Rajya Sabha Member, he was the Governor of Reserve Bank of India from November 1997 to September 2003. He was the Chief Economic Adviser to the Union Government in the 1980s; Banking Secretary between 1985 and 1989; Finance Secretary, Ministry of Finance, Government of India, and Chairman of the Economic Advisory Council to the Prime Minister between January 1991 and September 1992. He has served as the Executive

Director representing India on the Boards of the International Monetary Fund and the World Bank. At the time of his appointment as the Governor of the Reserve Bank, he was the Member-Secretary, Planning Commission in New Delhi. He has authored Indias Economic Crisis: The Way Ahead and edited The Indian Economy: Problems and Prospects. His latest book Indias Economic Policy: Preparing for the Twenty-first Century examines some of the critical policy choices for India at the present juncture. e-mail: bjalan@sansad.nic.in

If ... I can by any lucky chance, in these days of evil, rub out one wrinkle from the brow of care or beguile the heavy heart of one moment of sorrow, if I can now and then penetrate through the gathering film of misanthropy, prompt a benevolent view of human nature, and make my reader more in good humor with his fellow beings and himself, surely, surely, I shall not then have written entirely in vain. Washington Irving

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Environment-Strategy-Performance Linkages: A Study of Indian Firms during Economic Liberalization


Sougata Ray

includes research articles that focus on the analysis and resolution of managerial and academic issues based on analytical and empirical or case research

RESEARCH

Executive Summary

KEY WORDS Economic Liberalization Corporate Strategy Contingency Theory Strategic Adaptation

How firms from emerging economies transform themselves to adapt to the changing institutional environment during economic liberalization has generated a lot of interest among management scholars and practitioners alike. This paper presents an analysis of the corporate strategic behaviour of firms in India, a giant emerging economy undergoing economic reforms over the last one decade. Based on existing theories, a multivariate model has been developed to explore the contingency linkages of environment, corporate strategy, and performance. The model has been empirically verified in LISREL framework using primary and secondary data for 111 firms mainly belonging to the list of top 500 firms in India. The major observations emerging from the analysis are as follows: Environment played a significant role in shaping firm strategies and performance during reforms. Environmental munificence and competitive intensity influenced firm strategies and performance as hypothesized. Availability of high growth and profit opportunities across industries, easier access to resources in the international market, improvement in the supply situation, etc., had the greatest influence on the strategic behaviour of firms in the liberalized era. Firms facing intense competition and demanding customers reorganized the business portfolio by divesting some businesses and moving into more promising unrelated businesses, cut down the organization flab through downsizing, and promoted greater sharing of resources within. Firms having better environment-strategy fit achieved superior performance. The effect of environment on firm performance was moderated by firm strategies. This conforms to the general principle of contingency theory derived based on the developed economy institutional framework. Among the corporate strategies, scale expansion strategy was found to be the most effective, as it yielded superior profit and market performance. Scale expansion benefited firms not only in gaining advantage due to economy of scale but also in using more modern technology and equipments. The strategy of product-market diversification did not have any significant effect on profitability. However, it resulted in poor market performance as observed from the significant negative influence of business scope on market return. This indicates that investors were generally wary of diversification moves by firms. Increased diversity in operation did not have any significant negative impact on performance. Therefore, unrelated diversification per se did not harm firms, at least, in the short run. The study does not support the earlier observations by researchers that firms with focused strategy and adopting defensive strategic orientation perform better during deregulation of industries in both developed and emerging economies. In fact, it can be observed that, during economic liberalization in India, firms that recognized the favourable and unfavourable changes in the environment early and increased their scale of business and diversified into deregulated industries selectively but aggressively achieved superior performance.

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ne of the prime concerns for strategic management as a field of inquiry is the phenomenon of strategic adaptation of firms, i.e., how firms achieve a proper fit with the environment through changes in strategy (Summer et al., 1990; Zajac, Kraatz and Bresser, 2000). During the past two and a half decades, a number of countries like India has been moving from an insular command and plan-oriented economy towards increasingly liberalized, globalized, and market-oriented economy. With the legacy of a socialistic and planning-oriented institutional framework, the economic transformation in some of these countries presents a unique business environment for firms that is distinct from what a typical Western firm would encounter and might need unique adaptive responses (Luo and Peng, 1999; Peng and Hearth, 1996). Although, recently, some notable studies on the subject have been reported, firmlevel studies on the impact of economic reforms in emerging economies are still very limited (Hoskisson et al., 2000). Studies by Manimala (1996) and Ray (1998) have reported that Indian firms recognized significant changes in the business environment during economic liberalization. Overall, economic liberalization in India has led to a more munificent environment characterized by opportunities for higher growth and return, greater availability of various resources, and easier access to the international market. It has provided improved infrastructure, better institutional support, and lower regulatory interference and hurdles. It has also resulted in an intensely competitive market with increased foreign and domestic competition and sophisticated and demanding customers. It has also been observed that in response to these emerging opportunities and threats, a large majority of firms aimed for higher growth and return; increased the scale of operation; diversified into new products and business lines; expanded the geographical base in domestic and international markets; offered a wider range of products to their customers, catered to many new and diverse customer segments; introduced foreign technology and emphasized modernization of plants and equipment, and increased the sharing of resources across departments, divisions, and business units within the firm (Ray and Dixit, 2000). However, under what environmental contingencies, which of the strategies resulted in superior performance would be of prime interest for management scholars and

practitioners. In this paper, we propose a multi-level, multivariate model based on theories primarily developed in the Western context, linking environment with corporate strategy and performance. We carried out an empirical verification of the research model using firmlevel primary and secondary data. We also discuss the implications of the results for theory and practice.

THEORY, CONSTRUCTS, AND LATENT VARIABLES OF RESEARCH MODEL


It is understood that economic liberalization would lead to changes in different attributes of the firms business environment. Being open systems, firms need to adapt to changing environment through changes in strategy (Katz and Kahn, 1966). However, this adaptation can be either environmentally determined as viewed from the perspectives of population ecology (Aldrich, 1979; Hannan and Freeman, 1977) and institutional theory (DiMaggio and Powell, 1983, 1991; Scott, 1987) or managerially controlled as viewed from a strategic choice perspective (Child, 1972, 1997; Weick, 1979, etc.) according to which strategic decisions in firms are made by the top managers or the dominant coalitions (Child, 1972) who choose strategies guided by their perceptions of the environment (Child and Keiser, 1981). By adopting a middle ground, strategic contingency theory (Hofer, 1975; Thompson, 1967) outlines an active but relatively limited role for managers to respond to the changing environment by continuously adapting to the emerging contingencies. Viewing firms as a total system, it observes that managers are only a component of the system which is technically constrained by the environment (Astley and Fombrun, 1983; Bourgeois, 1984). The focus of managerial decision-making is not primarily on choice but on gathering correct information about changes in the environment and examining the consequences of alternative responses because strategic choices among contingencies are more consequential (Astley and Van de Ven, 1983; Venkatraman, 1989). In other words, in a given environment, a limited set of strategies are effective and strategic choices moderate the relationship between environment and firm performance.

Business Environment
A firms environment has been defined as the aggregate of those external factors that have impacts or the potential to have impacts on its functioning (Thompson, 1967;
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Emery and Trist, 1965). Environment is also the source of constraints, contingencies, problems, and opportunities that effect the terms on which an organization transacts business (Khandwalla, 1977). Three environmental latent variables, namely, munificence, competitive intensity, and environmental efficiency are included in the model. Munificence is governed by the presence of various opportunities and resources in the environment and the competition among firms for those opportunities and resources (Castrogiovami, 1991). Being a source of information and other form of resources, environment has certain governing influences on the strategic choices made by a firm (Pfeffer and Salancik, 1978). There are many possible sources of environmental influence such as bargaining power of customers, intensity of competition, and regulatory influence which can broadly be classified as intensity of market forces and regulatory intensity. In a more regulated environment, the role of market diminishes as the government, rather than the market, regulates the behaviour of firms (Desai, 1993; Dill, 1958). With increased regulatory intensity, the intensity of market forces is likely to diminish and vice versa, as regulation and market forces often work at cross-purposes. A dimension called competitive intensity is slated to capture the net effect of the opposite effect of market and regulatory forces. For conducting business, a firm has to transact directly with many individuals and government and non-government institutions and organizations. Political turmoil, transport and other forms of strike, etc., pose problems, create uncertainty, and influence transaction costs incurred by a firm. This attribute of the environment is termed as environmental efficiency. Some authors (Kogut, 1991; Porter, 1990, etc.) have considered institutional environment in a country as major constituents of national environment of a firm. However, these factors have hardly been incorporated in the operationalization of the environment by mainstream organizational researchers (Peng and Heath, 1996).

Corporate Strategy
The most critical choices in corporate strategy are the choice of businesses (scope or configuration) which product and customer to serve and how to manage the interlinkages of different businesses (organization) to better utilize corporate resources (Goold, Campbell and Alexander, 1996). Therefore, strategic management at
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the corporate level mainly involves one of the following four activities: portfolio management, restructuring, transferring skills, and sharing activities across businesses (Porter, 1987). We have included five key dimensions of corporate strategy business scope, geographical scope, scale of operation, diversity of operation, and sharing of resources. The changes in these dimensions together constitute the corporate strategic behaviour of firms during economic liberalization. Strategy literature has identified three dimensions related to scope such as vertical scope, product scope, and geographical scope (Barney, 1998). Vertical scope and product scope respectively indicate the vertical and horizontal spreads of product market choices and together outline the total domain or scope of business of a firm (Ansoff, 1965). Geographical scope captures geographical spread of both factor and product markets. Firms are also concerned about decisions regarding how much to produce, how many manufacturing and other facilities that would need to be set up, and the size of the organization in terms of structure and number of employees, etc. Scale of operation, which subsumes both size of operation and size of organization, captures this facet of corporate strategy. Moreover, there are similarities and differences in various aspects such as suppliers, customers, technology, and regulatory agencies across different lines of businesses, geographical markets, and product lines. The more the number of customer segments covered, higher is the requirement of knowledge and information processing about customers to design appropriate marketing mix. The more the products produced by a firm, the wider the complexity and variety of designs and production processes (Thompson, 1967). The complexity in management also increases with technical intricacy of products and processes (Mintzberg, 1979). All these add to a different dimension of corporate strategy called diversity of operation. Finally, another dimension of corporate strategy, called sharing of resources, indicates the common use of tangible and intangible resources by different constituents of a firm either simultaneously or sequentially or both. The constituents may be different business units, divisions or departments. The single business firms also have geographical or product divisions, regional offices and departments which need exchanging and sharing of resources for effective functioning and deriving synergy.

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Performance
Performance is a difficult concept both in terms of definition and measurement (Keats and Hitt, 1988; Meyer and Gupta, 1994). Being consistent with the literature, we have used both accounting-based operating and market-based performance measures. The indicators of operating performance used are profitability measures such as return on sales, return on assets, and return on net worth. The indicator for market-based measures of performance used is market return adjusted for market risk.

PROPOSITIONS FOR THE MULTIVARIATE MODEL


The following section develops propositions linking various variables identified above.

Effect of Environment on Corporate Strategy and Performance


Economic liberalization provides easier and more economical access to various resources and better business opportunities to most firms. This leads to higher environmental munificence (Aldrich, 1979; Pfeffer and Salancik, 1978)). Munificent environment creates condition for growth and profit (Dess and Beard, 1984). With the increase in environmental munificence, managers perceive more opportunities and aspire for more growth in revenue and also aim at achieving higher return on investment. It also helps generate organizational slack to support excess manpower and larger organization. Growth is easier to achieve in a resource-rich environment where funds for expansion and diversification are available in plenty at a reasonable cost and technology and materials are accessible. As the regulatory entry barriers are removed, firms that spot the opportunity for diversification enter new industries. The relaxation of licensing requirements and dilution of anti-trust policies such as Monopoly and Restrictive Trade Practices Act coupled with expected demand surge facilitate enhancing of production capacity, modernization of plants and equipment, and strengthening of marketing and distribution networks in the present lines of business. Munificence in the domestic environment allows firms to become more competitive and spread operations in other more profitable geographical markets (Vernon, 1966). The strategic initiatives of modernization and expansion help firms attain the critical scale, reduce cost, and improve quality es-

sential for becoming globally competitive. These firms with improved global competitiveness improve their domestic presence and get a better foothold in the international market. Further, after substantial devaluation of the rupee, exports become a more profitable proposition than domestic sales. So, managers find it easier to generate funds from the capital market for export-oriented ventures. Also, thrust by the government on boosting exports makes funds more easily available for export-led ventures even from the lending agencies. Caves (1981) suggested that, in a munificent environment, firms would tend to reduce or balance overall risk through diversification which will result in enhanced performance. Greater opportunity for diversification in new industries helps firms reduce their risks in the existing business. The newly found opportunities in different markets entice firms to reach to more number of geographical markets and cater to a wider range of customer segments. However, distribution of risks across businesses and geographical markets with higher environmental munificence enhances firms performance (Keats and Hitt, 1988). This also suggests that strategy mediates the relationship between perceived munificence and performance of firms. Therefore, greater environmental munificence motivates firms to increase the scale of operation, business scope, and geographical scope which, in turn, help achieve superior performance. In other words, the indirect and total effect of environmental munificence on profitability will be positive. Thus, it is proposed that: Hypothesis 1A: Greater the increase in environmental munificence, greater will be the increase in scale of operation, business scope, and geographical scope. Hypothesis 1B: The effect of the change in environmental munificence on firms profitability and market performance will be positive but indirect, being moderated by the corporate strategies. Increased bargaining power of customers and competitive intensity reduce profitability, increase the risk of remaining in the present business, and force firms to look for opportunities in other industries to reduce dependencies in the existing business (Hannan and Freeman, 1977; Keats and Hitt, 1988). However, increasing awareness and demand of customers forces firms to concentrate on the main line of business and reduce the
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business scope and diversity. Studies showed that the highly diversified giant US firms being faced with intense competition were forced to divest many of their businesses to reduce the size of the corporate portfolio of businesses and to reorganize themselves around the core businesses (Markides, 1995). Increased demand of customers for higher value for money puts pressure on firms to improve the main line of business. Firms cut costs to become more competitive and give higher value for money to customers, be more productive, provide speedy delivery of products and services, and take faster decisions to beat competition. This requires a leaner organization through reduction of excess manpower and overheads. Moreover, for becoming more responsive to the market forces, firms flatten the organization structure by reducing layers of decision-making. The extent of competition and lack of profit in the principal forces firms to diversify into new industries (Delios and Beamish, 1999). Higher market pressure owing to greater customer demand and competitive pressure in the existing lines of business lead to reduction in profit margin and overall profit. To maintain growth and profitability, firms diversify into more profitable industries (Stimpert and Duhaime, 1997). This leads to greater business scope. However, if the prospects for growth and profitability within related industries are limited, diversification is made into unrelated areas (Bowman, 1982). Within the existing business domains, firms offer a wider product range to satisfy customer needs and gain competitive advantage. They cater to wider customer segments to maintain and expand market share. Diversity of operation increases as firms add new features and bring in more varieties in products, explore new customer segments, and diversify into unrelated industries. Highly competitive situation demands better coordination and more exchange of resources among different business units and divisions as these help reduce cost and become more responsive to customer needs. While highly competitive industry environment reduces the profit-earning potential of the firm, the strategies adopted by firms mediate the relationship between perceived competitive intensity resulting in a negative indirect and total effect on performance. Thus, it is proposed that: Hypothesis 2A: Greater the increase in competitive intensity, greater will be the increase in business scope, diversity of operation, and sharing of resources.
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Hypothesis 2B: Greater the increase in competitive intensity, lower will be the increase in scale of operation. Hypothesis 2C: The effect of the change in competitive intensity on firms profitability and market performance will be negative but indirect, being moderated by the corporate strategies. Environmental efficiency directly contributes to reduction of uncertainty faced by firms. The greater the degree of improvement in infrastructure and institutions the lower is the extent of uncertainty faced by firms. Uncertain product demand and input supply create contingencies for diversification (Beattie, 1980; Caves, 1980; Chandler, 1962). Recognition and bureaucratic procedures delay implementation of strategic decisions of firms and create complexity in boundary spanning activities (Thompson, 1967). High degree of regulation creates complexity for managers in strategic decisionmaking as they have to devise strategies and systems to monitor, decipher, and counter regulatory changes. The reduction of regulatory control reduces the complexity of task environment (Khandwalla, 1977) and in the process helps reduce complexity in operation. As a result, diversity in the firms operation increases. Thompson (1967) observes that high performing firms create buffer of excess capacity under uncertainty to avoid adverse effect on operating performance. Therefore, firms strategies will moderate the extent to which firms will benefit from the more efficient environment. In other words, the effect of perceived environmental efficiency on profitability will be moderated by the strategies adopted by firms and will have a positive, indirect, and total effect. Thus, it is proposed that: Hypothesis 3A: Greater the increase in environmental inefficiency, greater will be the increase in business scope and diversity of operation. Hypothesis 3B: The effect of the change in environmental efficiency on firms profitability will be positive but indirect, being moderated by the corporate strategies.

Effect of Corporate Strategy on Performance


Firms that are willing and able to change to more effective strategies in an emerging environment should perform better than those firms which are unable or unwilling to adopt appropriate strategies (Forte et al.,

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2000). The relationship between different dimensions of corporate strategies and performance has been well researched. Scale expansions or horizontal expansions (Ansoff, 1965) are by and large more successful than other strategies for generating higher return (Pennings, Barkema and Dooma, 1994). In fact, microeconomics theory provides a strong basis for the potential effect on scale of operation. Increase in scale helps firms reduce per unit cost of production up to a point. This has a dual benefit (Porter, 1980). Lowering of cost of production provides competitive advantage and boosts up sales growth. The benefits of scale are realized from every activity of a firms value chain (Porter, 1985). As firms in India historically operate at sub-optimal scales (Desai, 1993), the expansion of scale of operation improves profitability and the firms adopting the strategy of scale expansion are viewed favourably by stock investors. The diversification-profitability link, although a well-explored research topic in strategic management, remains inconclusive (Datta, Rajagopalan and Rasheed, 1991). Diversification has been the oft-adopted route for growth and spreading of risk across market (Luffman and Reed, 1982; Rumelt, 1974). Diversification into new industries and product lines helps firms reduce risk in the existing business domain. Profits are easier to achieve if risks are distributed across businesses and geographical markets with higher environmental munificence (Keats and Hitt, 1988). Although long history of research on diversification fails to provide any conclusive evidence, it is generally believed that related diversification generates greater earnings than unrelated diversification (Markides and Williamson, 1994; Varadarajan and Ramanujam, 1989). The oft-cited reasons are that firms often face difficulties in integrating diverse market mechanisms, technologies, products, skills, and other specialized resources of the unrelated business with those of existing businesses. Restructuring of a large number of diversified corporations around the world in the nineties rising on the wave of the concept of core competencies (Prahalad and Hamel, 1990) symbolizes this dominant belief of the modern era that conglomerates fail to perform. However, some authors in recent years have argued that in the emerging markets such as India, focusing on core competencies is not necessary and unrelated diversification may not lead to under-performance (Khanna and Palepu, 1997, 2000; Khanna and Rivkin, 2001). Their main argument is that markets and institutions are not

well developed in these countries and hence a conglomerate can add value in dealing with capital, labour, and product markets and make better utilization of regulatory framework and enforcement of contracts. In the absence of a well developed market, the corporate headquarters can play the role of an efficient market and corporate brands can be more easily and effectively utilized on a large array of businesses where entry in the business is more difficult than competing in the business. This contention of imperfect and under-developed emerging market did not stand the recent empirical scrutiny (Kakani, 2000; Kakani and Ramachandran, 2001). Underlying the debate of non-focus conglomerate strategies in the emerging markets is the assumption that the role of corporate advantage in shaping the competitive advantage in the individual businesses is overbearingly high and better management of the individual businesses may not be very critical in a less competitive market. However, when industries are highly competitive, which most Indian industries are fast becoming, this crucial assumption is challenged. Generalized corporate resources such as raising capital or relationship with regulators no longer add so much value that the company can perform in a large array of businesses even in the absence of a well-developed competitive advantage at the business level. Any form of diversification, even if it is closely related to the existing business domain, adds to diversity in operation because the markets and products are not the same. However, in related business domains, managers are more familiar with supplier and customer profiles which help them cater to the needs of the market better and avoid costly mistakes. Relatedness also facilitates firms to share intangible resources and derive the benefits of synergy (Bettis, 1981). When a firm has a number of business units and divisions, it can attempt to exploit the scope economies accrued due to sharing of cost at some parts of the value chain (Porter, 1985). Thus, higher sharing of resources helps firms gain cost advantage and achieve higher profit. However, the extent to which scope economies are achievable depends on the fungibility of the existing assets across business and product lines (Barney, 1991). Moreover, conceiving and implementing radically new projects may require specific skills to be developed at several stages of value chain which, in turn, require time and investments and make firms more vulnerable. Hence, stock investors find
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diversification a riskier strategy than scale expansion and penalize firms. Thus, we propose that, while increase in business scope due to careful diversification into profitable industries has a favourable impact on the profitability of the firm, greater diversity of operation due to unrelated diversification will lead to lower profitability and erosion of market value. The linkage of geographical scope and performance is established in strategy literature (Delios and Beamish, 1999). The ability to source lower cost of inputs and the opportunity to exploit proprietary assets across a greater number of markets and at a lower marginal cost yields a distinct benefit (Kim et al., 1993). Geographical dispersion is an effective strategy for risk dispersion (Kim, Hwang and Burgers, 1989). By covering a wider geographical market even within the country, firms can spread the risk in the existing business and create new niches. In the face of heightened competition in the domestic market, firms may prefer geographical expansion to foreign markets instead of diversification (Buhner, 1987). Earlier researchers (Delios and Beamish, 1999; Hitt, Hoskisson and Kim, 1997; Tallman and Li, 1996) found positive influence of geographical scope on firms profitability. This strategy is valued highly by stock investors and has a favourable impact on market performance. So, the following relationships of various corporate strategy dimensions with performance are proposed: Hypothesis 4A: Greater the increase in scale of operation, higher will be the profitability and market performance.
Figure 1: Proposed Research Model

Hypothesis 4B: Greater the increase in geographical scope, higher will be the profitability and market performance. Hypothesis 4C: Greater the increase in diversity of operation, lower will be the profitability and market performance. Hypothesis 4D: Greater the increase in business scope and sharing of resources, higher will be the profitability. Hypothesis 4E: Greater the increase in business scope, lower will be the market performance. Hypothesis 4F: Greater the increase in sharing of resources, higher will be the profitability.

METHODOLOGY AND SAMPLE


Model Identification
The research model summarizing the propositions is presented in Figure 1. The underlying causal assumption of the model has been that changes in environment influence the strategies which, in turn, influence performance of firms. The research model has been tested with a sample of firms in India in LISREL framework (Joreskog and Sorbom, 1993). India provides the perfect setting for testing the research model as a sustained policy and administrative reforms, popularly known as economic liberalization, have been vigorously pursued here since 1991. The integrated structural equation model consists of ten composites of observed variables corresponding

+
Munificence

Scale of business

+ + + + + + +

+
Business scope

+ + +
Profitability

Competitive intensity

Geographi Geographic c scope scope

+ + -

Diversity of operation

Market performance

Environmental efficiency

+ +
Sharing of resources

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to three latent environmental constructs: munificence, competitive intensity, and environmental efficiency. Opportunity, availability of resources from international market, availability of funds, and bargaining power of suppliers are the composite observed variables for the latent construct munificence. Intensity of competition and bargaining power of customers are the observed variables for the latent construct competitive intensity. As per our earlier discussion, we have specified regulatory control to load on both competitive intensity and environmental efficiency. Two composite variables created from six institutional efficiency items and uncertainty were the three observed variables for the latent construct environmental efficiency. There are ten observed variables for five latent corporate strategy variables. All these variables capture the extent of change that has taken place in each of the strategy dimensions during the post-liberalization period. For example, the observed variables for indicators of the latent construct scale of business are the change in scale of operation, organizational scale, number of employees, and total assets. Similarly, the change in domestic scope and international scope together constitute the latent construct change in geographical scope. Along with the change in product-market scope, as reported by firms, we have included an objective indicator change in business line to capture the latent construct change in business scope of firms. There is one observed variable each for diversity of operation and sharing of resources. All the observed variables that are derived from the survey data as reported by firms are the composite of multi-items scales with Cronbach Alpha ranging from 0.7 to 0.86. Three indicators used for profitability-performance are return on sales, return on assets, and return on net worth. The indicator for marketbased measures of performance is the market return adjusted for market risk. The empirical verification of the model required systematic measurement of change in the business environment of firms during economic reforms, identification of the change in corporate strategies of firms, and recording of performance of firms. Required data for environment and strategy variables for Indian firms were not available from the secondary sources. So, a large sample survey design was adopted and primary data were collected through a structured questionnaire. These were verified wherever possible by information from the published documents and secondary sources

such as the Centre for Monitoring Indian Economy (CMIE) database, Stock Exchange Directory, business magazines like Business World, Business Today, and Business India, and newspapers like The Economic Times, Business Standard, and Financial Express.

Survey Instrument Design


An initial list of items that correspond to various dimensions of environment, organizational resources, and corporate strategy was generated based on the exhaustive review of literature and interview with managers. The list was independently evaluated by the principal researcher and five others familiar with the literature in the field for their face/content validity. A survey instrument was prepared based on the final list of items. The questionnaire had undergone a couple of rounds of pretests with a group of participants attending Executive Development Programmes at the Indian Institute of Management, Ahmedabad, to improve the item wording and to ensure that items were also well understood by the target respondents. The survey instrument was finally pre-tested with multiple respondents belonging to six firms from the targeted population. There were no significant differences in responses of multiple respondents from the same firm. Most of the questions were sought to be answered on a seven-point semantic rating scale as if they were interval data. It was expected that use of semantic scales for some variables may lead to certain measurement error, but in the absence of readily quantifiable proxies, this method served our purpose quite well. The notion that judgements of knowledgeable respondents about variables is at least as likely to produce useful answers as quantitative estimates is well accepted by researchers (Levin, 1987).

Sampling and Data Collection


The data for the study were collected from firms in India. The state and privately-owned firms that were listed in the major stock exchanges in India and also appeared in the list of top 500 firms as compiled by The Economic Times and Business Standard comprised the primary population for the survey. The rankings by these magazines have been made on the basis of net sales, i.e., income excluding excise duty, octroi, sales tax, cash discounts, rebates or commissions paid on sales. Firms from the service industries such as financing, banking, software, leasing, trading, hotel, and tourism were
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excluded to bring more homogeneity in the sample. Though these industries have also shown high dynamism during economic reforms and are worth studying, because of inherent differences in issues and concerns as compared to firms from manufacturing industries, it was decided to exclude them from the present study. To ensure a reasonably large variation in size, another 100 firms randomly selected from the list of top 1000 firms as compiled by the Business Standard were also included in the final population. As previous experiences of firm-level survey research in India indicated typically very low response rate ranging from 6-12 per cent, it also helped increase the probability of achieving higher final sample size. As a preparatory step, a letter of invitation to participate in the study along with a one- page abstract of the research proposal was sent to the chief executive officers of 511 firms with diverse geographical spread and across a wide range of industries. While 15 firms declined for reasons of company policy and paucity of time, 169 firms expressed their willingness to participate in the survey. As prior experiences in India showed that only in about half of the cases, initial agreement materialized to final response (Khandwalla, 1985), questionnaires were also sent to the other remaining firms who did not respond to our first letter making the final tally to 496. The questionnaire and accompanying letters advised that only top level executives, i.e., either the chief executive officer himself or a very senior level executive should complete the questionnaire. This was to ensure that only those persons familiar with the business environment in India for at least a decade and the issues of strategic importance to the firms would complete the questionnaires. As strategic decisions are taken based on the perception of the dominant coalition in a firm, it was assumed that response from a top level executive who is a part of the dominant coalition would be a good proxy. Though there are problems associated with this
Table 1: Sample Characteristics
Variable Net sales (Rs in million) Total assets (Rs in million) Net worth (Rs in million) Net profit (Rs in million) Number of employees Number of business lines Age (Years) Mean 7923.09 9674.06 4359.87 507.44 4252.36 3.19 40.95

key informant approach (Philips, 1981; Huber and Power, 1985), it is an accepted norm in strategy research. The survey was conducted in late 1996 and early 1997. After several reminder letters, personal visits, and telephone calls, 118 responses and 9 declines were received. Out of 118 responses, 111 were found to be usable making the effective response rate to 23 per cent. This is much better in comparison to those of earlier studies in India and quite reasonable for such target population in any other context. This paper reports on the data from 111 firms. Table 1 presents the summary sample characteristics. The size of sampled firms in terms of net sales, net assets, and number of employees showed wide variations reflecting a huge range of size. The sample also carried a good mix of state-owned public sector enterprises and privately-owned Indian and foreign firms. This mix is important because all three types of firms have significant contributions to the total industrial output of India. A wide range of industries, both profitable and loss-making firms, was covered by the sample. Accordingly, we rule out the possibility of systematic non-response bias in the sample. We measured the profitability performance of firms as six years average between April 1993 and March 1999. Market performance was measured as the average market return adjusted for risk between April 1993 and March 1997. Profitability from 1993 onwards was taken to accommodate the lag effect of strategy on performance. Data on financial and market performance were obtained from the electronic data base of the CMIE.

ANALYSIS AND RESULTS


A nested model approach as suggested by Anderson and Gerbing (1988) has been followed to test the hypotheses concerning the structural relationships among variables. The first model is the measurement model with the paths between observed variables and associated latent constructs freed and latent constructs allowed to correlate freely. After the measurement model, the theoretical

Standard Deviation 16654.07 16242.57 1703.10 1475.32 6955.98 2.34 26.26

Minimum 236.6 258.1 -215.01 -1147.5 74 1 10

Maximum 125261.6 85746.03 43124.02 9974.01 49739 11 143

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model, with all paths not specifically hypothesized to exist fixed to zero, has been fitted with the data. The initial model indicated a poor fit with the data. Following the suggestion by Joreskog and Sorbom (1993), after successive examination of the normalized residuals, semleaf plots, and modification indexes, an attempt was made in steps to develop the best fitting model by deleting non-significant paths and allowing the measurement errors to correlate when theoretically justified and significant drops in chi-square occurred. The overall fit of the final model to the data was respectable with CFI = 0.941, IFI = 0.945 and NNFI = 0.930. The value in excess of 0.9 signifies a good data model fit (Mueller, 1996). The ratio of chi-square and degrees of freedom was also quite small. Moreover, RMSEA is 0.0425 and p value for test of close fit (RMSEA < 0.05) is non-significant (p = 0.733). It was observed that as the number of latent constructs included in a model increases, the data model fit decreases in spite of strong theoretical support (McAllister, 1995; Niehoff and Moorman, 1993). Hence, for our model, which included as many as ten latent variables and 24 observed variables, the achieved model fit was very reasonable. The measurement model shows that all factor loadings of latent variables on respective observed variables as specified are significant, values are higher than 0.35 in all cases, and are also consistent between the measurement model and a final model. The significant factor loadings are good evidence of convergent validity of the latent constructs. Maximum likelihood standardized estimates and t-statistics of each of the significant structural parameters of the final model are summarized in Figure 2. A comparison of Figure 1 and Figure 2 would reveal that only seven out of 16 hypothesized direct paths (indicated by firm lines) and three out of six hypothesized indirect paths (indicated by dotted lines) were significant. The structural paths, which showed significant total effects, are shown in Table 2. The total effect of one variable on the other is arrived at by simply summing the direct and all indirect effects. It is observed that, as hypothesized, change in environmental munificence has a significant direct positive impact on change in scale of business, business scope, and geographical scope. It also has significant total positive effect on all corporate strategy dimensions, viz., change in business scope, scale of business, geographical scope, diversity of operation, sharing of resources, and profitability of firms. Similarly, as hypothe-

Table 2: Estimates of Structural Paths with Significant Total Effect


Structural Path Munificence > Business scope Munificence > Scale of business Munificence > Geographical scope Munificence > Diversity of operation Munificence > Sharing of resources Munificence > Profitability Competitive intensity > Business scope Competitive intensity > Scale of business Competitive intensity > Diversity of operation Competitive intensity > Sharing of resources Competitive intensity > Profitability Environmental efficiency > Profitability Business scope > Profitability Scale of business> Profitability Scale of business > Market performance Total Effect 0.421 0.358 0.558 0.392 0.247 0.139 -0.295 -0.221 0.349 0.220 -0.088 0.197 0.349 0.388 0.873 (2.873) (2.565) (3.563) (3.052) (3.192) (2.395) (-2.239) (-2.244) (2.731) (2.901) (-2.260) (2.099) (3.428) (2.758) (2.679)

Note: Figures in bracket shows the corresponding t-value. t > 3 indicates statistical significance at p < 0.001; t > 2.59 indicates statistical significance at p < 0.01; and t > 1.96 indicates statistical significance at p < 0.05.

sized, change in competitive intensity has significant direct negative effect on change in business scope. However, contrary to our hypotheses, change in competitive intensity is found to have a direct positive effect on change in diversity of operation. It also has significant total negative effect on change in business scope, scale of business, and profitability, and positive total effect on change in diversity of operation and sharing of resources. Change in environmental efficiency has no significant effect on any of the corporate strategy dimensions. However, it has significant positive total effect on profitability. Among the corporate strategy dimensions, only change in scale of business and business scope has an impact on performance of firms. While change in scale of business has direct positive effect on both profitability and market performance, business scope has direct negative effect on market performance. However, though both increased scale of business as well as business scope have resulted in significant total positive effects on profitability, their effects on market performance are in opposite directions. The remaining paths linking the other strategy dimensions and performance variables are found to be insignificant.

DISCUSSION AND CONCLUSIONS


Results of SEM indicate that environment as a whole has a pervasive influence on strategic responses and performance of firms mostly in the hypothesized direction.
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Figure 2: Estimated Structural Model


Scale of business + + 0.139(2.395) Business scope + Profitability 0.468(2.026) Geographic scope 0.197(2.099) Diversity of operation 0.873(2.679) Market performance

0.358(2.565) Munificence + 0.557(3.740) 0.295(2.239) Competitive intensity +

0.388(3.358) +

0.421(2.836)

0.088(2.260) 0.450(3.061) +

+ Environmental efficiency

Sharing of resources

It is observed that availability of high growth and profit opportunities across industries, easier access to resources in the international market, improvement in the supply situation, etc., had the greatest influence on the strategic behaviour of firms in the liberalized era. Firms that recognized these favourable changes in the environment and increased their scale of business and diversified into deregulated industries selectively achieved superior performance. Similarly, firms facing intense competition and demanding customers reorganized their business portfolio by divesting some businesses and moving into more promising unrelated businesses, cut down the organization flab through downsizing, and promoted greater sharing of resources within. Along with opportunities, economic liberalization also posed threats to firms in terms of more domestic and foreign competition and increasingly demanding customers. Being exposed to foreign goods, Indian customers became increasingly aware of alternatives and choosy and started demanding higher value for money. As a result, firms were forced to concentrate more on their main lines of business. They probably raised funds by divesting non-core and less profitable product and business lines to improve the main business, resulting in a decrease in business scope. Higher competitive pressure in the existing lines of business perhaps led to reduction in profit margin and overall return on investment. To maintain profitability,
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firms vacated some of the less profitable markets and diversified to more profitable unrelated industries. Firms were catering to diverse customer segments to retain the overall market share and offering greater product range to satisfy customer needs and beat competition. Therefore, the diversity of operation increased significantly for firms perceiving high degree of competitive intensity during reforms. Similarly, in the liberalized era, faster clearance of project proposals, simplification of procedures for importing and exporting goods, and smoother dealing with the government departments and financial institutions led to improved environmental efficiency for most firms. This resulted in lower transaction cost, reduced administrative overheads, and improved profitability. Also, reduction in political strikes and agitation that usually disrupt business operations helped firms improve efficiency and earn higher profits. Increased scale of business was found to have generated higher profit for firms. The increase in scale in operation in the liberalized era was often associated with technology upgradation and modernization of manufacturing facilities. As a result, firms adopting scale expansion strategies not only had the scale advantage but also emerged technologically more sophisticated to deliver better quality products to customers. Increased diversity in operation did not have any significant negative impact on performance. Therefore, the general

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prescription that concentrating on core competencies and core businesses would yield superior performance did not find support. This implies that unrelated diversification per se might not be detrimental to firms, at least, in the short run. One must notice that underlying the debate of nonfocus conglomerate strategies of business groups in the emerging markets (Kakani and Ramachandran, 2001; Khanna and Palepu, 1997) is the assumption that the role of corporate advantage in shaping the competitive advantage in the individual businesses is overbearingly high. Gaining access to industries and capital back up to gain a foothold in those industries may be more critical than better management of the individual businesses. This assumption is justified in a less competitive market. However, when industries are highly competitive, which most Indian industries are fast becoming, this crucial assumption will be challenged. At least the stock investors were wary of such moves by firms as observed from the significant negative influence of business scope on market return. In a highly competitive market, generalized corporate capabilities such as raising and allocating capital or relationship with regulators no longer add so much value that the company can perform in a large array of businesses even in the absence of a well-developed competitive advantage at the business level. Managers in the liberalized environment need to be selective in diversification moves. During initial years of economic reforms, the inefficiencies of managing unrelated businesses by diversified firms might be shielded by the presence of high growth and profit opportunities in a large number of recently deregulated industries. Only a few public sector firms had prior experience and skills in those industries. Thus, all new entrants would get some time to exploit the growth and profit opportunities. However, eventually, those firms which can achieve the economies of scale early by aggressively expanding the scale of operation, developing the required skills for the new businesses faster, and extracting some benefit of synergy from the existing business by transferring tangible and intangible resources are likely to withstand the emerging competitive pressure and achieve sustained success. Though, on the whole, all firms faced pressure on profitability, firms which made the right strategic changes could reduce the adverse impact of the intensely competitive environment. In other words, firms having

better environment-strategy fit achieved superior performance. This conforms to the general principle of contingency theory (Hofer, 1975; Venkatraman, 1989) derived based on the developed economy institutional framework. However, the observation that firms in India that assessed the changing environment properly and changed their strategies aggressively in the liberalized era performed better is in contrast to the findings of studies during deregulation of industries in the developed economies (e.g., Mahon and Murray, 1980; Smith and Grimm, 1987). It also differs from the findings of the study of Chinese electronics firms by Tan and Litschert (1994). These studies reported that firms which had become more focused and adopted defensive strategic orientation performed better. The plausible explanation lies in understanding that economic liberalization is fundamentally different from industry deregulation (Ray, 2003). Although those firms operating in an industry undergoing deregulation may have greater competitive strategy options, they are unlikely to have fresh opportunities to start new businesses or venture into new industries or geographies. In fact, researchers (Darroch, 1992; Mahon and Murray, 1980; Smith and Grimm, 1987) have observed that, within a deregulated industry, firms faced greater competitive pressure after deregulation and hence shifted from an unfocused to a focused strategy. Economic liberalization, unlike industry deregulation, consists of not only deregulation of a number of industries, but also leads to a number of economy-wide policy and administrative reforms cutting across sectors such as trade, banking, and commerce, and capital and labour markets. The sheer magnitude and scope of changes in the economy create a different set of environmental contingencies that are quite different from those under privatization and deregulation of selected industries in a market-driven economy. Therefore, perceived changes in the environment and the resulting responses by firms in an industry due to industry deregulation in a market-driven economy are likely to be different from those firms which operated in a controlled economy for long that is subjected to deregulation and liberalization as a whole. The results clearly indicate that firms which had better environment-strategy fit achieved superior performance. This is a pointer to the increasingly important role of strategic management in Indian firms. In a fast changing competitive environment, early recognition of
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opportunities and threats, right identification of customers needs, and effectively serving them with quality products become the key to success. With the diminishing influence of regulatory authorities, the responsibility now lies with strategic managers to scan the environment, identify the opportunities and resources, understand the demand of customers and be aware of the potential threat of competition, and formulate and implement the right mix of strategies expeditiously. Better recognition of the changes in the environment by managers and acting on them by positioning the firm in profitable niches and acquiring, building, and leveraging resources hold the key to superior performance. All these, however, indicate the increased importance of environment scanning and strategic planning systems and the critical role of managers in charge of boundary spanning activities such as marketing, corporate finance, and outsourcing in strategic decision-making of firms.

Economic liberalization is a long-drawn process and evolves through several phases being subjected to successive generation of reforms. We have taken a snapshot picture of strategic adaptation of firms during early phases of economic liberalization. However, much more research is needed to validate and complement this study and get a complete understanding of strategic behaviour of firms during liberalization and globalization of economies with a long history of regulation and protection. Longitudinal research studying the co-evolutionary dynamics of firms and environment during the last one decade based on time series data and descriptive case studies would be very useful to complement this study. Moreover, similar studies perhaps with a larger sample and in different liberalizing economy contexts would definitely provide more credence to this study and also enrich the research tradition of environment-strategyperformance.

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Acknowledgements This research was supported by grants from Indian Institute of Management, Ahmedabad and P D Agarwal Foundation for Management Research. The author expresses his gratitude to Professors Shekhar Chaudhuri, J S Chhokar, M R Dixit, P N Khandwalla, Arie Lewin, Maria Sakakibara and the anonymous reviewers of Academy of Management Meeting 2003 and Vikalpa for their helpful comments and suggestions.

Sougata Ray is an Associate Professor in the Strategic Management Group at Indian Institute of Management, Calcutta. He specializes in the broad areas of strategy, international management, and entrepreneurship. He has contributed a number of research papers and case studies to reputed journals, books (edited volumes), and conferences in Asia, North America, and Europe on topics such as corporate responses to economic reforms, global competition and strategy of firms from developing nations, entry strategies of multinational firms in emerging markets, competition, strategy and entrepre- neurship in high technology and emerging industries. He serves as a member of the Editorial Board of Decision, a journal published by IIM, Calcutta. e-mail: sougata@iimcal.ac.in

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Measuring Service Quality: SERVQUAL vs. SERVPERF Scales


Sanjay K Jain and Garima Gupta

includes research articles that focus on the analysis and resolution of managerial and academic issues based on analytical and empirical or case research

RESEARCH

Executive Summary

KEY WORDS Service Quality Measurement of Service Quality Service Quality Scale Scale Validity and Reliability Diagnostic Ability of Scale

Quality has come to be recognized as a strategic tool for attaining operational efficiency and improved business performance. This is true for both the goods and services sectors. However, the problem with management of service quality in service firms is that quality is not easily identifiable and measurable due to inherent characteristics of services which make them different from goods. Various definitions of the term service quality have been proposed in the past and, based on different definitions, different scales for measuring service quality have been put forward. SERVQUAL and SERVPERF constitute two major service quality measurement scales. The consensus, however, continues to elude till date as to which one is superior. An ideal service quality scale is one that is not only psychometrically sound but is also diagnostically robust enough to provide insights to the managers for corrective actions in the event of quality shortfalls. Empirical studies evaluating validity, reliability, and methodological soundness of service quality scales clearly point to the superiority of the SERVPERF scale. The diagnostic ability of the scales, however, has not been explicitly explicated and empirically verified in the past. The present study aims at filling this void in service quality literature. It assesses the diagnostic power of the two service quality scales. Validity and methodological soundness of these scales have also been probed in the Indian context an aspect which has so far remained neglected due to preoccupation of the past studies with service industries in the developed world. Using data collected through a survey of consumers of fast food restaurants in Delhi, the study finds the SERVPERF scale to be providing a more convergent and discriminantvalid explanation of service quality construct. However, the scale is found deficient in its diagnostic power. It is the SERVQUAL scale which outperforms the SERVPERF scale by virtue of possessing higher diagnostic power to pinpoint areas for managerial interventions in the event of service quality shortfalls. The major managerial implications of the study are: Because of its psychometric soundness and greater instrument parsimoniousness, one should employ the SERVPERF scale for assessing overall service quality of a firm. The SERVPERF scale should also be the preferred research instrument when one is interested in undertaking service quality comparisons across service industries. On the other hand, when the research objective is to identify areas relating to service quality shortfalls for possible intervention by the managers, the SERVQUAL scale needs to be preferred because of its superior diagnostic power. However, one serious problem with the SERVQUAL scale is that it entails gigantic data collection task. Employing a lengthy questionnaire, one is required to collect data about consumers expectations as well as perceptions of a firms performance on each of the 22 service quality scale attributes. Addition of importance weights can further add to the diagnostic power of the SERVQUAL scale, but the choice needs to be weighed against the additional task of data collection. Collecting data on importance scores relating to each of the 22 service attributes is indeed a major deterrent. However, alternative, less tedious approaches, discussed towards the end of the paper, can be employed by the researchers to obviate the data collection task.

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uality has come to be recognized as a strategic tool for attaining operational efficiency and improved business performance (Anderson and Zeithaml, 1984; Babakus and Boller, 1992; Garvin, 1983; Phillips, Chang and Buzzell, 1983). This is true for the services sector too. Several authors have discussed the unique importance of quality to service firms (e.g., Normann, 1984; Shaw, 1978) and have demonstrated its positive relationship with profits, increased market share, return on investment, customer satisfaction, and future purchase intentions (Anderson, Fornell and Lehmann 1994; Boulding et al., 1993; Buzzell and Gale, 1987; Rust and Oliver, 1994). One obvious conclusion of these studies is that firms with superior quality products outperform those marketing inferior quality products. Notwithstanding the recognized importance of service quality, there have been methodological issues and application problems with regard to its operationalization. Quality in the context of service industries has been conceptualized differently and based on different conceptualizations, alternative scales have been proposed for service quality measurement (see, for instance, Brady, Cronin and Brand, 2002; Cronin and Taylor, 1992, 1994; Dabholkar, Shepherd and Thorpe, 2000; Parasu- raman, Zeithaml and Berry, 1985, 1988). Despite considerable work undertaken in the area, there is no consensus yet as to which one of the measurement scales is robust enough for measuring and comparing service quality. One major problem with past studies has been their preoccupation with assessing psychometric and metho- dological soundness of service scales that too in the context of service industries in the developed countries. Virtually no empirical efforts have been made to eva- luate the diagnostic ability of the scales in providing managerial insights for corrective actions in the event of quality shortfalls. Furthermore, little work has been done to examine the applicability of these scales to the service industries in developing countries. This paper, therefore, is an attempt to fill this existing void in the services quality literature. Based on a survey of consumers of fast food restaurants in Delhi, this paper assesses the diagnostic usefulness as well as the psychometric and methodological soundness of the two widely advocated service quality scales, viz., SERVQUAL and SERVPERF.

SERVICE QUALITY: CONCEPTUALIZATION AND OPERATIONALIZATION


Quality has been defined differently by different authors. Some prominent definitions include conformance to requirements (Crosby, 1984), fitness for use (Juran, 1988) or one that satisfies the customer (Eiglier and Langeard, 1987). As per the Japanese production philosophy, quality implies zero defects in the firms offerings. Though initial efforts in defining and measuring service quality emanated largely from the goods sector, a solid foundation for research work in the area was laid down in the mid-eighties by Parasuraman, Zeithaml and Berry (1985). They were amongst the earliest researchers to emphatically point out that the concept of quality prevalent in the goods sector is not extendable to the services sector. Being inherently and essentially intangible, heterogeneous, perishable, and entailing simultaneity and inseparability of production and consumption, services require a distinct framework for quality explication and measurement. As against the goods sector where tangible cues exist to enable consumers to evaluate product quality, quality in the service context is explicated in terms of parameters that largely come under the domain of experience and credence properties and are as such difficult to measure and evaluate (Parasuraman, Zeithaml and Berry, 1985; Zeithaml and Bitner, 2001). One major contribution of Parasuraman, Zeithaml and Berry (1988) was to provide a terse definition of service quality. They defined service quality as a global judgment, or attitude, relating to the superiority of the service, and explicated it as involving evaluations of the outcome (i.e., what the customer actually receives from service) and process of service act (i.e., the manner in which service is delivered). In line with the propositions put forward by Gronroos (1982) and Smith and Houston (1982), Parasuraman, Zeithaml and Berry (1985, 1988) posited and operationalized service quality as a difference between consumer expectations of what they want and their perceptions of what they get. Based on this conceptualization and operationalization, they proposed a service quality measurement scale called SERVQUAL. The SERVQUAL scale constitutes an important landmark in the service quality literature and has been extensively applied in different service settings.

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MEASURING SERVICE QUALITY: SERVQUAL vs. SERVPERF SCALES

Over time, a few variants of the scale have also been proposed. The SERVPERF scale is one such scale that has been put forward by Cronin and Taylor (1992) in the early nineties. Numerous studies have been undertaken to assess the superiority of two scales, but consensus continues to elude as to which one is a better scale. The following two sections provide an overview of the operationalization and methodological issues concerning these two scales.

SQ i = ( Pij E ij )
j=1

(1)

SERVQUAL Scale
The foundation for the SERVQUAL scale is the gap model proposed by Parasuraman, Zeithaml and Berry (1985, 1988). With roots in disconfirmation paradigm, 1 the gap model maintains that satisfaction is related to the size and direction of disconfirmation of a persons experience vis--vis his/her initial expectations (Churchill and Surprenant, 1982; Parasuraman, Zeithaml and Berry, 1985; Smith and Houston, 1982). As a gap or difference between customer expectations and perceptions, service quality is viewed as lying along a continuum ranging from ideal quality to totally unacceptable quality, with some points along the continuum representing satisfactory quality. Parasuraman, Zeithaml and Berry (1988) held that when perceived or experienced service is less than expected service, it implies less than satisfactory service quality. But, when perceived service is less than expected service, the obvious inference is that service quality is more than satisfactory. Parasuraman, Zeithaml and Berry (1988) posited that while a negative discrepancy between perceptions and expectations a performance-gap as they call it causes dissatisfaction, a positive discrepancy leads to consumer delight. Based on their empirical work, they identified a set of 22 variables/items tapping five different dimensions of service quality construct.2 Since they operationalized service quality as being a gap between customers expectations and perceptions of performance on these variables, their service quality measurement scale is comprised of a total of 44 items (22 for expectations and 22 for perceptions). Customers responses to their expectations and perceptions are obtained on a 7-point Likert scale and are compared to arrive at (P-E) gap scores. The higher (more positive) the perception minus expectation score, the higher is perceived to be the level of service quality. In an equation form, their operationalization of service quality can be expressed as follows:
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where: SQi = perceived service quality of individual i k = number of service attributes/items P = perception of individual i with respect to performance of a service firm attribute j E = service quality expectation for attribute j that is the relevant norm for individual i The importance of Parasuraman, Zeithaml and Berrys (1988) scale is evident by its application in a number of empirical studies across varied service settings (Brown and Swartz, 1989; Carman, 1990; Kassim and Bojei, 2002; Lewis, 1987, 1991; Pitt, Gosthuizen and Morris, 1992; Witkowski and Wolfinbarger, 2002; Young, Cunningham and Lee, 1994). Despite its extensive application, the SERVQUAL scale has been criticized on various conceptual and operational grounds. Some major objections against the scale relate to use of (P-E) gap scores, length of the questionnaire, predictive power of the instrument, and validity of the five-dimension structure (e.g., Babakus and Boller, 1992; Cronin and Taylor, 1992; Dabholkar, Shepherd and Thorpe, 2000; Teas, 1993, 1994). Since this paper does not purport to examine dimensionality issue, we shall confine ourselves to a discussion of only the first three problem areas. Several issues have been raised with regard to use of (P-E) gap scores, i.e., disconfirmation model. Most studies have found a poor fit between service quality as measured through Parasuraman, Zeithaml and Berrys (1988) scale and the overall service quality measured directly through a single-item scale (e.g., Babakus and Boller, 1992; Babakus and Mangold, 1989; Carman, 1990; Finn and Lamb, 1991; Spreng and Singh, 1993). Though the use of gap scores is intuitively appealing and conceptually sensible, the ability of these scores to provide additional information beyond that already contained in the perception component of service quality scale is under doubt (Babakus and Boller, 1992; Iacobucci, Grayson and Ostrom, 1994). Pointing to conceptual, theoretical, and measurement problems associated with the disconfirmation model, Teas (1993, 1994) observed that a (P-E) gap of magnitude -1 can be produced in six ways: P=1, E=2; P=2, E=3; P=3, E=4; P=4, E=5; P=5, E=6 and P=6, E=7 and these tied gaps cannot be con-

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strued as implying equal perceived service quality shortfalls. In a similar vein, the empirical study by Peter, Churchill and Brown (1993) found difference scores being beset with psychometric problems and, therefore, cautioned against the use of (P-E) scores. Validity of (P-E) measurement framework has also come under attack due to problems with the conceptualization and measurement of expectation component of the SERVQUAL scale. While perception (P) is definable and measurable in a straightforward manner as the consumers belief about service is experienced, expectation (E) is subject to multiple interpretations and as such has been operationalized differently by different authors/ researchers (e.g., Babakus and Inhofe, 1991; Brown and Swartz, 1989; Dabholkar et al., 2000; Gronroos, 1990; Teas, 1993, 1994). Initially, Parasuraman, Zeithaml and Berry (1985, 1988) defined expectation close on the lines of Miller (1977) as desires or wants of consumers, i.e., what they feel a service provider should offer rather than would offer. This conceptualization was based on the reasoning that the term expectation has been used differently in service quality literature than in the customer satisfaction literature where it is defined as a prediction of future events, i.e., what customers feel a service provider would offer. Parasuraman, Berry and Zeithaml (1990) labelled this should be expectation as normative expectation, and posited it as being similar to ideal expectation (Zeithaml and Parasuraman, 1991). Later, realizing the problem with this interpretation, they themselves proposed a revised expectation (E*) measure, i.e., what the customer would expect from excellent service (Parasuraman, Zeithaml and Berry, 1994). It is because of the vagueness of the expectation concept that some researchers like Babakus and Boller (1992), Bolton and Drew (1991a), Brown, Churchill and Peter (1993), and Carman (1990) stressed the need for developing a methodologically more precise scale. The SERVPERF scale developed by Cronin and Taylor (1992) is one of the important variants of the SERVQUAL scale. For, being based on the perception component alone, it has been conceptually and methodologically posited as a better scale than the SERVQUAL scale which has its origin in disconfirmation paradigm.

They questioned the conceptual basis of the SERVQUAL scale and found it confusing with service satisfaction. They, therefore, opined that expectation (E) component of SERVQUAL be discarded and instead performance (P) component alone be used. They proposed what is referred to as the SERVPERF scale. Besides theoretical arguments, Cronin and Taylor (1992) provided empirical evidence across four industries (namely banks, pest control, dry cleaning, and fast food) to corroborate the superiority of their performance-only instrument over disconfirmation-based SERVQUAL scale. Being a variant of the SERVQUAL scale and containing perceived performance component alone, performance only scale is comprised of only 22 items. A higher perceived performance implies higher service quality. In equation form, it can be expressed as:

SQi = Pij
j =1

(2)

SERVPERF Scale
Cronin and Taylor (1992) were amongst the researchers who levelled maximum attack on the SERVQUAL scale.

SQi = perceived service quality of individual i k = number of attributes/items P = perception of individual i with respect to performance of a service firm on attribute j Methodologically, the SERVPERF scale represents marked improvement over the SERVQUAL scale. Not only is the scale more efficient in reducing the number of items to be measured by 50 per cent, it has also been empirically found superior to the SERVQUAL scale for being able to explain greater variance in the overall service quality measured through the use of single-item scale. This explains the considerable support that has emerged over time in favour of the SERVPERF scale (Babakus and Boller, 1992; Bolton and Drew, 1991b; Boulding et al., 1993; Churchill and Surprenant, 1982; Gotlieb, Grewal and Brown, 1994; Hartline and Ferrell, 1996; Mazis, Antola and Klippel, 1975; Woodruff, Cadotte and Jenkins, 1983). Though still lagging behind the SERVQUAL scale in application, researchers have increasingly started making use of the performance-only measure of service quality (Andaleeb and Basu, 1994; Babakus and Boller, 1992; Boulding et al., 1993; Brady et al., 2002; Cronin et al., 2000; Cronin and Taylor, 1992, 1994). Also when applied in conjunction with the SERVQUAL scale, the SERVPERF measure has outperformed the SERVQUAL scale (Babakus and Boller, 1992; Brady, Cronin and Brand, 2002; Cronin and Taylor, 1992;
MEASURING SERVICE QUALITY: SERVQUAL vs. SERVPERF SCALES

where:

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Dabholkar et al., 2000). Seeing its superiority, even Zeithaml (one of the founders of the SERVQUAL scale) in a recent study observed that Our results are incompatible with both the one-dimensional view of expectations and the gap formation for service quality. Instead, we find that perceived quality is directly influenced only by perceptions (of performance) (Boulding et al., 1993). This admittance cogently lends a testimony to the superiority of the SERVPERF scale.

Service Quality Measurement: Unweighted and Weighted Paradigms


The significance of various quality attributes used in the service quality scales can considerably differ across different types of services and service customers. Security, for instance, might be a prime determinant of quality for bank customers but may not mean much to customers of a beauty parlour. Since service quality attributes are not expected to be equally important across service industries, it has been suggested to include importance weights in the service quality measurement scales (Cronin and Taylor, 1992; Parasuraman, Zeithaml and Berry, 1995, 1998; Parasuraman, Berry and Zeithaml, 1991; Zeithaml, Parasuraman and Berry, 1990). While the unweighted measures of the SERVQUAL and the SERVPERF scales have been described above vide equations (1) and (2), the weighted versions of the SERVQUAL and the SERVPERF scales as proposed by Cronin and Taylor (1992) are as follows:

the two scales. The diagnostic ability of the scales has not been explicitly explicated and empirically investigated. The psychometric and methodological aspects of a scale are no doubt important considerations but one cannot overlook the assessment of the diagnostic power of the scales. From the strategy formulation point of view, it is rather the diagnostic ability of the scale that can help managers in ascertaining where the quality shortfalls prevail and what possibly can be done to close down the gaps.

METHODOLOGY
The present study is an attempt to make a comparative assessment of the SERVQUAL and the SERVPERF scales in the Indian context in terms of their validity, ability to explain variance in the overall service quality, power to distinguish among service objects/firms, parsimony in data collection, and, more importantly, their diagnostic ability to provide insights for managerial interventions in case of quality shortfalls. Data for making comparisons among the unweighted and weighted versions of the two scales were collected through a survey of the consumers of the fast food restaurants in Delhi. The fast food restaurants were chosen due to their growing familiarity and popularity with the respondents under study. Another reason was that the fast food restaurant services fall mid way on the pure goods - pure service continuum (Kotler, 2003). Seldom are the extremes found in most service businesses. For ensuring a greater generalizability of service quality scales, it was considered desirable to select a service offering that is comprised of both the good (i.e., food) and service (i.e., preparation and delivery of food) components. Eight fast food restaurants (Nirulas, Wimpy, Dominos, McDonald, Pizza Hut, Haldiram, Bikanerwala, and Rameshwar) rated as more familiar and patronized restaurants in different parts of Delhi in the pilot survey were selected. Using the personal survey method, 300 students and lecturers of different colleges and departments of the University of Delhi spread all over the city of Delhi were approached. The field work was done during December 2001-March 2002. After repeated follow-ups, only 200 duly filled-in questionnaires could be collected constituting a 67 per cent response rate. The sample was deliberately restricted to students and lecturers of Delhi University and was equally divided between these two groups. The idea underlying the selection of these two categories of respondents was their easy accessibility.

SQ i = I ij (Pij E ij )
j=1
k

(3)

SQ i = I ij (Pij )
j=1

(4)

where: Iij is the weighting factor, i.e., importance of attribute j to an individual i. Though, on theoretical grounds, addition of weights makes sense (Bolton and Drew, 1991a), not much improvement in the measurement potency of either scale has been reported after inclusion of importance weights. Between weighted versions of two scales, weighted SERVPERF scale has been theoretically posited to be superior to weighted SERVQUAL scale (Bolton and Drew, 1991a). As pointed out earlier, one major problem with the past studies has been their preoccupation with assessment of psychometric and methodological soundness of
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Quota sampling was employed for selecting respondents from these two groups. Each respondent was asked to give information about two restaurants one most frequently visited and one least frequently visited. At the analysis stage, collected data were pooled together thus constituting a total of 400 responses. Parasuraman, Zeithaml and Berrys (1988) 22-item SERVQUAL instrument was employed for collecting the data regarding the respondents expectations, perceptions, and importance weights of various service attributes. Wherever required, slight modifications in the wording of scale items were made to make the questionnaire understandable to the surveyed respondents. Some of the items were negatively worded to avoid the problem of routine ticking of items by the respondents. In addition to the above mentioned 66 scale items (22 each for expectations, perceptions, and importance rating), the questionnaire included items relating to overall quality, overall satisfaction, and behavioural intentions of the consumers. These items were included to assess the validity of the multi-item service quality scales used at our end. The single-item direct measures of overall service quality, namely, overall quality of these restaurants is excellent and overall satisfaction, namely, overall I feel satisfied with the services provided were used. Cronin and Taylor (1992) have used similar measures for assessing validity of multi-item service quality scales. Behavioural intentions were measured with the help of a 3-item scale as suggested by Zeithaml and Parasuraman (1996) and later used by Brady and Robertson (2001) and Brady,Cronin and Brand (2002).3 Excepting importance weights and behavioural items, responses to all the scale items were obtained on a 5-point Likert scale ranging from 5 for strongly agree to 1 for strongly disagree. A 4-point Likert scale anchored on 4 for very important and 1 for not important was used for measuring importance weights

of each item. Responses to behavioural intention items were obtained using a 5-point Likert scale ranging from 1 for very low to 5 for very high.

FINDINGS AND DISCUSSION


Validity of Alternative Measurement Scales
As suggested by Churchill (1979), convergent and discriminant validity of four measurement scales was assessed by computing correlations coefficients for different pairs of scales. The results are summarized in Table 1. The presence of a high correlation between alternate measures of service quality is a pointer to the convergent validity of all the four scales. The SERVPERF scale is, however, found having a stronger correlation with other similar measures, viz., SERVQUAL and importance weighted service quality measures. A higher correlation found between two different measures of the same variable than that found between the measure of a variable and other variable implies the presence of discriminant validity (Churchill, 1979) in respect of all the four multi-item service quality scales. Once again, it is the SERVPERF scale which is found possessing the highest discriminant validity. SERVPERF is, thus, found providing a more convergent as well as discriminant valid explanation of service quality.

Explanatory Power of Alternative Measurement Scales


The ability of a scale to explain the variation in the overall service quality (measured directly through a single-item scale) was assessed by regressing respondents perceptions of overall service quality on its corresponding multi-item service quality scale. Adjusted R 2 values reported in Table 2 clearly point to the superiority of SERVPERF scale for being able to explain greater

Table 1: Alternate Service Quality Scales and Other Measures Correlation Coefficients
SERVQUAL (P-E) SERVQUAL (P-E) SERVPERF (P) Weighted SERVQUAL I(P-E) Weighted SERVPERF I(P) Overall service quality Overall satisfaction Behavioural intentions 1.000 .735 .995 .759 .416 .420 .293 .767 .993 .544 .557 .440 .772 .399 .425 .308 .531 .554 .459 .724 .570 .528 1.000 SERVPERF (P) Weighted SERVQUAL I (P-E) Weighted SERVPERF I (P) Overall Service Quality Overall Satisfaction Behavioural Intentions

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Table 2: Explanatory Power of Alternative Service Scales Regression Results


Measurement Scale (Independent Variable) SERVQUAL (P-E) SERVPERF (P) Weighted SERVQUAL I(P-E) Weighted SERVPERF I(P) R2 .173 .296 .159 .282 Adjusted R2 .171 .294 .156 .280

Parsimony in Data Collection


Often, ease of data collection is a major consideration governing the choice of measurement scales for studies in the business context. When examined from this perspective, the unweighted performance-only scale turns out to be the best choice as it requires much less informational input than required by the other scales. While the SERVQUAL and weighted service quality scales (both SERVQUAL and the SERVPERF) require data on customer perceptions as well as customer expectations and/or importance perceptions also, the performanceonly measure requires data on customers perceptions alone, thus considerably obviating the data collection task. While the number of items for which data are required is only 22 for the SERVPERF scale, it is 44 and 66 for the SERVQUAL and the weighted SERVQUAL scales respectively (Table 4). Besides making the questionnaire lengthy and compounding data editing and coding tasks, requirement of additional data can have its toll on the response rate too. This study is a case in point. Seeing a lengthy questionnaire, many respondents hesitated to fill it up and returned it on the spot.

Note: Dependent variable = Overall service quality.

proportion of variance (0.294) in the overall service quality than is the case with other scales. Addition of importance weights is not able to enhance the explanatory power of the SERVPERF and the SERVQUAL scales. The results of the present study are quite in conformity with those of Cronin and Taylor (1992) who also found addition of importance weight not improving the predictive ability of either scale.

Discriminatory Power of Alternative Measurement Scales


One basic use of a service quality scale is to gain insight as to where a particular service firm stands vis--vis others in the market. The scale that can best differentiate among service firms obviously represents a better choice. Mean quality scores for each restaurant were computed and compared with the help of ANOVA technique to delve into the discriminatory power of alternative measurement scales. The results presented in Table 3 show significant differences (p < .000) existing among mean service quality scores for each of the alternate scales. The results are quite in line with those obtained by using single-item measures of service quality. The results thus establish the ability of all the four scales to be able to discriminate among the objects (i.e., restaurants), and as such imply that any one of the scales can be used for making quality comparisons across service firms.

Diagnostic Ability of Scales in Providing Insights for Managerial Intervention and Strategy Formulation
A major reason underlying the use of a multi-item scale vis--vis its single-item counterpart is its ability to provide information about the attributes where a given firm is deficient in providing service quality and thus needs to evolve strategies to remove such quality shortfalls with a view to enhance customer satisfaction in future. When judged from this perspective, all the four service quality scales, being multi-item scales, appear capable of performing the task. But, unfortunately, the scales

Table 3: Discriminatory Power of Alternate Scales ANOVA Results


Restaurant Nirulas Wimpys Dominos McDonalds Pizza Hut Haldiram Bikanerwala Rameshwar Overall mean F-value (significance level) SERVPERF (P) 3.63 3.41 3.40 3.72 3.64 3.55 3.38 3.19 3.55 6.60 (p <.000) Weighted SERVPERF I (P) 3.67 3.44 3.50 3.78 3.72 3.51 3.41 3.30 3.61 5.31 (p <.000) SERVQUAL (P-E) -0.28 -0.64 -0.45 -0.21 -0.24 -0.40 -0.57 -0.58 -0.37 4.25 (p <.000) Weighted SERVQUAL I (P-E) -0.31 -0.58 -0.41 -0.20 -0.29 -0.50 -0.62 -0.58 -0.38 3.40 (p <.002) Overall Service Quality 4.04 3.46 3.52 4.23 4.00 3.72 3.65 3.19 3.86 6.77 (p<.000)

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Table 4: Number of Items Contained in Service Quality Measurement Scales


Scale SERVQUAL (P-E) SERVPERF (P) Weighted SERVQUAL I(P-E) Weighted SERVPERF I(P) Number of Items 44 22 66 44

differ considerably in terms of the areas identified for improvement as well as the order in which the identified areas need to be taken up for quality improvement. This asymmetrical power of the four scales can be probed into by taking up four typical service attributes, namely, use of up-to-date equipment and technology, prompt response, accuracy of records, and convenience of operating hours as being tapped in the study vide scale items 1, 11, 13, and 22 respectively. The performance of a restaurant (name disguised) on these four scale items is reported in Table 5. An analysis of Table 5 reveals the following findings. When measured with the help of performanceonly (i.e., SERVPERF) scale, scores in column 3 show that the restaurant is providing quality in respect of service items 1, 13, and 22. The mean scores in the range of 3.31 to 3.97 for these items are a pointer to this inference. The consumers appear indifferent to the provision of service quality in respect of item 11. However, when compared with maximum possible attainable value of 5 on a 5-point scale, the restaurant under consideration seems deficient in respect of all the four service areas (column 5) implying managerial intervention in all these areas. In the event of time and resource constraints, however, the management needs to prioritize quality deficient areas. This can be done in two ways: either on the basis of magnitude of performance scores

(scores lower in magnitude pointing to higher priority for intervention) or on the basis of magnitude of the implied gap scores between perceived performance (P) and maximally attainable score of 5 (with higher gaps implying immediate interventions). Judged anyway, the service areas in the descending order of intervention urgency are 11, 22, 13, and 1 (see columns 3 and 5). The management can pick up one or a few areas for managerial intervention depending upon the availability of time and financial resources at its disposal. If importance scores are also taken into account as is the case with the weighted SERVPERF scale, the order of priority gets changed to 11, 13, 22, and 1. In the case of the SERVQUAL scale requiring comparison of customers perceptions of service performance (P) with their expectations (E), the areas with zero or positive gaps imply either customer satisfaction or delight with the service provision and as such do not call for any managerial intervention. But, in the areas where gaps are negative, the management needs to do something urgently for improving the quality. When viewed from this perspective, only three service areas, namely, 13, 11, and 1 having negative gaps, call for managerial intervention and in that order as determined by the magnitude of gap scores shown in column 9 of Table 5. Taking into account the importance scores also as is the case with the weighted SERVQUAL scale, order of priority areas gets changed to 11, 13, and 1 (see column 10). We thus find that though all the four multi-item scales possess diagnostic power to suggest areas for managerial actions, the four scales differ considerably in terms of areas suggested as well as the order in which the actions in the identified areas are called for. The moot

Table 5: Areas Suggested for Quality Improvement by Alternate Service Quality Scales
Scale Item Item Description Performance Maximum (P) or Score SERVPERF Score (3) (4) 3.97 3.08 3.51 3.31 5.00 5.00 5.00 5.00 Gap (P-M) Importance Score (I) I(P) or Expectation Gap (P-E) Weighted Score or SERVPERF (E) SERVQUAL Score (7) (8) (9) 16.99 12.60 12.88 13.37 11, 13, 22, 1 4.37 3.57 4.05 3.04 -0.40 -0.49 -0.54 -0.27 13, 11, 1 I(P-E) or Weighted SERVQUAL (10) -1.71 -6.01 -1.98 -1.09 11, 13, 1

(1) 1. 11. 13. 22.

(2) Use of up-to-date equipment and technology Prompt response Accuracy of records Operating hours convenient to all Action areas in order of priority

(5) -1.03 -1.92 -1.49 -1.69

(6) 4.28 4.09 3.67 4.05

11, 22, 13, 1

11, 22, 13, 1

Note: Customer expectations, perceptions, and importance for each service quality item were measured on a 5-point Likert scale ranging from 5 for strongly agree to 1 for strongly disagree.

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MEASURING SERVICE QUALITY: SERVQUAL vs. SERVPERF SCALES

point, therefore, is to determine which scale provides a more pragmatic and managerially useful diagnosis. From a closer perusal of the data provided in Table 4, it may be observed that the problem of different areas and different ordering suggested by the four scales is coming up basically due to different reference points used explicitly or implicitly for computing the service quality shortfalls. While it is the maximally attainable score of 5 on a 5-point scale that presumably is serving as a reference point in the case of the SERVPERF scale, it is customer expectation for each of the service area that is acting as a yardstick under the SERVQUAL scale. Ideally speaking, the management should strive for attaining the maximally attainable the performance level (a score of 5 in the case of 5-point scale) in all those service areas where the performance level is less than 5. This is exactly what the SERVPERF scale-based analysis purports to do. However, this is tenable only under situations when there are no time and resource constraints and it can be assumed that all the areas are equally important to customers and they want maximally possible quality level in respect of each of the service attributes. But, in a situation where the management works under resource constraints (this usually is the case) and consumers do not equally importantly want maximum possible service quality provision, the management needs to identify areas which are more critical from the consumers point of view and call for immediate attention. This is exactly what the SERVQUAL scale does by pointing to areas where firms performance is below the customers expectations. Between the two scales, therefore, the SERVQUAL scale stands to provide a more pragmatic diagnosis of the service quality provision than the SERVPERF scale. 4 So long as perceived performance equals or exceeds customer expectations for a service attribute, the SERVQUAL scale does not point to managerial intervention despite performance level in respect to that attribute falling short of the maximally attainable service quality score. Service area 22 is a case in point. As per the SERVPERF scale, this is also a fitting area for managerial intervention because the perceived performance level in respect of this attribute is far less than the maximally attainable value of 5. This, however, is not the case with the SERVQUAL scale. Since the customer perceptions of a restaurants performance are above their expectation level, there seems to be no ostensible justification in further trying to improve the performance in this area.
VIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

The customers are already getting more than their expectations; any attempt to further improve the performance in this area might drain the restaurant owner of the resources needed for improvement in other critical areas. Any such effort, moreover, is unlikely to add to the customers delight as the customers themselves are not desirous of having more of this service attribute as revealed by their mean expectation score which is much lower than the ideally and maximally attainable score of 5. If importance scores are also taken into consideration, the weighted versions of both the scales provide much more useful insights than those provided by the unweighted counterparts. Be it the SERVQUAL or the SERVPERF scale, the inclusion of weights does represent improvement over the unweighted measures. By incorporating the customer perceptions of the importance of different service attributes in the analysis, the weighted service quality scales are able to more precisely direct managerial attention to deficient areas which are more critical from the customers viewpoint and as such need to be urgently attended to. It may, furthermore, be observed that between the weighted versions of the SERVPERF and the SERVQUAL scales, the weighted SERVQUAL scale is much more superior in its diagnostic power. This scale takes into account not only the magnitude of customer defined service quality gaps but also the importance weights that customers assign to different service attributes, thus pointing to such service quality shortfalls as are crucial to a firms success in the market and deserve immediate managerial intervention.

CONCLUSIONS, IMPLICATIONS, AND DIRECTIONS FOR FUTURE RESEARCH


A highly contentious issue examined in this paper relates to the operationalization of service quality construct. A review of extant literature points to SERVQUAL and SERVPERF as being the two most widely advocated and applied service quality scales. Notwithstanding a number of researches undertaken in the field, it is not yet clear as to which one of the two scales is a better measure of service quality. Since the focus of the past studies has been on an assessment of the psychometric and methodological soundness alone of the service quality scales and that too in the context of the developed world this study represents a pioneering effort towards evaluating the methodological soundness as well as the diagnostic power of the two scales

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in the context of a developing country India. A survey of the consumers of the fast food restaurants in the Delhi was carried out to gather the necessary information. The unweighted as well as the weighted versions of the SERVQUAL and the SERVPERF scales were comparatively assessed in terms of their convergent and discriminant validity, ability to explain variation in the overall service quality, ease in data collection, capacity to distinguish restaurants on quality dimension, and diagnostic capability of providing directions for managerial interventions in the event of service quality shortfalls. So far as the assessment of various scales on the first three parameters is concerned, the unweighted performance-only measure (i.e., the SERVPERF scale) emerges as a better choice. It is found capable of providing a more convergent and discriminant valid explanation of service quality construct. It also turns out to be the most parsimonious measure of service quality and is capable of explaining greater proportion of variance present in the overall service quality measured through a singleitem scale. The addition of importance weights, however, does not result in a higher validity and explanatory power of the unweighted SERVQUAL and SERVPERF scales. These findings are quite in conformity with those of earlier studies recommending the use of unweighted perception-only scores (e.g., Bolton and Drew, 1991b; Boulding et al., 1993; Churchill and Surprenant, 1982; Cronin, Brady and Hult, 2000; Cronin and Taylor, 1992). When examined from the point of view of the power of various scales to discriminate among the objects (i.e., restaurants in the present case), all the four scales stand at par in performing the job. But in terms of diagnostic ability, it is the SERVQUAL scale that emerges as a clear winner. The SERVPERF scale, notwithstanding its superiority in other respects, turns out to be a poor choice. For, being based on an implied comparison with the maximally attainable scores, it suggests intervention even in areas where the firms performance level is already up to customers expectations. The incorporation of expectation scores provides richer information than that provided by the perception-only scores thus adding to the diagnostic power of the service quality scale. Even the developers of performance-only scale were cognizant of this fact and did not suggest that it is unnecessary to measure customer expectations in service quality research (Cronin and Taylor, 1992). From a diagnostic perspective, therefore, (P-E) scale

constitutes a better choice. Since it entails a direct comparison of performance perceptions with customer expectations, it provides a more pragmatic diagnosis of service quality shortfalls. Especially in the event of time and resource constraints, the SERVQUAL scale is able to direct managerial attention to service areas which are critically deficient from the customers viewpoint and require immediate attention. No doubt, the SERVQUAL scale entails greater data collection work, but it can be eased out by employing direct rather than computed expectation disconfirmation measures. This can be done by asking customers to directly report about the extent they feel a given firm has performed in comparison to their expectations in respect of each service attribute rather than asking them to report their perception and expectation scores separately as is required under the SERVQUAL scale (for a further discussion on this aspect, see Dabholkar, Shepherd and Thorpe, 2000). The addition of importance weights further adds to the diagnostic power of the SERVQUAL scale. Though the inclusion of weights improves the diagnostic ability of even the SERVPERF scale, the scale continues to suffer from its generic weakness of directing managerial attention to such service areas which are not at all deficient in the customers perception. In overall terms, we thus find that while the SERVPERF scale is a more convergent and discriminant valid explanation of the service construct, possesses greater power to explain variations in the overall service quality scores, and is also a more parsimonious data collection instrument, it is the SERVQUAL scale which entails superior diagnostic power to pinpoint areas for managerial intervention. The obvious managerial implication emanating from the study findings is that when one is interested simply in assessing the overall service quality of a firm or making quality comparisons across service industries, one can employ the SERVPERF scale because of its psychometric soundness and instrument parsimoniousness. However, when one is interested in identifying the areas of a firms service quality shortfalls for managerial interventions, one should prefer the SERVQUAL scale because of its superior diagnostic power. No doubt, the use of the weighted SERVQUAL scale is the most appropriate alternative from the point of view of the diagnostic ability of various scales, yet a final decision in this respect needs to be weighed against the gigantic task of information collection. Following CroMEASURING SERVICE QUALITY: SERVQUAL vs. SERVPERF SCALES

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nin and Taylors (1992) approach, one requires collecting information on importance weights for all the 22 scale items thus considerably increasing the length of the survey instrument. However, alternative approaches do exist that can be employed to overcome this problem. One possible alternative is to collect information about the importance weights at the service dimension rather than the individual service level. This can be accomplished by first doing a pilot survey of the respondents using 44 SERVQUAL scale items and then performing a factor analysis on the collected data for identifying service dimensions. Once the service dimensions are identified, a final survey of all the sample respondents can be done for seeking information in respect of the 44 scale items as well as for the importance weights for each of the service quality dimensions identified during the pilot survey stage. Addition of one more question seeking importance information will only slightly increase the questionnaire size. The importance information so gathered can then be used for prioritizing the quality deficient service areas for managerial intervention. Alternatively, one can employ the approach adopted by Parasuraman, Zeithaml and Berry (1988). Instead of directly collecting information from the respondents, they derived importance weights by regressing overall quality perception scores on the SERVQUAL scores for each of the dimensions identified through the use of factor analysis on the data collected vide 44 scale items. Irrespective of the approach used, the data collection task will be much simpler than required as per the approach employed by Cronin and Taylor (1992) for gathering data in connection with the weighted SERVQUAL scale. Though the study brings to the fore interesting findings, it will not be out of place to mention here some of its limitations. A single service setting with a few restaurants under investigation and a small database of only 400 observations preclude much of the generalizability of the study findings. Studies of similar kind

with larger sample sizes need to be replicated in different service industries in different countries especially in the developing ones to ascertain applicability and superiority of the alternate service quality scales. Dimensionality, though an important consideration from the point of view of both the validity and reliability assessment, has not been investigated in this paper due to space limitations. It is nonetheless an important issue in itself and needs to be thoroughly examined before coming to a final judgment about the superiority of the service quality scales. It is quite possible that the conclusions of the present study might change if the dimensionality angle is incorporated into the analysis. Studies in future may delve into this aspect. One final caveat relates to the limited power of both the unweighted and the weighted versions of the SERVQUAL and the SERVPERF scales to explain variations present in the overall service quality scores assessed through the use of a single-item scale. This casts doubts on the applicability of multi-item service quality scales as propounded and tested in the developed countries to the service industries in a developing country like India. Though regressing overall service quality scores on service quality dimensions might somewhat improve the explanatory power of these scales, we do not expect any appreciable improvement in the results. The poor explanatory power of the scales in the present study might have arisen either due to methodological considerations such as the use of a smaller sample or a 5-point rather than a 7-point Likert scale employed by the developers of service quality scales in their studies or else as is more likely to be the case the problem has arisen due to the inappropriateness of items contained in the service quality scales under investigation in the context of the developing countries. Both these aspects need to be thoroughly examined in future researches so as to be able to arrive at a psychometrically as well as managerially more useful service quality scale for use in the service industries of the developing countries.

ENDNOTES
1. Customer satisfaction with services or perception of service quality can be viewed as confirmation or disconfirmation of customer expectations of a service offer. The proponents of the gap model have based their researches on disconfirmation paradigm which maintains that satisfaction is related to the size and direction of the disconfirmation experience where disconfirmation is related to the persons initial expectations. For
VIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

further discussion, see Churchill and Surprenant, 1982 and Parasuraman, Zeithaml and Berry, 1985. 2. A factor analysis of 22 scale items led Parasuraman, Zeithaml and Berry (1988) to conclude that consumers use five dimensions for evaluating service quality. The five dimensions identified by them included tangibility, reliability, responsiveness, assurance, and empathy. 3. The scale items used in this connection were: The

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probability that I will use their facilities again, The likelihood that I would recommend the restaurants to a friend, and If I had to eat in a fast food restaurant again, the chance that I would make the same choice. 4. Even though a high correlation (r=0.747) existed be-

tween (P-M) and (P-E) gap scores, the former cannot be used as a substitute for the latter as on a case by case basis, it can point to initiating actions even in such areas which do not need any managerial intervention based on (P-E) scores.

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Rust, R T and Oliver, R L (1994). Service Quality New Directions in Theory and Practice, New York: Sage Publications. Shaw, J (1978). The Quality - Productivity Connection, New York: Van Nostrand. Smith, R A and Houston, M J (1982). Script-based Evaluations of Satisfaction with Services, in Berry, L, Shostack, G and Upah, G (eds.), Emerging Perspectives on Services Marketing, Chicago: American Marketing Association, 59-62. Spreng, R A and Singh, A K (1993). An Empirical Assessment of the SERVQUAL Scale and the Relationship between Service Quality and Satisfaction, in Peter, D W, Cravens, R and Dickson (eds.), Enhancing Knowledge Development in Marketing, Chicago, IL: American Marketing Association, 1-6. Teas, K R (1993). Expectations, Performance Evaluation, and Consumers Perceptions of Quality, Journal of Marketing, 57(October), 18-34. Teas, K R (1994). Expectations as a Comparison Standard in Measuring Service Quality: An Assessment of Reassessment, Journal of Marketing, 58(January), 132-39. Witkowski, T H and Wolfinbarger, M F (2002). Comparative Service Quality: German and American Ratings across Service Settings, Journal of Business Research, 55 (11), 875-81. Woodruff, R B, Cadotte, E R and Jenkins, R L (1983). Modelling Consumer Satisfaction Processes Using Experience-based Norms, Journal of Marketing Research, 20(August), 296-304. Young, C, Cunningham, L and Lee, M (1994). Assessing Service Quality as an Effective Management Tool: The Case of the Airline Industry, Journal of Marketing Theory and Practice, 2(Spring), 76-96. Zeithaml, V A, Parasuraman, A and Berry, L L (1990). Delivering Service Quality: Balancing Customer Perceptions and Expectations, New York: The Free Press. Zeithaml, V A and Parasuraman, A (1991). The Nature and Determinants of Customer Expectation of Service, Marketing Science Institute Working Paper No. 91-113, Cambridge, MA: Marketing Science Institute. Zeithaml, V A and Parasuraman, A (1996). The Behavioral Consequences of Service Quality, Journal of Marketing, 60(April), 31-46. Zeithaml, V A and Bitner, M J (2001). Services Marketing: Integrating Customer Focus Across the Firms, 2nd Edition, Boston: Tata-McGraw Hill.

Sanjay K Jain is Professor of Marketing and International Business in the Department of Commerce, Delhi School of Economics, University of Delhi, Delhi. His areas of teaching and research include marketing, services marketing, international marketing, and marketing research. He is the author of the book titled Export Marketing Strategies and Performance: A Study of Indian Textiles published in two volumes. He has published more than 70 research papers in reputed journals including Journal of Global Marketing, Malaysian Journal of Small and Medium Enterprises, Vikalpa,
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Business Analyst, etc. and also presented papers at various national and international conferences. e-mail: skjaindse@vsnl.net Garima Gupta is a Lecturer of Commerce in Kamla Nehru College, University of Delhi, Delhi. She is currently pursuing her doctoral study in the Department of Commerce, Delhi School of Economics, University of Delhi, Delhi. e-mail: garimagupta77@yahoo.co.in

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Identification of Top Performing Economies


Ravindra H Dholakia and Akhilesh S Kumar

includes research articles that focus on the analysis and resolution of managerial and academic issues based on analytical and empirical or case research

RESEARCH

Executive Summary

KEY WORDS Emerging Economies Economic Indicators Cross-country Regression International Ranking Economic Development

In the era of globalization and liberalization, important investment and business decisions have to carefully consider long-term performance and prospects of different national economies. National governments would also compete with one another on the strength of their economic performance and policies. Several organizations make regular efforts to evaluate prospects and rank countries for different purposes but research identifying the top performing economies considering different dimensions of their long-term performance is conspicuous by its absence. Using seven indicators of economic performance of 187 countries, this paper identifies the top 50 performers during the decades of 1981-90 and 1991-2000. Five of these indicators are the trend rates of growth over a decade in imports, foreign direct investment (FDI), capital formation, per capita income, and forex reserves. Average inflation rate and Human Development Index (HDI) are the remaining indicators. The selected indicators are very distinct from one another not only during the decade of eighties but also during the nineties. It is found that economic performance of countries, which was already specialized in a few dimensions, is becoming more specialized and focused during the nineties when compared to the eighties. This paper also examines the inter-relationship among the indicators over time. This study has generated findings for national policy making and for businesses to assess macroeconomic prospects. There are 26 common countries in the two sets of top 50 performers during the eighties and the nineties. High performance on the consumer inflation and/or human development front has emerged practically as a pre-condition for consistently good overall performance. On this count, it appears that a large number of the new entrants to the club of 50 top performers during the nineties are not likely to hold on to their position in the coming decade. Such emerging economies may prove to be risky. The experience of the eighties and the nineties suggests that high inflation during a decade does not deter the solid real economic performance on other dimensions during the same decade but may create problems of maintaining consistency of relative performance over time, if not checked. For predicting the overall performance of countries, past performance does not help in general. However, three indicators, viz., growth of per capita income, growth of FDI, and HDI can be predicted to some extent through past performance on various dimensions. The findings suggest the following: A trade-off exists between high inflation and future high growth and between high inflation and future high HDI. Long-term growth of investment may negatively affect the future long-term growth of output and long-term growth of forex reserves may negatively affect future long-term growth of FDI in a country. Growth causes human capital and not vice-versa. Based on the prediction of partial performance, the study identifies 15 economies likely to be among the top 50 performers in the first decade of the 21st century. Since four of the seven performance indicators do not depend on past performance, the remaining 35 top performers may spring genuine surprises. Economic environment and policies of countries during the decade would decide their relative performance.

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n the era of greater liberalization and globalization, top performing economies of the world need to be carefully identified. This is important for the business strategy of the existing and potential multinational corporations as well as the policy decisions of the governments in different countries. Of late, several organizations have been conducting similar exercises regularly (The Economist, 1999; World Economic Forum, 1999, 2002, and 2003; International Finance Corporation, 1999; World Bank, 1999, 2002, 2003, etc). Some of these exercises use only the published macroeconomic data available readily from secondary sources (e.g., The Economist, 1999; International Finance Corporation, 1999; Global Edge, 2002; and World Bank, 2003), whereas the others combine them with specially conducted surveys in the participating countries (e.g., World Economic Forum, 1999, 2002, and 2003). Moreover, the precise objectives and focus of these exercises also differ. Some of them focus on the better performers amongst emerging markets only (e.g. The Economist, 1999; International Finance Corporation, 1999; Global Edge, 2002), while the others identify the most competitive and technologically advanced economies (e.g., World Economic Forum, 1999, 2002, and 2003). The emerging economies, or more precisely, the emerging market economies, are generally identified on three criteria, viz., (i) low income or developing country status, (ii) high economic growth, and (iii) government policies leading to greater opening of the economy to domestic and global market forces (Arnold and Quelch, 1998; Hoskisson et al., 2000). The Economist (1999) currently identifies two distinct sets, viz., emerging economies and developed countries where size is also one of the criteria. In 1995, it had suggested grouping of countries into paralysed (the poor economies), progressing (the emerging economies), and paranoid (the rich countries terrified by competition from the progressives). However, it soon realized that these groupings would not remain stable over time, given the ever-changing nature of the global forces. It, therefore, decided to identify two sets based on economic expansion through sound policies followed by countries with absolute size of the economy playing an important role. The International Finance Corporation (1999) identified 51 rapidly growing developing countries as emerging economies and Hoskisson et al. (2000) added 13 transition economies in the former USSR to make a list of 64 emerging market economies. All developed countries were ex-

cluded from their list. There is, however, no serious effort at identifying the top performing economies in the world over a period, say a decade, irrespective of the level of their development. We need to consider the economic performance of different countries on various dimensions relevant for corporate business strategies and government policies. In this paper, we make an attempt in this direction by first considering a set of relevant indicators of economic performance over a decade and then identifying the top 50 economies with the help of those indicators. We report the results of this exercise for the decades of the eighties and the nineties and examine their similarities and implications. We also discuss the possibility of predicting a set of top performers for the next decade.

INDICATORS OF PERFORMANCE OVER A DECADE


Growth of Imports (Gimpgs)
Since business interests are linked to the market, we look for performance indicators primarily connected with the markets. We, therefore, consider the international trade of a country to get our first indicator of performance. Imports of goods and services into an economy provide the rest of the world with the market opportunities to do business with the country. While the size of imports determines the importance of the economy, its rate of growth over a fairly long period, say a decade, would reflect the performance of the economy. It is not the size but the rate of expansion that provides the business opportunity. We expect a performing economy to have a consistently high growth of imports. If a performing economy shows a low growth of imports, it implies the presence of either domestic distortions or restrictive trade policies as in the case of Japan (Teramishi, 1992), Malta (Bonnici, 2002), Cyprus, Panama, etc. Both represent negative aspects of the economic performance of a country. On the other hand, if the growth of imports is high on a sustained basis in a country not performing well on other fronts, e.g., Brazil, Ghana, Mexico, Turkey, etc., it may reflect a long-term strategy for growth based on the correction of domestic distortion. A period as long as a decade would hopefully ensure that short-term and temporary factors do not unduly influence the results.

Growth of Foreign Direct Investment (Gfdi)


The second indicator could be the ability of the economy
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to attract foreign capital. Trade liberalization is certainly an important dimension of globalization but factors flowing across the border are also an integral part of the concept as accepted by the World Trade Organization and its agreements on investment and services (Goyal and Mohd, 2001). Since capital is fungible and relatively more mobile across nations, the net inflows of the foreign direct investment (FDI) during a year would again reflect the level of development of an economy. Growth in these flows over a decade would reveal changing perceptions of the global community and fundamental changes taking place in the structure and policies in the economy. Very low growth of FDI over a decade would indicate either relative stagnation and saturation of the growth prospects of the economy in the foreigners perception or presence of policies discouraging FDI. These are both negative aspects of economic performance. High growth of FDI like high growth of imports gives extra weight to the globally emerging markets.

mance of an economy. All the studies cited earlier have considered an indicator measuring economic expansion. We propose to consider GDP and not GNP because we would like to emphasize the productive capacity and resource efficiency in a geographical region rather than income accruing to the resources of a country. Secondly, the economic performance should be measured over time after adjusting for population growth.

Inflation (INF)
Another criterion for measuring the economic performance of the economies is price stability. Low inflation is one of the long-term policy objectives in almost all the countries. The lower the consumer price inflation, the better the investment and business climate in a country (Barro, 1997). A low average rate of inflation in a country implies that the relative prices of commodities tend to remain more or less stable. The relative demand for commodities would then be determined by the growth of income and change in tastes and preferences. Since both are reasonably predictable, business uncertainties and risks are lower. High inflation, on the contrary, leads to greater business uncertainties and risks. Inflation is a distinct aspect of the economic performance of a country and should be included as a performance criterion to give due consideration to the business climate and sentiments.

Growth of Gross Capital Formation (Ggcf)


The third criterion identifying the top performers is to consider the total capital investment or capital formation undertaken in the economy. The gross capital formation (GCF) during a year reflects the level of development of an economy. The growth of real GCF over a decade reveals the rate of acceleration in the productive capacity and thereby indicates the maximum growth the economy is capable of achieving. It is possible to argue that an economy can grow over time mainly through sustained technical progress and may not, therefore, require very high growth of GCF 1. However, most of the technical advances over a long time require fresh doses of capital (Nelson, 1964). A high rate of technical progress on a sustained basis would lead to a high rate of obsolescence and hence a high rate of depreciation. The gross investment would, therefore, show high growth. Thus, a performing economy is not likely to show low growth of GCF.

Growth of Forex Reserves (Gfr)


Yet another performance indicator is the net result of the balance of payments of the country. The net effect of the current account and capital account is on the total reserves of foreign currency in the economy. There are several countries that have been aggressively pursuing the policy of accumulating foreign exchange reserves in their central monetary authority so that the currency crisis or any such threat to the stability of their financial system can be effectively tackled if the need arises (Jalan, 2002; Kapur and Patel, 2003). In the light of the experience of the currency and financial crises during the last decade, the behaviour of the total reserves of foreign currencies in the country assumes a special significance as an indicator of the performance of the economy. It basically acts like a signal of the market power of the countrys central monetary authority in the forex market. Again, it is not the level but the growth of reserves that reflects the economic performance of the country over a decade.

Growth of Per Capita Gross Domestic Product (Ggdppc)


The next criterion could be the size of the market as measured by the per capita purchasing power generated in the system. Per capita real gross domestic product (GDP pc) is usually taken to reflect the level of development of a country. Its rate of growth sustained over a decade would be an undisputed indicator of economic perforVIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

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Human Development Index (HDI)


Finally, we consider the performance of an economy in terms of its past developmental efforts, specific points of advantage gained through deliberate development strategy or available through natural endowments, gifts or coincidences. All these factors get converted into the development of human resources in the country. HDI is based on the achievements of the economy on education, health, and income. It is a reasonably comprehensive measure of the level of human development in a country in relation to other countries (UNDP, 2002). The level of HDI once attained is likely to sustain itself over time. Rapid improvements are possible but drastic reductions are unlikely. Since the level of HDI generally signals the quality of human resources in a country, it may also reflect the ability to generate innovations, absorb technical progress, and adapt to changing business environments. All these factors are likely to determine the potential of the country for economic growth and advancement. We, therefore, take the level of HDI prevailing in a country at the mid-point of the decade as an important indicator of economic performance over the decade. Based on various aspects of the economic performance of a country relevant from the business angle, we have identified seven different indicators. Except for HDI, all the other indicators are annual rates of growth over a decade2. For consumer price inflation, an arithmetic average of the annual rate is taken over the relevant decade. For the remaining five indicators, semilogarithmic time trend rate is estimated for the two decades. All these seven indicators are calculated for all the countries3 for the decades 1981-90 and 1991-2000. How distinct are these seven indicators chosen to reflect the economic performance of countries? They appear to be quite distinct and represent different dimensions of the economic performance of countries during the eighties and the nineties. Tables 1 and 2 report the correlation matrices among these seven indicators for the eighties and the nineties respectively4. It is evident that none of the correlations is very high and substantial where r-squared exceeds 0.5. In fact, for most of the pairs, r-squared is less than 0.1, and for several pairs, r-squared is less than 0.01. Thus, the chosen seven indicators have captured quite well the distinct dimensions of the economic performance of the countries during the last two decades. Moreover, the two tables also show a general weakening of the correlations during the nineties when

compared with the eighties for all indicators except inflation. This is an interesting finding because it means that the economic performance of countries, which was already specialized on a few dimensions, is becoming more specialized and focused during the nineties when compared to the eighties. It suggests that the development goals, targets, and strategies are becoming sharper and narrowly focused over time. This has an important implication for the identification of the top performers because the standard methods of combining different indicators attaching some uniform weights become invalid and even conceptually challengeable. Thus, different popular methods like using equal weights to ranking of individual indicators or statistically derived weights through the principal component method (Desilva, Thattil and Gamini, 2000; Biswas and Caliendo, 2002; Gveli, 2000) or equal weights after converting the indicators into indices as in PQLI (Morris, 1979) and HDI (UNDP, 2002)
Table 1: Correlation Matrix among the Seven Indicators 1980s
Ggcf Ggdppc Ggcf Gimpgs Gfdi Gfr INF Gimpgs Gfdi Gfr INF 0.29126 (131) 0.13590 (117) 0.10950 (123) 0.00308 (99) 0.10554 (128) HDI 0.34090 (123) 0.04504 (111) 0.31355 (109) 0.35334 (87) 0.12514 (109) 0.01486 (108)

0.68084 0.55525 0.16520 0.40805 (132) (130) (103) (134) 0.62415 0.20253 0.50281 (127) (95) (119) 0.12082 0.42460 (97) (123) 0.16193 (105)

Note: Numbers in parentheses are the numbers of observations (countries).

Table 2: Correlation Matrix among the Seven Indicators 1990s


Ggcf Ggdppc Ggcf Gimpgs Gfdi Gfr INF Gimpgs Gfdi Gfr INF 0.34676 (159) 0.09696 (148) 0.28562 (151) 0.02729 (148) 0.01629 (160) HDI 0.15655 (139) 0.02863 (130) 0.15748 (131) 0.02901 (132) 0.08516 (133) 0.06286 (133)

0.53666 0.57737 0.08711 0.02706 (55) (58) (55) (164) 0.61736 0.14944 0.04251 (153) (141) (151) 0.08429 0.01682 (144) (154) 0.13574 (151)

Note: Numbers in parentheses are the numbers of observations (countries).


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are all meaningless in the light of our findings. Countries having different perceptions attach different importance to various dimensions of economic performance. Any uniform scale of weights cannot do justice to all. We, therefore, need a different approach.

IDENTIFYING THE TOP PERFORMERS


If the economic performance of countries is considered along one dimension and with one indicator, the rankings are generally non-controversial. However, when there are several dimensions and multiple indicators, overall rankings would be problematic. But, in order to identify a certain number of top performers, we may not need precise overall rankings of countries. This is because if our objective is to identify the 50 top overall performers, we can first identify the top 50 countries in each of the seven indicators by awarding one point each. We would then emerge with seven different sets of 50 countries each. The countries that are common to all the seven sets are necessarily among the top 50 overall performers. This would be a sub-set comprising of only a small number of countries if at all. During the nineties, for example, there was no such country and during the eighties, there were only three such countries. We may, then, consider countries present in six out of the seven sets. These countries are among the top 50 performers in six out of the seven dimensions. Again the number of such countries is likely to be small, e.g., only eight such countries in the eighties and two in the nineties. We can, then, consider the countries appearing in any five sets, four sets and so on. Table 3 provides the distribution of 187 countries considered in this study according to their score that shows the number of sets they appear in during the eighties and the nineties. Some interesting patterns of economic performance of countries emerge from Table 3. The number of allround performers scoring at least five points has sharply reduced to 12 during the nineties compared to 25 during the eighties. But, at the same time, the number of countries with a score of two or more has increased from 82
Table 3: Distribution of Countries According to their Scores during the Eighties and the Nineties
Score* No. of countries during the eighties No. of countries during the nineties 7 6 5 4 3 2 1 0

in the eighties to 96 in the nineties. An average country during the eighties had a score of one or none whereas, during the nineties, it had two or more. However, among the top performers, the shift appears to be in the reverse direction an average top performer having a score of four or more during the eighties to only three during the nineties. We may return to our question of how to select the top 50 overall performers if the distribution of the countries is as given in Table 3. We can readily see that there are 39 countries in the eighties and 30 countries in the nineties with a score of four or more but there are 56 countries in the eighties and 66 countries in the nineties with a score of three or more. Therefore, we have to select 11 out of 17 countries in the eighties and 20 out of 36 countries in the nineties with a score of three to complete the list of 50 top overall performers in each decade. In order to select those countries, the indicators are converted into the corresponding indices with the best value in the indicator during a decade as 100 and the worst value as zero from among all the 187 countries. This exercise is done only for those indicators where the country ranks in the top 50. Then, the index values for all the three indicators in each of the 17 countries in the eighties and 36 countries in the nineties are added to arrive at the rankings of those countries so as to select 11 countries in the eighties and 20 countries in the nineties 5. The top 50 overall performers so identified are presented in Tables 4 and 5 respectively along with their rankings in the seven indicators and the total score. The advantage of this method over the other methods is that non-availability of data on one, two or three indicators for a country does not disqualify the country from being effectively considered. Actually, Tables 4 and 5 clearly bring out that there are several countries among the top 50 performing economies in the world where the data on some of the seven indicators are not available or reported. Methodological requirements of comprehensive data availability should not come in the way of recognizing their superior performance on other fronts. The only assumption we have to make about the nonavailability of an indicator value in a country is that the country does not rank among the top 50 in that particular indicator during the decade. It is certainly not as restrictive an assumption or a procedure as dropping the country altogether from the analysis, a common practice in other similar exercises.

3 8 14 14 17 26 52 53 0 2 10 18 36 30 48 43

*If a country appears in one set during the decade, it gets a score of one. The score of five, for instance, means that the country is in top 50 countries in five out of seven indicators during the decade.
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Table 4: Top 50 Countries on Overall Economic Performance during the Eighties


No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Country Japan Korea, Rep. United Kingdom Belize Canada Denmark Finland Spain St. Kitts and Nevis St. Vincent and the Grenadines Thailand Antigua and Barbuda Belgium China Dominica Luxembourg Malta Mauritius Portugal Singapore St. Lucia Sweden Switzerland Turkey United States Australia Botswana Chad Costa Rica Cyprus France Grenada Hong Kong, China India Italy Macao, China Mali Netherlands Seychelles Austria Burkina Faso Chile Dominican Republic Germany Greece Ireland New Zealand Norway Panama Swaziland Ggdppc Rank 27 3 36 47 60 66 41 40 2 14 9 5 59 1 16 22 12 33 17 8 55 75 38 44 63 6 31 95 13 65 10 11 29 49 25 137 67 21 61 91 35 90 53 97 37 96 50 152 24 Ggcf Rank 29 4 23 6 34 35 55 24 1 22 8 10 42 5 26 17 12 9 51 67 16 31 48 27 54 59 3 21 56 53 38 50 25 63 18 46 52 7 60 14 11 33 64 85 89 77 82 129 69 Gimpgs Rank 25 6 20 51 19 48 39 12 29 46 5 21 47 15 36 30 16 3 17 11 41 38 10 18 34 7 8 14 54 45 71 2 31 27 23 24 49 1 42 72 61 4 58 43 35 56 74 111 50 Gfdi Rank 21 17 11 14 13 4 7 29 12 20 28 37 27 5 71 8 19 49 77 23 37 25 44 39 68 106 51 79 32 24 35 67 50 33 56 52 93 58 47 34 62 94 30 36 3 16 Gfr Rank 33 20 39 10 25 31 23 22 26 30 14 35 53 49 17 90 1 6 44 19 37 68 29 51 36 4 11 40 46 82 89 120 45 3 18 73 99 74 24 69 123 81 34 61 21 55 100 57 INF Rank 7 47 49 27 43 42 50 75 20 32 30 48 18 87 34 31 9 69 102 8 28 61 18 121 35 67 81 12 116 36 46 38 66 72 77 76 11 15 22 3 108 114 13 106 64 82 63 5 96 HDI Rank 4 39 18 48 1 8 12 20 Score@ 7 7 7 6 6 6 6 6 6 6 6 5 5 5 5 5 5 5 5 5 5 5 5 5 5 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 3 3 3

61 10 79 17 33 59 34 36 8 5 67 2 12 73 117 41 26 10 25 97 19 118 6 15 121 42 65 14 22 21 16 6 44 85

@The number of indicators in which the country is in top 50. Sources: (1) World Development Indicators 2002 (on CD ROM). (2) International Financial Statistics 2003 (online: http://ifs.apdi.net). (3) Human Development Report 2002 (online: http://hdr.undp.org).

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IDENTIFICATION OF TOP PERFORMING ECONOMIES

Table 5: Top 50 Countries on Overall Economic Performance during the Nineties


No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Country Ireland Poland Australia Croatia India Korea, Rep. Lithuania Slovak Republic Trinidad and Tobago Uganda United States Vietnam Bangladesh Canada Chile Denmark Finland Hungary Israel Japan Luxembourg Maldives Malta New Zealand Nicaragua Romania Singapore Slovenia Uruguay Yemen, Rep. Armenia Austria Bahamas, The Belgium Bosnia and Herzegovina Cyprus Czech Republic Equatorial Guinea Georgia Germany Malaysia Netherlands Norway Panama Seychelles Spain Sudan Sweden Switzerland United Kingdom Ggdppc Rank 4 8 38 26 18 17 159 32 49 24 53 5 36 66 9 67 31 44 68 104 20 7 25 73 103 120 13 27 56 42 127 84 115 78 2 33 86 1 178 100 22 62 37 80 108 52 6 72 117 54 88 110 65 60 91 57 93 3 140 44 2 1 113 90 89 54 20 36 86 95 3 135 7 1 17 85 39 80 76 100 8 33 132 54 74 6 12 151 47 59 53 82 126 1 36 44 50 119 66 100 163 151 96 161 112 102 140 157 13 159 137 144 140 19 44 26 24 5 20 49 148 23 11 35 20 112 4 11 10 16 53 8 4 50 47 79 25 31 98 Ggcf Rank 14 8 40 29 24 119 22 18 6 21 26 5 23 55 30 47 77 12 94 124 45 39 127 32 9 143 38 10 71 19 42 103 53 41 46 159 72 8 49 5 44 Gimpgs Rank 6 4 37 90 27 30 48 13 28 5 26 2 22 47 23 73 51 9 44 94 83 32 119 49 19 38 118 42 138 23 15 117 116 14 Gfdi Rank 22 26 124 16 27 34 9 61 89 7 35 86 4 40 57 39 19 134 48 38 Gfr Rank 131 17 117 9 23 40 10 26 36 15 145 29 150 84 92 87 124 80 39 46 155 24 135 125 35 48 89 11 43 22 5 116 83 148 INF Rank 30 129 18 154 87 62 145 90 66 105 32 45 63 13 94 15 10 117 96 2 16 78 34 8 156 151 7 107 139 132 160 21 28 11 HDI Rank 21 39 2 41 102 28 43 33 42 125 4 88 116 1 37 16 15 38 22 7 13 72 30 18 95 48 26 28 35 119 70 14 34 2 Score@ 6 6 5 5 5 5 5 5 5 5 5 5 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

@The number of indicators in which the country is in top 50. Sources: As cited in Table 4.
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Top 50 Performers of the Eighties and the Nineties


A comparison of the top 50 performers during the eighties and the nineties is interesting. Twenty-six countries are common to both the lists. Twenty-four countries out of the top 50 during the eighties dropped out of the list to make room for 24 new entrants during the nineties. Out of the 24 emerging top performers during the nineties, as many as 13 countries had serious problems about data availability during the eighties. It is difficult to say whether they would have made it into the top 50 performers in the eighties if satisfactory data had been available on all indicators during the eighties. Ignoring the problem of data availability, however, it is important to compare the performance of all these 74 countries over two decades. Table 6 provides comparison in terms of the seven indicators between the two decades for each of the 26 countries common to both the lists. Table 6 reveals that in only five countries, viz., Australia, Chile, India, Ireland, and New Zealand, has the country score increased during the nineties over the eighties. In another five countries, it has remained the same and in the remaining 16 countries, it has fallen. Thus, although the 26 countries appear to have maintained their status as belonging to the top 50 performers in the eighties and the nineties, the relative performance in 16 of them has actually deteriorated over the years. A closer look at Table 6 reveals that, while the absolute performance in terms of most of the seven indicators has deteriorated for several of these 16 countries, it has actually improved for Denmark, Finland, and the Netherlands in spite of their relative performance going down. The trend rate of growth of per capita real GDP has increased from the eighties to the nineties only in nine out of these 26 common top performers during the two decades. Another distinctive feature of the 26 common countries emerging clearly from Table 6 is that except India, the others have very high performance on the inflation and/or HDI front. Among this group of consistent performers, India is the only country with poor performance on both these counts. Except India, all countries show improvement in terms of inflation, while on the HDI front, all countries show clear improvement. It appears that high level of human development with good control over consumer inflation is almost a pre-condition for consistently high overall economic performance6. None of the other five indicators generates such a close association.

Those 24 countries that dropped out of the list of 50 top performers during the nineties from the list of the eighties indicate an all-round deteriorated performance except HDI (Table 7). In HDI, there is a clear improvement in all the countries. Table 7 shows that in 18 out of 24 countries, the trend rate of growth in per capita real GDP has fallen sharply during the nineties compared to the eighties. The presence of China among these 24 countries is somewhat surprising because it has experienced absolute improvement in all but two indicators and yet it has lost its place relative to the others. However, drawing from our earlier discussion, we can argue that China is not performing very well relatively on both HDI and inflation and hence may not be able to maintain consistently high overall economic performance. In fact, out of the performers of the eighties, there are only two countries, viz., France and Belize, that have high performance on HDI and inflation and yet failed to maintain consistently high relative overall economic performance during the nineties. The group of emerging performers of the nineties is presented in Table 8. Non-availability of data for the eighties in the case of 11 out of the 24 countries makes it difficult to draw meaningful conclusions. Some of those countries could have been among the top 50 countries if satisfactory data had been available for the eighties. From the available data, however, we can say that several of these new entrants to this club of 50 are relatively shaky in the sense that they may not be able to hold on to their membership in the coming decade. This is because their performance on HDI and inflation front is relatively not high and far from what is required. Thus, Armenia, Bangladesh, Bosnia, Equatorial Guinea, Georgia, Maldives, Nicaragua, Sudan, Uganda, and Yemen will have to be extra cautious and make extra efforts to maintain their relative performance over the next decade. The key to success in these economies appears to be control of inflation because they are lagging far behind in terms of HDI, the other critical indicator. Malaysia, the Bahamas, and Trinidad and Tobago, on the other hand, are very likely to maintain their relative performance during the next decade. All other countries on the list have to tackle the problem of high inflation in their economy to achieve stability and consistency of performance. It is indeed surprising that all the emerging performers of the nineties except the Bahamas, Malaysia,
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Table 6: Comparison of Performance of 26 Common Countries during the Eighties and the Nineties
No. Nations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Australia Austria Belgium Canada Chile Cyprus Denmark Finland Germany India Ireland Japan Korea,Rep. Luxembourg Malta Netherlands New Zealand Norway Panama Seychelles Singapore Spain Sweden Switzerland United Kingdom United States 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s GDP pc 0.0216 0.0300 0.0221 0.0172 0.0225 0.0187 0.0222 0.0223 0.0321 0.0477 0.0529 0.0316 0.0204 0.0221 0.0295 0.0324 0.0237 0.0118 0.0354 0.0431 0.0315 0.0684 0.0360 0.0101 0.0761 0.0433 0.0481 0.0396 0.0397 0.0381 0.0203 0.0231 0.0067 0.0194 0.0244 0.0302 -0.0215 0.0186 0.0410 0.0085 0.0471 0.0445 0.0298 0.0251 0.0233 0.0195 0.0162 0.0043 0.0318 0.0241 0.0275 0.0243 GCF 0.0346 0.0701 0.0331 0.0207 0.0495 0.0308 0.0560 0.0566 0.0907 0.0803 0.0386 -0.0321 0.0552 0.0615 0.0387 0.0414 0.0284 0.0132 0.0653 0.0831 -0.0063 0.1079 0.0601 -0.0007 0.1200 0.0041 0.0733 0.0631 0.0870 -0.0032 0.0412 0.0324 0.0148 0.0774 0.0056 0.0569 -0.0989 0.0963 0.0980 0.0719 0.0237 0.0237 0.0674 0.0336 0.0589 0.0324 0.0447 0.0154 0.0678 0.0501 0.0399 0.0818 0.0949 0.0894 0.0512 0.0678 0.0535 0.0467 0.0681 0.0705 0.0790 0.0974 Imp GS 0.0576 0.0842 0.0506 0.0584 0.0482 0.0452 0.0785 0.0778 0.0357 0.0999 0.0442 0.0019 0.0479 0.0579 0.0519 0.0737 0.0387 0.0519 0.0599 0.0959 0.0574 0.1358 0.0654 0.0453 0.1126 0.0904 0.0622 0.0523 0.0816 0.0200 0.0478 0.0531 0.0427 0.0749 0.0268 0.0555 -0.0230 0.0401 0.1480 0.1239 0.0580 0.2839 0.2324 0.2679 0.2378 0.0099 0.2068 0.2343 0.5903 0.2442 0.1144 0.1780 0.1437 0.0824 0.2457 0.0645 0.2809 0.2996 0.2032 0.2734 0.3807 0.2550 0.1786 0.3080 FDI 0.1965 0.0675 0.1265 0.2592 0.2032 0.2734 0.3591 0.2923 0.0942 0.2398 0.0207 0.0333 0.5453 0.2942 0.4559 0.3746 0.2234 0.4441 0.2109 0.3470 -0.1125 0.3568 0.2997 0.2978 0.3467 0.3124 TR 0.1312 0.0515 0.0395 0.0532 0.0755 -0.0069 0.1681 0.1043 0.0447 0.0844 0.0932 0.0501 0.1407 0.1013 0.1784 0.0414 0.0245 -0.0153 -0.0821 0.2310 0.0553 0.0351 0.1382 0.1852 0.1871 0.1990 -0.0207 0.0044 0.0275 0.0397 -0.0757 0.1869 0.0405 0.0727 0.0547 -0.0159 0.0707 -0.0141 0.0108 0.1002 0.0981 0.1844 -0.0265 0.1287 -0.0467 0.0456 0.0221 0.1227 -0.0008 0.0797 -0.0009 INF 8.1277 2.2212 3.5296 2.3185 3.4088 1.9597 5.9693 1.9968 20.4466 9.5399 4.8960 3.8301 5.9457 2.1377 6.7690 1.8628 2.6323 2.2454 8.8793 9.0508 7.8471 2.5392 2.0582 0.8345 6.3942 5.0970 4.4578 2.1842 2.2998 2.8937 2.4606 2.4517 10.8799 1.7520 7.6645 2.3404 1.8440 1.1682 3.0784 2.2870 2.2843 1.7296 9.3628 3.8929 7.6141 2.3303 3.4088 1.9597 6.5854 3.0520 4.7401 2.8014 0.782 0.857 0.855 0.895 0.883 0.925 0.892 0.914 0.858 0.916 0.898 0.925 HDI 0.873 0.927 0.867 0.909 0.875 0.927 0.906 0.932 0.754 0.811 0.821 0.866 0.883 0.907 0.873 0.908 0.868 0.907 0.473 0.545 0.846 0.894 0.893 0.923 0.774 0.852 0.860 0.912 0.793 0.850 0.888 0.922 0.866 0.902 0.888 0.925 0.745 0.770 Score 4 5 3 3 5 3 6 4 3 4 4 3 6 4 6 4 3 3 4 5 3 6 7 4 7 5 5 4 5 4 4 3 3 4 3 3 3 3 4 3 5 4 6 3 5 3 5 3 7 3 5 5

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Table 7: Comparison of Performance of 24 Countries Not Listed among Top Performers during the Nineties (Rate of Growth)
No. Nations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Antigua and Barbuda Belize Botswana Burkina Faso Chad China Costa Rica Dominica Dominican Rep. France Greece Grenada Hong Kong, China Italy Macao, China Mali Mauritius Portugal St. Kitts and Nevis St. Lucia St. Vincent and Gren. Swaziland Thailand Turkey 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 0.0092 0.0444 0.0205 0.0146 0.0064 0.0192 0.0571 0.0326 0.0549 0.0159 0.0257 0.0146 0.0372 -0.0030 -0.0132 0.0147 0.0535 0.0399 0.0337 0.0262 0.0765 0.0467 0.0596 0.0076 0.0523 0.0275 0.0385 0.0023 0.0594 0.0267 0.0300 0.0215 GDP pc 0.0657 0.0286 0.0263 0.0139 0.0637 0.0234 0.0092 0.0230 0.0341 -0.0089 0.0823 0.0856 0.0070 0.0298 0.1072 0.1067 0.0707 0.0468 0.0628 0.0162 0.0564 0.0639 0.0406 0.0191 0.0010 0.0373 0.0512 0.0533 0.0423 0.0454 0.0287 0.0181 0.0722 -0.0692 0.0453 -0.0045 0.0942 0.0392 0.0414 0.0549 0.1377 0.0460 0.0742 0.0246 0.0688 0.0511 0.0227 0.0209 0.0979 -0.0627 0.0617 0.0426 GCF 0.0925 0.0207 0.0988 0.0304 0.1293 -0.0046 0.0800 0.0749 Imp GS 0.0680 0.0300 0.0453 0.0270 0.1100 0.0147 0.0280 0.0182 0.1087 -0.0368 0.0928 0.0530 0.0928 0.0865 0.0554 0.0166 0.1230 0.0677 0.0497 0.0563 0.0504 0.0638 0.0289 0.0652 0.1340 0.0709 0.0645 0.0497 0.0668 0.0094 0.0668 0.0287 0.1310 0.0522 0.0800 0.0727 0.0626 0.0457 0.0972 0.0018 0.0490 0.0301 0.0469 0.0268 0.1222 0.0309 0.0984 0.1124 0.1420 0.1758 0.4555 0.2164 0.3240 0.0649 0.3604 0.1800 0.0272 0.0519 0.3102 0.1640 0.3516 -0.2400 0.2462 0.1360 0.2769 0.0230 0.0660 0.1239 0.3583 0.0739 0.0616 -0.1791 -0.0983 -0.0250 -0.2529 0.1503 0.2599 0.1911 0.1266 0.1261 0.5195 -0.0540 0.1580 0.2316 0.2343 0.1064 0.0876 -0.0182 0.2772 0.1113 FDI TR 0.1332 0.0704 0.2356 0.0810 0.2925 0.0728 0.1703 -0.0012 0.2346 0.1104 0.0829 0.2411 0.1180 0.0478 0.1911 0.0701 -0.0892 0.0384 0.0242 0.0511 0.1378 0.1350 0.0072 0.1534 0.1552 0.0950 -0.0188 0.3159 0.1461 0.1907 0.0403 0.3921 -0.0089 0.2584 -0.0663 0.1600 0.1038 0.1885 0.0500 0.1445 0.0712 0.0693 0.0616 0.2044 0.0636 0.1467 0.1928 INF 6.4708 2.5180 4.1761 1.7580 10.5841 10.5134 1.3416 4.5795 2.5345 7.0622 11.8369 7.4735 27.1867 16.0461 4.6900 2.1072 24.2451 11.0107 6.3683 1.7242 19.0408 9.3896 5.2858 2.1959 8.0906 5.3448 9.7217 3.7292 9.6485 3.3975 4.0512 8.3024 6.6819 17.3141 4.9396 3.4399 3.5251 4.2976 3.2908 4.5265 2.4217 14.5265 9.4532 4.4398 4.5367 46.2873 76.7014 0.569 0.620 0.676 0.749 0.654 0.717 0.292 0.346 0.686 0.746 0.787 0.855 0.823 0.877 0.856 0.897 0.667 0.698 0.875 0.914 0.845 0.868 0.718 0.772 0.613 0.620 0.282 0.300 0.298 0.335 0.591 0.681 0.770 0.805 HDI Score 5 2 6 2 4 0 3 1 4 0 5 3 4 3 5 1 3 2 4 2 3 1 4 2 4 1 4 2 4 1 4 0 5 1 5 2 6 2 5 1 6 2 3 0 6 1 5 2

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Table 8: Comparison of Performance of 24 Countries Emerging only in the Nineties as Top Performers (Rate of Growth)
No. Nations 1 Armenia 2 Bahamas, The 3 Bangladesh 4 Bosnia and Herzegovina 5 Croatia 6 Czech Republic 7 Equatorial Guinea 8 Georgia 9 Hungary 10 Israel 11 Lithuania 12 Malaysia 13 Maldives 14 Nicaragua 15 Poland 16 Romania 17 Slovak Republic 18 Slovenia 19 Sudan 20 Trinidad and Tobago 21 Uganda 22 Uruguay 23 Vietnam 24 Yemen, Rep. 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s 80s 90s GDP pc 0.0018 0.0244 0.0055 0.0145 0.0304 0.1840 0.0376 0.0164 -0.0087 0.1948 -0.0090 -0.0966 0.0158 0.0284 0.0174 0.0219 0.0629 -0.0153 0.0229 0.0391 0.0706 0.0568 -0.0515 0.0106 -0.0736 0.0506 -0.0027 0.0034 0.0154 0.0317 0.0363 -0.0245 0.0571 -0.0256 0.0264 0.0037 0.0387 0.0054 0.0238 0.0219 0.0590 0.0287 GCF 0.0656 Imp GS -0.1179 FDI 0.5094 0.6045 -0.2326 0.6091 TR 0.6214 0.0153 0.1086 0.1274 -0.0122 INF 739.9026 5.5348 2.5162 7.3649 5.2992 HDI 0.715 0.817 0.816 0.386 0.445 Score 0 3 2 3 2 4 0 3 0 5 0 3 1 3 0 3 1 4 1 4 1 5 2 3 2 4 0 4 1 6 2 4 1 5 0 4 0 3 2 5 1 5 1 4 0 5 0 4

0.0192 0.0933 0.3047 0.0805 0.0638 0.3841 0.4818 -0.0059 0.1133 0.0223 0.0307 0.0946 0.0235 0.0321 0.0704 -0.0745 0.1192 0.1252 0.0712 -0.0388 0.0028 0.0999 0.1146

0.0646 0.1034 0.1960 0.0473 0.1331 0.0580 0.4202 0.1059 0.0192 0.1167 0.0405 0.0795 0.0752 0.0679 0.0831 0.0895 -0.0270 0.1053 0.1450 -0.0052 0.0835 0.0360 0.1113 0.0734

0.3964 0.2409 0.1978 0.5642 0.0234 0.1225 0.2624 0.4751 0.0102 -0.1203 0.0063 0.0799 0.3554 0.0600 0.3483 0.4008 0.2333 0.0888 1.5106 0.4437 0.1602 0.5299 0.1175 0.4198 0.1679 -0.5380

0.3176 0.1479 -0.0421 0.0727 -0.1046 -0.0966 0.1141 0.0277 0.2007 0.3169 0.0738 0.0793 0.2372 0.2296 0.2097 0.2022 0.2749 0.0479 0.1840 0.2231 0.3141 -0.0727 0.3072 -0.3699 0.2096 -0.1121 0.2992 0.0639 0.1914 0.2170 0.2385

453.8095 238.2516 7.5935

0.789 0.843 0.533 0.582

39.3309 10.9270 20.2521 118.2897 9.6304 70.3021 3.2481 3.5538 7.4807 2438.8706 339.1007 107.6725 28.4287 22.2534 121.0157 9.2172 13.6422 40.2020 82.1034 11.0800 5.4693 103.4137 12.8222 62.4875 38.0910 3.7115 30.6111

0.805 0.809 0.836 0.877 0.781 0.693 0.760 0.629 0.707 0.584 0.615 0.808 0.794 0.772 0.813 0.817 0.852 0.395 0.462 0.774 0.787 0.386 0.404 0.781 0.815 0.583 0.649 0.439

-0.1122 0.1368 0.0770 0.0958 -0.0495 0.0450 0.1737 0.0999

0.0217 0.0952 0.0430 0.1403 0.0131 0.0820 0.2688 0.0783

and Vietnam have experienced relatively very high average inflation rate during the nineties. Thus, high inflation during a decade does not deter the solid real economic performance on the other dimensions during the same decade7, but may create problems of maintaining the consistency of relative performance over time, if not checked.
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PREDICTING FUTURE PERFORMANCE


Finally, we attempt to predict the economic performance of countries in the next decade. As a first step, we find the correlation for each indicator value during the eighties and the nineties. All correlation coefficients are very low except for HDI where it turns out to be +0.9853.*
* This is not surprising since HDI is more of a stock variable.

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For the rest, the r-squared are less than 0.09. Thus, except HDI, the future values of the other six indicators are not highly correlated with their current values when performance over a decade is considered on a given dimension. As a second step, then, we take the past performance on all the seven dimensions to check whether the future performance on seven individual dimensions can be explained. We, therefore, run regressions with each indicator in the nineties as the dependent variable and all the seven indicators in the eighties as the independent variables 8. Here our intention is to examine the explanatory power of the performance indicator we are using rather than statistically mining explanatory variables. Four of our seven indicators are not explained satisfactorily by the past performance measures. Only three out of the seven regressions turn out to be statistically significant at 3 per cent level of significance in terms of the goodness of fit test. On these three regressions, we applied the step-wise regression procedures to arrive at the most significant and acceptable fit. The results are shown in Table 9. These findings are surprising for the following reasons: Contrary to what Barro (1997) found, inflation in equation (1) has a positive and significant coefficient implying a direct relationship with growth of income. Thus, our finding suggests the existence of a trade-off between higher inflation and higher growth. A negative and significant coefficient of Ggcf in equation (1) seems to contradict the finding of Blomstrom, Lipsey and Zyan (1996) that investment does not cause future growth. Higher investment is likely

to result in higher incremental capital-output ratio by depressing the rate of return ultimately leading to a fall in the future growth of income. Thus, growth of investment may cause output growth, albeit negatively. However, in the cross-country regression framework, we can argue that the initial level of the investment rate in a country would play an important role in this relationship. Even when the incremental capital-output ratio remains constant in the face of rapid growth of investment, if the initial investment rate is low, future growth will be low; and with slow growth of investment, the growth of income will be high if the initial investment rate is high.* Under such conditions, our finding implies that investment rates across countries show a tendency of convergence. A negative and significant coefficient of Gfr in equation (2) contradicts the arguments of Kapur and Patel (2003) that the foreign investors may see high accumulation of forex reserves by a country as reducing the risk of financial crises. On the contrary, the foreign investors may perceive very rapid growth of forex reserves in a country as a symptom and a potential threat of the government intervention to the market forces. Once the forex reserves reach a reasonably safe level of six to seven months of imports, any excess accumulation can raise such suspicion. Even if direct costs of forex reserves are low for a country, their indirect costs in terms of reducing manoeuverability and flexibility of monetary policy instruments are very high. In view of the importance of inflation and HDI

*We are grateful to Professor V N Kothari for pointing this out.

Table 9: Results of Regression Equations


1. (Ggdppc)1990s= 0.0079 t-value P-Value + 0.5157(Ggdppc)1980s -- 0.1231(Ggcf)1980s + 0.1321 (Gimpgs) (2.55) (0.013)
1980s

+ 1.87(10)-5(Inf)1980s (2.35) (0.021)

(3.37) (4.58) (-2.45) (0.001) (0.000) - (0.017) R2 = 0.386 F(4,75) = 11.80 P-value = 0.000 = --0.0505 -- 0.1733 (Gfdi)1980s

2.

(Gfdi)1990s t-value P-Value

-- 0.3177 (Gfr)1980s + 0.3851(HDI)1980 (2.82) (0.006)

(-0.57) (-1.49) (-1.78) (0.569) - (0.140) (0.079) R2 = 0.117 F(3,75) = 3.31 P-value = 0.024

3.

(HDI)1995 t-value P-Value

= 0.0337 + 0.5641(Ggdppc)1980s + 1.86(10)-5(Inf)1980s + 0.9961(HDI) (3.19) (4.72) (1.56) (0.002) (0.000) (0.124) R2 = 0.983 F(3,76) = 1503.96 P-value = 0.000 (62.84) (0.000)

1985

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emerging from the discussion in the previous section, the finding in equation (3) suggests some distant trade-off considering the magnitude and significance of its coefficient. The rest of the findings of our regressions are in line with the existing literature. Thus, a positive and significant coefficient of Ggdppc in equation (3) and absence of HDI in equation (1) supports the hypothesis that growth causes human capital and not vice-versa 9 (Bils and Klenow, 1996). Similarly, HDI is very important for growth of FDI (equation 2). Based on these three regressions, it is possible to generate the expected performance of different countries on the three indicators. On the assumption that the extent of relationship given by the estimated parameters in these regressions remain stable over time, we may plug in the values of the independent variables for the eighties to generate the prediction of the trend rates of growth of per capita real GDP and net inflow of FDI for the decade of 2001-2010 and the level of HDI in 2005 in different countries. Since the availability of data is better in the nineties, the number of countries covered in our prediction is 156. The results predict a more even growth of per capita real GDP during the first decade of the 21st century. They also predict strong growth in the developed countries and considerable swings in the growth of the net inflows of FDI. Based on our prediction of the three performance indicators, 15 economies are likely to be among the top performers of the next decade and would obviously invite the attention of the business community. These countries, in the alphabetical order, are: Argentina, Australia, Chile, Costa Rica, Cyprus, Czech Republic, Finland, Hungary, Ireland, Malaysia, Malta, Mexico, Norway, Portugal, and Spain. There may be genuine surprises in store as far as the other 35 top performers of the future are concerned. This is because four of our seven indicators of economic performance do not depend on the past performance. They are largely governed by the policies and changes in economic environment. Therefore, while we can identify some of the 50 top performers of the future, we may not be able to identify most of them.

ent national economies. The national governments would also compete with one another on the strength of their economic performance and policies. Several organizations make regular efforts to evaluate prospects and rank countries for different purposes but research identifying the top performing economies considering different dimensions of their long-term performance is conspicuous by its absence. We have made a modest effort to bridge this gap by considering seven distinct criteria or indicators for measuring long-term performance and prospects of different economies to identify the top 50 performers. Our selected indicators are very distinct from one another not only during the decade of the eighties but also during the nineties. It is found that economic performance of countries, which was already specialized on a few dimensions, is becoming more specialized and focused during the nineties when compared to the eighties. It seems that development goals, targets, and strategies of countries are becoming sharper and narrowly focused over time. This makes all currently popular methods using uniform scale of weights to rank different countries considering different dimensions of economic performance invalid and unacceptable. As an effective alternative, a simple and robust method to identify the top 50 performers is proposed and used in the present study. Since the method does not require completeness of the entire set for each country, it can cover larger number of countries then hitherto considered. The study has generated some interesting findings for national policy making and for businesses to assess macroeconomic prospects. There are 26 common countries in the two sets of top 50 performers during the eighties and the nineties. High performance on the consumer inflation and/or human development front has emerged practically as a pre-condition for consistently good overall performance. On this count, it appears that a large number of the new entrants to the club of 50 top performers during the nineties are not likely to hold on to their position in the coming decade. Such emerging economies may prove to be risky. The experience of the eighties and the nineties suggests that high inflation during a decade does not deter solid real economic performance on other dimensions during the same decade but may create problems of maintaining consistency of relative performance over time, if not checked. For predicting the overall performance of countries,

CONCLUSIONS AND IMPLICATIONS


In the era of globalization and liberalization, important investment and business decisions have to carefully consider long-term performance and prospects of differVIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

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past performance does not help in general. However, three indicators, viz., growth of per capita income, growth of FDI, and HDI can be predicted to some extent through past performance on various dimensions. Our findings suggest a trade-off between high inflation and future high growth and between high inflation and future high HDI. Similarly, long-term growth of investment may negatively affect the future long-term growth of output and longterm growth of forex reserves may negatively affect future long-term growth of FDI in a country. Moreover, our

findings also lend support to the hypothesis that growth causes human capital and not vice-versa. Based on prediction of partial performance, the study identifies 15 economies likely to be among the top 50 performers in the first decade of the 21st century. Since four of our seven performance indicators do not depend on past performance, the remaining 35 top performers may spring genuine surprises. Economic environment and policies during the decade would decide their relative performance.

ENDNOTES
1. Solow (1957) and Abramovitz (1956) challenged the existing belief that capital accumulation played a very important role in the growth of a country. Several empirical studies of the developed countries, e.g., Denison (1967) and Auer (1979) corroborated their finding that technical progress plays an overwhelming role in accounting for the growth of per capita income of a country. However, recent evidences from the study of developing countries, e.g., World Bank (1991) and Young (1995) show a significant share of capital accumulation in the growth of a country. The issue is far from settled empirically. Easterly and Levine (2001) consider it a stylized fact that total factor productivity growth (TFPG) or the residual is more important than capital accumulation. 2. The imports, GCF, and GDPpc are measured in constant 1995 US$ whereas the net inflow of FDI is in current US$. Time series data on these four variables along with the consumer price annual inflation rate are available from the World Development Indicators published by the World Bank (2002). Time series on forex reserves is available from IMF (2002) and the HDI is available from the UNDP (2002). 3. Out of 207 countries for which the World Development Indicators (2002) provide data, the non-availability of data does not permit us to construct even one indicator either for the eighties or the nineties in the case of 20 countries. We have, therefore, dropped those 20 countries from our analysis. For two countries (Afghanistan and Libya), none of the seven indicators could be constructed for the nineties whereas there were nine such countries for the 1980s. Moreover, countries are defined as distinct economies rather than political area. Thus, politically, Macao and Hong Kong fall under China, but here we have considered them as two economies or countries. The calculated indicators can be obtained from the authors. 4. The number of observations for each correlation in these tables differs because of the non-reporting of data on different indicators in the basic sources. 5. Equal weights to indexes at this stage is justified because all the countries in the group have appeared in the top 50 performers in any three out of the seven indicators. Our suggested method picks up only those indicators for a country where it has performed. Different countries may have performed on different indicators. The index only measures the strength of their relative performance compared to the best and the worst performers. Equal weights to add such relative performance in three different dimensions has nothing objectionable. 6. Using similar measurement and concept of consumer inflation with the cross-country data for the sixties, the seventies, and the eighties, Barro (1997) finds a significant negative relation between inflation and growth. He also finds the causation from higher long-term inflation to reduced growth (Chapter 3, p 117). His results do provide support to our finding here. It should be noted, however, that our finding considers good relative performance of a country on multiple dimensions and not on a single dimension of growth in income. 7. Our finding here appears to be in sharp contrast to Barro (1997) who finds no sign in any range of a positive relation that would signify that higher inflation had to be tolerated to obtain more growth (p 98). While growth of income is just one dimension of economic performance, we are considering multiple dimensions and only the emerging performers during the nineties. 8. Here the problem of data non-availability becomes a severe constraint. Fitting a multiple regression requires that the data matrix be complete and uniform for all variables. When we consider this constraint, the number of countries falls sharply from 187 to only 80. Since 80 is a large sample, our result may be considered reliable for prediction if found statistically significant. 9 A recent study finds two-way causality between the levels of economic and human development in India (Dholakia, 2003). It does not contradict our findings here because we find that growth of per capita GDP in the previous decade is a significant determinant of the level of HDI but the previous level of HDI does not significantly determine growth of per capita GDP in the cross-country regressions.

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REFERENCES
Abramovitz, M (1956). Resource and Output Trends in the United States since 1870, American Economic Review: Papers and Proceeding, 46(May), 115-23. Arnold, D J and Quelch, J A (1998). New Strategies in Emerging Economies, Sloan Management Review, 40 (1), 7-20. Auer, L (1979). Regional Disparities of Productivity and Growth in Canada, Economic Council of Canada. Barro, R J (1997). Determinants of Economic Growth A Cross-Country Empirical Study, Cambridge: MIT Press. Bils, Mark, and Klenow P (1996). Does Schooling Cause Growth? American Economic Review, 90(5), 1160-83. Biswas, Basudeb and Caliendo, Frank (2002). A Multivariate Analysis of the Human Development Index, Indian Economic Journal, 49(4), 96-100. Blomstrom, Magnus, Lipsey, R and Zejan, M (1996). Is Fixed Investment the Key to Economic Growth? Quarterly Journal of Economics, 111(1), 269-76. Bonnici, Josef (2002). Think Global Act How? Inaugural Address at the Malta External Trade Corporation Conference, February 6. Denison, E (1967). Why Growth Rates Differ: Post-War Experience in Nine Western Countries, Washington, DC: Brookings Institute. DeSilva, Gamini, Thattil, R O and Gamini, S Samita (2000). Construction of a Composite Index of Human Development for Developing Nations, IAOS Conference on Statistics Development and Human Rights held at Montreaux (Switzerland), 4-8 September. Dholakia, Ravindra H (2003). Regional Disparity in Economic and Human Development in India, Economic and Political Weekly, 38(39), 4166-72. Easterly, William and Levine, Ross (2001). Its Not Factor Accumulation: Stylized Facts and Growth Models, World Bank Economic Review, 15(3), 177-219. Global Edge (2002). http://ciber.msu.edu/Research/MPI/ default.asp. Goyal, Arun and Mohd, Noor (eds.) (2001). WTO in the New Millennium: Commentary, Case Law and Legal Texts, Fifth Edition, Bombay: MUIRDC World Trade Centre, September. Gveli, Serdar K (2000). A Ranking of Islamic Countries in Terms of Their Levels of Socio-Economic Development, Journal of Economic Cooperation, 21(1), 97-114. Hoskisson, R E; Eden, L, Lan, C M and Wright, M (2000). Strategy in Emerging Economies, Academy of Management Journal, 43(3), 249-67. International Finance Corporation (1999). Database from http://www.ifc.org/EMBD/SLIDES/img009.gif. International Monetary Fund (2003). International Financial Statistics, Washington, DC. Jalan, Bimal (2002). Financial Architecture: To Each His Own, Address delivered at the symposium of Central Bank Governors hosted by the Bank of England at London, July 5. Kapur, Devesh and Patel, Urjit R (2003). Large Foreign Currency Reserves: Insurance for Domestic Weakness and External Uncertainties, Economic and Political Weekly, 38(11), 1047-53. Morris, David Morris (1979). Measuring the Conditions of the Worlds Poor: The Physical Quality of Life Index, Washington, DC: Overseas Development Council. Nelson R (1964). Aggregate Production Functions and Medium Range Growth Projections, American Economic Review, 54(5), 575-606. Solow, R (1957). Technical Change and the Aggregate Production Function, Review of Economics and Statistics, 39(August), 312-20. Teramishi, Juro (1992). Import Substitution Policy in Japans Economic Development, Tokyo: Institute of Economic Research, Hototsubashi University. The Economist (1999). 2nd January. UNDP (2002). Human Development Report 2002, New York. World Bank (1991). World Development Report 1991, Washington, DC. World Bank (2002). World Development Indicators 2002 (on CD-ROM), Washington, DC. World Bank (2003). Global Economic Prospects and the Developing Countries, Washington DC: WBDP. World Economic Forum (1999). The Global Competitiveness Report 1998-99, New York: Oxford University Press. World Economic Forum (2002). The Global Competitiveness Report 2001-02, New York: Oxford University Press. World Economic Forum (2003). The Global Competitiveness Report 2002-03, New York: Oxford University Press. Young A (1995). The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience, Quarterly Journal of Economics, 110 (3), August, 641-80.

Acknowledgements The authors are grateful to Professor M M Monippally for going through the first draft of the paper carefully and making very useful suggestions and editorial changes and to Professor V N Kothari and Professor J C Sandesara for their valuable comments and observations. The authors are also grateful to the anonymous referee of Vikalpa for his/her valuable comments in the organization of the paper. Ravindra H Dholakia, Professor in the Economics Area of Indian Institute of Management, Ahmedabad, currently holds the RBI Chair. A doctorate in Regional Development Economics from
VIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

MSU, Baroda, his areas of interest include regional development, macroeconomic policy and environment, demand analysis, and international trade. He has published 12 books and several international cases, monographs, and research papers in reputed journals. e-mail: rdholakia@iimahd.ernet.in Akhilesh S Kumar is a Research of Associate in the Economics Area of Indian Institute of Management, Ahmedabad. His areas of interest are macroeconomics and international trade. e-mail: akhilesh@iimahd.ernet.in

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Rekindling the Heart and the Soul of Management


J Singh

presents articles focusing on managerial applications of management practices, theories, and concepts

INTERFACES

Executive Summary

KEY WORDS Downsizing Leadership Social Responsibility Ethical Conduct Culture Building Pygmalion Effect

A concerted set of initiatives over the last 50 years has transformed management into a profession and a popular discipline for formal study. However, there has been a steady deterioration in the quality of working life in modern organizations. Contrary to the oftrepeated clich about people being valuable assets, they are increasingly being treated as liabilities that can no longer be afforded. This is best reflected in the frenzy of rightsizing a weak euphemism for turning employees out. Those who are lucky enough to survive are then subjected to a mechanistic culture devoid of human sensitivity. The focus is on squeezing the maximum out of them but not doing enough to make them feel wanted or to enhance their sense of self-worth and self-respect. Compounding these problems is the more dramatic fall in leadership standards. As the spate of recent scandals suggest, many organizations have fallen into the hands of greedy impostors masquerading as leaders. Simultaneously, the public image of business corporations has been severely tarnished. Because of frauds and other misdemeanours that have been uncovered and publicized, they are perceived less as creators of social wealth and progressively more as exploitative organizations seeking to prosper at the expense of the common good. Business ethics, good governance, and corporate social responsibility may be fashionable themes for conferences but they are not much in evidence in practice. Any insightful observer is, therefore, likely to infer that modern corporations have lost their hearts (and hence the people-are-liabilities mindset) and their souls (hence their lack of sensitivity to social well-being). This paper underscores the urgent need for rekindling the corporate heart and soul reorienting the prevailing approaches to dealing with employees and changing the mindset about corporate purpose. What people require is a genuinely supportive environment and a persevering, diligent leader to show the way. For creating the right kind of environment, the author suggests the following measures: appoint the right person treat people like assets not liabilities invest generously in culture-building cultivate the right attitudes. For rekindling the corporate soul, the following initiatives are suggested: follow ethical conduct appoint ethical people get oriented towards social responsibility. Only when all these are achieved will business organizations provide enriching work experiences to their employees and ultimately succeed in transcending profit-making in its narrow sense to attain their more altruistic, nobler purposes. Among the various prescriptive measures, the most crucial is the selection of individuals for leadership roles. The importance of character is vital. Yet, it is perhaps the one requirement that is most often compromised.

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ustained attempts have been made over the last 50 years to professionalize the field of management. A dramatic increase in the number of business schools, the growing fraternity of MBAs, the booming business in continuing executive education, the rapid multiplication of professional associations and industry confederations, the mushrooming of management consultancies, and the burgeoning sale of books on topics such as quality, leadership, and excellence are some of the indicators of the intensity of this campaign. Notwithstanding all these attempts at enhancing professionalism, there are growing signs of disillusionment with life in todays seemingly professional organizations. Employees complain of meaningless work, excessive stress, and increasing insecurityall leading to a variety of stress-induced diseases. Hypertension and cardiac problems have become almost as normal as the common cold. Though pay and working conditions have undoubtedly improved over the years, the psychological quality of life in organizations has not; in fact, it has clearly deteriorated. Employees have little time left for themselves, their families, and for meeting their social obligations. As a result, they view their work merely as a necessary chore and not as an enriching, fulfilling experience. The rising turnover rate among employees and the mounting difficulty in attracting talented professionals as replacement are a manifestation of this disillusionment. So are the numerous stories about the dreaded Monday blues and about how employees begin each week eagerly looking forward to the coming weekend. No wonder then that Terkel (1972) prefaced his seminal book titled Working with the acerbic observation that work is, by its very nature, about violenceto the spirit as well as the body It is aboutdaily humiliations. This type of work leads to a parching of the human spirit rather than its fulfilment. Added to the disillusionment of employees is the disenchantment of the general public. Because of the cumulative effect of corporate misdemeanours in the past and a spate of scandals recently, the image of management, especially of big business, has been severely tarnished. To the common man on the street, it has virtually become a synonym for unrestrained greed and exploitation. It stands severely indicted for its unethical practices, environmental degradation, and social irresponsibility. One measure of the low esteem in which it is now held is the finding of a survey reported recently

in The Economist (2003) that corporate leaders rank only a shade higher than second-hand car salesmen in the publics mind. It is ironic that corporations that provide so much employment and produce so much wealth for society have come to such a pass. One possible explanation is that they have become professional only superficially. In their dealings with their employees, they still lack a deep understanding of what makes people tick. Therefore, they are unable to touch their hearts and to bring the best out of them. Similarly, they have shown great insensitivity in their dealings with the general public. They have been so obsessed with short-term results that they have forgotten the true purpose and the ultimate source of their performance. In brief, they seem to have lost their corporate heart and soul.

THE MISSING HEART


Good human resource management is first and foremost a matter of the heart. It hinges on genuine respect for other people, deep concern for their well-being, and abiding confidence in their capabilities. With such an attitude as the starting point, one can in repeated enactments of the Pygmalion Effect enable those one leads to develop to the very limits of their potential. However, the passion and commitment of Pygmalion is rare. The typical manager we encounter in our dayto-day work is so preoccupied with himself that he appears to have little time, respect or concern for others. His approach towards them is basically utilitarian; he uses and often abuses them for his own interests. He somehow drives people to do their assigned work and uses restrictive control systems to ensure that they do not deviate in any way from what they are told to do. When the work is done, he collects his rewards and moves on. Such exploitative managers only succeed in creating conditions under which human potential is stifled and work is reduced to being merely a necessary but demeaning and painful chore. Employees in most companies are left wearing shackles not on their hands, but on their minds and spirits, unable to exercise their innovativeness and creativity. In a bygone era, describing a person as being hard at work implied that he was engaged in his craft with all his heart and passion. However, in the contemporary context, it is more likely to imply labour under duress. He exerts himself only physically but his heart and passion have been squeezed out.
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Mindless repetition can reduce even a profound statement to being merely an empty, worn-out clich. People are our most valuable assets is a fine example of this phenomenon. Executives wanting to appear enlightened repeat it routinely. However, they do so mechanically and without much conviction as is amply evident to any observer from their actual day-to-day behaviour. They appear far more preoccupied with meeting their narrow performance metrics and somehow clambering up the ladder of personal success than looking after the ordinary folks in their organizations. Instead of treating them as valuable assets to be cherished, handled with tender care, and protected zealously, they regard them either as mere tools to be used or as burdensome costs to be minimized and, therefore, often deal with them in ways that are clearly an affront to human dignity and self-respect.

Symptoms of the Malady


The inference that management today lacks the heart necessary for understanding and dealing effectively with people at work may be drawn from a series of observations: People-are-liabilities mindset: Contrary to the popular belief about people being valuable assets, the topranking executives of today seem to be concerned only with the bottom line and behave as if their employees are costly, unaffordable liabilities. They only calculate what they pay in terms of salaries and wages and feel that they would be better off saving on such payments. They do not see what wealth employees have produced already and what more they are capable of producing provided they are treated well. They lack the capacity to appreciate the innate creativity within their employees and the virtually limitless potential they have to overcome challenges or solve seemingly insurmountable problems. Therefore, they appear singularly obsessed with ways of getting rid of people their biggest liabilities. Downsizing spiral: The knee-jerk reaction of almost every company faced with intensified competition is to shed manpower the same manpower eulogized so often in public as our most valuable assets. In a complete reversal of thinking, it is suddenly described as unaffordable costs. To make it appear less cruel than it actually is, it is referred to euphemistically as rightsizing. But, call it by any name, the effect is the same:

extremely painful for those who have their source of livelihood snatched away from them suddenly for reasons totally beyond their control. The compulsions behind downsizing are easy to grasp. In a competitive market, companies have to acquire an edge over their rivals in one way or another. Among the options available is to gain a cost advantage. This requires a careful review of existing costs and identification of areas where reductions can be made. While searching for areas where greater economy can be achieved, attention invariably focuses on manpower costs. Salaries and wages paid to employees form a major component of costs. Therefore, when all other measures to reduce costs have proved insufficient, manpower is reduced to minimize the outflow on account of salaries and wages. There is no denying that as organizations prosper and grow, they accumulate excess baggage or slack resources everywhere. These may take the form of excess production capacity, inventory or even manpower. As long as the going is good, there is no pressure to reduce the slack. However, during an economic downturn or when competitive pressures mount, frantic attempts are made to minimize the slack resources. Therefore, it is quite understandable that the cost of maintaining the surplus manpower accumulated over the years also receives due attention. There is no problem with downsizing as an extreme, one-time corrective measure. It can be regarded as surgery painful but necessary. Unfortunately, however, experience shows that it has become a repetitive or addictive habit. Every time a company hits a road bump, it tends to resort to another round of manpower reduction. Thus, there is an unending spiral of intermittent or serial downsizing. Those who survive one round enjoy only a temporary reprieve; they are left guessing about when their turn to be axed will come next. For those who are suddenly deprived of their source of livelihood, it is a traumatic, humiliating experience. Apart from the financial insecurity arising from losing their jobs, they lose their respectability in the eyes of their family members, professional peers, and society in general. And for those who are safe for now but waiting in the queue for their turn, the anxiety is debilitating. Seeing the heartlessness of their employer and the fate of their colleagues, they lose their commitment to work and their loyalty to the organization.

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Repeated downsizing also raises some ethical questions: If ordinary workers are axed in the interest of economy, why is it that at the other end of the hierarchy, there are phenomenal increases in executive compensation? There was a time when organization designers were of the view that the highest salary should not be more than four times that of the lowest. On the contrary, we now have cases where the chief executives compensation is 400 times that of the lowest paid employee! Thus, on the one hand, we hear about containing employee cost and, on the other, there are unjustifiable increases in executive compensation. Those who typically get axed are not the ones who had anything to do with accumulating excess manpower in the first place. The responsibility ought to lie with senior executives who saw the need for and authorized recruitment of additional employees. The decision-makers who were instrumental in the build-up rarely, if ever, pay the price for their mistakes. It would be safe to assume that they go up to bigger things in their company. But, those who were persuaded to accept employment are the ones who unwittingly bear the burden of separation. Except in rare cases (e.g., Tata Steel), the separation is managed without any consideration for human dignity. Nothing except a paltry compensation is offered for years of service. In effect, people are turned out ignominiously. Should committed, loyal employees be dispensed with so cheaply and callously? In the final analysis, we must not ignore fundamental truths. It is possible to temporarily boost productivity by restructuring and downsizing but it is not possible to sustain high productivity and innovation without winning the hearts of employees. In many ways, downsizing is like anorexia; it can make one leaner and thinner but not necessarily healthier. Mechanistic culture: All natural species flourish best when surrounded by an environment conducive to their growth possessing the requisite level of warmth, nourishment, security, and support. On the other hand, when the environment turns hostile, they all suffer and slide towards extinction. This is the law of nature. As in nature, so too in organizations. People who work in an organization also require an environment organizational culture conducive to their growth. When it

has the appropriate character, it energizes everyone coming under its influence to be highly productive and creative. But, if the culture is a contrasting one, then human potential is stifled and growth is stunted. Unfortunately, we are not so adept at cultivating such nurturing environments. One reason for this shortcoming is our inability to think organically as we should about living beings. Instead, in our attempt to appear scientific, we have become mechanistic in our approach to people at work. There is little trace of feeling, respect or empathy. Our attitude is even reflected in the names given to tools of man management: leveraging human assets; human capital management; human resource accounting; reengineering and restructuring; outplacement; outsourcing; talent management; flattening; delayering; downsizing or rightsizing; competency mapping; PMS, 360 degree, and consequence management. It would not be surprising if an uninitiated person were to mistake them as references to mechanical objects rather than to ordinary people. How motivated are they likely to be after they have been flattened, de-layered, restructured, reengineered, rightsized, and leveraged? In their eagerness to appear scientific, companies often hastily adopt fashionable techniques. In their unwarranted haste, however, they almost invariably fail to fully internalize the values underlying such techniques. Their superficial understanding and mechanical application inevitably results in poor implementation. Even intrinsically good techniques, therefore, degenerate into empty rituals and fail to yield the desired results. All popular aphorisms have a flip side and can be debated. But one that we have started to accept blindly says: What gets measured, gets done. Because there is a good amount of truth in it, we have now taken measurement to an extreme without being aware of its shortcomings. HR professionals today want to measure behaviour minutely: aptitudes, attitudes, values, commitment, loyalty, integrity, competencies, satisfaction, performance, and potential. This fetish for measurement or numerical myopia is being pursued at the expense of the developmental responsibility of human resource management. Much could be gained by paying greater attention to the creation of an environment or culture conducive to enthusiasm and excitement than to measuring them. We need to pursue this course more out of conviction and passion than something driven by artificial measures. It needs
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to be understood that trying to measure with more precision what is essentially abstract and unmeasurable is futile and can only lead to erroneous inferences. We have discarded time-tested notions such as organizational loyalty and belongingness as old-fashioned. Instead, we are cultivating a culture more suited to mercenaries. Motivation is no longer through an emotional bond between employees and their organization but through money and other extrinsic rewards. Perform and get rich appears to be the new motto. Those who are not adequately motivated by such incentives have no value or place. As a result, there is no commitment or loyalty left either way; organizations are not committed to their employees and vice versa. We need to get back to fundamentals. The elementary, but still relevant, teachings of Maslow and Herzberg implore us to appeal to the noble, self-actualizing needs of professionals through a set of real motivators job content and work environment rather than short-term, but expensive, hygiene improvements. Leadership or lack of it: There is a myth that people rise to leadership positions by virtue of their merit. The reality, however, is that people reach there more often because of their proficiency in organizational politics or by accident. One measure of this is the number of CEOs and other high-ranking executives who have eventually been dismissed because they did not measure up to the requirements of their role. The evidence is even stronger in the case of political leaders. What if one is really wanting in merit? As the Chinese philosopher, Guanzi, said: If a person rises to a level of authority that exceeds his virtue, all will suffer. If Guanzi is correct, then we can imagine the amount of damage caused to the morale, culture, and team-work in organizations where persons have risen undeservedly to key positions of leadership. Leadership behaviours that are common and that sap the energy and enthusiasm of people include: Preoccupation with self-promotion and self-aggrandisement rather than focusing on organizational health and the well-being of all members. Using people as stepping stones and discarding them subsequently without the rewards due to them. Divide and rule tactics to secure ones own position. Stealing credit from those who actually deserve it for their work or ideas. Excessive control over professionals who have the capability and the desire to work independently;

not empowering them to perform their roles effectively. Whimsical, ad-hoc decision-making; inconsistency in thinking; lack of clarity about long-term direction. Management by fear. Unrestrained ambition and greed; lack of financial integrity and intellectual dishonesty. Keeping people in the dark not communicating regularly and clearly with them. Insufficient attention to the development of the people one works with. The need of the hour is for a new breed of leaders who are also good social architects. They should be skilled in crafting environments in which eager individuals feel wanted, work together successfully, and deploy their creative potential to the maximum extent possible.

THE MISSING SOUL


What marks a successful life? In this increasingly materialistic world, we may be tempted to judge a person simply by the amount of wealth he has accumulated. However, relying fully on a single measure would be a gross mistake for two significant reasons. First, it ignores the means employed to accumulate ones wealth and the uses to which it has finally been put. Respectable wealth must be acquired legitimately and used unselfishly. Second, it overlooks the multidimensional nature of life. One does not exist solely for accumulating wealth; one must also be concerned about the social, cultural, and spiritual aspects of ones life. Therefore, there are multiple requirements for success. In the end, one ought to be judged by a composite measure of how one has lived life taken in its totality. It must be distinguished by an upliftment of the human spirit and soul. It is important to remember that the noble personalities of history, the ones we regard as role-models, were not necessarily the wealthiest; they are revered because they left behind a rich legacy of achievements in multiple areas and lived according to values which are universally treasured. The same reasoning should apply to corporations also. Like individuals, they too have multiple facets. Therefore, it is difficult to capture their success in one measure alone. Single-minded success appears empty after a while. Though management texts proclaim profit maximization as the central purpose, it is the equivalent of saying that an individuals life ought to be judged

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mainly by his personal wealth. In essence, profits are like oxygen essential for survival but not the purpose of it. Profits are important and should be used as one of the several measures of success. However, we must also be concerned about how profits are earned and what uses they are put to. If they are earned by questionable means and are appropriated by a small group of owners or high-ranking executives mostly for their own benefit, they would not be regarded by the society as being of much value. Like successful individuals, good corporations too are expected to conform to social norms and contribute to the well-being of people and communities around them. Through their products, services, and all their related business activities, they are expected to enhance the quality of life of everyone who comes in contact with them. There is a higher purpose, and standard of success, than mere profit-making. This does not mean that profits are not important. In fact, it is very essential for business enterprises to be profitable; otherwise, they will not be able to continue operations. However, being profitable though necessary is not a sufficient reason for their existence. After making their profits, they must focus on serving all their stakeholders and constituencies. In the end, they must be seen as adding value to the society in general. If, after making profits, they also succeed in enriching the society, they would have met both the necessary and sufficient conditions of effectiveness. Enhancing shareholder value has become the driving mantra of modern management. The assumption is that the shareholder is a person who has taken risk in putting his hard-earned money into a new venture. To justify his risk, the organization must give him a rate of return higher than he would have got elsewhere. The problem with this assumption is that the shareholder community is a very diversified one; it now includes both the initial shareholders who bore the risk while founding a company and short-term speculators who subsequently parked their money in it as a speculative investment. The first group of investors or entrepreneurs has a strong commitment to make their venture succeed. For them, their company is like a dream project. They put their heart and soul into making it succeed. They support it through all its ups and downs. The second group of speculative financial investors is more mercenary in its outlook. They are only riding piggyback

on the entrepreneurs in the hope that their share value will appreciate fast at which stage they will book their profits and take their money away to speculate on another promising enterprise. They take little pride in building it through sustained effort or interest. In essence, they are fair-weather investors. They have no abiding commitment to make the enterprise succeed. Should both types of shareholders be treated the same way? Should maximizing the gains of speculators be the driving motive of management? Also, why is financial equity of the shareholder considered to be the only equity? What about the intellectual capital of employees who, in addition to providing their sweat capital their hard physical labour are constantly thinking of technological improvements to raise efficiency and productivity or new products and services to win customers? In this knowledge-based era, it is this intellectual capital that gives a company its greatest competitive advantage. What about the goodwill equity of the community in which an organization exists? Apart from providing it with much-needed support services, the people of that community also put up with many inconveniences resulting directly from its operations; for example, air, noise, and water pollution. What is a company? We need to reflect on this crucial question. It must be understood first as the creation of entrepreneurs who establish it to serve a societal, not a selfish, need. Second, it is a place where a group of people employees come together to create fulfilling lives for themselves. They both succeed in reaching their respective ends only by contributing to society in general. Third, in order to succeed, the company needs to be efficient and profitable. As companies grow and legal ownership passes into the hands of financial investors, the interests of shareholders squeeze out other interests. Eventually, firms that were created to serve society get transformed to ones serving only their shareholders. This is the tragedy of modern organizations. Much of the evidence around us suggests that managements today are engaged in almost a single-minded pursuit of profits and shareholder value. They are under intense pressure from the speculative financial community to promise and deliver virtually unreasonable returns; they have become victims of the quarter-byquarter mentality promoted by them.

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Symptoms of the Malady


Thanks to a series of scandals and a litany of other misdemeanours registered over the years, the image of big business, along with the reputation of high-level executives, is on a steady decline. As a result, any keen observer is prompted to infer that modern corporations are tending to lose their souls. Among the chief reasons for such an inference are: Misrepresentation: Many corporations that were held in high esteem only a short while ago have been exposed for breaking laws, tampering with their accounts, and deceiving their stakeholders. For example, one study showed that the proforma earnings announced by the top 100 NASDAQ companies in the first nine months of 2001 exceeded audited profits by $100 billion. Even the audited figures overstated actual profits by a big margin. Also, there is breaking news about the chief executive of Shell coming under intense fire for having misled the public about his companys proven oil reserves. It appears that they were exaggerated by at least 25 per cent in order to artificially boost the companys valuation. These are not isolated cases. Numerous examples of such gross misrepresentation have come to light in recent times. They even include many venerable names from the Fortune 500 list. Mistrust: A recent survey by Gallup indicates that 82 per cent of the public no longer trusts management for taking proper care of the shareholders; 90 per cent do not trust them for taking care of the employees; and up to 95 per cent in some countries believe that their management only looks after itself. It is frightening that the societys wealth and well-being are in the hands of people with so little credibility. Unethical conduct: Many corporate icons have been knocked off their high pedestals by startling revelations of their misconduct in office. The range of their misdemeanour includes insider trading, misappropriation of corporate funds for personal use, concealing information about the hazardous side-effects of their products and production processes, throwing prudence aside to pursue megalomaniac schemes solely to pander to their inflated egos, fabricating performance data to lull stakeholders into believing that all is well with their company when the truth is otherwise with the intention of manipulating their bonus earnings and dishonest trade practices. It ought to disturb us that an increasing number of business leaders are being caught on the wrong side of the law.
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Misgovernance: The Enron debacle and a series of similar scams in high-profile companies have underscored the need for tightening governance standards. It is quite clear that the boards of directors have failed in their duty to ensure probity, transparency, accountability, and fairness in the conduct of important business. With virtually no checks and balances they exercised absolute power and ended up abusing them. As a result, improved governance has risen to the top of the corporate, and even political, agenda in many countries. Social irresponsibility: Corporate activity is doubleedged: it results in both gains and losses for the society. The gains are in the form of needed goods and services, employment, and economic development. These outcomes are the ones that have traditionally been highlighted. But, there are concurrent, countervailing losses that are often most conveniently overlooked. Industrial activity is notable for consuming large quantities of natural resources and, in the end, generating a variety of harmful effluents. The cumulative effect of the wanton exploitation of natural resources and the unrestrained discharge of waste material has caused incalculable, and perhaps irreparable, damage to our planets environment. The list of indictments is long: air and water pollution; deforestation; greenhouse effect; ozone depletion; climate change; and chemical poisoning. Nevertheless, most companies have disowned responsibility for the environmental devastation wreaked by them. Corporations are embedded in society. Therefore, they cannot disassociate themselves from its general health. But, that is precisely what many of them appear to be doing. They are preoccupied with their own narrow interests and are watching the worsening scene around them like idle spectators. They continue with their single-minded pursuit of financial profit ignoring the threatening social problems around them: unemployment, illiteracy, urban decay, health, corruption, etc. At best, to clear their conscience, they indulge in PR-oriented philanthropy. But, what is needed is their active involvement in mitigating these problems. Anti-business sentiment: The mistrust described above has led some towards activism. They are mounting an increasingly strident campaign against big business and institutions associated with them. Notice, for instance, the popular outrage against the WTO and WEF both of which are seen as symbols of the rich and of big business. Their critics claim that they are doing a great

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deal of harm to poor economies: plundering natural resources with scant respect for the environment; using obsolete, even hazardous, technologies that endanger the lives of employees and the neighbouring communities; expropriating the profits; and not reinvesting enough in the economies from which the profits were earned. Unfortunately, most companies still regard social responsibility and sustainable development as noble but impractical ideas. At best, they are willing to comply with laws but not take any initiatives on their own. It must, however, go beyond simple compliance with existing laws because laws are always several steps behind what is required. It enjoins them to do even better. Also, sustainability should go beyond concern for the environment alone. It must also consider human factors, e.g., balance between work and other parts of life. This imbalance is a major cause of stress in work life.

The primary task of management then is to nurture the kind of environment in which the wonderful minds of people can go to work and their latent potential can be fully realized. Some of the measures that can be used for this purpose are as follows: Appoint the right person: The behavioural style of a leader at any level directly impacts all those who work under him. If he possesses Pygmalion-like qualities, he is certain to inspire and extract the best out of his team. However, if he lacks those qualities, he is likely to treat them in ways that raise their psychological defences. A defensive attitude is not conducive to giving off ones best. Therefore, appointing the right leader makes all the difference. To use a metaphor made famous by Collins (2001), the transformation of organizations requires that the wrong leaders occupying various positions be first taken off the bus and their seats be given to more deserving candidates. Unless this change is made, there is little hope of any strategy working effectively. It is not enough to suggest people-orientation as one among several criteria for selecting a leader. We must go beyond and insist on it as one that cannot be compromised. No matter what other credentials a person has, if he does not have the requisite level of peopleorientation, he is not a fit candidate to head a team. An otherwise competent person could do a great deal of damage if he turns out to be obsessed with his personal interest, has an exaggerated ego, behaves arrogantly, is power-hungry, competes unfairly or is vindictive in nature. The damage he is likely to cause in the first place cannot easily be undone; no amount of HR sophistry is sufficient for this purpose. Therefore, the first step towards putting the heart back into organizations is to ensure that only individuals who value and respect others are appointed to leadership positions. Their subsequent growth should depend on how successful they have been in marshalling their human resources. The acid test of their leadership is the spirit and morale of their people. They must be masters of the art of fostering a sense of belonging and ownership, commitment and organizational loyalty, and igniting the passions of people to aim for ever-increasing standards of performance. Treat people like assets, not liabilities: Unless an organization is in the habit of collecting misfits, it must look upon its people as priceless assets. Therefore, all its efforts must be directed towards making them feel
REKINDLING THE HEART AND THE SOUL OF MANAGEMENT

THE REMEDY
For a significant breakthrough in organizational performance and overall effectiveness, there is an urgent need for reorienting the prevailing approaches to dealing with employees and our mindset about corporate purpose.

Rekindling the Heart


Dealings with people must be founded on respect and a deep Pygmalion-like conviction in their innate creativity and potential. It must be presumed at the start that they naturally yearn for challenges to overcome, opportunities to innovate, and excel in whatever they do. All they require is a genuinely supportive environment and a persevering, diligent coach to show the way. But, neither such respect nor such conviction comes naturally to us. Victims of over-sized egos, we tend to be far too preoccupied with ourselves to show sufficient respect for others. We also lack the keen eye to see the hidden potential in people; nor do we have the diligence to develop them. Because of lack of respect for others and our inability to recognize their true potential, much of management as it is practised today is about controlling behaviour based on a suspicion that people cannot be relied upon to act responsibly on their own. They need tough-minded superiors to direct them properly and monitor all that they do.

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wanted and enhancing their value. In a crisis, there is a temptation to live by disposing off ones assets. This may be justified as a temporary measure; but it cannot be sustained it is the surest route to eventual bankruptcy. In the final analysis, prosperity derives from accumulating and strengthening ones asset-base. This principle must translate into measures to keep an organizations workforce intact and taken care of properly. We must find ways of escaping the vicious cycle of downsizing as this is the way to eventual growth. Democratize: All organizations are essentially hierarchical. What distinguishes one from another is the nature of its hierarchy: how power is distributed and wielded. At one extreme are highly regimented, centralized organizations where all power is concentrated in the hands of a few key functionaries at the very top. Most members of such organizations are merely expected to do what they are told. At the other end are organizations where power is shared equitably. There is inner democracy; people at all levels are involved and have an effective voice in day-to-day decision-making. The degree of inner democracy is an important determinant of the attitudes of the professionals. In general, the greater the democracy, the more involved and empowered they feel; they develop a sense of belonging and ownership. Under such conditions, they are able to give off their best. Therefore, the route to the heart of employees is not through extrinsic inducements but through genuine democratization of management processes. Every effort must be made to prevent power-hungry individuals from usurping power. Inner democracy must be promoted and protected until it matures and becomes indelibly ingrained in the corporate DNA. Invest generously in culture-building: With the right person in place, the task of fostering the desired culture becomes a lot easier. The essential ingredients of this culture are: Respect for people; enhancement of their sense of self-esteem. Getting each individual to identify with the organization by cultivating a sense of ownership and belonging and encouraging involvement. These may sound old-fashioned but are still very potent virtues. Liberal empowerment at all levels; professionals are given ample space to work independently and
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according to their own judgment. Controls are exercised only by exception. Engaging people fully in their work and, thereby, motivating them to excel themselves. There is sufficient understanding of the futility and expense of trying to motivate through external inducements only. Open, timely communication in all directions with a view to uniting hearts and minds. Emphasis on teamwork and trust; developing a sense of community. Appreciation of the good work of team members; fairness in rewarding them. Attention to personal growth and development. Absence of fear (of superiors or of committing mistakes). Encouragement for continuous organizational learning and sharing of knowledge. As culture cannot be imported, simply imitating practices from other companies is of little consequence. For culture to take deep roots, it is essential that all members share common values and live strictly by them. Our talk and our walk must reinforce one another consistently. Cultivate right attitudes: It is worth remembering that success in building the kind of culture described above does not depend on fancy, pseudo-scientific HR tools; it is more linked to having the right attitudes towards people in the first place. Tools are merely artefacts; by themselves, they are incapable of achieving anything. What matters is who wields the tools and how. A person with the right attitudes can do wonders with them (or even without them). But, a person who does not have the essential attitudes will use the same tools to do more damage than good.

Rekindling the Soul


Mundane profit-making or shareholder value cannot be the only driving force behind organizational activity. There has to be a more fundamental, grander, largerthan-life reason why so many people struggle so hard to set organizations up and then strive even harder to make them perform well. Organizations can be regarded as truly successful when they enrich or contribute to the well-being of all who come in contact with them. Therefore, the measures of performance must go beyond the conventional financial indicators. They are far too restrictive; they address

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only the needs of financial investors but ignore the less visible, but no less important, investments made by other stakeholders. We must begin to measure organizational success in terms of contributions to all of them. The time has come for us to invent new measures such as Total Returns to Community (TRTC) and Returns on Total Capital (ROTC) to supplement the traditional financial indicators we have been relying upon so long. These should focus on the gains or outcomes from the viewpoint of all parties that have invested their resources, financial or otherwise, in an organization. The key initiatives required to reawaken the corporate soul are as follows: Follow ethical conduct: Gaining competitive advantage is important. But, so are the means employed in the process. Any competitive edge that is acquired by taking undue advantage of others is worth little and cannot be sustained for the simple reason that it invites retaliation. Therefore, organizations must insist on following ethical standards in all their actions. Each stakeholder must be dealt with fairly; there must be no attempt to gain by deceiving them. Once such a mistake is committed, corporate reputation suffers irreparable damage. Remember: reputation is fragile. Like china is never the same once it is cracked, reputation is difficult to restore once it is sullied. Appoint ethical people: Like people-orientation, personal integrity must be regarded as a non-negotiable criterion for appointments to a responsible position. Regardless of ones numerous credentials, one ought not to be put in a leadership role unless one first passes the basic tests of integrity. If anyone with questionable integrity somehow acquires such a role, he is very likely to abuse his powers for personal gains. This will weaken and ultimately kill the very organization he was chosen to lead. The power of ones leadership is multiplied manifold when, in addition to integrity, it is guided by a holistic outlook towards the purpose of any corporate activity or of life itself. High emotional and spiritual not necessarily religious quotients are the hallmarks of leaders with such holistic minds. They aim at delivering the maximum benefit to the maximum number of people rather than serving either their own or the narrow interests of a privileged few. They are cast in the mould of Jamsetji Tata (Harris, 1958). Improve governance: Boards must come alive and assert themselves. Their intended role is to give an overall

sense of direction to management and to ensure that all corporate affairs are conducted with full propriety in accordance with accepted norms. To play this role effectively, they need to act independently. Unfortunately, many boards have surrendered their independence. They have become pliable tools in the hands of overpowering managements; they merely attach their seal of approval to whatever their masters want done. This abject failure is the common cause of almost all the corporate scandals recorded in recent times. Many of the initiatives taken to improve governance are, regrettably, quite misguided. They aim merely at tightening the statutory requirements. As a result, there are a host of new regulations about the number of independent directors and the composition of various committees. But, simply enacting new statutes does not guarantee compliance; there has to be an underlying culture based on respect for the law. What is overlooked is that a director does not become independent simply by designating him so nor does a committee. The need is really for true independence of mind and character. When boards are made up of such fiercely independent personalities, they will be able to direct and oversee the corporate functioning effectively and ensure the fulfilment of societal, rather than merely narrow, sectoral objectives. They will begin to function like the corporate conscience. Get socially-oriented: Social responsibility has for long remained a fashionable subject of conversation at seminars but there is little evidence of it in practice. The time has now come for us to pay more serious attention to it. Each organization has countless dealings, directly or indirectly, with members of the community in which it is embedded. Therefore, it affects their lives in numerous ways. Based on their collective experiences, they articulate their expectations from it in exchange for the material and moral support they provide. All indications are that they are becoming increasingly vocal and insistent in their demands that management commit resources to fulfil their expectations. Social responsibility is all about understanding these expectations and trying to meet them to the extent possible. Every community has its quota of problems. These have traditionally been assumed to be the responsibility of governmental or social organizations rather than that of business corporations. However, given the symbiotic relationship between business and society, management can no longer disown responsibility for addressing such
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social issues. With the impressive resources at their command and their track record of efficiency in day-today operations, they must step in to take a more active role. In view of their limited resources, however, organizations must guard against assuming responsibility for all social malaise. It would be more prudent to focus on selected areas where they can make a visible impact. The rest should be left for other agencies more qualified for the purpose. The managements focus must first be concentrated on the negative consequences of organizational activity. To begin with, there is environmental degradation connected with extraction of raw materials and exploitation of other natural resources. Second, there are numerous problems arising from the combustion of large quantities of fossil fuels to power machines. Third, there are also problems relating to disposal of polluted, toxic effluents and other solid waste matter. Finally, there are the unanticipated side-effects of consuming their products. All these combine to cause incalculable damage to society. Since they arise directly from organizational activity, management is under a deep moral, and even legal, obligation to mitigate the consequences of its actions. Unfortunately, this responsibility has been largely evaded in the past leaving hapless individuals to suffer the painful consequences. Social responsibility, however, is not limited only to ameliorating damage caused to society directly, albeit inadvertently, by a company. It goes a big step further to address some social malaise not directly of its making. Each community may be plagued by a unique set of social problems. It is incumbent upon the managements of firms operating there to identify some of these and commit resources to redressing them. Therefore, a socially responsible company is expected to evaluate its communitys varied needs and expectations and select a few areas where it feels it can make a meaningful contribution either alone or in association with other like-minded partners. These could range from basic literacy to higher education, health care, vocational training, afforestation, water harvesting, sports, arts, and culture. Such initiatives are consistent with a principle enshrined in the German constitution: Property imposes duties. Its use should also serve the public well (Article 14, section 2). Extending this principle to the managements of private business implies very clearly
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that they too have an obligation to use their corporate wealth for the common good. Dave Packard, the legendary co-founder of HP, instilled in it a value system that is largely responsible for its enviable public image: I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a companys existence, we have to go deeper and find the real reasons for our being. As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so that they are able to accomplish something collectively that they could not accomplish separately they make a contribution to society, a phrase which sounds trite but is fundamental. Tata Steel is undoubtedly the best example of social responsibility in India. It spends enormous amounts of money on a wide array of activities to ameliorate the pressing social problems in its hinterland. The excellence of its work has made it a truly benchmark company. JRD Tata, one of the most distinguished chairmen in its history, articulated its driving philosophy very eloquently: No success or achievement in material terms is worthwhile unless it serves the needs or interests of the country and its people and is achieved by fair and honest means.

CONCLUSION
Merely to survive and prosper is not enough. Organizations must also leave behind indelible footprints in the sands of time. To be able to do so, they need to first make the best possible use of their employee community or their human resources. More than a battery of quasiscientific HR tools, this requires that management has its heart in the right place. It must understand the inner aspirations and motivations of the people and deal with them in ways that, apart from getting the best performance out of them, also make them feel wanted and enhance their self-esteem. In addition, corporations must not spend all their time and effort only in the pursuit of profits and market capitalization; they must also strive for a nobler cause. Instead of being mere economic machines, they ought to take on the character of de Geus (1997) living company flowing like a perennial, timeless river nourishing everything along its course. Imbued with a sensitive conscience and an enlightened

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soul, they must aim at improving the quality of life of all those who come in contact with them to the maximum extent possible. They should regard this not as a periphe-

ral but a primary objective. Such causes give meaning and purpose to their existence.

REFERENCES
Collins, Jim (2001). Good to Great, New York: Harper Business. De Geus, Arie (1997). The Living Company, Boston: HBS Press. Harris, Frank (1958). J N Tata: A Chronicle of His Life, London: Blackie and Sons. Terkel, Studs (1972). Working, New York: Pantheon Books. The Economist (2003). October 25.

J Singh, a Ph.D. from Wharton School, University of Pennsylvania, has just returned to XLRI, Jamshedpur as the Tata Steel Chair Professor of Organizational Development. Prior to this, he spearheaded the organizational learning and human resource initiatives of Tata Steel for 20 years. He began his professional

career in 1970 on the faculty of XLRI and eventually rose to serve as its Dean for four years before moving on to Tata Steel. He has been closely associated with several professional associations such as CII, AIMA, ISTD, IISI, and Cedep (at Insead). e-mail: jittusingh@xlri.ac.in

History proves that dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones. If by democratic methods people get a government strong enough to protect them from fear and starvation, their democracy succeeds; but if they do not, they grow impatient. Therefore, the only sure bulwark of continuing liberty is a government strong enough to protect the interests of the people, and a people strong enough and well enough informed to maintain its sovereign control over its government. Franklin Delano Roosevelt

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Does Higher Price Signal Better Quality?


D P S Verma and Soma Sen Gupta

presents articles focusing on managerial applications of management practices, theories, and concepts

INTERFACES

Executive Summary

KEY WORDS Product Quality Perceived Quality Purchase Decision Price-quality Relationship

With differentiated products, consumers may not be aware of the quality and features of the products they buy. They are often unable to make a quality comparison among various brands. Moreover, they often gather little information even when the financial commitment involved is substantial. A popular belief is: You get what you pay for. Therefore, consumers tend to believe that high price is an indicator of better quality. Although many studies conducted on price-quality relationship have supported this belief, there are other studies that have found the relationship to be product-specific and weak in general. This study seeks to examine the relationship between the price of the product and the buyers perception of quality in respect of durable, semi-durable, and non-durable products in the Indian context. Three products were selected for the purpose of the study: colour television as a durable product; T-shirt as a semi-durable product; and toothpaste as a non-durable product. Data were collected from the primary sources with the help of a non-disguised, pre-structured questionnaire. In particular, the authors sought to explore answer to two questions: (1) Does high price have a positive influence on the buyers perception of product quality? (2) Is there a significant difference in the buyers perception of the quality of products falling in different price ranges? The major findings of the study are as follows: For a durable product, like colour television, setting the price too low will negatively affect the quality image of the product and the consumer would be reluctant to buy a low-priced brand as it might lower his image in the society. Pricing it reasonably high will give the product a high-quality image. However, the marketer should take care of the competitors pricing policies and the buyers purchasing power. The target market for T-shirt in India consists mainly of the young, especially the college students, having limited purchasing power. They prefer local, or little known, but trendy brands of T-shirts rather than expensive ones. Also, they would opt for a T-shirt of a reputed brand if it is within their purchasing power. However, reducing the price of the T-shirt may dilute its brand image. Hence, the marketer of the T-shirt should think of market segmentation strategies and select the appropriate target segment(s) and price the product accordingly. For toothpaste, brand reputation is a critical factor and the marketer should price the product according to the reputation enjoyed by the brand. However, the price-quality relationship for this product has been found to be weak in comparison to colour television and T-shirt. The marketer, therefore, should be wary of charging a very low price as it would create an inferior quality image in the mind of the buyer. The findings have important marketing implications for pricing, market segmentation, target marketing, and product positioning.

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ricing is an important decision area of marketing. It is the only element of the marketing mix that generates revenue; all the other elements involve cost. In spite of its importance, however, pricing has been an area of little theoretical understanding and even less operating precision (Shapiro, 1968). Price is also one of the most important marketplace cues. The all-pervasive influence of price is due, in part, to the fact that the price cue is present in all purchase situations and, at a minimum, represents to all consumers, the amount of economic outlay that must be sacrificed in order to engage in a given purchase transaction (Lichtenstein, Ridgway and Netemeyer, 1993). Although it is believed that price serves as an indicator of quality, there exists no general price-perceived quality relationship. In fact, price becomes a less important indicator of quality in the presence of other product quality cues such as brand name or store image (Erickson and Johansson, 1985). The use of price as an indicator of quality depends on the following (Zeithaml, 1988): the availability of other cues to quality the price variation within a product class the product quality variation within a product category the level of consumer awareness about price the consumers ability to distinguish quality variation in a product group. It is in this context that this study seeks to examine the influence of price of the product on the buyers perception of quality in respect of durable, semi-durable, and non-durable products. It also seeks to ascertain whether this cue has a different effect on the three types of products.

an indicator of quality for commodities such as textile products where quality cannot be ascertained by sight and where, owing to changes in technology and fashion, past experience was of little use (Gabor and Granger, 1966). Price played an important role in indicating quality of many products for four reasons (Shapiro, 1968): The ease of measurement since price is a concrete, measurable variable. The effort and satisfaction, i.e., consumer satisfaction with a product depends on the amount of effort spent by the consumer in acquiring the product and an expenditure of money may be viewed by the consumer as similar to an expenditure of effort. The snob appeal. The reduction of the perceived risk of buying a product of poorer quality.

IS PRICE AN INDEX OF QUALITY?


Price, the extrinsic cue, has received the most research attention out of all the intrinsic and extrinsic cues. Price is identified as an important index of quality (Scitovsky, 1945). In his view, the word cheap usually means inferior quality. In the United States, the word expensive is in the process of losing its original meaning and becoming a synonym for superior quality. In one of the pioneering studies on price-perceived quality relationship, Leavitt (1954) observed that the buyers tended to have doubts when they chose the lowerpriced brands than in the case of higher-priced brands. He concluded that a higher price might sometimes increase the buyers readiness to buy. Price would be

However, Shapiro warned marketers that the concept of price as an indicator of quality should not be applied indiscriminately in making pricing decisions. McConnell (1968) examined the relationship between price and the quality of beer which is a frequentlypurchased consumer product. He found that the buyers used price as an indicator of product quality. With a homogeneous product and various unknown brand names, buyers perceived the highest-priced brand to be of better quality than the other two brands. He concluded that price, without any other cue, was an effective measure for brand evaluation. In an experimental study, Gardener (1971) explored the degree of price-quality relationship for three products: toothpaste, a mans shirt, and a suit. He concluded that while price did not affect the perception of product quality in case of all the three products, whether branded or not, it did affect the willingness to buy a shirt. Consumer choices regarding price might be influenced by the following product-specific factors (Lambert, 1970): buyers confidence in the predictive value of price perceived consequences of making a poor brand choice amount of brand-to-brand variation in product quality social importance of the product difficulty encountered in making quality judgments

ability to assess product quality. In another study, Lambert (1972) found that in all the sample product categories, the buyers of the highDOES HIGHER PRICE SIGNAL BETTER QUALITY?

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priced product had significantly more low-priced alternatives. Shapiro (1973) sought to determine whether price would act as a communicator of quality and ascertain the reasons for consumers judging the product quality by price by determining the correlates of price reliance. It was found that, for most of the dimensions such as quality, durability, looks or fragrance, the number of buyers ranking the high-priced product better than the low-priced product was greater than the number of buyers ranking the low-priced product better than the highpriced product. But, a substantial number of buyers rated the products as equal. The study revealed that price was a communicator of quality and the associated attributes in the marketplace when the product was actually present and the setting relatively realistic. On the other hand, the data showed that price was not a strong communicator of quality. Furthermore, price reliance appears to be a generalized mental construct an attitude or trait, i.e., some people seem to be price-reliant regardless of the product under consideration. Interestingly, the study of the relationship between demographics and generalized price reliance shows price reliance to be correlated with older age and lower education but not with income. Price reliance depends upon the consumers trust in the competence and honesty of the price-maker, perceived risk in a purchase situation, self-confidence of the customers, snobbery among them, importance of shopping speed, and the perceived quality difference among the brands. Price and quality were linked together in the mind of the consumer (Shivdasani, 1972). Price plays different roles in the purchase-decision process. In traditional economic theory, since higher price has a negative impact on the consumers budget, price has a negative influence on his buying decision. However, from a behavioural perspective, price may be perceived as a product quality cue (Monroe and Krishnan, 1988). Therefore, price may be viewed either as an indicator of sacrifice, or as a quality cue, or both. Rao and Monroe (1988) found that price increase might play a positive or a negative role in the purchase-decision process. People are more likely to use price as an indicator of quality for expensive products. As price increases, the risk of an incorrect decision increases and the buyer is often less familiar with the product because of the infrequency of purchase. In such situations, simple learned
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heuristics, based on folk wisdom, such as you get what you pay for, are likely to be used (Rao and Monroe, 1989). Gerstner (1985) found that the relationship between quality and price was product-specific and weak in general. In the Indian scene, Mehta, Parasuraman and Ambarish Kumar (1972) conducted an experimental study to find out the relationship between quality and price and to examine the consumers brand choice with respect to ready-made shirts. The study indicated that a majority of the buyers perceived some quality difference between the two shirts which were identical in all respects except for the brand names. The study revealed that the name of a well-known brand induced the consumers to be favourably disposed towards that brand in terms of quality and price perception and they were willing to pay a higher price for the well-known brand. Tellis and Gaeth (1990) identified three choice strategies that the consumer might use under uncertainty when the price of the product was better known than its quality: best-value, price-seeking, and price-aversion. While the best value strategy involves choosing the brand with the least cost in terms of price and the expected quality, price-seeking is selecting the highestpriced brand to maximize the expected quality, and price-aversion refers to buying the lowest-priced brand to minimize the immediate cost. The strategy that a consumer would use depends upon the information on quality, importance of quality, and the price-quality correlation. Erickson and Johansson (1985) investigated the multi-faceted role of price in product evaluation with an empirical analysis of beliefs, attitudes, and intention of buyers regarding various automobile brands. Three interesting conclusions were drawn from the empirical results: The price-quality relationship operates in a reciprocal manner. A high-priced car is perceived to possess (unwarranted) high quality. A high-quality car is, likewise, perceived to be high-priced than it actually is. As a consequence of the price-quality relationship, perceived price is a good proxy variable for perceived quality. However, price was found to have a positive but indirect effect on intention, i.e., price affects intention positively through its positive effect on quality perception, through the positive effect of quality perception on attitude, and through the

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positive effect of attitude on intention. Price perception has an independent and negative effect on the probability of purchasing a car a budget constraint. Lichtenstein and Burton (1989) found that consumers perceived objective price-quality relationship with only a modest degree of accuracy and that the pricequality perception was more accurate for non-durable products than for durable products. Consumers use price as a surrogate indicator of quality if they lack product information or confidence in their own ability to make the choice on other grounds (Schiffman and Kanuk, 1996). Moreover, when the consumer is familiar with a brand or has experience with a product, price has less influence on product selection. Rao and Monroe (1989) integrated the previous research on the influence of price, brand name, and/or store name on buyers evaluation of product quality. They found that, for consumer products, the relationship between price and perceived quality and between brand name and perceived quality was positive and statistically significant, and the effect of store name on perceived quality was small and not statistically significant. Moreover, though statistically significant, multi-cue studies generated slightly larger effect than single-cue studies. Monroe and Krishnans (1988) meta-analysis revealed a more positive effect for price when brand information was present than when it was not and that brand name enhanced the influence of price on quality perception. Andrews and Valenzi (1991) examined the individual and the combined effect of price, brand name, and store name on the quality perception for two products: sweaters and shoes. Render and OConner (1976) conducted a similar study on shirts, desk radio, and after-shave lotion. Both the studies revealed that price produced a stronger effect on the quality perception than either brand or store information. Another study conducted by Gardener (1971) on mens socks, electric toothbrush, tape recorder, and mens suit, revealed a moderate price-quality relationship when price was the only available information cue. However, when other information cues (product, brand, and limited product information) were introduced, this relationship was replaced by a brand-quality relationship. Dawar and Parker (1994) found that brand name was universally used more than price and physical appearance, which were, in turn, used more than the

retailers reputation as signals of product quality. The study also revealed that the more one uses the brand name as a signal, the more one uses price, physical appearance, and retailer reputation as signals of product quality. Dodds, Monroe and Grewal (1991) studied the relationship between the individual and the combined effects of price, brand, and store information on the buyers perception of product quality and value as well as on their willingness to buy. They found that when price was the only extrinsic cue available, consumers perceived quality to be positively related to price.

PRICING AND INDIAN BUYERS PERCEPTION OF QUALITY


In this paper, we use Indian data to answer the following two questions: Does high price have a positive influence on the buyers perception of product quality? Is there a significant difference in the buyers perception of the quality of products that fall in different price ranges? We analysed three productscolour television, representing the durable category; T-shirt, the semidurable category; and toothpaste, the non-durable category (see Box for Research Design and Methodology). We elicited information from consumers on these three products through a questionnaire. The questionnaire contained statements relating to the factors that the respondents might have considered while buying the product and their general opinion regarding the quality of that product. The statements were classified into factors on the basis of opinions of
Box: Research Design and Methodology
For the purpose of the study, three products were selected to represent the three product categories durable, semi-durable, and non-durable. Colour television represented the durable product category; T-shirt the semi-durable category; and toothpaste the non-durable product category. A household was considered as a sampling unit and the non-probability, convenience sampling method was adopted to select the sample items. The sample chosen consisted of 525 respondents for the three products taken together (179 respondents for colour television, 175 for T-shirt, and 171 for toothpaste). The respondents represented different age-groups, educational levels, and incomegroups. They were selected from the metropolitan city of Delhi and its satellite towns Faridabad, Ghaziabad, Noida, and Gurgaon. The data were collected through field survey with the help of three non-disguised, pre-structured questionnaires during December 2000 to May 2001. The data were analysed with the help of the SPSS package. The statistical tools used for data analysis included tabulation and frequency distribution, mean, standard deviation, correlation, paired t-test, and the multiple regression analysis.

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DOES HIGHER PRICE SIGNAL BETTER QUALITY?

five judges who were appointed for this purpose. The seven factors identified were brand reputation, price, features, promotion, brand loyalty, store reputation, and store loyalty. The second set of factors consisted of the buyers perception of the quality-revealing ability of five out of the seven factors, i.e., brand reputation, price, features, promotion, and store reputation.

Table 2: Ranking Factors in Terms of Quality Perception


Factors Colour Television T-shirt N=179 N=175 Mean Rank Mean Rank 3.50 3.32 3.74 2.74 3.16 II III I V IV 3.37 3.32 3.82 2.80 3.31 II III I V IV Toothpaste N=171 Mean Rank 3.36 3.08 3.14 2.68 2.66 I III II IV V

Factors Considered while Buying the Product


In order to determine the importance of the seven factors for the respondents while buying the three products colour television, T-shirt, and toothpaste the mean, percentage mean, and standard deviation were computed. On the basis of their mean values, the factors were ranked. The results are presented in Table 1. Consumers considered price as an important factor for purchasing the product. This was particularly true in the case of consumer durables like colour television as well as for semi-durable products like a T-shirt. While, for colour television, price bagged the first rank, in the case of T-shirt, it was ranked second. The buyers paid less attention to price while purchasing toothpaste and, hence, it managed to secure the fifth rank among the seven factors. The possible reason for this phenomenon is that people habitually buy a particular brand of toothpaste and do not pay much attention to the price.

Brand reputation Price Product features Promotion Store reputation

rank. Buyers gave maximum weight to product features but price was ranked third among the five factors, for all the three products. This suggests that buyers generally believe that the higher the price of the product, the superior will be its quality.

Price-Quality Relationship: Durable Product


The findings reported in Tables 1 and 2 reveal that price is considered to be an important factor by the respondents in product evaluation. As reported in Table 1, price is considered to be the most important factor while buying a colour television and people go for high-priced brands with the belief that it would ensure value for their money. It is also clear from Table 2 that people perceive that higher the price of colour television, the superior would be its quality and, hence, price managed to secure the third rank in terms of its association with quality.

Quality Perception of the Influencing Factors


In an attempt to compare the quality perception of the factors with regard to the three products, the mean scores and the corresponding ranks were computed. The results are presented in Table 2. It is noticed from Table 2 that buyers, to a considerable extent, judged the quality of the product on the basis of brand reputation. This was true for all the three products. Therefore, this factor secured the second rank in the case of both colour television and T-shirt. However, in the case of toothpaste, this factor bagged the first
Table 1: Factors Considered while Buying the Product
Factors Colour Television T-shirt N=179 N=175 Mean Rank Mean Rank 3.28 3.75 3.74 2.77 3.27 3.10 3.00 III I II VII IV V VI 3.04 3.32 3.73 2.54 3.06 2.84 2.88 IV II I VII III VI V Toothpaste N=171 Mean Rank 3.07 3.15 3.52 3.19 3.55 2.79 3.51 VI V II IV I VII III

Perceived Quality of Colour Television Falling in Different Price Ranges


In order to ascertain whether the buyers perception of quality was affected by price of the colour television, the respondents were asked to judge the quality of a regular 21-inch colour television on the basis of five price ranges. Their responses are summarized in Table 3. Only 7 out of 179 respondents (3.9%) believed that a low-priced colour television set would be of high quality, i.e., if it is priced up to Rs 10,000. On the other hand, for the television falling in the highest price range of Rs 25,001 and above, 142 respondents (79.3%) opined that it would be of very high quality and 21 respondents (11.7%) believed that it would be of high quality. Thus, it appears that the higher the price of colour television, the higher will be the consumers perception of its quality. The mean, percentage mean, and standard deviation for each of the price ranges are presented in Table 4. It indicates that the higher the price range, higher is the perception of quality of the colour television. The first rank was secured by the colour televisions falling

Brand reputation Price Product features Promotion Brand loyalty Store reputation Store loyalty

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Table 3: Price Range and Quality Ratings of Colour Television


Quality Price Range Up Rs Rs Rs Rs to Rs 10,000 10,001-Rs 15,000 15,001-Rs 20,000 20,001-Rs 25,000 25,001 and above Very Low 57(31.8) 04(02.2) 02(01.1) 00(00.0) 01(00.6) Low 54(30.2) 41(22.9) 03(01.7) 02(01.1) 00(00.0) Number(%) of Respondents Average High 61(34.1) 93(52.0) 73(40.8) 15(08.4) 15(08.4) 07(03.9) 40(22.3) 88(49.2) 88(49.2) 21(11.7)

Very High 00(00.0) 01(00.6) 13(07.3) 74(41.3) 142(79.3)

Total 179(100) 179(100) 179(100) 179(100) 179(100)

Table 4: Ranking Price Ranges in Terms of Perceived Quality of Colour Television


Price Range Rs Rs Rs Rs up 25,001 and above 20,001-Rs 25,000 15,001-Rs 20,000 10,001-Rs 15,000 to Rs 10,000 Mean 4.69 4.31 3.60 2.96 2.10 Percentage Standard Mean Deviation 93.8 86.2 72.0 59.2 42.0 0.67 0.67 0.70 0.75 0.90 Rank I II III IV V

in the price range of Rs 25,001 and above while the lowest price range of up to Rs 10,000 secured the fifth and the last rank. The information contained in Table 4 was further statistically analysed to ascertain if there was any significant difference in the perceived quality of colour televisions falling in different price ranges. In order to test this, all the price ranges were classified into three groups on the basis of their mean scores: Price-group A: Rs 25,001 and above. Price-group B: Rs 20,001 to Rs 25,000 and Rs 15,001 to Rs 20,000. Price-group C: Rs 10,001 to Rs 15,000 and up to Rs 10,000. The three price-groups were put to paired t-test, the results of which are presented in Table 5. The t-values were found to be significant at 0.01 level of significance in all the three cases. Hence, we may conclude that the perceived quality of the colour televisions falling in different price ranges differs significantly. A multiple regression was conducted to determine why the respondents considered price while purchasing
Table 5: Comparison of Price Groups of Colour Television
Price Group A B A C B C Mean 2.53 3.95 2.53 4.69 3.95 4.69 Standard Deviation 0.75 0.62 0.75 0.67 0.62 0.67 t-value 25.71** 28.31** 16.62**

a colour television. The results of this test are presented in Table 6. It reveals that while the quality perception attached with price and store prompted the buyer to consider the price while buying a television, his income also played a significant role. The correlations between three factors and price were also found to be statistically significant. The effect of the respondents perception about the price the higher the price of the television, the superior will be its quality played the most important role in the consideration of the factor price while buying television contributing up to 29 per cent of its total possible impact. Thus, the consumers considered price as an important criteria in judging the quality of colour television. They perceived higher-priced televisions to be of high quality. Significant differences relating to the perception of the quality of colour televisions falling in different price ranges were also found. Thus, we may accept the fact that high price has a positive influence on buyers perception of product quality.

Price-Quality Relationship: Semi-durable Product


The T-shirt market is flooded with a host of brands local, national, and multinational, besides the unbranded ones. Even among the branded T-shirts, the buyer is faced with the problem of making a distinction between a genuine and a fake brand. Most of the reputed brands are sold through the company outlets or exclusive showrooms. Hence, it becomes difficult to distinguish betTable 6: Variables Determining Price of Colour Television (Multiple Regression)
Independent Variable Quality perception of price Quality perception of store Income Multiple R = 0.47; R2 = 0.22. * Significant at 0.05 level. ** Significant at 0.01 level.
DOES HIGHER PRICE SIGNAL BETTER QUALITY?

Dependent Variable: Price Beta Simple r t-value 0.29** 0.23** 0.19** 0.37** 0.34** 0.16* 3.93 3.05 2.76

**Significant at 0.01 level.

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ween brand reputation and store reputation. Moreover, T-shirts are found in a very wide price range of, say, Rs 50 to Rs 2,500, and predicting the quality of a particular T-shirt available at a particular price becomes all the more difficult for the buyer. From the data given in Tables 1 and 2, we can examine the influence of price on the buyers perception of quality of a T-shirt. It is evident from the tables that price was an important factor for the respondents while purchasing a T-shirt and in judging its quality. Price got the second rank among the factors considered by the respondents while purchasing a T-shirt and the third rank in terms of its quality-revealing ability.

Perceived Quality of T-shirt Falling in Different Price Ranges


In order to ascertain whether the buyers perception of product quality is affected by the price of the T-shirt, nine price-classes were selected, starting from below Rs 50 to Rs 1,201 and above, and the respondents were asked to rate the quality of a T-shirt falling in these nine price ranges. The responses are presented in Table 7. Table 7 reveals that the lower the price, the lower is the quality rating given by the respondents. A total of 133 respondents (76%) were of the opinion that a Tshirt falling in the price range of below Rs 50 would be of very low quality and another 34 (19.4%) said that it would be of low quality. On the other hand, for the last four price ranges, i.e., the T-shirts priced above Rs 451, not a single respondent gave a low or a very low quality-rating. Thus, the respondents believed that the higher the price of the T-shirt, the superior would be its quality. Furthermore, the mean, percentage mean, and standard deviation for each of the price ranges were computed and then these price ranges were ranked on the basis of their mean scores. The results are presented in Table 8.
Table 7: Price Ranges and Quality Ratings of T-shirt
Quality Price Range Below Rs 50 Rs 51 to Rs 100 Rs 101 to Rs 200 Rs 201 to Rs 300 Rs 301 to Rs 450 Rs 451 to Rs 600 Rs 601 to Rs 900 Rs 901 to Rs 1,200 Rs 1,201 and above Very Low 133(76.0) 85(48.6) 16(09.1) 04(02.3) 01(00.6) 00(00.0) 00(00.0) 00(00.0) 00(00.0) Low 34(19.4) 67(38.3) 86(49.1) 22(12.6) 03(01.7) 00(00.0) 00(00.0) 00(00.0) 00(00.0)

Table 8 shows that while the T-shirt falling in the highest range of Rs 1,201 and above secured the first rank with the highest mean score, the lowest price range of below Rs 50 got the last rank with the lowest mean score. For a further analysis, price ranges in Table 8 were classified into three groups: Price-group A: Rs 1,201 and above, Rs 901 to Rs 1,200 and Rs 601 to Rs 900. Price-group B: Rs 451 to Rs 600, Rs 301 to Rs 450 and Rs 201 to Rs 300. Price-group C: Rs 101 to Rs 200, Rs 51 to Rs 100and below Rs 50. In order to test whether there is a significant difference in the perceived quality of a T-shirt falling in different price ranges, the three price groups were put to paired t-test. The results are presented in Table 9. The t-values in all the three cases were found to be high and significant at 0.01 level of significance, implying that the buyers perceived a significant difference in the quality of T-shirts falling in different price ranges. Similar results were obtained from the multiple regression analysis. High price has a positive influence on the buyers perception of the quality of T-shirts and people see a significant difference in the quality of T-shirts available at different price ranges. However, ultimately, buyers judge the price of the product on the basis of its features such as the strength and texture of the fabric, colour, design, and shape of the T-shirt, and not merely on the basis of their perception about the price or the high price-superior quality image.

Price-Quality Relationship: Non-durable Product


The respondents paid less attention to the price of the toothpaste, as shown in Table 1, and hence price was ranked fifth among the seven factors. However, in terms

Number and Percentage of Respondents Average High Very High 08(04.6) 23(13.1) 68(38.9) 125(71.4) 85(48.6) 31(71.7) 09(05.1) 08(04.6) 09(05.1) 00(00.0) 00(00.0) 05(02.9) 24(13.7) 81(46.3) 111(63.4) 88(50.3) 34(19.4) 19(10.9) 00(00.0) 00(00.0) 00(00.0) 00(00.0) 05(02.9) 33(18.9) 78(44.6) 133(76.0) 147(84.0)

Total 175(100) 175(100) 175(100) 175(100) 175(100) 175(100) 175(100) 175(100) 175(100)

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Table 8: Ranking Price Ranges: Perceived Quality of T-shirt


Price Range Rs 1,201 and above Rs 901 to Rs 1,200 Rs 601 to Rs 900 Rs 451 to Rs 600 Rs 301 to Rs 450 Rs 201 to Rs 300 Rs 101 to Rs 200 Rs 51 to Rs 100 Below Rs 50 Mean 4.79 4.71 4.39 4.01 3.49 2.97 2.35 1.65 1.29 Percentage Mean 95.8 94.2 87.8 80.2 69.8 59.4 47.0 33.0 25.8 Standard Deviation 0.52 0.55 0.59 0.61 0.61 0.60 0.69 0.70 0.55 Rank I II III IV V VI VII VIII IX

Table 9: Comparison of Price Groups of T-shirt


Price Group A B A C B C Mean 4.63 3.49 4.63 1.76 3.49 1.76 Standard Deviation 0.49 0.51 0.49 0.57 0.51 0.57 t-value 26.73** 47.91** 42.44**

**Significant at 0.01 level.

of the quality-revealing ability of this factor, it managed to get the third rank after brand reputation and features as can be noticed in Table 2. These results indicate that although people do not pay attention to the price of the toothpaste while making the purchase, they do associate high price with superior quality.

Perceived Quality of Toothpaste in Different Price Ranges


The respondents were asked to judge the quality of a 150gm toothpaste tube on the basis of six price ranges. The purpose was to ascertain whether the buyers perception of quality was affected by the price of the toothpaste. The responses are summarized in Table 10. As shown in the table, people perceived that the higher the price of the toothpaste, the superior will be its quality. While 86 respondents (50.3%) believed that a 150gm toothpaste tube priced below Rs 10 would be of very low quality, for the highest price range, viz., Rs 51 and above, 88 respondents (51.5%) gave a very high quality rating. On the basis of the results shown in Table 10, the mean, percentage mean, standard deviation, and the ranks corresponding to the mean values for each of the six price ranges were computed. The results are presented in Table 11. From Table 11, it is evident that the higher the price range, the higher is the mean value or the quality rating

and, therefore, higher is the corresponding rank. The highest price range of Rs 51 and above scored the highest mean value of 4.39 and secured the first rank. Thus, the respondents perceived a difference in the quality of toothpaste available at different prices and gave a high quality rating to the high-priced toothpaste and vice-versa. A further grouping of the price ranges, and a paired analysis as well as the multiple regression analysis substantiated these results. Thus, the buyers believe that the higher the price of toothpaste, the superior will be its quality. However, they would like to pay a high price for a toothpaste which has the maximum number of features as they believe that such a toothpaste will give the maximum value for their money. Moreover, most of the respondents were either brand-loyal or went for reputed brands and, therefore, paid little attention to the price of the toothpaste.

Principal Components of Price


The importance of price while buying any of the three products has already been discussed in the previous paragraphs. The principal components of this factor were further analysed on the basis of their mean scores and standard deviation. The results are presented in Table 12. The analysis of the variables revealed that, for all the three products, the buyers attached much importance to the fact that they would get value for their money by buying that brand. This was especially true for colour television and T-shirt. The variable value for

Table 10: Price Ranges and Quality Ratings of Toothpaste


Quality Price Range Below Rs 11 Rs 21 Rs 31 Rs 41 Rs 51 Rs 10 to Rs 20 to Rs 30 to Rs 40 to Rs 50 and above Very Low 86(50.3) 26(15.2) 02(01.2) 01(00.6) 01(00.6) 01(00.6) Low 57(33.3) 72(42.1) 28(16.4) 03(01.8) 01(00.6) 01(00.6) Number of Respondents(%) Average High 26(15.2) 66(38.6) 103(60.2) 56(32.8) 24(14.0) 19(11.1) 02(01.2) 07(04.1) 36(21.1) 94(55.0) 90(52.5) 62(36.3)

Very High 00(00.0) 00(00.0) 02(01.2) 17(09.9) 56(32.7) 88(51.5)

Total 171(100) 171(100) 171(100) 171(100) 171(100) 171(100)

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DOES HIGHER PRICE SIGNAL BETTER QUALITY?

Table 11: Ranking Price Ranges: Perceived Quality of Toothpaste


Price Range Rs 51 Rs 41 Rs 31 Rs 21 Rs 11 Below and above to Rs 50 to Rs 40 to Rs 30 to Rs 20 Rs 10 Mean 4.39 4.18 3.72 3.05 2.32 1.67 Percentage Mean 87.8 83.6 74.4 61.0 46.4 33.4 Standard Deviation 0.70 0.68 0.69 0.68 0.78 0.77 Rank I II III IV V VI

PRICE-QUALITY RELATIONSHIP: MANAGERIAL IMPLICATIONS


An analysis of the price-quality relationship for the three products reveals the following: Colour television: Among the seven factors considered by the buyers while purchasing a colour television, price is the most important factor. The buyers perceive a considerable difference among the quality of colour television falling under different price ranges. They believe that price can reveal its quality and the higher the price of the television, the superior will be its quality. Moreover, while purchasing a durable product like a colour television, buyers prefer to go for a high-or a reasonably-priced brand, rather than a low-priced one. Moreover, they want value for their money and find it risky to buy a low-priced product. T-shirt: For purchasing T-shirts too, price is an important consideration while selecting a brand. However, the buyers would like to pay more for reputed brands and for features present in the T-shirt like the strength and texture of the fabric and fast colour. They believe that the lower the price of the T-shirt, the inferior will be its quality. However, they are a bit sceptical about the high-price-superior quality relationship. Nevertheless, they perceive a considerable difference in the quality of the T-shirt falling in different price ranges. The expectation of getting value for their money has more importance to them than the high-price consideration. Toothpaste: The buyers generally pay less attention to the price of the toothpaste while making the actual purchase. Brand loyalty, features of the toothpaste, and brand reputation takes precedence over price. However, they see a significant difference in the quality of the toothpaste available at different price ranges. They do believe that the lower the price of the toothpaste, the inferior will be its quality and vice-versa. But, this belief is somewhat weaker for toothpaste in comparison to the other two products. Again, in comparison to colour television and T-shirt, while buying a toothpaste, the buyers are less concerned about whether they will get

money scored a very high mean of 4.58 and 4.39, respectively, for the two products, while it was only 3.53 for the toothpaste. For all the three products, a majority of the respondents believed that the price of the brand they had purchased was reasonable. This variable scored an average rating for the three products. The mean scores of this variable were 2.94, 2.96, and 2.77 for colour television, T-shirt, and toothpaste, respectively. The buyers perception of the product quality on the basis of price was further examined. For this purpose, the mean and the standard deviation for each of the relevant statements were computed. The results are shown in Table 13. The buyers believed that it would be risky to buy a low-priced brand and, therefore, the mean computed for this variable was reasonably high in case of all the three products: 3.59 for colour television, 3.58 for T-shirt, and 3.42 for toothpaste. Another interesting finding is that, despite the respondents agreeing to the common proposition the lower the price of the product, the inferior will be its quality, they did not strongly believe that the higher the price of the product, the better will be its quality. Therefore, while the mean scores for the former statement were 3.23, 3.27, and 3.06, respectively for colour television, T-shirt, and toothpaste, the mean scores for the latter statement were 3.14, 3.11, and 2.79, respectively. It can be inferred from Table 13 that buyers perceived a lesser association between price and quality for toothpaste in comparison to colour television and Tshirt.
Table 12: Factors Influencing Price Consideration
Factor Colour Television (N=179) Mean Standard Deviation 2.94 4.58 1.12 0.56

T-shirt (N=175) Mean Standard Deviation 2.96 4.39 1.12 0.65

Toothpaste (N=171) Mean Standard Deviation 2.77 3.53 0.98 0.71

High price of the product Value for money

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Table 13: Price and Quality Perception


Statement Colour Television N=179 Mean Standard Deviation 3.14 3.23 3.59 1.12 1.11 1.03 T-shirt N=175 Mean Standard Deviation 1.11 1.16 1.04 Toothpaste N=171 Mean Standard Deviation 2.79 3.06 3.42 1.08 1.12 1.06

The higher the price of the product, the better will be its quality The lower the price of the product, the inferior will be its quality It is risky to buy a low-priced product

3.11 3.27 3.58

value for their money from that purchase. The findings of the study have the following implications for the marketer for pricing of the three types of products: Colour television: In the case of colour television, setting the price too low will negatively affect the quality image of the product and the consumer would be reluctant to buy a low-priced brand which may lower his or her image in the society. Pricing it reasonably high will give the product a high quality image. But, the marketer should also take care of the competitors pricing policies and the purchasing power of the target market. T-shirt: Pricing of the T-shirt is all the more difficult. The problem faced by the marketers of T-shirt in the Indian market is that their target market segment mainly consists of the young, especially the college-going ones, having limited purchasing power. They would prefer a local or not-so-reputed brands of trendy T-shirts rather

than spending on expensive branded T-shirts. But, they will definitely prefer a T-shirt of reputed brand if it is within their purchasing power. However, reducing the price of the the T-shirt may dilute its image. Hence, the marketer of the T-shirt should adopt appropriate market segmentation strategies, select the appropriate target segment, and price the T-shirt accordingly. Toothpaste: For toothpaste, brand image is a decisive factor and the marketer should price the product according to the reputation enjoyed or likely to be enjoyed by the brand. However, the price-quality relationship for this product is rather weak in comparison to colour television and T-shirt. However, the marketer should keep in mind that charging a very low price would create an inferior quality image in the minds of the buyer. Moreover, the buyer, generally, judges the price of this product in terms of his/her internal reference price. Hence, an understanding of the buyers internal reference price is necessary for the marketer.

REFERENCES
Andrews, Robert I and Valenzi, Enxo R (1991). Combining Price, Brand and Store Cues to Form an Impression of Product Quality, quoted in Dodds, William B, Monroe, Kent B and Grewal, Dhruv, Effects of Price, Brand, and Store Information on Buyers Product Evaluations, Journal of Marketing Research, 28(3), 307-19. Dawar, Niraj and Parker, Philip (1994). Marketing Universals: Consumers Use of Brand Name, Price and Physical Appearance, and Retailer Reputation as Signals of Product Quality, Journal of Marketing, 58(2), 8195. Dodds, William B, Monroe, Kent B and Grewal, Dhruv (1991). Effects of Price, Brand, and Store Information on Buyers Product Evaluations, Journal of Marketing Research, 28(3), 307-19. Erickson, Gary M and Johansson, Johny K (1985). The Role of Price in Multi-Attribute Product Evaluations, Journal of Consumer Research, 12(3), 195-99. Gabor, A and Granger, C W J (1966). Price as an Indicator of Quality: Report on an Inquiry, Economica, 33(1), 4370. Gardener, David M (1971). Is there a Generalized PriceQuality Relationship? Journal of Marketing Research, 8(2), 241-43. Gerstner, Eitan (1985). Do Higher Prices Signal Higher Quality? Journal of Marketing Research, 22(2), 209-15. Lambert, Zarrel V (1970). Product Perception: An Important Variable in Price Strategy, Journal of Marketing, 34(4), 68-71. Lambert, Zarrel V (1972). Price and Choice Behaviour, Journal of Marketing Research, 9(1), 35-40. Leavitt, Harold J (1954). A Note on Some Experimental Findings about the Meaning of Price, Journal of Business, 27(2), 205-10. Lichtenstein, Donald R and Burton, Scot (1989). The Relationship Between Perceived and Objective PriceQuality, Journal of Marketing Research, 26(4), 429-43. Lichtenstein, Donald R, Ridgway, Nancy M and Netemeyer, Richard G (1993). Price Perceptions and Consumer Shopping Behaviour: A Field Study, Journal of Marketing Research, 30(2), 234-45. McConnell, J Douglas (1968). The Price-Quality Relationship in an Experimental Setting, Journal of Marketing Research, 5(3), 300-34.
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Mehta, Subhash C, Parasuraman, A and Ambarish Kumar, K (1972). Impact of Price and Brand on Consumers Choice: An Experimental Study, in Mehta, Subhash C, Indian Consumers: Studies and Cases for Marketing Decisions, New Delhi: Tata McGraw-Hill, 53-62. Monroe, Kent B and Krishnan, R (1988). The Effect of Price on Subjective Product Evaluations, quoted in Rao, Akshay R and Monroe, Kent B, The Moderating Effect of Prior Knowledge on Cue Utilization in Product Evaluations, Journal of Consumer Research, 15(3), 253-64. Rao, Akshay R and Monroe, Kent B (1988). The Moderating Effect of Prior Knowledge on Cue Utilization in Product Evaluations, Journal of Consumer Research, 15(3), 253-64. Rao, Akshay R and Monroe, Kent B (1989). The Effect of Price, Brand Name, and Store Name on Buyers Perceptions of Product Quality: An Integrative Review, Journal of Marketing Research, 26(3), 351-57. Render, Berry and OConnor, Thomas S (1976). The Influence of Price, Store Name and Brand Name on Perceptions of Product Quality, Journal of Academy of

Marketing Science, 4(4), 722-30. Schiffman, Leon G and Kanuk, Leslie Lazar (1996). Consumer Behaviour, 5th edition, New Delhi: Prentice-Hall of India, 193. Scitovsky, Tibor (1945). Some Consequences of the Habit of Judging Quality by Price, Review of Economic Studies, 12(2), 100-102. Shapiro, Benson P (1968). The Psychology of Pricing, Harvard Business Review, 46(4), 14-25. Shapiro, Benson P (1973). Price Reliance: Existence and Sources, Journal of Marketing Research, 10(3), 286-87. Shivdasani, H K (1972). Psychology of Pricing: PricePerceived Quality Relationship, Indian Management, 11(1), 29-33. Tellis, Gerard J, and Gaeth, Gary J (1990). Best Value, Price-Seeking and Price Aversion: The Impact of Information and Learning on Consumer Choices, Journal of Marketing, 54(2), 34-45. Zeithaml, Valarie A (1988). Consumer Perceptions of Price, Quality and Value: A Means-End Model and Synthesis of Evidence, Journal of Marketing, 52(3), 2-22.

D P S Verma was a Professor in the Department of Commerce, Delhi School of Economics, University of Delhi, Delhi. He has also held senior administrative and managerial positions in the central government and in the industry. His teaching and research interests include marketing, competition law and policy, consumer protection law, and operations research. He has authored four books and published over 100 articles in leading national and international journals. He has delivered lectures at reputed universities and business schools of Manchester, Birmingham, Paris, London, and Budapest. e-mail: dpsverma@hotmail.com

Soma Sen Gupta is a Senior Lecturer in Commerce, Kamla Nehru College, University of Delhi, Delhi. She is also a visiting faculty in the Department of Commerce, South Campus, University of Delhi, Delhi. A Ph.D. from the University of Delhi, she has published several articles in reputed journals and presented papers in national seminars. e-mail: soma_sg@rediffmail.com

We tend not to choose the unknown, which might be a shock or a disappointment or simply a little difficult to cope with. And yet it is the unknown with all its disappointments and surprises that is the most enriching. Anne Morrow Lindbergh

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Governance of Higher Education Institutions


I M Pandey

presents articles focusing on managerial applications of management practices, theories, and concepts

INTERFACES

Executive Summary

KEY WORDS Governance Autonomy Societal Accountability Bureaucratization Higher Education Institutions

Governance includes the issues of autonomy and accountability. In most countries, including developing countries, autonomy is being extended to higher education institutions (HEIs) in order to increase the flexibility which these institutions require to meet the needs of the society and the economy. Autonomy is the prerogative and the ability of an institution to act by its own choices in pursuit of its mission and goals. This ensures optimum allocation of resources for achieving the stated goals and missions of HEIs which are knowledge creation and dissemination. These institutions are missionoriented and although they have a significant impact on the economy and the society, their action and results are not directly measurable in financial terms. Autonomy encompasses three areas academic, institutional, and financial. Academic autonomy is the freedom for faculty members to operate freely which would lead to intellectual wealth of great quality. Institutional autonomy includes operational freedom and freedom of decision-making by the institute's constituents. Financial autonomy means the freedom to raise and use funds according to its priorities and internal rules. An institution cannot have full institutional autonomy without financial autonomy. Allowing financial autonomy with accountability would assess the effectiveness of the institution in disseminating knowledge to its students. Autonomy of publicly funded institutions also implies societal accountability. Institutions operate in a given environment. Therefore, their actions and outcomes must be consistent with the demands of the external environment. Societal concern assumes great significance as governance in HEIs cannot be devoid of environment and social responsibility. Every organization's actions influence the members of the society, directly or indirectly. Therefore, HEIs should strive to strike a balance between needs of their stakeholders, demands of the society, and autonomy. A socially responsible HEI should perform the following duties: Be a resource and supporter for public policies and issues. Ensure admission to all qualified students from all sections of the society. Facilitate quality education and research. Assist in professionalizing management practice of socially desirable but undermanaged sectors. Help business and industry through training, research, and consultancy. Research on the issues that are significant for the government, the industry, and other sectors and disseminate the research findings. Collaborate with other academic institutions to help them improve their academic standards. Organizations take a lot from the society and hence should also give back to the society. This attitude will sustain them over a long period of time.

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he issues of autonomy and accountability, in fact, relate to the governance of higher education institutions (HEIs). Historically, there has never been a doubt about the academic freedom of HEIs in the civilized world though it might have differed in scope and content. It is a norm now to extend autonomy to HEIs in most countries including developing countries and even those operating under closed political systems. HEIs in various countries evolved in response to the needs of business, economy, and society. The raison d'tre for the extension of autonomy is the fundamental belief that it will increase the flexibility and speed that the institutions require to address the needs of the society and the economy. Autonomy ensures optimum allocation of resources for achieving HEIs' stated goals and missions. The decision cannot be optimum if they cannot be made by the people who are directly responsible for supplying services. To respond to the stakeholders and the society's changing needs quickly, HEIs must be innovative, creative, and enterprising. It is doubtful that a state-controlled and financially dependent institution, devoid of autonomy, is likely to be enterprising, innovative, and creative; it will be over-bureaucratic and wasteful in utilizing the scarce resources (human capital and money).

Academic Autonomy
From ancient times, the civilized world has developed and practised models of academic freedom; a student is free to learn what he or she chooses to learn; a teacher is free to teach and research what he or she chooses to teach and research. This freedom is recognized everywhere, legally or by tradition and practice, irrespective of financial dependence or independence of an academic institution. This has resulted in intellectual wealth of great quality. Whenever this privilege is violated, it creates uproar, anger, and anguish. In democratically functioning societies, everyone including the state takes academic freedom for granted. An operational definition of academic freedom is: "It is the unfettered choice of an individual teacher to teach and write and pursue research, irrespective of what it leads to, without any fear from anywhere."

Institutional Autonomy
Institutional autonomy goes beyond academic freedom and includes operational freedom and the freedom of deciding the framework and structure of the decisionmaking process. Institutional autonomy guarantees that the institution is entitled to determine its structure, systems, mission, goals, and priorities consistent with the societal needs and take decisions independently. Generally, in case of the state-funded HEIs, the state, through policy deliberations with various segments of the society, provides for an organizational structure that will ensure the autonomous decision-making and functioning of HEIs. In a fair and transparent manner, it will also put a governing board in place that will comprise eminent people from different sectors education, business, government, social organizations, etc. The institutional autonomy will be diluted if the governing board is constituted on political considerations rather than based on the demands of competent governance. The role of the governing board will be to provide broad policy guidelines, strategic directions, and help the head (say, the director) of the institution to raise funds. The board will also ensure academic autonomy and freedom of decision-making to the faculty and protect it. It is perhaps desirable that the governing board and the faculty, rather than the government, should have a greater say in appointing the director to ensure autonomy. The real autonomy will lie with the authority and freedom of academic staff ensuring the efficient and effective
GOVERNANCE OF HIGHER EDUCATION INSTITUTIONS

WHAT IS AUTONOMY?
Autonomy is the privilege and the capacity of an institution to act by its own choices in pursuit of its mission and goals. The degree of autonomy depends on the extent an institution can decide its own actions and the extent it is directed to follow directions and actions not of its choice. Hence, autonomy means unconstrained freedom of action and capacity of action within the established norms, goals, mission, structure, systems, and processes of the institution. As I argue later, unconstrained autonomy bags more accountability. Autonomy in the case of HEIs encompasses operational or institutional autonomy, academic freedom, and financial autonomy. I will explain each of them. Without financial autonomy, no institution can have effective institutional and academic autonomy unless the funding agencies grant financial autonomy by a contract that is either legally or socially enforceable. The past traditions, based on mutual trust and respect between the institutions and fund providers (may be read as government), may also ensure financial autonomy, if not absolutely, but to a great extent, functionally useful and viable.

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functioning of the institution. Knowledge is the core of an academic institution. It is the faculty members who create and disseminate knowledge. Hence, they should be at the centre stage of decision-making. The most critical ingredients of institutional autonomy include the freedom of the faculty members to: select students develop processes to recruit academic and nonacademic staff set standards of teaching, research, and faculty and student performance decide to whom to award degrees design its curriculum and offer new courses as demanded by changing needs of the economy and the society innovate in teaching methodology allocate funds received from any source.

Financial Autonomy
Financial autonomy means the freedom to raise and use funds. Any institution that raises its own funds can decide to use it according to its internal rules, systems, processes etc.; it should not be constrained by the external influences and control to use funds. Hence, it will enjoy financial autonomy. An institution, dependent on the government funds, may enjoy financial autonomy in different degrees. It will have financial autonomy if it has independent decision-making power to use its own and the government funds. The state may behave differently. It may interfere with certain areas of decision-making and spending; or it may play the role of a facilitator and counsellor and actively or passively guide the utilization of funds; or it may ask the financially supported institution to be subservient to its diktat; or it may provide financial support without any intervention. The resource dependence of HEIs on the government funding (and other funding sources) necessitates them to depend on their environment. At times, they may find it difficult to maintain autonomy and will be confronted with outside interference and control quite a dysfunctional situation for discharging their stated gaols and missions. Notwithstanding the financial dependence and diluted autonomy, there are HEIs like JNU or Delhi School of Economics that have maintained high academic standards since these institutions do enjoy academic freedom. A multiple-source and self-generated funding is central to an institution's financial autonomy. Through
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a conscious decision, most governments worldwide are reducing their share in funding HEIs. They are demanding HEIs to raise their own funds (by deciding on fees and other sources of income) and do a lot with lesser government financial support. For example, apart from the developed countries, in developing countries like Indonesia, Malaysia, Thailand, and Bangladesh, governments have passed legislations in favour of the privatization of higher education. Some governments are prepared to make strategic investments in highly achievement-oriented and internationally acclaimed HEIs and accord them full autonomy. South Korea is an example. The Expenditure Reform Commission, India, recommended a liberal funding without much of administrative and financial strings and with full autonomy to 'outstanding and internationally' autonomous institutions (ERC Report, p 207). It is paradoxical to note that in some quarters in India, people argue that the higher education professional institutions like IIMs and IITs should have financial dependence on the state in spite of their capabilities to raise their own funds. It is not good economics.

Link between Institutional and Financial Autonomy


Given the fact that certain HEIs will remain financially dependent on the government, willingly or forcefully or otherwise, could they retain both financial autonomy and institutional autonomy? Autonomy means accountability. Assuming that we are able to specify accountability for these institutions, the government must allow these institutions to function as autonomous institutions so that they could achieve excellence in meeting their goals, mission, etc. It is incongruous to think that an institution will have full institutional autonomy without financial autonomy; they are interlinked and inseparable. By financial autonomy, I mean the ability and capability of an institution to spend money according to its strategic and operating priorities to achieve its stated goals. Of course, there are institutions that have functional and financial autonomy but have not performed well. To satisfy all ingredients of institutional autonomy as spelt earlier in this paper, having financial autonomy is a necessary condition. Usually, governments, including in India, give funding on the basis of the number of students enrolled in degree/diploma programmes. Thus, a simple mechanism of allowing financial autonomy with accountability is assessing an institution's effectiveness in imparting knowledge to the admitted students. It

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should be understood that an institution imparting quality education should decide on the number of students and the fees. The government can then decide what percentage of fees it will like to reimburse to the institution. This process will ensure the autonomy of HEIs.

ACCOUNTABILITY
Autonomy or no autonomy, all organizations, including institutions of higher education, are accountable to its stakeholders in particular and to the society in general. Autonomy of publicly funded institutions also implies societal accountability. Greater autonomy to these institutions means greater accountability to the society. Normally, accountability means measuring the efficiency and effectiveness of what an institution does. If an institution does well (in terms of quality) what it is intended to do, it is efficient. If it utilizes resources economically and judiciously, it is effective. Accountability pre-supposes clearly defined mission, goals, initiatives, etc. and performance measurement indicators. Excellent institutions clearly state where and how they seek to excel and accomplish objectives. For highly acclaimed HEIs, it is sufficient to submit the audited financial statement to the government and other providers of funds. Their performance and achievements should be so visible that they should not be subjected to bureaucratic controls and reporting and auditing. However, I would suggest that such institutions should also prepare periodically a 'social report' listing their contributions to the society. For example, IITs and IIMs are known for the quality of their students and research, but they have also made tremendous impact and contribution in many socially desirable sectors purely due to the self-motivated initiatives of individuals and groups of faculty members. Accountability will be wanting from HEIs if the society loses trust in them. If that is the case, the challenge is to regain the society's trust. The institutions should strive to strike a balance between stakeholders' needs, societal demands, and institutional autonomy. A socially responsible HEI will do the following to discharge its societal accountability: Serve as a resource and champion for public policy and issues. Ensure admission to all qualified students from all sections of the society. Ensure quality education and research. Help in professionalizing management practice of

socially desirable, but under-managed sectors. Assist business and industry through training, research, and consultancy. Research on the issues that are significant for the government, the industry, and other sectors and disseminate the research findings. Collaborate with other academic institutions to help them improve their academic standards. Sensitize the participants in various education programmes to the concerns and needs of the society. We must understand that accountability can restrain the institutional and academic autonomy. The idea that those who fund higher education should have the right to determine how funds are spent might erode autonomy and would be dysfunctional to the efficient and effective functioning of HEIs. It is not only the government but also the industry and other agencies that fund higher education which demand accountability. Corporate or non-corporate organizations funding the research of faculty members may demand specific results. This will erode their intellectual freedom and capacity. In the name of accountability and efficiency, corporate sector practices and bureaucracy may be imposed on the HEIs. Both 'managerism' and 'bureaucratization' will prove fatal to the very survival of institutional autonomy an essential condition for achieving excellence. HEIs are mission-oriented organizations. Their accountability lies in achieving their missions.

GOVERNANCE
Governance assumes a decision-making structure and performance evaluation. The issues of governance become more complex in the case of HEIs as there are no directly identifiable owners and they have multiple sources of funds in the form of grants and donations. They are also coalitions of different groups and their actions are not measurable in financial terms, though they have tremendous impact on the society. What is the governance model that can be applied to such organizations? I shall take the example of Indian Institute of Management, Ahmedabad (IIMA) to illustrate the practice of governance at HEIs. IIMA was the result of the grand vision of Dr Vikaram Sarabhai. It is a fine example of the trustworthy partnership and cooperation between the state and the central governments and private industry. In the beginning, it received substantial funds
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from the government. Over the years, with government support and its own initiatives of raising funds, its dependence on the government funds has reduced. In the past, persons of great stature and eminence like Shri Keshub Mahindra, Dr I G Patel, and Shri P L Tandon have served as the Chairman/President of the IIMA governing board. Reputed people with great distinction from all walks of life are serving as members on the IIMA board. IIMA was created with a clear mission of professionalizing management education and practice. From the very beginning, the founding fathers created a value system that led faculty members to excel in teaching, research, training, and consulting. It is worth noting that IIMA was created as a management institute rather than a business school. As a management institute, its scope was much broader than being merely confined to the business sector. It was designed to cater to all sectors and particularly those that were socially desirable. IIMA, from its inception, committed itself to professionalize management practices of the business sector as well as agriculture and public systems (education, energy, transport, infrastructure,etc.). Over the years, many more new sectors have been added. IIMA is functioning as a autonomous institution while diligently serving the societal needs. The achievements of IIMs in general and IIMA in particular are well known. What has motivated IIMA to achieve what it has achieved? It is the autonomy of the faculty members that has motivated them to achieve excellence. Their salaries and other monetary benefits are not very high by world standards or industry standards. Consulting adds a little more to their monetary benefits. It, however, has a much broader objective; it is a mechanism of learning about the management practice and using this knowledge to enrich students and other participants in the education programmes. It also provides good ideas and rich material for research. IIMs should have appropriate processes to link consulting with teaching and research. The faculty is the core of an institution's performance and excellence. As the mission of HEIs like IIMs is to professionalize management practice and education in India, the faculty members assume the centrestage in achieving this mission. The faculty members are not managers; they are knowledge creators and intellectuals. Any system of governance that interferes with their autonomous functioning will be dysfunctional. IIMA is a faculty driven and managed institute. The faculty
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has all the responsibilities to discharge its duties without any authority. IIMA faculty, to my knowledge and experience, is amongst the most committed and competent faculty in India. The faculty members have doctorates from some of the best universities in the world such as Harvard, MIT, Chicago, Berkeley, Stanford, London School of Economics, Delhi School of Economics, and IIMA itself. It is only the academic freedom and autonomy and hence the opportunity to innovate and excel that has kept these faculty members at IIMA. If the government starts governing IIMA by rules and bureaucratic controls, it would mar their creativity and innovativeness and they would not be able to achieve excellence in attaining the institute's mission. In my experience and as per my knowledge, both the state and the central governments have always supported IIMA in varieties of ways in its endeavour to achieve excellence. IIMA is fortunate to have its well wishers in government and everywhere. No doubt, the government does subject IIMs and IIMA to some administrative and bureaucratic rules and control which at times impede the speed and flexibility of IIMA in the day-to-day operations. But, there was never any substantial interference; the autonomy financial, academic, and institutional was respected, by and large. Not that IIMA did not face serious problems; it did but each time the problem was amicably settled. We had mature and responsible people having understanding of mutual constraints on both the sides. Once IIMs and IIMA faced a grave situation where the government wanted it to become a 'national institute' through an act of Parliament. IIMA argued with the minister and the bureaucrats concerned that this will be a disastrous step for the autonomous functioning of IIMs; they understood and agreed with the Institute's point of view.

CONCLUSION
The governance model for HEIs will have to be a normative model consciously created with specific mission and well-defined goals. In this model, the real decision-making should be with the faculty members who will develop a culture of excellence. The government's role should be to put an eminent board in place which will act as a sounding board for the decisions of the institutes. If the HEIs achieve excellence as determined by the users of teaching, research, consulting, etc., they would have made a tremendous contribution to the society and served their purpose.

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Note The author's reflections in this article are based on his experience of over two decades at Indian Institute of Management, Ahmedabad. I M Pandey, a Ph.D. in Finance from Delhi School of Economics, University of Delhi, is a Professor at Indian Institute of Management, Ahmedabad. He has taught at graduate business schools in USA, France, UK, Malaysia, Thailand, Vietnam, Sri Lanka and Bangladesh. His publications include ten books, six research monographs, and about 100 articles and management cases. His

articles are published in international refereed journals in USA, UK, Singapore, Malaysia, and France. He is a member on the IFCI and Cochin Shipyard Company boards and has served on the boards of IDBI-Principal, Ahmedabad Stock Exchange, Gujarat Chemicals, and IDBI's Western Region Advisory Board. He was a member of the Controller of Capital Issues Advisory Committee. He is Editor of Vikalpa: The Journal for Decision Makers and is on the editorial advisory boards of eight journals including Global Business and Finance Review (USA) and International Journal of Accounting, Auditing and Performance Evaluation (UK). e-mail: impandey@iimahd.ernet.in

When the creation was new and all the stars shone in their first splendour, the gods held their assembly in the sky and sang Oh, the picture of perfection! The joy unalloyed! But one cried of a sudden It seems that somewhere there is a break in the chain of light and one of the stars has been lost. The golden string of their harp snapped, their song stopped, and they cried in dismay Yes, that lost star was the best, she was the glory of all heavens! From that day the search is unceasing for her, and the cry goes on from one to the other that in her the world has lost its one joy! Only in the deepest silence of night the stars smile and whisper among themselves Vain is this seeking! Unbroken perfection is over all! Rabindranath Tagore Gitanjali

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GOVERNANCE OF HIGHER EDUCATION INSTITUTIONS

Social Context of Management Education: Institution Building Experiences at IIMs


I G Patel, Samuel Paul, Pradip N Khandwalla, Amitava Bose, K R S Murthy, N Vittal, Rishikesha T Krishnan, and Arun Kumar Jain Anil K Gupta (Coordinator)
Executive Summary

includes debate by practitioners and academicians on a contemporary topic

COLLOQUIUM

KEY WORDS Management Education Institutional Building Elitism Governance Corporate Social Responsibility Academic Excellence Globalization

IIMs have played a significant role in realizing the societal aspirations of India becoming a creative, compassionate, and developed nation. This needs attention of all stakeholders. Very few people know that IIMs contribute as much, if not more, to public action and management as to the private sector management. The purpose of this Colloquium is to proactively ask questions which will help IIMs to explicitly state their contributions to the society and be ready for challenges ahead. Some of the key issues discussed in this Colloquium are: The processes through which IIMs have defined their goals and directions over the years. Adequacy of initiatives taken by IIMs to generate greater social, ethical, and professional accountability among students and executives trained at IIMs. IIMs institution building role and its impact on the quality of management education and practice in India. Factors contributing to the elitist character of IIMs and its social context and significance. The potential for IIMs playing a catalytic role in facilitating, empowering or serving the small-scale, unorganized/under-managed sectors and other civil society organizations. The role that IIMs see for themselves in building India into a developed nation. The following points emerged from the discussion: IIMs have made a tremendous contribution to the Indian economy by providing corporate leadership. The skills developed and honed in IIMs should be extended to other sectors and institutions. IIMs form the backbone of our countrys economic success by helping professionalize management for all sectors of the economy and providing the entrepreneurial, technical, and skilled personnel for superior wealth generation. IIMs offer a model for management education with open and merit-based admissions, good and relevant curriculum, campus placement, and a general motivation to be relevant to the social needs. The participative, decentralized, and transparent governance system can make IIMs the role model for excellence-seeking institutions. If global reputation for distinctive contribution and institutional excellence has to be sustained, IIMs would need to coordinate their approaches to addressing opportunities in globalization. To gain social legitimacy and respect of various stakeholders, IIMs need to take proactive steps to bring students from less privileged social backgrounds. Higher management education institutions such as IIMs should develop a coherent and compelling vision of how they would want to contribute to the new, liberalized India. Visioning must be participative and must involve all the stakeholders.

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I G Patel
Former Director, IIM, Ahmedabad and London School of Economics; Former Governor, RBI There is a great deal of legitimate concern and unease as well as ill-informed criticism about the state of higher education in India. Many feel that the present system of higher education is elitist and should not be pampered further. On the other hand, most educationists are worried about the poor quality of teaching and research in most of our educational institutions. They emphasize the need for much greater resources if higher education is to be worthy of the name and if at least some institutions of higher learning in India are to be world-class and cater to the vastly complex needs of a knowledge society. In the new world of globalization, it is the quality of knowledge and research and skills which will give competitive advantage to a country and not cheap unskilled labour or even natural resources. Are we not living on the capital created in the early years of Independence by the vision of a Nehru or a Bhabha or a Mahalanobis? institutions to take certain proactive steps to alleviate the situation. Let me just mention a few things which are crying for attention. Basic talent is distributed fairly widely and uniformly in the society. What one needs to outperform and make it to the top is capacity building. What steps have technical or professional institutions such as IITs and IIMs taken to achieve such a goal? Given the tough standards of entry in the institutions of higher education, only the most meritorious are able to reach such institutions. This is to be expected. But, the truth is that, to gain social legitimacy and respect of various stakeholders, such institutions have to take proactive steps to bring students from less privileged social backgrounds. Indian administrative service tried and succeeded in this mission.

First of all, if we are to meet the needs of a globalized When economically weak students do enter such society, let us not decry, denigrate or elite institutions, there is a need to debilitate such centres of excellence provide them financial and other In the new world of as we already have. IIMs, IITs, Indiassistance to lessen the stress on their globalization, it is the an Institute of Science, Tata Institute families. A fund of Rs 2.5 million was quality of knowledge and of Fundamental Research, National created for such a purpose several research and skills which Drug Research Laboratory, National years ago at IIMA. We need to gauge will give competitive Physics or Chemical Laboratories the effective utilization of the fund advantage to a country and many others are among the best till recently and the proactive steps and not cheap unskilled in the world. We have to strive to taken to reach out to such students. labour or even natural make them better not worse. There are several reasons why resources. students from institutions like IIMs I would agree that elitism is go to well-paying corporate jobs. inherent in our present system of Much of the public sector does not have the organhigher education. By and large, the middle and upper izational environment to absorb the skills and persclasses benefit by it and the poor have little access to pectives that such students are equipped with. But, it. I am afraid this is true to some extent of every country one could try to provide incentives to students to be it India, the UK or the US. The relatively betterencourage them to go to social and under-managed off with higher education in the family for generations sectors. For instance, one could write-off the loans have an advantage which gets compounded by their or pay the loans of such students who go to such ability to send their children to better schools. To pretend sectors even for one or two years. Every developthat we can avoid this altogether and everywhere is mental institution has to cross-subsidize. Why cant hypocritical. At the same time, it cannot be denied that the better-off students pay more so that the less these so-called elite institutions do have some social privileged students can pay less and some go to responsibilities. To gain social legitimacy and respect of work for NGOs or such other institutions? various stakeholders, it becomes unavoidable for such

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Tremendous social capital has been invested in the background who otherwise cannot afford elitist edubuilding up of IIMs and IITs and there is no doubt cation, they may be brought into the mainstream that the society has a right to demand returns on through such proactive steps. this investment. There is a need for greater social My question is: Are institutions of higher education engagement. Special programmes for women and listening enough to the voices at the other socially disadvantaged grassroots in society? The pyramid sections must be organized and Tremendous social capital for social climbing is becoming steepa fund be created to pay their has been invested in the er and steeper with passage of time. fees, of course, on merit grounds. building up of IIMs and The base from which elites are drawn Equality of opportunity has to IITs and there is no doubt and the constituency which they be ensured even in Managethat the society has a serve is becoming thinner. Can the ment Development Programmes right to demand returns pyramid become flatter? Will IIMs (MDPs) as managers from less on this investment. There take more proactive steps to bring privileged classes have no less is a need for greater young students and professional talent than those whose employsocial engagement. managers from various social ers or who themselves can pay streams into their elite club so that to get high quality executive the elite themselves become more training that IIMs offer. socially aligned and responsive? After all, the autonomy Yet another way to create new elite with may be these institutions have enjoyed and quite well deservhigher social conscience could be to track toppers edly also cast on them greater social responsibility. There of school exams in different states and encourage is no way by which the demand for such an accountthem to apply to such elite institutions. By support- ability can be dismissed as an unnecessary call on their ing some of the students from disadvantaged social doors.

Samuel Paul
Former Director, IIM, Ahmedabad; Chairman, Public Affairs Centre, Bangalore IIMs were established by the Government of India as ever, the only news about them in the media usually a part of its industrialization and modernization strapertain to the high salaries offered to the new graduates tegy. IITs had already arrived and management educaalmost as if salary is a proxy for excellence! Little else tion was seen as a complementary input along with was written about them in the press until the infamous technology for the modernization of the Indian econofee issue came along. It merely reinforced the elitist my. It explains why these two sets of institutions were image of IIMs. brought within the purview of the But those who founded these technical education wing of the institutions were inspired by their Ministry of Education. IIMs stand out because of potential for professionalizing manhigh barriers to entry, The public perception about agement. They may have been aware placement of their most institutions of higher learning of the elitist trap along the way but graduates in the corporate is that they are elitist. There is noththat would not have stopped them sector, and the global ing surprising about it as they cater from taking the route they did. opportunities that come largely to rather small and select their way. The first three IIMs to be set up groups of young people whose parwere keenly aware of the larger role ents were able to give them a good they had to play in the nations deeducation. Among such institutions, IIMs stand out velopment. Even though IIMA and IIMC had well known because of the high barriers to entry into these instituUS business schools as their collaborators, they did not tions, placement of their graduates in the corporate sector, confine their attention to the private corporate sector and the global opportunities that come their way. HowVIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

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alone. At IIMA, the early establishment of the Centre for Management in Agriculture (CMA) and the later creation of the Public Systems Group (PSG) testify to its larger vision. IIMA has collaborated with the National Academy of Administration at Mussoorie for several years in IAS training programmes. Much field work was done at this time and new cases were developed for use at the Academy. IIMA also incubated the Indian Institute of Forestry Management and contributed to faculty development at many universities.

At IIMC, many programmes were conducted for public enterprises and advisory services were provided to various governments. At IIMB, there was an ambitious effort to work on the management issues of a variety of sectors beyond industry. A good deal of Third, there is a special problem that is peculiar to research, training, and consulting was thus done for the the government. The government personnel may attend government, social sectors, and other non-corporate IIM programmes but are often unsectors. The fact remains, however, able to apply their new knowledge that these initiatives did not result in in their settings. Either the system There is a special a significant diversification of the IIM may not permit it or sustaining new programmes. The corporate sector problem that is peculiar ideas becomes difficult in a bureaucfocus continued to be the dominant to the government. The racy that does not reward them. This and the most visible image of all IIMs. government personnel was the problem with IIMA-NationIt is important to see why this has may attend IIM al Academy collaboration. The propersisted. programmes but are often gramme got off to a good start when unable to apply their new Some might argue that IIMs did the IIMA faculty was directly inknowledge in their not adequately highlight their work volved. But, when this period of joint settings. Either the system beyond the private corporate sector. work was over, the Academy was may not permit it or Though there is some truth in it, I unable to sustain the programme sustaining new ideas doubt very much that more aggreswith the same vigour. Factors such becomes difficult in a sive publicity would have helped. as changes in leadership and faculty bureaucracy that does not There were more important and may well have been responsible for reward them. subtle factors at work. First of all, this decline. Many consulting assignmanagement knowledge and curriments for the government may also cula have evolved around the corporate sector and it is have had a similar fate. this pool of knowledge, concepts, and tools that the IIMs Given this scenario, it is not surprising that IIMs borrowed from abroad. It made it easier for IIMs to have been dominated by their corporate sector focus. It organize programmes and undertake consultancy for will not be easy to reverse or weaken this trend. But, the corporate sector. Even if IIMs invested in research surely, IIMs can take steps to address the needs of other to generate knowledge on other sectors, it would have sectors that are important for the country and the govtaken time. Thus, there was a head start factor in favour ernment. Even the private business schools in the West of serving the private corporate sector. have diversified their work along these lines. Leading Second, there was greater response to IIMs from the business schools in the US, for example, have created corporate sector than from other sectors and public special programmes for small entrepreneurs, the farm agencies. The post-graduate and executive programmes sector, and non-governmental organizations. Some of are the best examples. The corporate sector absorbed them have funded research on the problems of these

almost all the new graduates. IIMBs graduates who specialized in other sectors did not find suitable placement. These specializations were later on discontinued. Consulting work was also dominated by the corporates. Government agencies that badly need management skills have many constraints in recruiting IIM graduates and attending executive programmes. Their procedures and compensation policies are such that they cannot effectively compete with the private corporate sector. Underserved sectors such as cooperatives or health may benefit even more from modern management but they are unable or not motivated enough to respond. And this is made even worse by the much higher salaries and career prospects corporates are able to offer to the new graduates.

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organizations. There are dedicated faculty groups who publish on these subjects. There is no reason why this cannot be done in India by the publicly funded IIMs. No one should be under the illusion that this shift will erase the elitist stamp on IIMs. The endeavour should be to do what is right for the country.

As noted above, several IIMs have already launched initiatives that go beyond the private corporate sector. A recent example is the creation of the Centre for Public International experience clearly shows that new Policy at IIMB that has a long-term programme for central initiatives invariably call for fresh investments and and state level officials. Perhaps, they are not publicized dedicated groups. It is easy to produce one paper enough and hence may not be fully known to the circles on a subject or to offer a course on a one-time basis. that matter. Of course, much more But, to generate systematic knowlneeds to be done beyond publicity. edge on a sector or to develop new Several IIMs have already What steps should IIMs take to move concepts and tools, longer-term inlaunched initiatives that in this direction? vestments and team efforts will be go beyond the private required. The kind of home work to corporate sector. A recent The faculty of IIMs should be be done to make this happen will not example is the creation of sensitized to the need to have a occur in the absence of a fair measure broader view of the management the Centre for Public of internal consensus and institutionneeds in the country. The new Policy at IIMB that has a al support. faculty who come from diverse long-term programme for Institutional autonomy and fields may not be fully aware of central and state level flexibility are pre-requisites for dothe new role they are expected officials. ing the different things mentioned to play. In earlier years, some above. It is unlikely that those who of the IIMs had a practice of orilook to the government to be told what they should enting the new faculty to the vision and scope of do will make use of the autonomy they possess. their institutes. The collaborating US schools also Many educational institutions are run in a bureauhelped with this process. It is important that the key cratic style. Autonomy seems to be wasted on them. professionals in IIMs share a common vision of their The traditions of IIMs in their early years were very role and contribution to society. different from this style. It was not uncommon for them to influence the governments ideas and ideas There are many ways to encourage faculty and boards for IIMs. I hope that the newer IIMs will learn from to think along these lines. One that has been tried this experience and tradition and guard and use out at IIMA is a faculty Committee on Future Ditheir autonomy to the best of their ability. rections that deliberates and recommends an agen-

da for action. Another option is to systematically consult with different stakeholders (not only the corporates) who may have useful ideas to offer. This implies, of course, that the institutes and their leadership including the faculty are willing to introspect and look for new ideas. It is the only way to avoid others pushing their agenda on IIMs. The initiative for change should come from within.

Pradip N Khandwalla
Former Director, IIM, Ahmedabad Professor Anil Gupta has posed a tough set of questions about the dilemmas of IIMs in the context of the faceoff between IIMs and its major funder, the government. The crisis seems to have passed due to political reasons. But, it could recur, in the same or other forms, so long as the dependency on the government is not addressed. I am nowhere near as familiar with the other IIMs as I am with IIMA, where I spent nearly 27 years of
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my professional life. So, my remarks pertain primarily to IIMA, though I hope they are not wholly irrelevant to the other IIMs. The tension between a principal funder and an institution of academic excellence is a continuing one but if IIMA retains its major strengths and responds creatively and effectively to these tensions, it will emerge stronger. Let me first list the strengths that IIMA, and generally all institutions of

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excellence, must retain or develop.

First of all, IIMA stands out as one of the few institutions in India that has a genuinely participative, decentralized, and transparent governance system. In theory, almost all the powers are vested in the Board of Governors and the Director. In reality, much of the decision-making is with the committees and individuals. The faculty, for instance, through various committees, has considerable say in the selection of the students and faculty members, in faculty promotions, in the content of the academic and training programmes that are offered, in the research that is funded, and even such financial decisions as the fixing of the fees. Individual faculty members have freedom to design new courses and training programmes, decide on the course content and pedagogy, and what research to undertake. Not that the decision-making process is a smooth one. It is frequently turbulent and occasionally exasperatingly slow. But, the process nearly mirrors the kind of democratic and participative civil society that we aspire to. In this sense, IIMA is a role model for all the excellence-seeking institutions of this country. They all have a stake in the excellence-through-autonomy of IIMA. Their support is worth cultivating in the present crisis.

IIMA stands out as one of the few institutions in India that has a genuinely participative, decentralized, and transparent governance system. It is a role model for all the excellence-seeking institutions of this country.

every course undergoes some change or the other every year in terms of readings, tests, projects or even pedagogy. In any given year, a dozen or more new courses and training programmes may be on offer. There is a huge backup for what is taught in the classroom in the form of hundreds of Indian case studies, research findings, and teaching notes that highlight the Indian, and increasingly, the global context. I do not have the latest figures. But, my estimate is that, over the years, IIMA faculty, research staff, and students have produced a thousand books and research monographs, and several thousand papers, case studies, and teaching notes. This is a contribution to the Indian management knowledge pool of monumental proportions in a country in which the style is to replicate in the classroom mostly American and British management wisdom of a decade or two back. This contribution is not well known. It should be publicized a lot more. No one in his or her right mind would want to erode IIMAs capacity for generating new and relevant management-related knowledge.

Fourthly, almost from its inception, IIMA has regarded itself as not just a business school, but as an institute of management. This is where it sharply differs from the leading overseas business schools. Over the Secondly, no one so far has credibly pointed to any decades, it formed centres and groups to contribute to hanky-panky in IIMAs selection of students and faculty. the effective management of agriculture and rural deHere again, IIMA is a role model for many institutions velopment, developmental administration, population in terms of institutional integrity. The latter is a scarce control, energy, health, and education. These groups commodity. No government in its right mind would have extended the impact of IIMA well beyond the want to put it in jeopardy through its actions. corporate sector. This contribution of IIMA also is not known enough. Again, no major The third strength of IIMA is its stakeholder in IIMA would want to If professional institutional creativity. It has not only erode this capacity of IIMA to conmanagement has become spawned several academic and traintribute, through research, training, an honoured phrase in ing programmes of widely recogand consulting, and rejuvenate what India, a country in which nized excellence, these programmes are known as the priority sectors of business, not too long themselves are continuously being our society. ago, was considered an re-invented. In many academic instiunscrupulous activity, There are many more contribututions of India, the syllabi hardly tions of IIMA. But I will mention change in a decade and courses are significant credit must only one more. If professional manmore or less frozen in time while the surely go to IIMs, notably agement has become an honoured relevant fields of knowledge go to IIMA. phrase in India, a country in which galloping. At IIMA, practically

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business, not too long ago, was considered an unscrupulous activity, significant credit must surely go to IIMs, notably to IIMA. Thanks to IITs and IIMs, the country is ranked high among the emerging economies on the quality of its technical and managerial manpower. This talent pool is a potent factor in attracting increasing foreign investments to India and in the globalization of Indian industry. It would cost the country dear to undermine this contribution.

quality of functioning by 2010, say, in terms of the professionalization of administrative staff and far better administration, speedier and more expertisebased participative decision-making, and greater entrepreneurship in identifying and grasping the opportunities afforded by economic growth and globalization. The fourth element is what IIMA should contribute to the management scene and to the quality of life in India.

Of course IIMA has its warts. It has been slow in grasping the opportunities opened up by globalization. In the past, IIMA has, of course, engaged in visionMost of the graduates of its Post-Graduate Programme ing exercises, primarily through the device of the Com(PGP) tend to opt for cushy jobs in cushy companies for mittee on Future Directions set up every five years or cushy pay and perks rather than prove their mettle as so. Its deliberations have involved most stakeholders entrepreneurs or as intrapreneurs in dynamic compaand its report is widely discussed internally. Some of nies short on professional management. IIMA could do its recommendations are implementa lot more to foster in its students a ed. But, in my experience, the implestronger sense of business ethics and Times have changed. mentation has been generally quite corporate social responsibility, two There is a lot more tardy and so the impact and the areas in which IIMA may be lagging competition now; benefits have been limited. behind its peers in the West. It is yet opportunities are now to develop a coherent and compelVisioning must be participative coming thick and fast, ling vision of what it wants to conand must involve all the stakeholdbut vanish quickly, too, if tribute to the new, liberalized, but ers. In the context of IIMs, it must not grasped in time. still very poor India. It could have involve not just the faculty and the Vision, creativity, contributed more aggressively and Board, but also the alumni, the stuenterprise, and effective effectively to such priority sectors as dents, the various sectors served by implementation are the the creaky Indian governance systhe institution, and also the governoars with which IIMA tem that have been such a drag on ment. Since the process of visioning must row into vaster our quality of life. There is a fear that is as important as the vision itself, waters. the IIMA is stuck on a plateau. It the help of one or more process conneeds to re-charge its batteries. Efsultants may be helpful in ensuring fective visioning is a process that can that the process is participative, there is enough brainhelp institutions like IIMA to leap from one level of storming for creative perspectives and options, and equalfunctioning to significantly higher levels of excellence. ly, there is a robust way of reaching a consensus on the I suggest four elements of collective visioning by IIMA: institutional vision. Retreats help and so could Devils The first element is one of institutional scope. What kind of a profile, through expansion and diversification, acquisitions and divestments, joint ventures, internationalization of activities, etc., does IIMA want to have, say, by 2010? The second element involves the visioning of institutional performance by 2010 in terms of international rankings, educational and research quality, and earnings to secure financial self-reliance. The third element involves the visioning of the advocacy to ensure that the vision has anticipated most of the likely impediments. Visioning is an exercise in wishful thinking if there is no effective implementation strategy. Visioning must be accompanied by an implementation strategy that breaks the task of agreed upon change into missions, specific tasks, structures of implementation with specific accountabilities and timelines, monitoring and review mechanisms and schedules, incentives for excellence in implementation, and so forth. Times have changed. There is a lot more competition now; opportunities are now

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coming thick and fast, but vanish quickly, too, if not grasped in time. Vision, creativity, enterprise, and ef-

fective implementation are the oars with which IIMA must row into vaster waters.

Amitava Bose
Former Director and Presently Professor, IIM, Calcutta The best students are going to want the best jobs. This is the reality. Whether we like it or not, the best jobs are nowadays defined in terms of money and authority. As parents, we push our children relentlessly in the direction of careers promising assured money and authority. It may be sad but it cannot be denied that the best jobs are not in the under-managed sectors but in the private corporate sector and with multinationals. Because of the operation of the profit motive, these jobs are also most demanding. At the same time, rewards for notable performance are quick in striking contrast to promotion-by-seniority-when-a-vacancy arises in govThe most visible of all IIM activities is the PGP. Most ernment and the public sector. If the under-managed critics of IIMs argue that the prodsectors want to hire from IIMs, they ucts of the PGP have only benefited must improve their absorptive caThere is a sense in which the private corporate sector and forpacity. the PGP is unabashedly eign multinationals. That could not elitist. It is a very A case in point is the IIMs themhave been the objective with which selves. Can IIMs hire their own stuexclusive programme. It the Government of India set up these dents as managers? Do IIMs promise cannot but be exclusive institutions and funded them. Critattractive managerial careers? The ics would like to see more of our since it is merit driven. older IIMs in particular are stradstudents addressing the needs of Those who do not dled with administrative rigidities public institutions including public possess the cut-off merit which are quite out of line with the utilities. They would be happier if just cannot get in. challenges of the contemporary our students had improved the way world. our railways are run, the way traffic The vision with which IIMs were set up was a vision with a difference. Indeed, it was never the intention that IIMs would be carbon copies of run-of-the-mill business schools that cater to the needs of the private corporate sector only. They were visualized as management institutions that would be capable of answering to a much wider societal mandate. The idea was to produce managers who would perform with equal ease no matter where they might be located. However, at the end of the day, the question remains: how much impact has all this created? in our cities is controlled, and the way in which our hospitals are managed. They assert that our students have not addressed the needs of the so-called undermanaged sectors of our economy. There is a sense in which the PGP is unabashedly elitist. It is a very exclusive programme. It cannot but be exclusive since it is merit driven. Those who do not possess the cut-off merit just cannot get in. There is one more point that is relevant here. Management education is market-driven in a way that university education in general is not. Because of the high credibility enjoyed by the meritocratic PGP, excellent placements are assured for its products. This has induced more and more of the brightest students of the land to try for admissions here. As a result, IIM students are among the best in the country. IIMs are not all-powerful. They may try but are unlikely to influence politically sensitive HR policies in the government sector. Again, they may try but are unlikely to alter preferences of the modern parent or aspirations of todays youth. There is, therefore, only one way by which IIMs can get their products to go to the under-managed sectors: they have to reposition themselves so as to exclude the academically brightest students. One way to do that would be to announce that IIMs are not going to offer placement services and to change the curriculum to exclude Westernized topics such as modern financial management, strategic management, etc., and introduce larger doses of public serviceoriented courses. What is quite certain, however, is that many faculty members would not agree to such a change. Also, which alumnus would want to see the IIM brand
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equity getting dissipated? So, that is where the problem lies. Of course, once the best students stop coming in, the best faculty would also pack up and go. There are many very good private institutions which will cash in on the exodus.

schools. As a consequence, IIMs have had a catalytic effect on management education in the country. Yet, there is room for improvement and I would like to make a concrete suggestion.

There is a certain amount of contribution that IIM In other words, given the nature of the world, IIMs faculty teams have been making to policy making in terms of research, consultancy, and training. My sugare elitist in the sense of academic exclusiveness. Elite gestion has to do with how to enhance a typical PGP jobs and academic merit go hand in hand. This may students involvement with develappear to be an unfortunate trap for opmental problems of the country. development. But is it really a trap? The suggestion is that the institutes There are many who would argue While striving after should take up large on-going rethat most development problems are academic excellence does search projects studying different non-academic in nature and do not not automatically address sectors of the country and execute require academic brilliance for their the pressing issues of these through the PGP. The word solution. Why not leave academic development, lack of sectors is being used in an elliptical brilliance for universities to tackle? academic excellence does fashion and a little loosely. These Publicly funded management instinot automatically foster could be defined in different ways. tutions ought to give priority to decommitment to national They could be defined in terms of velopment and if that means getting development either. products (e.g., agro-based industries rid of obsessive preoccupation with such as tea, sugar, etc.), services academic credentials then so be it. (transport, power, etc.), organization (informal, factoThe response to the above is the following: While ries, peasant farming, etc.), geography (rural Bengal, striving after academic excellence does not automaticaletc.) and so on. The projects should be so designed as ly address the pressing issues of development, lack of to require considerable field work and the students should academic excellence does not automatically foster combe assigned to spend time on the field as part of the core mitment to national development either. There are many curriculum. The hard work is not how to design such schools already in existence which do not cater to the projects but to organize their execution. We would need brightest students. Why are the products of these schools the governments help. not helping to solve the pressing problems of developThe idea seems to be promising. In this manner, not ment management? Is the government doing anything only would IIM students and teachers contribute to the to absorb them in the under-managed sectors? development literature (and thereby to policy making), It would not be appropriate to judge the PGP of IIMs the very process of participating in the field surveys solely in terms of direct placements. The PGP has set would enrich their understanding of the ground realistandards for hundreds of other schools to emulate. The ties. The effect of this on fresh minds can be expected PGP syllabus has been used as a benchmark for other to be far reaching and permanent.

K R S Murthy
Former Director, IIM, Bangalore The social context of elitism in management education has changed significantly since the first two IIMs were set up in the 1960s. When India embarked on planned economic development, the need was felt for engineers and managers. Industry was unfamiliar with the modern management concepts, methods and techniques. IIMs were to introduce modern management education in India. Its graduates were to complement the supply of
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engineers from IITs. Planning was done to balance the supply of engineers and managers with the expected needs of the industry. However, this balancing did not take place at the micro level because the large and heavy industries were primarily driven by the government, while the graduates of both IITs and IIMs preferred other avenues. The challenge for IIMs was to learn and absorb the

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American management education and practices, adapt them to the Indian context through research, familiarize Indian industry with modern management methods and techniques, and find placement opportunities for the graduates.

In the early years, the IIMA Board worked informally like a selfgoverning society. There was strong support from the state and central governments. The fluid initial conditions, the tall leadership, and the quality of government decision makers in the government enabled the management of strategic discontinuities in location, in the choice of collaborator, in negotiations with the state government, the collaborator and Ford Foundation, as also in enlisting the cooperation and support of industry. The Board of Governors mediated and facilitated institutional leadership to enlist the required support from industry and to overcome the many constraints arising out of governmental rules and procedures.

In the 1960s, the social context provided few alternatives to bright and merited youngsters other than the IAS. The transparent and meritbased system of IIMs provided a respectable alternative career choice.

tion and confidence increased. The sector groups were able to provide significant help to policy makers.

IIMA and IIMC invested heavily on faculty and adaptation, either through case development or other research and innovation in curriculum. The faculty learnt and adapted the American management practices and educational methods and delivered excellent education in a contextually relevant manner. Awareness was created among target groups about the usefulness of the institutes products and services. Consultancy was undertaken as a way of learning about the challenges faced by Indian managers.

Thus, although unable to attract graduates into its operations, the Government of India had successfully launched some important and useful elitist higher educational institutions. For a variety of reasons, the turnover of graduates in industry was high. Although their merit, education, and potential were acknowledged, there were criticisms that the graduates were arrogant, ambitious, and selfish. I do not think that they were any more so than any other group of successful young professionals. The careers that they finally settled on were as diverse as that of any other professional group. Not infrequently does one come across IIM graduates who have become entrepreneurs, senior managers in non-government organizations, public enterprises, and even joined civil services after competitive examinations. Thus, IIM graduates have contributed significantly in a number of sectors and areas.

In the 1960s, the social context provided few alternatives to bright and merited youngsters other than the IAS. In that context, the transparent and merit-based system of IIMs provided a respectable alternative career choice. More and more youngsters competed for a chance, which was available irrespective of caste, region, religion, or subject of study at the graduate level. The elitism came from merit and success in competition. That is the way the students got tuned to before, during, and after their educational period in IIMs, quite a different charSimultaneously, IIMA also set up faculty groups to acteristic vis--vis the elitism of the IAS cadres. For, the work on agriculture, banking, and other sectors. In order IIM graduates do not enjoy mononot to impose any additional burden poly or governmental power that the on the government budget, other than The elitism came from IAS cadres get accustomed to. The that required for the PGP, the sectomerit and success in network of IIM alumni is quite difral faculty groups were required to competition. That is the ferent from the network of the IAS. be self-financing, which also enabled way the students got A get-together of the IIM alumni is them to be responsive and relevant tuned to before, during, mostly a personal and emotional to practitioners. and after their affair, without any of the dynamics Private industry recognized the educational period in of power of network of an IAS batch. useful contribution that the execuThe opportunities that IIM graduIIMs, quite a different tive programmes and the graduate ates get are open to non-elitists characteristic vis--vis the programmes could make to managenon-IIM graduates and even nonelitism of the IAS cadres. rial practice. The Institutes reputagraduates unlike the IAS. Their

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organizations too have to compete, unlike the government. The elitism of IIMs was also due to the sector faculty groups, which earned the goodwill of policy makers and professional bodies, sponsoring their research studies. The watchwords were social relevance and excellence. In the 1970s, a visiting professor of strategy and organizational theory from Case Western Reserve University to IIMA compared the research output of IIMA faculty with those of his University. His finding was that while the topics chosen by the faculty of his University were theoretical and focused narrowly on organizational issues, the topics that the IIMA faculty chose appeared to be much wider in scope and addressing practical problems. Even at the cost of not finding a place in international journals, the faculty preferred focusing on work that was The elitism relevant. Although, many private institutions and university departments followed the example of IIMs and started management education programmes, their number was less than a hundred. The IIMs stood apart in terms of their faculty, campus, and other resources.

sumption that a model of management, relevant to the large and growing Indian public sector, could be indigenously built and delivered. It did not collaborate with any foreign institution. It expected that the government and the public sector would support and absorb the output. Again, that did not happen, although some public enterprises, with good leadership, were able to attract some of the IIM and non-IIM management graduates to their organizations.

The elitist status of the institutions and their graduates, naturally, gave rise to the question: why should the government subsidize the education of elitist managers who serve private industry, especially the multinationals? The Government of India could have made the IIMs selffinancing, with greater autonomy in fixing the fee, and raising other funds. But, it did not. IIMs continued to balance their budgets and the various demands on them through a combination of project funding and government grants.

The IIM model for management education its open and merit-based admissions on an all-India basis, good and relevant curriculum, and campus placement efforts, and a general motivation to be relevant to the social needs was emulated to different degrees by many private colleges and even university management departments. The functioning of IIMs with many sentient groups, flat of IIMs was and participative decision-making structures was a great departure from also due to the sector the functioning of a typical univerfaculty groups, which sity, with its hierarchic, non-responearned the goodwill of sive, and highly politicized systems. policy makers and While some universities tried to give professional bodies, greater autonomy to their managesponsoring their research ment departments, the IIM model studies. The watchwords could not in general be replicated in were social relevance and the Universities and the colleges as excellence. they could not mobilize the requisite faculty and other resources. There has been a rapid expansion in management education, beginning with the late 1980s and early 1990s. There are now nearly 1,000 institutions, which are offering masters level education in management, with a capacity to graduate over 60,000 a year. The number of institutions offering management education in various application areas such as health has also increased. Elitist groups are increasing in a number of areas R&D, Information Technology, Biotechnology, Drugs and Pharmaceuticals, and the Capital Markets, with or without formal management qualifications. The growth impetus has come from the economic reforms of the 1990s which has released private energy and initiative. Just as the Indian subsidiaries of the multinationals were the first to recognize the value of the IIM graduates in the 1960s, the new multinationals entering India have been quick not only to recognize the

The social context changed in the 1970s, with the government moving further towards tighter government control of the economy. With nationalization of banking, coal, and other sectors, and the focus on poverty removal and rural development, it was felt that there was a need for young graduates in the public sector. It was in such a social context, and as a departure from the earlier IIMs, that IIMB was set up in the 1970s. Building on the experience of IIMA and IIMC, IIMB started on the asVIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

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value of the graduates of IIMs, but to this situation than IITs as they In the early 1990s, when also in recognizing the potential for were autonomous. IITs, governed by the Government of India research collaboration with Indian the IIT Act, were more dependent on faced a financial crunch, research institutions. Indian indusgovernment approval for fee increasit wanted IIMs and IITs to try, under intense international comes. Some of the IITs had to defer even become self-financing. petition, is becoming active not only much-needed maintenance expendiIIMs were able to respond on Indian campuses but also on tures for several years until the govbetter to this situation campuses abroad. Globalization has ernment was able to approve fee rethan IITs as they were taken off. The media is tuned to the vision. global systems. It terms the IIMs as autonomous. More recently, the government B-schools, ignoring the deliberate tried to impose a cut in the fee choice of management, instead of charged by IIMs. Such coercive power of the government business, in their very names and the many programmes can hurt institution building. In the structure of IIMs, and activities that IIMs are involved in. the government has a dominating role. It appoints the In this social context, there is a need to redefine the Chairman, the Board members, and the Director. In the recent crisis over the fee cut, Shri Narayana Murthy tried standards for excellence and relevance of Indias elitist to mediate between the institutes and the government. educational institutions. IIMs need more focus and The failure of the government to take a more objective intensity for their teaching, research, and consultancy and comprehensive view of the system is disturbing. activities. If achieving such intensity in all the current activities is difficult, they need to select and synergize. Internal structures and policies, especially the government constraints in personnel management, have to be changed. One major lesson from the institution building experience of IIMs is that while the state and central governments can be expected to be supportive, especially in funding in good times, they cannot provide the initiative and timely coordination across different departments or ministries. In the planned era, the government was indifferent enough not to impose drastic changes on IIMs. That has not been the case in the more volatile social context since the 1990s. In the early 1990s, when the Government of India faced a financial crunch, it wanted IIMs and IITs to become self-financing. IIMs were able to respond better In the emerging global social context, the governance and leadership of elite institutions have to be comprehensive, flexible, understanding. The Board should be independent and autonomous. In my view, the Board should appoint the Chairman of the Board and the Director as in the case of Indian Institute of Science, Bangalore. The Board can then take full responsibility for governance. The Board can institute a system of accountability to all its stakeholders. In institutions that can be financially independent, the Governments control role can be restricted to participation in Board discussions and supporting institutional activities wherever possible. The governments power to intervene or set rules should be restricted to short periods of gross malfunctioning. The government and the nation will not be a loser with such a transformation. IIMs will scale greater heights and bring more benefits to all its stakeholders.

N Vittal
Former Chairman, Central Vigilance Commission IIMs were, to begin with, visualized as institutions to provide management education for an independent India in an environment conducive to provide managers and leaders for business enterprises. IIMs, particularly, those in Ahmedabad and Calcutta which came up early, were very much influenced by the institutions with which they were closely connected, namely, Harvard Business School and Massachusetts Institute of Technology. The issue whether IIMs are elitists or social organizations has been provoked by a controversy initiated in the recent past. Perhaps, out of this controversy, an opportunity has arisen to reflect on the role of IIMs and their relevance to India today. A little reflection about
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the human development and proover a wide spectrum is the creation Progress does not come gress achieved in any society will of social tensions and a general defrom the common man. It show that progress does not come terioration in efficiency and quality is the uncommon man from the common man. It is the unof governance. who brings progress in common man who brings progress In this context, where do IIMs any field. Progress in any field. Progress invariably stand? Even in the US, institutions invariably comes from the comes from the people who are talsuch as Harvard Business School and people who are talented, ented, who are able to see beyond Massachusetts Institute of Technowho are able to see their time, who are innovative, and logy with whom the earlier IIMs had who provide leadership. These peobeyond their time, who collaborated are recognized as outple by their very nature are classified are innovative, and who standing institutions and will qualas elite. Human society can be looked provide leadership. ify as elitist institutions. So, IIMs at from two angles. The first is what are, in my perception, elitist institumay be called as purely material or tions and should remain so. This is because it is the elite physical or to use the electronic jargon, the hardware who provide leadership and are able to make a contriaspect. At the physical level, all human beings are equal. bution. If we make IIMs into populist institutions, we But, there is a second dimension of the human society. will only be destroying what has been systematically This is what could be called the non-material, spiritual built over the years. There is a Kikuyu proverb which or the software dimension. In this dimension, all human says, dont destroy anything unless you can replace it beings are definitely not equal. Though it may sound with something of value. If we look at IIMs today, we cynical, some are more equal than others. can be proud that we have created institutions of excelThe concepts of liberty, equality, and fraternity lence which are recognized all over the world. This is evolved very strongly after the French Revolution in particularly significant in the context of globalization 1789. These concepts were essentially based on the where the world has become borderless. principle of equality of human beings. In fact, much In this new globalized context, another important before the French Revolution, spiritual and religious leaders in different parts of the world have pointed out factor should be considered. While in a country like India, we may think in terms of social justice, affirmative that all of us are equal because we are the children of action, quota, etc., in the global market, the only curGod. Nevertheless, when it comes to material progress rency is merit. It is this merit that IIMs try to nurture. of the society, in whatever field we consider, be it art, Perhaps, one can question whether IIMs are really making industry or economics, it is the elite, the leaders in a contribution to the development of real talent. But, thinking, who have made a contribution. the very process of selection ensures that the brightest After India became indepenand the best among the youth comdent in 1947, the principle of equality pete for the entrance examination. If we make IIMs into was very much in the minds of the In the selection process itself, IIMs populist institutions, we leaders. Article 14 of the Constitustart with an advantage because they tion enshrines this principle. In rewill only be destroying have the best human resources availcent times, we have seen the legacy what has been able. In addition, the method of teachof affirmative actions and reservasystematically built over ing and education that has been tions. However, this continuous evolved is such that the products of the years. If we look at emphasis on social justice which is IIMs automatically carry a brand IIMs today, we can be populist is also contributing to the equity. They are picked up readily proud that we have mediocratization of the society. A by the Indian private sector and the created institutions of society which has only mediocre multinationals. Over the years, the excellence which are people will not be able to make brand equity of IIMs has grown and recognized all over the progress. The net result of the conthere is no reason why it should be world. tinuous emphasis on social justice compromised.
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Perhaps, from a purely econombe the focus of IIMA. Over the years, IIMs have made a ic point of view, if the human reI think, both IIMs have contributed tremendous contribution sources can be classified, we can to excellent managerial leadership to the Indian economy by adopt the policy of freely convertible both within the private sector and providing managerial currency or non-convertible currenthe public sector. leadership. Some of the cy for human resources. If we fall Next, I come to the issue of top managers today in into the trap of quotas and populism, funding of IIMs. Some of the older different large we will be creating managers who IIMs are supposed to have a large organizations including will be like non-convertible currencorpus. It is believed that the govcies. They may not have any value some multinationals are ernment helped them to build the in the global market place. On the IIM products. In that corpus. To what extent is this true? other hand, with the focus on merit, sense, the processes by What is IIMs thinking on utilizing the products from IIMs today are which IIMs have defined the resources for the benefit of the like freely convertible currencies their goals and directions society through various alternatives which are acceptable in every counare right. including different pricing of prodtry of the world. I would, therefore, ucts such as PGP, Fellow Programme suggest that IIMs should realize that in Management (FPM), MDP etc., and services for difthey are elitist institutions and continue their tradition ferent sectors in the society? The decision apparently so that they can produce products which are universally taken at the meetings of the directors of IIMs to come accepted in the global market and are capable of proup with a revised scholarship scheme for the economviding leadership wherever they are. ically weak students, I think, is the best solution under We examine some other relevant issues in this con- the circumstances. Otherwise, there is no need to medtext. The first issue is: What are the processes through dle with the financial resources of IIMs. which IIMs have defined their goals and directions over We now turn to the question: Do IIMs have any the years? In fact, IIMs, particularly IIMA, was started with the collaboration of Harvard Business School. It role to play in serving the under-managed sectors and other civil society organizations which cannot afford to has set up very healthy traditions and I remember the pay high prices? How should IIMs play this role? Committee on Future Directions headed by Professor V Definitely, the principles of management should be L Mote. Perhaps, there have been similar committees that were constituted from time to time. Hence, even if extended to other sectors also. However, there is a disconnection between policy and implementation which IIMA is considered to be an ivory tower institution, it probably the management experts have not been able is not an isolated ivory tower. In fact, IIMs have made to resolve. But, perhaps, there is a learning process a tremendous contribution to the Indian economy by which may soon enable the extension of management providing managerial leadership. Some of the top manprinciples to the government. There is no reason why agers today in different large organizations including the skills developed and honed in institutions like IIMs some multinationals are IIM products. In that sense, the cannot be extended to other sectors and institutions. processes by which IIMs have defined their goals and IIMs must consider expanding their directions are right. activities in this direction. As regards There is no reason why Regarding the issue of IIMs the pricing of these programmes, it the skills developed and catering primarily to the private should be left to the market forces corporate sector, I personally feel, honed in institutions like or the principle of enlightened selfthere is no need for IIMs to be apolIIMs cannot be extended interest. ogetic about it. In fact, when IIMB to other sectors and Finally, I look at the question of came up, Professor N S Ramaswamy, institutions. IIMs must what role IIMs see for themselves in the then Director, tried to focus on consider expanding their making India a developed nation. the public sector as against the priactivities in this direction. The role IIMs play is to select the best vate sector which was supposed to

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among the youth and give them excellent management education so that they are automatically picked up by successful enterprises both within the country and abroad. Some of them take initiatives and are selected by the non-governmental organizations. A few join the

government and consultancies also provide opportunity. The products of IIMs are practically present in all significant sectors of the country and it is through these alumni that IIMs can play a role in shaping the destiny of the nation.

Rishikesha T Krishnan
Faculty, Corporate Strategy and Policy IIM, Bangalore The first three IIMs were conceived during a period of biggest contribution to the industrial/corporate sector. multi-dimensional challenges in nation-building and Given the size of IIMs, it is unreasonable to expect them these IIMs had multiple objectives within an overall to be able to provide specialized knowledge or education mission of improving the quality of management in for the whole economy. India. In keeping with this mission, IIMs defined manAre IIMs elitist? It is a fact that we are highly agement broadly and undertook several activities in selective of both faculty and students and our graduates non-business sectors such as the CMA and the PSG of go into jobs that pay, at least by Indian standards, very IIMA and the Centre for Public Policy of IIMB. Many handsome salaries. In this sense, we are elitist. However, faculty members have been involved there is nothing wrong in IIMs being in these activities and continue to do considered elitist as long as it is for so. These activities are highlighted The problem is that we the right reasons. Many countries in our annual reports and statements want to be known as tophave an implicit hierarchy of acaby the Directors and any additional tier world-class demic institutions even in the US visibility for them would be welcome. educational institutions and the UK which are well endowed However, in the public eye, IIMs have but are unwilling to be with institutions of higher learning, remained better known for their measured by this universities like Harvard and CamPGPs. I see no reason why we should criterion. In the absence bridge occupy a unique position. This be apologetic about producing good of any major discontinuity distinctive positioning is due to the managers and managerial knowlin the market for quality of scholarship demonstrated edge that contribute to the industrial knowledge, if we want to by their faculty over an extended and services sectors. make an impact globally, period of time. Further, they ensure we have to start by Since 1991, India has adopted a that the best students can enter their playing the game by the predominantly capitalist economic portals independent of their ability global rules before we system and the country needs good to pay (though they may also admit seek to change the rules. managers to work in the corporate some students from families of their sector as well as qualified profesalumni or donors for reasons of sional entrepreneurs. In spite of liberalization in the continuity and tradition!). So far, we have done well on higher education sector and the mushrooming of busithe second count, i.e., we have ensured a rigorous and ness schools, there are very few new business schools fair selection process that selects only the best students that are providing a contemporary and high quality without discrimination except for government-mandatmanagement education. In his book, The Competitive ed affirmative action and we have provided financial Advantage of Nations, Michael Porter has emphasized the support to those who needed it (though we have perhaps importance of specialized assets and specialized knowlnot given enough visibility to the availability of this edge for country competitiveness. Across the world, support). However, we are not as strong on the first among developing countries, India is one country that dimension, i.e., on the quality of scholarship we have realized early the importance of higher education and demonstrated. the development of specialized people resources. The worlds leading academic institutions are evaGiven our current strengths, IIMs can make the luated by the quality of their research output, i.e., by
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the thought leadership that their vard Business School and Stanford. Our future will be faculty demonstrate. The problem is Going a step further, Harvard Busidecided by our that we want to be known as top-tier ness School, Wharton School, and contributions to world-class educational institutions University of Michigan have anknowledge creation rather but are unwilling to be measured by nounced the founding of research than merely knowledge this criterion. In the absence of any centres located in India! dissemination. major discontinuity in the market for An eye-opener for IIMs is that knowledge, if we want to make an all are not able to see and appreciate impact globally, we have to start by our contribution. While our alumni have (naturally) playing the game by the global rules before we seek to been supportive, many people are suspicious of us and change the rules. Universities in China and Hong Kong some even downright resentful. It is clear that many have learnt these lessons well and focus on research in people wonder whether we are making the best use of top-tier journals, even if this means they have to attract the resources the society has provided us. People are top scholars from the US and other countries to join them suspicious of what we do and there is a perception that at internationally competitive salaries. They work withwe are so busy consulting (making money!) that we do in the existing paradigm of research before trying to not have time to teach students. While data at IIMB show establish new paradigms. that only about 5 per cent of the faculty use anywhere What is somewhat disquieting is that we have not near the full 52 days of consulting allowed by the rules, made the best use of opportunities right in our backyard. it is clear that the society expects us to provide high By any account, the growth of the Indian software inquality management education to larger numbers of dustry has been a momentous event in the history of students than we are doing at present. People are uneconomic development. But, barring a few exceptions impressed by our claims of fulfilling other functions such as my colleague, S Krishnas co-authored book such as executive education and training. While we may (Sahay, S, Nicholson, B and Krishna, S, 2003, Global IT be able to support ourselves independently in a finanOutsourcing: Software Development Across Borders, Cam- cial sense, we need to reflect on whether we can survive bridge: Cambridge University Press) on the managein a resource-scarce and often politicized environment ment of globally dispersed software projects and the unless we enjoy greater support and legitimacy from the multiple IIM contributions to an international project on society at large. innovation in the Indian IT industry (DCosta, A P and We have not educated the public and important Sridharan, E [eds.], 2004, India in the Global Software stakeholders about what should be the role of leading Industry: Innovation Firm Strategies and Development, Lonmanagement academic institutions such as ours. We don: Palgrave Macmillan), we have allowed others to have not talked enough about what should be the criteria define the research agenda related to the study of the software industry. The first paper in a top journal that to measure our performance and provided enough data to stakeholders to enable them to documented its evolution was writmake an assessment of our performten by academics (albeit of Indian ance. We have found fault with the If we create an academic origin) sitting thousands of miles surveys conducted by business environment of away at Carnegie Mellon University magazines but not suggested alterquestioning, probing, and (Arora, A; Arunachalam, V S, Asunnate ways of doing a more rigorous intellectual debate, it is di, J and Fernandes R, 2001, The assessment of our quality. We have but natural that some of Indian Software Services Industry, made a start in benchmarking our our graduates will move Research Policy, 30, 1267-1287). The performance and this needs to be away from the corporate growth story of the industry has been carried forward. We should write appropriated by McKinsey & Comworld to play a larger more books and articles so that peopany with the assistance of NASSsocial role. Our job is to ple recognize our output and thought COM. The most widely used cases provide such an leadership. We should, in our own on Indian software companies have environment. interest, play a bigger role in enhancbeen written by professors at Har-

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ing the quality of management education in other management institutions. In a nation where scams are almost routine occurrences, we have made an outstanding contribution to the economy with modest investments by the government. The three older IIMs are today in a position to sustain and grow their contributions without further investment by the government. Isnt this an outstanding achievement? We need to publicize this fact. Going forward, IIMs need to focus on two activities: research and long duration academic programmes. Executive education and consulting are important to help faculty keep in touch with industry problems and to supplement faculty income but these will have to play second fiddle. (The ideal would surely be to raise faculty salaries so as to make executive education teaching an optional extra for those with the talent and the interest. We may be able to make this case more strongly once we have greater societal legitimacy.)

amount of teaching in long duration academic programmes and papers published in refereed journals. As research is conducted by individuals, the absence of formal inter-IIM research collaborations in the past is not surprising. Further, we have very few fora where faculty from IIMs can share their research and ideas. But, fortunately, there are signs of change. Both Vikalpa and IIMB Management Review have been actively soliciting contributions and refereeing contributions from other IIMs. Two professional bodies the Society for Operations Management (SOM) and the Strategic Management Forum (SMF) have been holding annual conferences for the last six to seven years and these provide the opportunity for exchange of research ideas and sow the seeds of collaboration. As a collective, IIMs and their faculty need to create similar professional bodies in the areas of management where they do not exist and to actively support the existing ones such as the SOM and the SMF.

Fortunately, at IIMB, our recent thinking has been in this direction. In the last few years, the IIMB faculty Across IIMs, another good sign is that we are behas published their research in top-tier journals such as coming more open to learning from the best global the Academy of Management Review, Journal of Financial schools. Recent efforts by Pankaj Economics, California Management Chandra (Elements of a World Class We must explicitly raise Review, IEEE Transactions on Software Management School, IIM, Ahmedaethical issues during all Engineering, Research Policy, and bad, Working Paper No 2003-09-03) World Development. There is a constages of the students at IIMA to capture the best practices sensus that our future will be decidstay at our institutes. Our of world-class management institutes ed by our contributions to knowlfailure to do so suggests and by Ravi Anshuman and S Chanedge creation rather than merely ambivalence or, even drashekar (How Contemporary are knowledge dissemination. We have worse, a message that the IIMs? MBA Curricula in a Globalized also been responsive to the educameans do not matter. World, Economic and Political Weektional demands of critical sectors by ly, February 21, 2004, 827-837) at IIMB launching two important new longto provide a framework for benchduration programmes. The Post-Graduate Programme marking PGP curricula show that we are moving away in Software Enterprise Management (a programme for from the argument that we are different. I believe that working software professionals designed in consultawe need to take the next step and have periodic peer tion with leading software companies and supported by review of our areas and curricula by internationallyan endowment from five leading software companies to respected peers from both within and outside India. drive research relevant to the industry) was started in I believe that our primary social responsibility is to 1998 and the Post-Graduate Programme in Public Policy use our resources to create new management knowledge and Management was started in 2002 to help hone the and to teach as many participants as possible in long capabilities of the bureaucracy in a deregulated economy. A committee to develop a new vision for IIMB (of duration programmes consistent with this knowledge which I am a member) has recommended an increase creation objective. Within a talented and motivated highperforming faculty body, there will always be indiviin the enrolment to the PGP in two stages, in 2005 and duals who will make major contributions to wider in2007. Further, we have recommended that the two nontellectual and social causes (as Anil Gupta has done in negotiable expectations from faculty be a minimum
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the area of grassroot innovations and Trilochan Sastry in the area of election reform). These activities need not be part of the objectives of the institutions themselves. Similarly, from within a talented pool of students, some will always gravitate towards the social sector as Vijay Mahajan and Bhushan Punani have done. Again, I do not think we need structured programmes to create such people if we create an academic environment of questioning, probing, and intellectual debate, it is but natural that some of our graduates will move away from the corporate world to play a larger social role. Our job is to provide such an environment. A secondary objective should be to reduce the gap between the top management schools and those below. For this, we need to create a large pool of talented management teachers and researchers. Unlike in a business context, where the rule of three might apply (according to this perspective, only the top three companies in an industry are profitable), we will, ironically, have more space if the gap between the other institutes and IIMs narrows. Otherwise, the social forces of greed and mediocrity will tend to pull down good institutions such as ours. As a corollary, the current offerings of IIMs in terms of the FPM and the Faculty Development Programme need to be increased in scope and size. This is consistent with an effort to raise research output and a focus on core academic activities.

To conclude, I would like to comment on our role in cultivating a higher standard of ethics and values among our students. To some extent, the values of our students are already formed when they enter an IIM. However, being young adults, their values are still open to reinforcement or questioning. We must explicitly raise ethical issues during all stages of their stay at our institutes. Our failure to do so suggests ambivalence or, even worse, a message that the means do not matter. However, what is more important is that students learn from us in many other ways from the way we interact with them, from the way we structure our evaluation systems, from the level of professionalism we maintain. They are sub-consciously watching us and observing our behaviour. If we set exams that test their memory instead of their analytical or integrative skills because such exams can be easily corrected by teaching assistants; or if we take months to give feedback on examinations; or if we set unreasonable deadlines that make collaboration highly attractive, we are giving (perhaps unwittingly) the wrong signals about professional values and ethics. Luckily, such instances are rare. To look at this more constructively, by interacting more closely with students and setting a good example of professional work ethics, I believe we can have a positive influence on students values.

Arun Kumar Jain


Faculty, Strategic and International Management, IIM, Lucknow The issue of institution building is important not only debate, I shall delve upon IIMs as institutions and some in the limited context of IIMs but also for all the overall areas where they need to carry out strategic and/or well-being of the country. Research structural realignments in order to on corporate governance and globalifunction within the ambit of societal Higher education zation consistently suggests that naexpectations. The lessons could be institutions such as IIMs tions prosper only when their instiuseful for institution builders in the should ideally form the tutions are nurtured and all stakebroader context of developing an backbone of our countrys holders demonstrate a healthy reaction plan. economic success by spect for their maintenance and sushelping professionalize First, let me comment on the tenance. This includes devising suitmanagement for all conceptual issue of IIMs as instituable structures and systems of regsectors of the economy tions. By definition, an organization ulation, governance, and manageand providing the is deemed an institution if it is selfment and allowing these to function. entrepreneurial, technical, perpetuating and draws its main Institution building in this sense is and skilled personnel for energies by delivering products and a many-faceted activity and a continsuperior wealth services that are perceived to be of uous one since the alignment is generation. high value to the proper and civiheavily context-dependent. In this

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lized functioning of the society (e.g. those relating to imposed by the society in general. judiciary, legislative, and executive arms of the governA far greater institutional effort and commitment ment). Often, institutions may be engaged in improving is necessary (and yet again the faculty has to provide the living standards of the people through capacity buildthe lead) to create conditions where the education portals ing and skills formation (such as IIMs). Conceptually, of IIMs are accessible to all sections of the society. Ecoan organization remains an institution as long as the nomically-and socially-deprived sections of the country societal responsibility angle and self-sustenance remain should neither feel (nor be made to feel) that IIMs are the focal point of the operational vision. Such organionly for the rich, and from the rich. There is an urgent zations have a strong strategic management in place need for remodelling the access mechanisms to make along with a strong external orientation. In a paradigm management education at IIMs more universal in charof knowledge economy, the quality of governance in acter and composition. This mindset probably has been institutions and continuous capacity building through a reason that although most IIMs had resources earinnovative processes is of prime importance. Higher marked for needy students for at least education institutions such as IIMs a decade or more, yet none had should ideally form the backbone of There is strong global actually disbursed these resources our countrys economic success by research evidence that to any significant extent. helping professionalize management institutions of higher for all sectors of the economy and For any institution, accountabillearning need substantial providing the entrepreneurial, techity parameters and robust performoperational autonomy in nical, and skilled personnel for suance measures are surrogates for a hierarchy-less perior wealth generation. making periodic reality checks. There There is a strong feeling in many segments that IIMs have forsaken their institutional character and become more of a nursery for producing managers for powerful corporations and MNCs. The implicit suggestion is that they have generally lost their initial moorings with respect to their social responsibilities! This is an issue that I would like to address from the perspectives of a first generation entrepreneur, a management scholar, and a common man. Broadly, the purpose of IIMs must be to enhance the quality of life of the people of India through professional Management (with a capital M) and relevant knowledge creation and dissemination. The faculty members are expected to participate and intervene in this nationbuilding endeavour through their research, teaching, consultancy, and writing. This means an expectation of a combination of leadership and entrepreneurial roles for the faculty members. Prestige and respect comes naturally, especially in a poor society, for such exalted positions. The faculty and IIMs would surely be perceived as elitist if they fail in meeting these social expectations and remain insensitive to the nature of trust
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environment for the knowledge-owning individuals to operate at the highest motivational levels for sustained periods of time. Structures at such organizations are generally multidisciplinary, temporary, and ad hoc existing only for a given project and then disbanding.

is strong global research evidence that institutions of higher learning need substantial operational autonomy in a hierarchy-less environment for the knowledge-owning individuals to operate at the highest motivational levels for sustained periods of time. Structures at such organizations are generally multi-disciplinary, temporary, and ad hoc existing only for a given project and then disbanding. To outsiders, this structureless informality may appear elitist but it is a necessary condition for excellence. However, these structural arrangements can also become self-serving instruments for self-preservation rather than mechanisms for continuous learning and executing pedagogical innovations. This to my mind is an important reason why there is little collaborative research, sharing of resources, and learning amongst IIMs themselves. Given the importance of this dimension of institution-building from the national perspective, performance measures need to be designed that encourage teamed efforts at least between IIMs (to start with). To quote Rhenmans terminologies (Rhenman, E, 1973, Organization Theory in Long-Range Planning, New

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York: John Wiley), an organization visited in the UK, the class size could IIMs should consider may be classified as a Corporation, vary between as high as 150 and as alternative modes of Marginal, Appendix or Institusmall as 35. While the case method knowledge-service tion depending upon the strength of was the most suitable for the smalldelivery (including the its strategic (internal) and ideologest size class, the teacher had to new communication ical (external) goals. Marginal and reorient the teaching pedagogy for technologies) to cover a Appendix organizations can easily the 100-plus class though the session large number of students, become expendable tools (Selznick, topic was common for all the classes. say 150, in a class. P, 1957, Leadership in Administration, Considering that the infrastrucEvanston, Illinois: R Peterson) since tural resources and facilities (includthey lack a personal identity. Many ing library, research assistance, computers and private-run educational set-ups remain corporations Internet connectivity, sabbatical leave, etc.) are with money-making as their core character and absence almost world-class, the IIM faculty should publish of an ideological value-system (larger societal good as far more in international journals. In top-rated busian objective). In this framework, for IIMs to remain ness schools in developed countries, the only curfunctioning institutions in the Indian context and within rency for securing tenured faculty positions is the the framework just discussed, we need to re-examine list of research publications in high impact making some of the thrust areas which are as follows: journals. Considering that there is a crying need for quality Similarly, IIMs need to carry out some introspection management teachers all across the country, we on how to remain wedded to the institutional comneed to improve the intake of doctoral students. mitments for creating and disseminating relevant Along with FDPs, the doctoral programme too has knowledge suitable for local and domestic conto be an important societal commitment of an IIM. ditions. There is a huge felt need for greater number We need to seriously debate amongst ourselves how of quality books and insightful case studies than to make the programme attractive to the best stubeing presently published by the faculty. Collabodents so that the country may have a pool of exrative research across IIMs is likely to reduce costs cellent management teachers! I agree this question especially for field-based writing projects, provide has direct linkages to faculty compensation and newer perceptions, and speed up delivery of the general quality of life (not just in IIMs). final product. IIMs should consider alternative modes of knowl There is a general perception that IIMs cater mainly edge-service delivery (including the new commuto the needs of the private sector and that too only nication technologies) to cover a large number of the privileged few. Performance yardsticks measstudents, say 150, in a class. Perhaps, the case method ured by the starting salaries of students, number of is the best for teaching management concepts, but, international positions, and number of MNCs comdifferent contexts may require application of differing for campus placement reinforce ent pedagogies. To me, the limthis strong perception. In reality, itation of smaller class-size (say IIMs need to carry out IIMs have made some significant con60 students) is more a case of some introspection on tributions towards raising the prorigidities in the pedagogy strucductivity standards and professionhow to remain wedded to tures driving the strategy rather alization of management of several the institutional than the other way round, stinationally strategic sectors such as commitments for creating fling the innovation possibilities. the PSUs, cooperatives, rural and agand disseminating It is not uncommon for classriculture, defence production, nuclerelevant knowledge sizes at MIT and Wharton to be ar energy, oil and electricity energy, suitable for local and in hundreds. At one of the toprailway and road transportation, domestic conditions. rated business schools that I university education, etc. However,
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these outcomes are generally tation of learning and knowledge in The future course of due to the enterprising efforts of the best research journals, the soaction for IIMs in the a few individual faculty memcalled networking effect would come short-to-medium term is bers than due to deliberate innaturally. IIMs need to provide a clear: Globalize in the stitutional initiatives and stratenurturing and enabling environment truest sense of the word gic thinking in policy. In this for creating the best brains. We can by becoming one of the context, IIML has identified corlearn from the Japanese Nobel Lautop attraction centres of porate governance as a key reate Susumu Tonegawa who said management education to thrust area towards fulfilling its he was glad to have moved to MIT students and faculty from social commitment for superior from Japan. To quote, I might never wealth creation, institutional have got the Nobel Prize for mediall parts of the world. and corporate processes, and cine (which he won single-handedly safeguarding the interests of the in 1987 for his revolutionary work on common investor. IIMs need to highlight and mar- the genetic origins of antibody diversity), since it was ket some of these facts and attributes of their func- the environment at MIT that enabled me to make my tioning. breakthrough in my thirties and win the Prize within 10 years. It is useful to remember that Mr Tonegawa Perhaps it would be difficult for IIMs to justify the retains his country-of-origin citizenship (just like our fact that only a few hundred students pass out each own Nobel Laureate Amartya Sen), but has been scathyear, i.e., the output numbers are wholly insuffiing in his criticism of the scientific research system in cient and inadequate for a large country like India. Japan where he says, individual potential is stifled, not This situation is aggravated when many PGPs take cultivated (Economic Times, February 18, 2004). up assignments outside India. IIMs need to address this issue at the earliest since it also involves changIIMs have traditionally had the requisite functional ing the existing mindsets regarding classroom pedaand academic autonomy and access to sufficient resourcgogies discussed earlier. es the country could provide. As institutions of excelTo me, the future course of action for IIMs in the lence, IIMs should individually and collectively sit toshort-to-medium term is clear: Globalize in the truest gether to evaluate the quality and quantity of their broad sense of the word by becoming one of the top attraction contributions and embark upon developing strategies to centres of management education to students and facmake their knowledge more relevant and accessible to ulty from all parts of the world. We are in an economic less privileged sections of the society and yet be able paradigm where the winner takes all and a breakto attract knowledge seekers and creators internationthrough can be achieved only through the networking ally. One positive legacy of the fee controversy is that effect. Once we have the virtuous cycle of top-class the Directors of the six IIMs are talking much more to students, world-class faculty, best organizations for each other than ever before. The need is to extend this consultancy and research, best recruiters, and documencollaboration at many more and different levels.

Anil K Gupta
KL Chair Professor of Entrepreneurship, IIM, Ahmedabad IIMs, particularly the older ones, have tried to build selfrenewing capacity through engagement with various stakeholders over the years. They must learn and leverage from the past lessons and experiences. They must continuously remain in dialogue with all the stakeholders to achieve far greater social legitimacy. Probably listening more carefully, learning more courageously, and leveraging the lessons from the past engagements
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more self critically would have given these institutions even greater social legitimacy than achieved so far. All panelists in this Colloquium agree that IIMs are elitist institutions in terms of high academic standards and distinction. Where the differences between IIMs do exist are in the way they have used their elitist character, and tremendous social capital invested in them, as Prof I G Patel puts it, to further enhance their social impact and

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appeal. IIMs, particularly, IIMA have made tremendous contribution in institution building as recounted by Professor Samuel Paul. However, it is realized that they could have together contributed much more to the institution building tasks not only in the country but, in fact, even globally, and that potential remains to be properly harnessed.

I remember, many years ago, the Khadi Village Industries Board of a state government wanted help in developing indicators to be used as a part of the management information system to evaluate its performance from time to time. The concerned faculty team proposed that the small amount that this board could pay be contributed to the staff welfare fund and that IIMA may not charge its overhead expenses just as the faculty would not charge anything for its time. Similarly, studies have been undertaken at different IIMs offering development plans for some of the most economically backward regions, artisanal clusters, primary health centres, and educational policy alternatives based on innovations of the primary school teachers. Similarly, our colleagues have also developed long-and short-term programmes for building capacity of public systems, disadvantaged sectors, and also occasionally the NGO sector. Colleagues in IIMs have systematically pursued capacity building in agriculture, infrastructure, transport, micro finance, energy, environment, cooperative sector, electoral reforms, management of grassroots green innovations, incubation of innovation-based enterprises, etc. But, what has made the most powerful impact on the popular mind is the high salaries that IIM students get. This is acceptable so long as it conveys validation by market place of the talent these young boys and girls show. It is seldom realized that about 30 per cent of the students (at IIMA) come from families having declared income less than Rs three

Studies have been undertaken at different IIMs offering development plans for some of the most economically backward regions, artisanal clusters, primary health centres, and educational policy alternatives based on innovations of the primary school teachers.

lakh per annum and 80 per cent from income less than Rs five lakh per annum. Basically, it is the young children from the middle class that make it to IIMs through a tough, rigorous admission process and take up lucrative, but highly competitive and challenging jobs in companies in India and abroad. The transition from a middle class background to the top salaried class in one generation is undoubtedly a matter of achievement and gratification. This would surely attract societal attention. Panelists have explained why these students, despite applicability of their education to public and civil society sectors, are not joining these sectors, primarily due to the limited capacity of the latter to absorb their talent.

The need for change has been felt by most panelists. Prof Paul rightly stresses the need for IIM leadership including the faculty, to introspect and look for new ideas. It is the only way to avoid others pushing their agenda on IIMs. The initiative for change should come from within. Mr Vittal makes a strong case for elitism of the kind IIMs possess to continue. But he also stresses, there is no reason why the skills developed and honed in the institutions like IIMs cannot be extended to other sectors and institutions. IIMs must consider expanding their activities It is seldom realized that in this direction. Continuing in this about 30 per cent of the vein, Prof Khandwalla adds, Over students (at IIMA) come the decades, it formed centres and from families having groups to contribute to the effective declared income less than management of agriculture and ruRs three lakh per annum ral development, developmental adand 80 per cent from ministration, population control, enincome less than Rs five ergy, health, and education. These lakh per annum. The groups have extended the impact of transition from a middle IIMA well beyond the corporate class background to the sector. Other IIMs also pursued simtop salaried class in one ilar diversification though with generation is undoubtedly mixed results and response. Prof a matter of achievement Khandwalla draws attention to areand gratification. This as which need much more attention would surely attract in future. He advises, IIMA could do a lot more to foster in its students societal attention. a stronger sense of business ethics
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and corporate social responsibility, two areas in which to make an impact globally, we have to start by playing IIMA may be lagging behind its peers in the West. It the game by the global rules before we seek to change is yet to develop a coherent and compelling vision of the rules.. There is a consensus that our future will what it wants to contribute to the new, liberalized, but be decided by our contributions to knowledge creation still very poor India. It could have contributed more rather than merely knowledge dissemination. Prof Jain aggressively and effectively to such priority sectors as feels that, IIMs need to carry out some introspection the creaky Indian governance system that have been on how to remain wedded to the institutional commitsuch a drag on our quality of life. The import of this ments for creating and disseminating relevant knowladvice does not need to be stressed any further. Prof edge suitable for local and domestic conditions. To Murthy suggests the need to redefine the standards for achieve this goal, he suggests that, as institutions of excellence and relevance of Indias higher educational excellence, IIMs should individually and collectively sit institutions through focused teaching, research, and contogether to evaluate the quality and quantity of their sultancy. According to him, if achieving such intensity broad contributions and embark upon developing stratin all the current activities is difficult, they need to select egies to make their knowledge more relevant and accesand synergize. Prof Bose suggests sible to less privileged sections of the a very practical but challenging opsociety, and yet be able to attract One of the most tion of aligning IIMs with larger knowledge seekers and creators inencouraging features of society through its most reputed and ternationally. IIMs is that like in any effective instrument the PGP. He Panelists have discussed the other social sphere, there adds that IIMs should take up large multifarious institution building efare faculty members who research projects aimed at studying forts being made or needed at IIMs. wish to contribute different sectors of the country and They have drawn attention towards towards the development execute them through the PGP. other contributions and processes of of sectors which cannot These projects, he suggests, should IIMs which may help harness their pay for these services. If be so designed as to require considelitist character for nation building. such contribution has not erable field work and the students I would like to reflect on some of the been forthcoming as should be assigned to spend time in strategies that IIMs could use, demuch as it should in all the field as part of the core curricpending on their strengths and well IIMs, the reason could be ulum. The hard work is not how to articulated priorities, to harness their the lack of institutional design such projects but to organize potential through (i) even more wider their execution. We would need the mechanisms which social engagement, (ii) greater investgovernments helpThe effect of this periodically take stock of ment in building capacity of those on fresh minds can be expected to be respective contribution in meritorious students who still canfar reaching and permanent. Will this regard. not make it to IIMs but deserve to the government be willing to absorb do so, and (iii) engaging with such such inputs from the brightest young social sectors which deserve their inputs but cannot pay minds of the country? for them at prevailing market prices. Prof Krishnan feels that IIMs need to benchmark themselves globally not only for the PGP where their One of the most encouraging features of IIMs is that record is impeccable but also for research outputs where like in any other social sphere, there are faculty members a great deal more can be done. He observes poignantly, who wish to contribute towards the development of The worlds leading academic institutions are evalusectors which cannot pay for these services. If such ated by the quality of their research output, i.e., by the contribution has not been forthcoming as much as it thought leadership that their faculty demonstrate. The should in all IIMs, the reason could be the lack of inproblem is that we want to be known as top-tier world stitutional mechanisms which periodically take stock of class educational institutions but are unwilling to be respective contribution in this regard. If we analyse the measured by this criterion. In the absence of any major minutes of the meetings of the faculty councils in most discontinuity in the market for knowledge, if we want IIMs, there might be a lack of evidence suggesting that
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views of other stakeholders (other than students and faculty) within and outside IIMs are given adequate attention. Perhaps excessive preoccupation with ones own views of the world and concerns may somewhat explain why some quarters of the society charge these institutions with insularity towards larger social concerns. Environmental, gender, and ethical concerns are central concerns today in the business as well as social realms nationally and globally. I suspect that there are not many MDPs offered for professionalizing management in the corporate sector including such inputs. Benchmarking with international institutions in this regard would be useful.

SMEs for over three decades and had identified entrepreneurship as a thrust area for research and training about a decade ago. The question is about the quantum of efforts and resources devoted to these activities in comparison with others and having a conscious strategy. The culture of IIMs will have to become more entrepreneurial.

Bringing students from the disadvantaged sections of the society through proactive steps as suggested by Prof I G Patel makes a lot of sense and concrete initiatives in this regard will certainly help in earning higher social respect than what IIMs already have. Perhaps, IIMs can design special management courses for these sections of the society or allow these students a graduated pace to complete the Producing managers equipped with professional management programmes. Similarly, some incenskills of world-class was a pioneering contribution tives such as writing-off the debts of the students of IIMs more than 30 years ago. who wish to serve such sections of No doubt, there is still a need for the society may also warrant experisuch managers in large numbers. There should be enough mentation as a means of moulding But, will older IIMs remain on incentives given to IIM minds and preferences of younger the edge of disciplinary as well students to spend some generation. as global margins by doing more time, as a part of the There should be enough incenof the same? Should their focus curriculum, as tives given to IIM students to spend evolve and realign with emergdevelopmental intern with some time, as a part of the curricuing needs of the society? Should small sector, NGOs, lum, as developmental intern with they stress on the development service sectors, defence, small sector, NGOs, service sectors, of leadership and entrepreneurand other strategic defence, and other strategic sectors. ship more than just conventionsectors. This will expose This will expose them to the chalal managerial education? Inthem to the challenges lenges faced by these sectors, and stead of placement salaries makfaced by these sectors. who knows, they may also contriing news, should not the busibute creatively to solving some probness plans of students that atlems of these sectors. Social engagement of young tract millions of rupees or dollars from national and minds can only generate greater empathy and perglobal venture firms make news? All IIMs would haps help in humanizing the corporate world also have to give serious thoughts to these and decide a bit more. on their own action plan. Creating jobs for masses is a need of the society and what better way of contributing to this cause than entrepreneurship development. But, developing risk-taking ability among students would also require more risk taking attitude among the faculty. It is noteworthy that IIMA and perhaps some other IIMs as well have always taken some initiatives in the direction of developing entrepreneurship and leadership and offering programmes for professionalizing management of small and medium size enterprises (SMEs). IIMA, for example, has been offering an MDP for Attractive research grants to faculty through challenge award programme for addressing some of the serious social problems of unemployment and rural and urban development could be another means of attracting brilliant minds towards pressing societal problems. The teaching material developed and used by IIMs could be placed in public domain with no restriction on its use so that various management schools can draw upon it. Unless the average performance
SOCIAL CONTEXT OF MANAGEMENT EDUCATION

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improves, we would only have a few elite institutions and others would remain average and suffer from mediocrity. IIMs have played a significant role in institution building and improving the management education and practice in India. They are certainly elite institutions and will remain so. But, elite institutions from different social streams must network to bring similar meritocratic culture that IIMs have brought about in their own self governance in other sectors. Nation-building is a challenging task and it will not help to leave that task entirely to politicians and bureauc-

Nation-building is a challenging task and it will not help to leave that task entirely to politicians and bureaucracy... Elite educational institutions like IIMs have to join hands... and create new benchmarks of theory building as well as trigger entrepreneurial experiments in various fields of development management.

racy. Civil society organizations are making tremendous efforts in awakening the social conscience of different sectors and segments of the society. Elite educational institutions like IIMs have to join hands with them and create new benchmarks of theory building as well as trigger entrepreneurial experiments in various fields of development management. Elites have harvested tremendous social capital. If they do not help in renewing it and, in fact, augmenting it, their claim on this capital may not remain intact.

Where the mind is without fear and head is held high; Where the knowledge is free; Where the world has not been broken up into fragments by narrow domestic walls; Where words come out of depths of truths; Where tireless striving stretches its arm towards perfection; Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit; Where the mind is led forward by thee into ever-widening thought and action... Into that heaven of freedom, my father, let my country awake. Rabindranath Tagore Gitanjali

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Sarvodaya Samiti
Debasis Pradhan

describes a real-life situation faced, a decision or action taken by an individual manager or by an organization at the strategic, functional or operational levels

MANAGEMENT CASE

rior to an important meeting of the partner organizations of Khadi and Village Industries Commission (KVIC) scheduled the next morning, Pradip Mohanty, Coordinator of Sarvodaya Samiti, wondered what would be the best course of action for his organization as he was concerned about the large number of honey bee-keepers associated with the Samiti. He knew that his action will have implications for the local honey industry in general and the bee-keepers in specific. He had to decide on the linkages of his organization with KVIC and its presence in different core activities like production, processing, and marketing and therefore suggest suitable ways to allocate the efforts and resources of the organization among these activities depending on the varied strengths of his organization. He was in a dilemma whether the Samiti should be a part of the proposed consortium. According to Mohanty, Though, at present, we are in a comfortable situation, we are looking at various options which can make the future more attractive.

BACKGROUND
Sarvodaya Samiti, Koraput, is a state-level, non-governmental, non-political organization. Registered in 1970-71 under the Societies Registration Act XXI of 1860, it is committed to the all-round and sustainable development of tribal and other under-privileged communities of the society. Started in 1959 as Narayanapatna Kshetra Samiti, it was renamed as Sarvodaya Samiti after its area of operation got extended to the other parts of the state. Its present activities are sustainable agriculture, development of khadi and village industries, child and women welfare, building of an educational complex for scheduled tribe girls, consumer welfare, watershed programmes, and rural marketing. As a founder member, Akshaya Mohanty said, We are one of the few organizations trying to promote rural marketing as one of the viable activities and bring in a change in the living standards of the poor. According to him, Though Sarvodaya Samiti is a not-for-profit organization, it has started realizing the greater interest and benefits in keeping the enterprise alive by making it a profitable entity. The Samiti had some good marketing experience which encouraged the organization to do marketing of the rural produce. It was one of the few institutions that had been certified by KVIC, Mumbai, and the Government

KEY WORDS Marketing Procurement Processing Tie-ups

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of India under the broad category, Development of Khadi and Village Industries. It encompassed a range of activities like production of khadi, promotion of beekeeping, and marketing of honey, turmeric powder, and arrowroot.

farmers by marketing their product with nominal charges for packing and processing. The income from the marketing and processing of honey was also used for the development of bee-keeping and training to the beekeepers.

Staffing Pattern of the Organization


Akshaya Mohanty was leading the organization in the capacity of its Secretary. Under him, Pradip Mohanty functioned as the sole organization Coordinator. He looked after all the programmes of the Samiti in general and marketing activities in specific. Out of a total of 22 employees, six were in charge of the central office and eight were in marketing operations. Three out of these eight members were engaged in the honey processing plant at Bhubaneswar. A technician, whose primary job was to take care of the processing of honey, was heading the processing centre. In addition, he also did the marketing in bulk by negotiating and collecting money from the buyers in time.

Viability of the Samiti


Different products of the Samiti were marketed through six consumer stores, retail outlets, and a distribution network spreading across different parts of the state and outside. The consumer stores were selling khadi products, honey, turmeric, and arrowroot. The Samiti was getting approximately 27 per cent of its revenues from honey and with the growing importance of honey production in the local economy, Pradip Mohanty expected the revenues to further increase in future (Table 1). Though khadi constituted the largest share (64%) of the total revenues of the Samiti, it had lesser margin, i.e., three per cent compared to the eight per cent in honey on the mark up. The popularity of khadi was also on the decline. Therefore, the growing honey business seemed to boost the financial position of the Samiti thus making it viable compensating for the lesser margin in khadi. Four different factors decided the importance of honey for the Samiti such as ease of procurement, availability of processing facilities, marketing experience, and financial support. There was an abundance of forest honey which could be procured by the Samiti as it had the necessary processing and packaging facilities
Table 1: Sales of Turmeric, Arrowroot, Honey, and Khadi (in Thousand Rupees)
Year Production Sales 1969-70 Production Sales 1989-90 Production Sales 1991-92 Production Sales 1992-93 Production Sales 1995-96 Production Sales 1996-97 Production Sales 1998-99 Production Sales 1999-2000 Production Sales 1968-69 Turmeric __ __ __ __ __ __ 15.50 15.70 37.00 45.10 15.90 30.00 14.10 31.30 15.90 30.00 51.10 83.90 Arrowroot __ __ __ __ __ __ 15.60 18.60 17.00 27.50 22.60 48.70 21.60 45.00 22.60 48.70 20.50 40.90 Honey 0.90 0.60 2.10 3.10 26.50 39.00 47.00 53.80 109.00 148.00 162.00 260.00 160.00 197.00 211.00 336.00 302.00 476.00 Khadi 40.90 210.10 103.20 281.50 __ __ 184.90 724.50 182.20 941.70 1010.00 1149.00 596.80 1137.80 805.80 1537.30 1150.90 1136.80

Honey Production in Local Economy


The role of honey production in the local economy is negligible with just around 5 per cent of the farmers of the district being engaged in bee-keeping. Pradip Mohanty estimated the income out of honey production and marketing to be approximately two per cent of the total income of the district though there was no official estimate. He was bullish about the exploration of marketing potential for different products of the organization. He felt that among all the activities of the Samiti, honey production, procurement, and marketing were expanding and needed greater attention in terms of time and manpower. According to him, Sarvodaya Samiti always gives importance to the production of honey by the farmers as it is an additional income for them without spending much time and energy. Also, rearing of bee colonies only requires some training in the local technique. A discussion with experts revealed that the local area was suitable for honey production. Koraput is a hilly region with 65 per cent of the geographical area covered by forest. There was plenty of forest honey available which needed better processing and impressive packaging for its marketing. The Samiti had realized the importance of bee-keeping as a livelihood option. As there was not enough farmland, the local people had expressed an interest in taking up bee-keeping. The Samiti used to give additional support to the

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to make it marketable. The honey marketed by the Samiti was getting very good response from the consumers for its quality and certification from Agmark. The decision to open a special honey processing centre at Bhubaneswar had perhaps been taken in view of its popularity. The Samiti wanted to establish its product as a quality branded honey in the honey market. It had experience and capability in marketing too. The fourth and one of the most vital factors was the financial support provided by the KVIC and the UNDP. The Samiti had garnered a lot of experience in providing training on bee-keeping, technical help, and supplying equipment from its involvement with organizations like KVIC and Integrated Tribal Development Agency (ITDA), Koraput, in the past.

quantum jump in the sales of honey in two phases: one after the Agmark certification in 1990-92 and the other after the shifting of the office to Bhubaneswar in 199597(Table 1).

Procurement
The procurement of apiary honey from Koraput district was very low compared to that from the other parts of India like West Bengal, Chhattisgarh, and parts of Bihar. Most of the forest honey available in Koraput and adjacent districts (Phulbani is the nearest) were being procured by the traders from adjacent states like Andhra Pradesh (Box 1). They were paying higher procurement prices like Rs 90-100 per kg vis--vis Rs 60 per kg paid by the Samiti. The Samiti did not rule out the possibility of paying competitive prices for procurement when they would have a better processing facility at their disposal. It could also procure honey from West Bengal, Chhattisgarh, and parts of Bihar. This is going to help the farmers of those areas as they are getting lower prices like Rs 40 per kg. But, the transportation cost is likely to increase the cost of procurement, said Akshaya Mohanty. Pradip Mohanty felt that there was a possibility of procurement of more amount of forest (rock bee) honey which was sufficiently available in different parts of Orissa. He gave an estimate of his procurement plans; Similipal was approximately 500 km from Koraput whereas the other two possible sources, namely Phulbani and Malkangiri, were less than 200 km away from Koraput. The Samiti hoped to do the marketing of its own procurement which was expected to be around 15 tonne per annum (Table 2). The Samiti was procuring 3-5 tonne of honey per annum from one of its partner cooperative societies named 24 Pargannas Bee-keeper Cooperative Society of West Bengal which was also certified by the KVIC. From Calcutta to Koraput, the transportation cost was Rs 14,000 per truck for 10 tonne of materials. From Koraput to
Box 1: Some Facts about Honey
Generally honey is of two types apiary honey and forest honey. Apiary honey is produced by the Indian hive bee and is extracted from the bee-keeping boxes. Normally, all the branded honey is apiary honey because it is clean and transparent. It is free from foreign materials like pollen, eggs, wax, etc., and, therefore, looks transparent. The forest honey, which is normally collected by crude methods from the beehives of the rock bee, looks turbid due to the presence of the above mentioned materials. Due to its turbidity, forest honey requires extra filtration to make it transparent.

Marketing and Processing


In 1982, four organizations were involved in different areas of bee-keeping and honey marketing activities. These were Orissa Khadi Board, KVIC, District Industries Centre (DIC), and ITDA, Koraput, providing financial help and technical support while the Samiti was the implementing agency. The Orissa Khadi Board was the only body involved in marketing though it had not taken it up seriously. Due to inconsistencies in procurement and improper processing of honey, the whole process of marketing of honey had not picked up. At the request of the then District Magistrate of Koraput, it entered into marketing of honey apart from its procurement. Initially, in the seventies, the Samiti used to manually process and sell its honey locally. When it started expanding its markets outside local areas, it applied for an Agmark certification and received the same in 1990. Ever since, it has taken lot of care to sustain the credibility of the product through proper processing and bottling. Koraput, the head office of the Samiti, was not well connected either to the other parts of the country or to different parts of the state and hence it was difficult to carry out both processing as well as marketing operations from here. The Agmark officials found it inconvenient to visit Koraput for taking the honey samples and giving approval. At times, the Samiti had to wait for months before getting an approval for marketing it. Hence, it took a decision to shift the processing centre from Koraput to Bhubaneswar. Thus, a new processing centre was opened at Bhubaneswar in 1995 which was involved in a host of other activities like procurement, processing, and bottling of honey. Statistics showed a
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Table 2: Procurement Plans of Rock Bee Honey


Area Similipal Malkangiri, Umerkote, and Nabarangpur Phulbani Quantity to be Procured Per Annum Eight tonne Two tonne Five tonne

Bhubaneswar, the transportation cost was Rs 8,000 per truck for 10 tonne of materials. The Samiti also procured 3-4 tonne of honey from the nearby coastal areas like Puri and Sakshigopal. The transportation cost for these places was Rs 2,000-3,000. From Koraput, the manually processed honey was transported to Bhubaneswar in 50 kg jerkins. The transportation charge for each jerkin was Rs 20-30. To compensate the transportation cost of Rs 10 to 12, we have to hike the retail price of our honey from Rs 135 to Rs 150 (as compared to Dabur it is still cheaper). It can be a viable proposition, said Pradip Mohanty.

Packaging and Branding


The Samiti packaged its honey in glass bottles and did not market it under any special brand name apart from the name Sarvodaya Samiti written on the bottle. The label wrapped over the bottles read Apiary written in a big font followed by a prominent Honey. At the bottom of the bottle, the name and address of the organization was given in still smaller size which Akshaya Mohanty as well as Pradip Mohanty virtually accepted as the brand. The word apiary differentiated this honey from forest honey.

HONEY MARKET: PRODUCT VARIANTS OF THE SAMITI AND ITS COMPETITORS


The Samitis share in the honey market is given in Table 3. Its market is divided into two parts. First, the local market comprising Koraput and Jeypore, the only two towns of the district, and the second comprising Bhubaneswar and the market outside. The main competitors of Samiti honey were Dabur honey and Himani Sona Chandi honey. The Samitis honey was given the Standard grade by Agmark whereas it was A and Special
Table 3: Market Share of Sarvodaya Samiti, Dabur, and Others in Honey Markets of Orissa (Quantity in Tonne)
Markets Koraput area Bhubaneswar and Cuttack Sarvodaya Samiti 2 8 Dabur 1 38 Others 00.4 18.5

for Dabur honey and Himani Sona Chandi honey respectively. The Samiti honey was available in variants of 1 kg, 500 gm, 200 gm, and 100 gm bottles whereas Dabur honey was also available in 50 gm and 25 gm bottles. The 50 gm and 25 gm bottles of Dabur honey were available at a price of Rs 15 and Rs 10. Though the Samiti had also made available its honey in 50 gm bottles, it did not generate enough revenue and hence was withdrawn. The past sales record showed that the entire procured amount had been sold out. According to the retailers of the local bakery and the grocery stores, The reason for lesser sale of 50 gm bottles is the popularity of the brand which resulted in more volume of sales for the bigger sized bottles of Sarvodaya Samiti. People are confident of the quality of the Sarvodaya Samiti honey and hence they purchase in bigger volumes instead of sizes like 50gm and 25 gm. The retailers were convinced that brands other than the Sarvodaya Samiti were being mostly used for medicinal purpose whereas the Samiti honey was a regular and necessary item. According to a grocery shop owner, Daburs and Himanis honey basically requires regular push from the retailers whereas Samiti honey does not require push for its sales. To quote the owner of a bakery, The honey of Sarvodaya Samiti is the first choice of consumers and the demand is more for bigger volumes which we often fail to meet due to insufficient supply. Due to the unavailability of the Samiti honey, consumers were looking for other brands like Dabur and Himani and especially smaller sized bottles like 50 gm. The Bhubaneswar office marketed the bottled honey mainly through the cooperative stores of Bhubaneswar and Cuttack. Initially, the Ayurvedic medicine stores were also included as part of the retail outlets followed by allopathic medicine stores and grocery stores. The margin given to all the retailers at present is the same at 15 per cent on the selling price. The Samiti had a plan to add more medicine stores to its list of retailers. Considering the big difference in the existing pricing of different brands (Table 4), the Samiti was planning to increase its market penetration with a better price-value realization. It was looking at the possibilities of hiking its prices slightly though it was contingent upon many factors like its relationship with KVIC, etc.

Promotional Activities
The Samiti participated in some melas and fairs like the Gramashree Mela in Berhampur organized by the Council
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Table 4: Comparative Prices of Different Brands (in Rupees)


Size 1 kg 500gm 200gm 100gm Sarvodaya 130.00 72.00 33.00 17.00 Dabur 180.00 94.00 52.00 27.00 Charak Jhandu Baidyanath Himani __ __ 43.00 __ __ __ 42.00 24.00 __ __ 47.00 __ __ __ 52 27

for Advancement of Peoples Action and Rural Technology (CAPART). It also participated in the Bali Jatra held at Cuttack, one of the biggest melas of India. It made sincere efforts to participate in all district level melas, fairs, and exhibitions. Pradip Mohanty admitted that there was a lot of potential in rural markets and that the Samiti was trying to benefit from this.

POLICY/GOVERNMENT REGULATIONS
The Orissa State Government was charging a sales tax of 12 per cent on the marketing of honey by the Samiti. The Samiti was not happy with this and the categorization of its honey as a consumer good as it meant an increase in the retail price of honey. According to the Samitis accountant, Orissa was the only state where the products certified by KVIC and DIC were taxable. This sales tax is putting us in a disadvantageous position vis-vis other honey producers and marketers under the KVIC banner in other parts of India, he said. The Samiti was fighting against this imposition in the Orissa High Court for waiving it off or reducing it to approximately 4 per cent.

STRATEGIC ISSUES
Pradip Mohanty was aware that the Samiti honey was a good brand which was reflected in its quick sales. As compared to its competitors, the Samiti looked very small for the reason that it was unable to meet the demand of the market because of its limited supply. Without an efficient processing facility, the Samiti had not tried to procure apiary honey in big volume, let alone forest honey. Therefore, to gain a stronger foothold in the market, it wanted to penetrate into the existing and new markets and generate more sales volume for its brand of honey. With the imposition of sales tax, it was finding it difficult to continue with the current prices as there was very less margin. However, as an organization working under the KVIC banner, it could not change the prices as pricing had to be decided by the KVIC. Therefore, the Samiti had to take a strategic decision whether it would continue under the KVIC
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banner. This decision would have wider implications as without the KVIC banner, the marketing of the entire product range of the Samiti will be deprived of the distribution network of KVIC. As a matter of fact, KVIC operates all over India and has partner local organizations in different parts of the country which are registered with it. It was at this juncture that the scene for honey marketing by the Samiti had been recast with a proposed consortium. The three parties likely to be part of the tripartite agreement were KVIC, ORMAS, and Sarvodaya Samiti. Under this arrangement, ORMAS working under the DRDA, Koraput, would find ways to increase the productivity of honey in the district with necessary support from KVIC and the Samiti and DRDA would provide financial support to the producers (bee-keepers) through the Swarna Jayanti Swarojgar Yojna (SGSY) to encourage bee-keeping activity. As per the CEO, ORMAS estimate, some financially supported Self Help Groups (SHGs) of producers would do the targeted procurement (Table 5). According to Akshaya Mohanty, Though all the funding will be regulated by the KVIC, Sarvodaya Samiti will benefit due to its long-standing relationship with KVIC. KVIC was to channelize the original funding of UNDP for plant installation. The honey procured by both ORMAS and the Samiti would be processed at the plant installed in the premises of the Samiti and later marketed by ORMAS. The new machine to be installed had a capacity of one quintal per day. Pradip Mohanty was very optimistic about the popularization of a new higher yielding species of honey bee called A Mellifera and his estimated forest honey procurement plan (Box 2). As per his estimates, approximately 24 tonne of honey could be procured to run the plant at 80 per cent of its capacity. The cost of installation of one such processing plant with a capacity of one quintal per day had been estimated to be Rs 0.45 million. With an escalation in the procurement, there was a plan to set up a bigger plant with a capacity of three quintal per day at a cost of Rs 0.65
Table 5: Proposed Estimate by ORMAS
Item No of SHGs to be formed No of members in each of the SHGs Honey bee boxes per member Yield per box per annum Total yield per annum Quantity 30 (in number) 10-15 (in number) 10 (in number) 10 (in kg) 30 (in tonne)

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Box 2: Information on A Melliferra Species


A Melliferra, a new variety of Italian bee, is a great hope in a situation where the demand for production is very high. It can give a yield of 30-40 kg honey per box per annum against the average yield of approximately 10 kg from the Indian bee. But, one of the conditions for nurturing this variety is the availability of flowers in abundance. This may be one of the areas of concern for the popularization of this breed.

million. It had been agreed upon that the procurement price would be Rs 60 per litre irrespective of the parties involved in procurement. In the agreement, there was a clause which would take care of the remuneration to the Samiti for doing the processing. So, the Samiti had to decide whether it should do only procurement and processing and let ORMAS do the marketing. However, Pradip Mohanty was reluctant to kill his brand by withdrawing from marketing after years of nurturing it. Pradip Mohanty was in a dilemma whether the Samiti should be a part of the consortium. As per the proposal, though the Samiti could continue with the procurement, its primary responsibility would be to process and bottle the honey for ORMAS. But, he feared that if he accepted the proposal, his growing marketing operations might suffer as most of the Samitis resources would be devoted to procurement and processing. At the same time, he was aware that being a part of this agreement, he could gain technological advantage with an advanced processing plant which would help his revenues grow. The Samiti was willing to work with all the stakeholders for the development of bee-keeping in the district with a hope that this option would be sustainable and appreciable. Pradip Mohanty wondered if he should follow the path of aggressive marketing using options like coming out of the KVIC network and formulate a new pricing strategy or be a part of the mission for increasing the honey productivity of the district and earn a decent revenue by only processing it. After deliberating over the issues, he identified several alternatives as the possible course of action for the organization.

processing for ORMAS while also processing and marketing its honey procured independently. Under the first option, ORMAS would pay the Samiti a processing fee of Rs 26 per litre. It was estimated that there would be a miscellaneous expenditure of Rs 20 per litre incurred by the Samiti. ORMAS was planning to sell this bottled honey at 5 per cent margin to a food company. Akshaya Mohanty was of the view that even if ORMAS did all the procurement and marketing, the Samiti could boost its position by leveraging its proven strength in processing and packaging honey, maintaining the quality, and getting the fixed processing charges. But, by doing only processing, the Samiti ran the risk of killing its own brand as it would not be involved in direct marketing. Under the second option, the Samiti could be a part of the consortium and take up processing for ORMAS and marketing of its own procured honey simultaneously. This alternative would utilize the marketing as well as the processing strengths of the Samiti which, as a part of the consortium, could process a limited quantity of honey procured by it and thereafter market the same under the brand name Sarvodaya Samiti. Thus, the Samiti could use the remaining capacity of the plant after the use by ORMAS. The marketing of Sarvodaya Samiti honey, however, would be contingent on the capacity utilization of the processing plant by ORMAS. The question here is: if the Samiti did not get any space for processing of its own honey, would it not be compelled to virtually kill its fast moving brand in the process? Though the possibility of installing a processing plant with a higher capacity of three quintals per day could give the Samiti some space to harness the potential of its brand, it needed further negotiation with both UNDP and KVIC and the total procurement had to be nearly three times that of the present procurement to run the plant efficiently.

Alternative 2: Sarvodaya Samiti not being Part of the Consortium


If the Samiti chooses not to be a part of the consortium, the plan of installation of the modern processing plant in its premise would stand cancelled and the Samiti would have to set up its own processing plant by making the required investment. Due to delay in testing and certification by Agmark, the Samiti was planning to set up its own Agmark unit in the premise of the organization to speed up the process of testing, approving,
SARVODAYA SAMITI

Alternative 1: Sarvodaya Samiti being Part of the Consortium


By signing the tripartite agreement, the Samiti would have the responsibility of processing the honey procured by ORMAS while ORMAS would market it. There were two options for the Samiti: i) take up the processing activity and withdraw from marketing completely ii) do

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and marketing honey. Can the Samiti justify the investment for its exclusive use? Though this proposition promised an assured marketing growth for the Samiti, there was a perceived threat that in the absence of ORMAS, the greater interest of the local honey beekeepers might get jeopardized.

much prospect for the Samiti as a marketing entity.

Alternative 5: Tie-up with Both ORMAS and OMFED


In line with the vision and the purpose of existence of the organization, the Samiti can decide to be a part of all such ventures described in the earlier proposals. As ORMAS and OMFED both aim at helping the farmers and providing them a platform for market linkage, it might be worthwhile for the Samiti to accept both the offers. The linkage might prove to be beneficial to all the parties in the long run but may hamper the efforts of the Samiti to establish its brand in food and beverages market. If the Samiti limits itself to processing of honey, it may find it difficult to start all the marketing activities from the scratch if both ORMAS and OMFED withdrew from the market. Pradip Mohanty was to take a decision whether to be a part of all the agreements and on the volume of business with ORMAS and OMFED. He wondered whether the Samiti had enough in-house capacity to honour all the agreements. According to Pradip Mohanty, We are working as an NGO and our prime objective is to help the farmers as well as the consumers. We want to develop the beekeeping industry in Orissa so that the production of honey increases with more number of farmers taking up bee-keeping along with other activities. At the same time, we want to get good response from the market for our products.

Alternative 3: Severing Linkage with KVIC


Pradip Mohanty also evaluated the option of coming out of the KVIC network and establish the Samiti as an independent marketing entity. As mentioned earlier, the imposition of 12 per cent sales tax by classifying the Samitis honey as a consumer good by the Government of Orissa had made marketing difficult for the Samiti. It was creating constraints in pricing. The Samiti had the choice of selling through the food companies similar to the plan of ORMAS. Can the severing of ties with KVIC benefit the bee-keepers in the long run? Can the Samiti develop such a national network like that of KVIC to sustain as an independent marketing entity? Will this severing of linkage have an impact on the marketing of its other products which are being marketed through the existing distribution channel of KVIC? These were the issues that need to be tackled before taking a decision.

Alternative 4: OMFED Proposal


There was a proposal from the Orissa State Cooperative Milk Producers Federation Limited (OMFED) to purchase the Samitis processed and bottled honey and market it under the OMFED brand name. It was being considered by the Samiti as a good proposition. In this proposal, the Samiti would process and pack honey for OMFED at Rs 26 per kg. OMFED was interested to enter into a contract with the Samiti which would ensure sustainable supply of the bottled honey on a long-term basis. Looking at the proposed plans of procurement, Pradip Mohanty was to decide if the Samiti would be interested in such a contract and be able to cater to the demand continually as this required a fully devoted processing plant. This proposal, however, ensured a market for the bee-keepers. Otherwise, there was not

Debasis Pradhan is a doctoral student at Institute of Rural Management, Anand and is the AKRSP Fellow in Rural Marketing area. He has done his PGDRM from XIM, Bhubaneswar and has worked for more than two years in the power sector. His areas of interest include rural marketing, relationship marketing, social marketing, and product management. Papers and management cases authored by him have appeared in national and international conference proceedings. e-mail: f012@irma.ac.in

Not everything that can be counted counts, and not everything that counts can be counted. Albert Einstein
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ABC Limited: Agriculture and Domestic Pumps Division

presents analyses of the management case by academicians and practitioners

DIAGNOSES

CASE ANALYSIS I
Mark Neal Associate Professor Department of Management College of Commerce and Economics Sultan Qaboos University Oman e-mail: markneal@squ.edu.om Richard Tansey Associate Professor College of Business Administration Texas A&M International University Texas, USA e-mail: rtansey@tamiu.edu.

he case study by Agrawal and Rajasekar gives a detailed analysis of ABC Limited (its history, cultural values, strategic choices) as well as a description of the current market conditions in the Indian electric water pump industry (EWP) (competitors, pricing, and market segmentation).

ABC LIMITEDS POSITIONING IN RURAL/URBAN EWP SEGMENTS


The Indian market for pumps is considerable at around Rs 19.5 billion and the Agricultural and Domestic Pumps (ADP) sector is estimated at Rs 11 billion. Within the ADP sector, the domestic and agricultural segments each contribute 40-42 per cent to sales while the industry segment contributes 12-14 per cent. One strategic issue for ABC Limited is whether to change its marketing profile, i.e., shift its attention from the agricultural sector to the growing domestic or industry sectors. There are obvious reasons why ABC should consider this. The agricultural sector is stagnating: current figures show little or no growth with forecasts estimating future growth in pump sales at 2.7 per cent. On the face of it, things look less than inspiring. There is, however, a hidden potential for further growth in the sector. Increased EWP use can expand the size of the agricultural sector as a whole by adding 30 per cent more irrigated land under cultivation. There is, thus, a large potential rural market that can provide jobs for hundreds of thousands of unemployed rural workers. The domestic sector is already expanding rapidly with current figures showing 5.5 per cent growth and forecasts estimating 10.5 per cent growth.

The October-December 2003 (Vol 28 No 4) issue of Vikalpa had published a management case titled ABC Limited: Agriculture and Domestic Pumps Division by Girish Kumar Agrawal and J Rajasekar. This issue features six responses on the case by Mark Neal and Richard Tansey; Narendar V Rao; S M Mehta; Upinder Dhar; Salma Ahmed and Ashfaque Khan; and Abhijeet, Ankur, and Satyaprakash.

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ABC Limiteds share in this sector is currently 8 per cent. The domestic pump sector is growing along with urbanization and the resultant increase in high-rise living which requires pumping water to high levels. There is a decreasing water table forcing the domestic as well as the agricultural bore holes to be dug deeper year-onyear. Within this context, the sector for domestic pumps is becoming more diverse and fragmented as the demand for basic pumping equipment is augmented by the demands associated with high-earners who use power showers, jacuzzis, etc. There is also the industrial sector (sewage handling pumps, alternators, vacuum pumps, etc.), where ABC Limited currently enjoys good market presence (14%) but which overall contributes relatively little to the proportion of sales (12-14%). Furthermore, the market size is currently only a fifth of the domestic or agriculture sectors and it thus offers limited scope for growth in absolute terms. Restricting the view to sector growth, then, it seems that there are greater opportunities for increased market presence in the faster-growing domestic sector. However, considering the positive effects of EWP use on the size of the agricultural sector, overall, we can see the possibility that EWP use may actually increase the demand for further EWPs.

sales are in the disorganized (non-brand) sector. It is thus competing in a low-growth market where margins are squeezed and the disorganized sector is allowed to thrive because of the governments inability to collect excise duties and sales taxes and by widespread noncompliance with labour laws. ABC Limited is the opposite of a disorganized sector institution, the first in India to secure both ISO 9001 and ISO 14001. As such, it competes only in the squeezed organized sector which constitutes half of the existing market.

THE IMPORTANCE OF THE ELECTRICITY SECTOR


Many of the contextual issues associated with operating in the agriculture sector are clustered around the supply of electricity. The privatization initiatives of the 1990s failed in the electricity sector with the result that the state currently retains effective control of power generation and distribution. In 1998, the total production of electricity equalled approximately 547.12 billion kilowatt hours. According to Exhibit 1 of the case, for the 19 Indian state electricity boards, agriculture users consumed 91.11 billion kilowatt hours in 1998. Through the control of electricity supply and distribution, the state shapes the EWP market. Because many farmers are poor, the existing market and its development depend heavily on electricity subsidies. The future of such subsidies is, however, uncertain because the state electricity boards are running out of money and the level of subsidy is becoming problematic. One would think that in such conditions, a company such as ABC Limited could increase customer benefit by competing on the power-efficiency of its product portfolio. Regulations, however, categorize pumps in terms of HP, thus encouraging firms to under-rate their products. As a result, there is little incentive for the farmers to buy energy-efficient pump products and this undermines the ability of firms to compete on efficiency. Thus, while government monopoly ensures that electricity supply is inefficient, state regulations ensure that more not less is consumed per pump. Understandably, the state supply of electricity is finding it difficult to keep up with this inflated demand from 11 million EWP owners. We can thus see an irony in the power shortages of November-December 2003 which were in part attributed to the over-use of agricultural EWPs. The effects of state intervention in the electricity and EWP sectors are thus mixed. While state electricity subABC LIMITED: AGRICULTURE AND DOMESTIC PUMPS DIVISION

GROWTH LIMITATIONS IN THE AGRICULTURAL SEGMENT


ABC Limited has been successful in the agricultural sector despite government interference which has historically engendered conditions of monopoly (electricity supply), indirect monopsony (indirect government purchase of pumps), bureaucracy, and corruption. The companys success in this segment cannot be dismissed as mere first-mover advantage: there are few technological barriers to entry and rivals have been aggressive in their attempts to gain market share at all levels. At the organized, brand level, ABC had to respond to domestic competition within every segment of its operations, particularly those in which the state-sponsored conditions made it difficult to compete on anything but price. Recently, things have become even tougher in this price-sensitive segment as Chinese imports priced at less than half their Indian counterparts have made inroads into the market. The companys performance is also notable when one considers that over 50 per cent of the Indian pump

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sidies undoubtedly support the market in EWPs and allow for its expansion, state intervention also causes problems: it needlessly inflates the demand for electricity in rural areas; it indirectly promotes the disorganized sector; and it can skew the market away from the EWP sector. For instance, because of the shortage and unreliability of rural electricity in some areas, 6.5 million rural farmers have purchased diesel pumps which are more expensive to operate. This situation requires companies such as ABC Limited to become the political champions for the needs of their rural buyers. They can do this by cooperating with others in the industry and lobbying for structural and regulatory changes in the electricity and EWP sectors. In order to achieve this, the company needs research to demonstrate both the positive and negative impacts of the present system for rural farmers. On the negative side, it can show how the current monopolistic system of electricity generation and distribution is grossly inefficient and how certain regulations are dysfunctional. On the positive side, crucially, it can provide evidence that electricity subsidies allow rural farmers to become more affluent. As mentioned, ABC Limited needs to distinguish the divergent effects of current state regulations and subsidies on their rural EWP customers. While state regulations clearly have a negative impact on rural farmers by restricting credit to potential buyers, state electric subsidies may have positive effects by increasing income and reducing poverty among rural farmers.

FUTURE DIVERSIFICATION BEYOND THE AGRICULTURAL SECTOR


ABC Limited needs to redefine its business model by asking the old marketing myopia question: what business are we in? Currently, the company responds to this issue by proclaiming that it is a manufacturer of EWPs for three segments of the Indian economy: Agriculture sector: There are problems for ABC Limited if it decides to remain in the agricultural sector: some are market-driven, such as increasing competition at the upper-end (e.g. Grundfos) and the lower-end of the market (China); others are due to government failure cumbersome credit regulations, high levels of bureaucracy, and corruption. The combination of these factors means that market conditions are tough; margins are low; competitive strategy is based on price; brands are

subject to unfair competition from the disorganized sector. On the positive side, it does enjoy advantages over rivals in its strong distribution and service networks. However, other companies, particularly foreign multinationals, are also adept at service and support network strategy. Industrial sector: The industrial sector does not pose such problems: the role of the government is restricted; companies are richer than farmers and do not usually need credit facilities for pumps. Furthermore, because of the specialized nature of industrial pump technology, margins are more attractive. Overall, the industrial sector seems to offer more scope for growth and increased margins. Domestic sector: The domestic sector is also free from government intervention. Domestic consumers of pump technology are usually richer than farmers and have no need for government-approved credit. If they do require credit, they have the know-how, income, and choice to obtain credit quickly and cheaply. Electricity is not as big an issue. Overall, the domestic sector looks attractive particularly when one considers its projected growth rate. We would suggest that ABC Limited envision its future according to the Dell model of providing low technology to mass markets in India. The company should perceive itself primarily as a systems integrator for combining pumps, electric engines, and pipes to customers who value one-stop shopping instead of being forced to acquire each of these components from separate suppliers. Like Dell or Cisco, it needs to streamline the number of manufacturers of these components to a few who supply each of these parts. By focusing on a few component suppliers, it can establish high quality parts that are made according to a dominant design that will facilitate both the cost and effectiveness of creating a standardized technology trajectory for future EWP expansion. Cisco has achieved enormous cost savings by establishing a centralized purchasing centre at its headquarters instead of continuing its old purchasing system in which hundreds of its subsidiaries bought parts at much higher prices but received much lower quality. By using the Dell or Cisco model, the company should develop its Internet site for business-to-local-dealer purchases. It needs to establish a dominant EWP design that is customized for each of its three large segments: agriculture, industry, and domestic.

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FEASIBILITY OF DELL/CISCO MODEL FOR ABC LIMITED


Currently, ABC Limited has a strong national network of dealers for distributing, promoting, and selling their products. Few foreign companies will be able to create such a national network. At best, the companys foreign competitors will establish networks in Indias large cities and a few of the wealthiest states. Thus, if it aspires to become the Dell of EWPs in India, it will have minimal competition from strong foreign manufacturers. The threat from German competitors is mainly focused on manufacturing high-quality EWP parts for urban areas, while the threat from Chinese competitors is focused on providing cheap EWP parts for rural areas. The Dell model for ABC can be a tool for selling both its own parts and those of its foreign competitors in much the same

way that IBM sells its own PC chips as well as Intels and AMDs chips. Thus, the Dell model encourages ABC Limited to cannibalize its own products thus reducing the risk of falling behind aggressive and efficient foreign competitors. Such is one level of strategy. The other level concerns state intervention and regulation: ABC Limited can be involved in shaping the market indirectly through coherent and cooperative lobbying of state agencies. As we have seen, one overall concern for the company is the retention of state electricity subsidies for rural farmers. It can combine its own interests with those of its actual and potential customers by arguing that such subsidies do not just sustain the market in EWPs but enhance the wealth of rural farmers and the effective distribution of water throughout rural India.

CASE ANALYSIS II
Narendar V Rao Associate Professor of Finance College of Business and Management Northeastern Illinois University Chicago, USA e-mail: nvr13@yahoo.com

new spirit of economic freedom is now stirring in India bringing extensive changes in its wake. A series of ambitious economic reforms aimed at unshackling the economy and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. Under these circumstances, any business would face critical decisions and business strategy changes in order to maintain its growth rate and achieve its strategic goals. ABC Limited is a major player in the motor pump industry in India. It is a subsidiary of the Pariwala Group of companies that was established in 1920 as a cast iron plough maker. It is organized into five strategic business units: industrial pumps, agricultural and domestic pumps, projects, valves and material handling, and paper and paints. The Agriculture and Domestic Pump (ADP) unit competes in three product-market segments, namely, agricultural pumps, domestic pumps, and industrial segments. Its market share in these segments is 10 per cent, 8 per cent, and 4 per cent respectively. The growth rate for the domestic sector is about 10-15 per cent while

it is estimated at a sluggish 2.7 per cent for the agricultural sector. The agricultural sector is the most price-sensitive of the three sectors. This is also the most competitive of the three sectors due to the presence of a large number of manufacturers from the organized as well as the unorganized sector. The competitive dynamics of this sector is also impacted by the presence of Chinese manufacturers who enjoy a significant price advantage and have benefited from low import tariffs. The absence of entry barriers as well as low technology requirements of this sector have also had a major impact on the competitive landscape. Moreover, the agricultural sector has suffered from market dislocation due to poorly executed government involvement. Subsidies to farmers for seed, fertilizer, and power have become counterproductive as they have led to over-production (and reduced prices) and the draining of local government capacity to pay the electricity companies. All this resulted in supply failures. The companys product design and engineering prowess does not give a competitive edge to this sector as the farmers do not consider energy efficiency a plus (due to government power subsidy) and
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require only basic, functional products. The domestic sector is the fastest growing segment as there is a growing demand for higher lift capacity pumps and special purpose pumps due to increased urbanization, growth of high rise buildings, and decrease in the water table in all parts of India. The customers in this segment are interested mainly in product range and functionality. Consequently, this sector is not as price-sensitive as the agricultural sector. The company is well positioned to address the needs of this sector due to its fast time-to-market pumps for specific applications, proven design and product development capability, and marketing skills. The customers in the industrial sector are discerning buyers who require high quality, energy efficient products. Product reliability and excellent after-sales service, not merely price, are important factors in the buying decision. The outlook for this sector looks promising given Indias accelerating rate of economic growth. This bodes well for ABC Limited as its core competencies match the requirements of the customers in this sector. ADP is facing its first negative growth in ten years and its head, Mr Rana, needs to evaluate the companys current position and formulate a long-term growth strategy that would enable it to achieve sustainable competitive advantage.

are facing a paucity of funds and the present level of subsidies is unsustainable in the long-run. Shift in demand base from agriculture to urban domestic markets: This trend is likely to accelerate due to the fact that the unorganized sector is making deep inroads into the agricultural segment. This segment is also the most price-sensitive and the unorganized sector has some inherent advantages in this regard. No entry barrier in the ADP segment of the business: This has resulted in the influx of many competitors (both foreign and domestic) into these segments. Hence, the company faces intense competition from the organized as well as the unorganized sector in these segments. Private sector banks are shifting to indirect financing. A comprehensive Act to foster private sector participation in electricity generation has been passed. The government still pursues an interventionist policy in agriculture. This results in a distortion of output prices. The demand in the domestic pump segment is increasing at a rapid pace due to the rapid growth in urbanization and the construction of high-rise buildings.

ISSUES
From the data provided by the case, the issues that require immediate attention are as follows: The changes in the political and economic landscape and its ramifications on the market growth and demand in the pump industry. The prospect of negative growth faced by the company for the first time in ten years. Substantial demand changes between sectors and between product type within the same sector. Shift in competition from the unorganized sector and foreign manufacturers. The strong development barriers faced by the agricultural sector due to restrictions on trade prices of agricultural products and limited financing power. Electricity and water crisis and their implications for the agricultural and domestic pumps segments.

SWOT ANALYSIS
Strengths
over 80 years of experience in manufacturing and marketing pumps of various sizes and applications comprehensive range of products excellent engineering company commitment to technological renewal strong social and ethical values proven design and product development capability winner of several awards and quality certifications skilled in manufacturing energy efficient pumps commitment to cost reduction across the entire product spectrum well-established nation-wide dealer network strategically placed regional offices which are connected to an online information system and which report to one central office ongoing efforts to enhance the distribution network and conduct market surveys on a regular basis part of a well-known business group.

ENVIRONMENTAL CHANGES
Rationalization of subsidies for the agricultural sector: This trend is likely to continue as the states

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Weaknesses
reliance on the domestic market that is subject to cyclical variations lack of exclusive service arrangements in rural areas no schemes for the end user higher costs as a result of excise duty and other tax disadvantages and mandatory compliance required with various labour and industrial laws.

Opportunities
significant growth in demand in both agriculture and domestic sectors increasing importance of the industrial sector increased demand for high quality motor pumps caused by lifestyle changes and increasing urbanization liberalization of the Indian economy and significant reforms in the electricity generation sector well positioned to market its products globally which holds true for sourcing of raw materials.

Threats
growing competition from the unorganized sector increasing global competition due to the reduction of customs duties on water pumps influx of cheap Chinese products no entry barriers lack of an efficient financing system for the purchase of water pumps numerous restrictions on trade of agricultural products including administered prices of farm products the commoditization of many of the companys products. This connotes that competition is now based almost exclusively on cost and only companies that are able to lead in terms of cost advantage will carve out the biggest share of the market.

RECOMMENDATIONS
The company should not only maintain but also further develop its technological and manufacturing excellence to distinguish itself from competition. It should focus on innovation and leverage its core competencies. It should maintain its reputation as a manufacturer of high quality, energy efficient products and aggressively pursue new technological solutions and develop new products in response to a change in market demand. The company faces intense competition in the ag-

ricultural segment particularly from the unorganized sector and Chinese imports. Consequently, it is the most price-sensitive segment. The firms in the unorganized sector and the Chinese firms have a much lower cost structure than ABC. In addition, given the low technology requirements of customers in this segment, the companys engineering excellence and its ability to produce energy efficient pumps do not give it a competitive advantage. This segment is also subject to the vagaries of changing governmental policies. Hence, it should not dissipate its resources by fighting the competition in these sectors and should get out of this segment altogether. Outsourcing production of pumps for this segment could result in quality problems and negatively impact on its brand image. Hence, it should not succumb to the temptation to outsource production to the unorganized sector. ABC should focus on the growing domestic and industrial sectors instead of the agricultural sector. The customers in these sectors are discerning buyers who appreciate the engineering excellence and energy efficiency of its products. In addition, with its reputation, dealer network, and resources, the company could add product service agreements and leasing to its product offering. This could enable it to add significantly to its revenue and income stream from these high margin options. The company should launch an advertising campaign to enhance its brand image and to differentiate itself from competition. The campaign should highlight the companys strengths. This is a strategic imperative that must be undertaken immediately. ABC should also aggressively export its products to SAARC countries initially and later to countries in South East Asia. This could be a new growth opportunity for the company. In the past, the company has won critical orders from prestigious domestic projects and its products were preferred for critical applications. This constitutes great market recognition and the company should take advantage of it. ABC has also acquired high design and product development capability and is known for fastest time-to-market pump development and has bagged several awards and quality certifications. With such impressive credentials, the company should definitively consider changing its business strategy to a product differentiation strategy and leverage its core competencies to maintain its sustainable competitive position and growth in the long run.
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Another strategic alternative for the company is merging with another pump manufacturer. Grundfos Pumps India Limited (GPIL) seems to be a good candidate for a merger. This company is not only one of the fastest growing water pump manufacturers in India but also holds considerable market share. A merger with GPIL would enable ABC to increase its domestic market share as well its international presence. It would also yield sizeable synergies. While diluting its high level of ethical standards

may yield some short-term financial benefits, it is likely to hurt the company in the long run. Hence, Mr Rana should reaffirm the companys values and must ensure that everyone in the organization is aware of the corporate credo. If Mr Rana can reshape the ADP units business strategy immediately, it should be possible for ABC Limited to maintain its market leadership position and its competitive advantage despite the changes in the economic, regulatory, and competitive environments.

CASE ANALYSIS III


S M Mehta Chief General Manager, (Development Policy Dept Farm Sector) NABARD Mumbai e-mail: nabfs@bom5.vsnl.net.in

BC Limited has to keep in view the professional ethics of the business, enhance its business with regard to the macro environment, and continue with its traditional stronghold on agriculture market in order to sustain its operations and achieve progress of the company. A SWOT analysis of the company reveals the following:

STRENGTHS
well-established corporate house having diversified activities eighty years experience in manufacturing and marketing of pumps fluid handling business (including industrial, agricultural, and domestic pumps) worth Rs 5.25 billion. wide range of products in all the sectors, i.e., agriculture, domestic, and industrial sector highly technical and excellent engineering skills high social and ethical values having already won awards and quality certification like ISO 9001 well spread network for distribution as well as service support established internet system with regional/area offices. well-planned strategies for advertising, sales, and promotion.

small hp range of pumps contributing about 30-35 per cent of yearly units sold lack of introduction of new technologies in respect of design, development, and manufacturing capabilities liberalization of the economy and lowering of custom duties resulting in reduced cost advantage entrance of multinational brands of pumps in the market uninterrupted power supply for operating the pumpsets particularly in the agriculture sector exclusive service arrangements not available in rural areas.

OPPORTUNITIES
increased demand for agriculture pumpsets both for lifting groundwater and carrying surface water additional demand for pumpsets to operate the micro irrigation system increased demand for processing of agriculture produce increased demand for domestic pumpsets with increase in high rise buildings in urban areas requirement of high pressure pumpsets and fittings to suit the new bathrooms increased demand for pumpsets for potable water supply as well as sewage handling.

WEAKNESSES
dependence on ancillary units particularly in the

THREATS
competition from multinationals with price compe-

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titiveness availability of unbranded products decline in dealers credit purchase of pumpsets on the recommendation of the agencies/dealers supplying other agricultural inputs reluctance on the part of the bankers to provide credit on account of low recovery and government decisions influencing repayments dealers indulging in promoting unbranded pumpsets as also local mechanics influencing the purchase decision reduction in the subsidy and other related issues.

banks compliance with the requirements for achieving targets for priority sector and agriculture sector; and increased demand for domestic and industrial segment.

RECOMMENDATIONS
The company, therefore, can build further from its present position by taking the following steps: technology upgradation in its area of core competence outsourcing some of the components/pump units with strict quality control and branding under companys name building brand image by advertising and sales strategies training of the staff in its service centres appointing authorized service agents in the rural areas or giving exclusive franchise effective use of Internet services for better management information system as well as supply chain system. In order to sustain its corporate value of professionalism and fairness in dealing with the customers and suppliers, ABC Limited should strengthen its areas of core competence manufacturing and supply of quality products. However, with increasing competition and business volumes, the company has to suitably change the product mix based on the market demand and also improve the quality of its services.

EMERGING SCENARIO
ABC needs to evaluate its options in the context of the following emerging factors. The national policy on agriculture is to double the agriculture produce by the end of the 10th Five Year Plan from the present level of approximately 210 million tonne and go for diversification of crops and improved agro-techniques. It also envisages effective and optimum use of available water resources using micro irrigation systems; improved facilities for storage of agriculture produce by constructing of cold storages; value addition through processing of agriculture produce; improvement in power generation and its availability for agriculture purposes in the years to come;

CASE ANALYSIS IV
Upinder Dhar Director Prestige Institute of Management and Research Indore e-mail: pimrindore@sancharnet.in

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he motor pump industry in India has been changing at a rapid pace. Broadly, it was divided into agricultural, domestic, and industrial sectors. The agricultural and domestic sectors dominated with 89 per cent market in terms of volume and 69 per cent in terms of value. The demand base was shifting from agriculture to the urban domestic markets. For the next few years, the growth rates for the agricultural and domestic sectors were estimated at 2.7 per cent and 5.5 per cent respectively. ABC Limited of the Pariwala Group of Companies believed that, to be competitive and successful, one required a comprehensive range of products and

solutions, a commitment to technological renewal, and global presence. Currently, the domestic segment is growing at an estimated rate of 10-15 per cent annually while the agricultural segment has stagnated. The earlier distribution efforts of ABC Limited were targeted at the agricultural customers which required some special capabilities of the dealers. In many areas, the dealer not only supplied other agricultural inputs like PVC pipes to carry irrigation water, sprinklers, and motor starters but also supplied credit to the farmers. Their knowledge of local area was critical to demand growth and actual sales realizations. However, with the
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changing scenario after liberalization, the company was more keen on targeting the growing domestic and urban sector.

IMPORTANCE OF CORPORATE VALUES


The corporate values of professionalism and fairness have sustained the company for a long period of time. The credibility of the company would remain intact if these values are not tampered with. The outsourcing of production to unorganized sector could be thought of only if ABC Limited could closely monitor the quality of the product and reliable supply schedule. It may initiate efforts in this direction on its own terms. After ensuring quality of production and reliable supply schedule under this arrangement, it should take steps for cracking the market hold of the unorganized sector. As India is emerging as one of the largest potential markets for pumps and pumping equipment and systems, many multinational brands have entered all the segments of the market. Liberalization had resulted in the lowering of customs duties on imported pumps which reduced the cost advantage available to domestic manufacturers. It was fair to compete on price as it was believed that only those companies that were price competitive and had strong distribution and service network would survive in the long run. It was appreciable that ABC Limited had successfully refrained from adopting any kind of unethical practices.

ADDRESSING THE AGRICULTURAL MARKET


In order to create an intermediate and vibrant market in electricity generation and distribution, the union government had decided to allow private participation in distribution of electricity by enacting a comprehensive law to deal with various problem areas which had hampered the development of the market. The enactment of the proposed act would spur the growth of private sector participation in electricity generation and distribution to reduce the demand and supply gap and hence may give momentum to the growth of agricultural segment. ABC Limited needs to make all possible efforts to educate the uninformed buyers who constitute the agricultural segment to prevent the malpractices prevalent in the unorganized sector. The manufacturers in this sector deliberately under-rated motor pumps assembly which made the product large sized, as compared to properly rated ones, and desirable for extra pumping and, therefore, more attractive to illiterate farmers. The latter , in any case, did not have to pay the full costs of electricity and for the wastage so caused. Considering that the companys core competence was in serving the traditional agricultural segment, it should launch attractive schemes for the farmers as an incentive to buy energy efficient products. It should not succumb to the practice of under-rating in order to capture market share and thereby compromise with the corporate code of ethics as this could lead to spoiling its reputation and losing its customers in the long run. Despite extensive service network and many authorized service centres, ABC Limited was not able to have an exclusive service arrangement in all the rural areas. Direct contact with sub-dealers in such areas was critically important for the company. While continuing to produce and market the highly energy efficient pro- ducts, the company could think of supplying the pump in kits too. The kits were likely to pierce the market where exclusive service arrangement was difficult. Another alternative could be to outsource service arrangement in such areas with effective monitoring by the company. Further, the company should continue its efforts in the direction of cost reduction in all parts of the value chain because customers exhibited price sensitivity and a desire for faster payback on their pumping systems.
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ADDRESSING THE FASTER GROWING URBAN MARKETS


In view of the growing demand for pumps in urban markets, it was appropriate to strengthen the distribution network which was a key factor for developing volumes. The company had rightly started giving importance to the process of dealer appraisal and evaluation. It had the capacity to respond to the needs of urban market which demanded variety, technological competence, distribution reach, strength, and rapid response from pump manufacturers. This is the time to redefine the business from an intermediate and almost a commodity product supplier to a consumer durable as well as a services company. Though production and service could be retained by the company, it may be advisable to outsource, at least initially, the marketing in domestic and urban pumps segment. However, it may widen its own network in the long run to overcome the fall-outs, if any. The product design should be given attention for variety and innovation. The SAP R/3 system may be effectively used to further improve management information system, facilitate faster service delivery, and become the backbone

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of information and business processes. The companys internet site should enable customers to key in their orders for being processed into order acceptance and dispatch. Since muncipalities regularly require pumps for water and sewage handling, these services are likely to be privatized a potential market for pumps. The human relations skills of the area sales executives have an important role to play. The company should conduct training programmes more frequently for the authorized service centre personnel to keep them abreast of new happenings and should undertake six-monthly instead of yearly performance review exercise to solve the problems without any delay.

cost reduction in all parts of the value chain. The company needs to maintain quality of the product in all respects. The market hold of the unorganized sector could be cracked if the company could outsource the production to unorganized sector under its close supervision for quality assurance. Distribution network needs to be further strengthened. The company should give importance to the process of dealer appraisal and evaluation. Business should be redefined from an intermediate and almost a commodity product supplier to a consumer durable as well as a service company. Initially, the marketing function could be outsourced in the case of domestic and urban pumps segment. However, the company may widen its network in the long run. Product variety and innovation should be paid due attention. E-initiative needs to be further encouraged to facilitate faster service delivery. The company should make efforts to tap the potential market of muncipalities as they regularly require pumps for water and sewage handling. The company can conduct training programmes more frequently for the authorized service centre personnel. In view of brisk changes taking place in the market scenario, the company should undertake six-monthly performance review exercise to solve the problem proactively.

SUMMARY OF THE RECOMMENDATIONS


Uninformed buyers should be made aware of the malpractices prevalent in the unorganized sector. Core competence of servicing traditional agricultural market should be retained. Besides having attractive schemes for dealers, incentive schemes should be launched for end-users too. For instance, incentives should be given to farmers for motivating them to buy energy efficient pumps. The company should not adopt unethical practices under any circumstances. The company should maintain direct contact with sub-dealers. The company may be able to attract customers even from those areas where it does not have exclusive service arrangement either by supplying the pump in kits, or by outsourcing the service arrangement. The company should continue to put in efforts for

CASE ANALYSIS V
Salma Ahmed Faculty Department of Business Administration Faculty of Management Studies and Research Aligarh Muslim University Aligarh e-mail: SALMAAHMED6@rediffmail.com Ashfaque Khan Manager Enterprise Sales Red Hat India New Delhi e-mail: akhan@redhat.com

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BC Limited experienced a stagnant demand in the agricultural division while there was an increase in demand in the urban domestic market (10-15%). Further, though the market size was large 5.5 billion in the domestic market, 4.5 billion

in agriculture, and 1 billion in the industrial segment, the market share was small a mere 8 per cent, 10 per cent, and 14 per cent respectively. An analysis of the environment reveals a changing trend. On the one hand, there was a stagnant demand
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in the agriculture sector due to the fact that agriculture sector subsidy was on a decline and land under irrigation increased only marginally (over the period 1981-1998). Hence, there was no major fillip to demand in this sector. On the other hand, demand in the urban domestic sector was on the rise. The major reasons for this were increase in urbanization and growth of high rise buildings, decrease in the level of water table thus increasing the water pressure requirement, increase in the use of desert coolers, and an increase in per capita consumption of electricity.

sion; this segment could be used as a cash cow. The urban domestic and industrial division could provide high growth opportunities to be tapped intelligently. However, since the problems of each segment are different, different strategies need to be adopted for each.

Strategy of Low Costs for Agriculture Sector


Cost is a critical issue for the needy farmers. Technology and attributes have no significance. Even energy efficiency is not a barometer as electricity hooking is the order of the day. Therefore, ABC Limited should adopt a strategy of low costs for the agricultural segment. Further, this could serve as an entry barrier for the other players and switching costs would also be very high. Low cost could be achieved through efficient management of the supply chain, a low inventory, and better forecasts. Finance is another issue of prominence in the agricultural sector. ABC Limited should ensure that nonavailability or shortage of funds does not create problems for the purchase of pumps for the farmers. The company should initiate zero finance scheme (through the dealers) or tie up with banks to promote micro finance and make procurement of finance less cumbersome and hassle-free. The companys major competitors have strong distribution network and hence it should also strengthen its distribution particularly in the rural areas and also initiate customer contact through dealers. The dealers should play a very important role in convincing the farmers. Moreover, it should also popularize the use of several schemes to attract the farmers. Further, efforts should also be undertaken to educate agricultural users regarding energy efficiency and also instil discipline in consumption of electricity and controlling wastages.

SWOT ANALYSIS
A SWOT analysis reveals the strengths, weaknesses, and opportunities. The major strengths are: high quality of products efficient management authorized service centres highly trained employees at service centres online order management efficient information management. The weaknesses are: fragile distribution network in the agricultural sector lack of financing options for farmers high price the threat of substitutes low cost offerings of the unorganized sector competition from MNCs competition from other major players no difference in the perception of energy efficient and non-efficient products in the agricultural sector. The major opportunity is created by: increase in demand in the urban domestic market segment.

Strategy of Differentiation in the Urban Segment


For the urban domestic and industrial segment, technology, energy efficiency, and product attributes are essential components. To keep the buyers of this segment loyal, a broader range of products should be provided like the other major players. Further, customized products, quick response, and an efficient after-sales service could go a long way in retaining customer loyalty. Instead of easy finance scheme, it is the dealer network, availability, reach, and response which play a more critical role.

RECOMMENDATIONS
There are many categories of buyers such as individual buyers, institutional buyers, OEMs like domestic equipment manufacturers, and the industrial equipment manufacturers. The buyers needs are different and their composition is also different. For instance, individual buyers in the urban sector are well educated as well as aware while the agricultural buyers are predominantly ignorant and dependent on nearby mechanics for advice. The company need not divest the agriculture diviVIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

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Increasing the common components on each product and outsourcing some of these while retaining design and assembly could help in making it more responsive and also in controlling costs. Further, to face the onslaught of competition from the MNCs, it

should empower itself with globally respected certificates to enhance its market creditability. Thus, by following two different strategies, ABC Limited could sustain itself in the market and also increase its market size.

CASE ANALYSIS VI
Abhijeet, Ankur, and Satyaprakash Post-Graduate Programme on International Business K J Somaiya Institute of Management Studies and Research Mumbai e-mail: placements@simsr.somaiya.edu

BCs core competence lies in its technological know-how, manufacturing capabilities to produce large variety of pumps, and its long experience in selling pumps in different markets. In the long term, the company will have to be cost competitive if it wants to survive in the market against MNCs, small and unorganized players, and cheap Chinese pump providers. In the current scenario, pump-manufacturing technology has reached a stage where there is less scope for innovations and product modification. Also, the market is highly price-sensitive. Hence, the company should focus on technological improvements to save the cost of production rather than product improvement. It should concentrate on cost saving in different parts of the value chain so as to increase the overall profit without increasing the selling price of the pumps. Considering that it has its own technological and manufacturing capacities, it can sell pumps at better profits than its competitors by saving costs. In an era when MNCs are setting up their manufacturing facilities in India to take advantage of cheap labour and better trained workforce, ABC Limited should not change its focus from manufacturing. These production bases will churn out customized product solutions and also act as a sourcing base for export markets in the long run for the company.

turnover, lack of availability of power, and poor infrastructure. Growth in agriculture pump market also requires a lot of ground work and long-term commitment to invest in the form of dealerships and service centre networks. Also, many other factors like availability of credit and opinions of the local mechanic and the dealer play an important role in the decision-making process of the generally illiterate farmers. All these factors make this segment very complex as compared to the other segments. Growth in the urban pump market is a function of power supply and degree of urbanization. The urban market, which traditionally was small in size, has now transformed into a market which is rapidly growing with a huge number of domestic and global companies trying to establish themselves in this market. This trend is bound to continue as the level of urbanization is increasing rapidly and so would the dependence of the population on electricity in the urban and semi-urban localities. The growing population of cities has given a thrust to the construction industry; the trend of high rise buildings is increasing in the cities which, in turn, increases the demand for domestic pumps. Apart from this, reaching domestic customers is easier than the farmers. Thus, we are looking at two markets where one is huge but stagnated and the other is rapidly growing but has customers demanding a large variety and an aesthetic appeal for the products they buy. Also, reach is very important as the customer would like to see and touch the pumps before buying thus leading to a larger number of SKUs and hence the proportionate inventory cost. As the company is already having a large dealer network (800 in three zones) and two manufacturing capacities serving the agricultural market, it should focus
ABC LIMITED: AGRICULTURE AND DOMESTIC PUMPS DIVISION

AGRICULTURAL MARKET VS DOMESTIC MARKET


The growth of agricultural pump market is a function of power supply, subsidiaries, dealers push, and cyclic crop output. This growth has over the years stagnated despite the huge market because of inability of the farmers to pay the price for different reasons like poor crop

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on the growing domestic market which requires less effort and resources than the agricultural sector but this does not mean that it should lose its stronghold in the agricultural market which is stagnant as it has a long reputation and standing in this segment.

COMPETITIVE ANALYSIS
As far as the competitive scenario is concerned, if we analyse the different competitors like KSB, Crompton & Greaves, GPIL, and others, most of them are catering to one or more than one segment of the market but no one is catering to all the segments. On the contrary, ABC is having a wide market presence and range of pumps providing it a competitive edge. To tackle the price war due to Chinese pumps, the company should approach common forums like the Indian Pump Manufacturing Association and also give a memorandum to government authorities to protect their domestic industries. However, in the long run, cost reduction along the value chain is the only option to survive against fierce competition from MNCs as well as the Chinese players.

facturing industry to opt for outsourcing. However, improper sourcing policy may lead to poor production quality, unreliable supply schedule, etc. The company has been in the pump making industry for many years and hence has good understanding of value adding and non-value adding activities. It must, therefore, decide the activities that it can outsource and have a selection criteria for manufacturers. It must also ensure that the suppliers follow all environment guidelines.

RESTRUCTURING
In the year 2000, ABC Limited went for restructuring and formed five groups. In order to emerge as a major player in the industry, it must concentrate on the faster growing urban markets and niche industrial and other evolving markets like municipalities and shed its non-core activities. Their core business is industrial, domestic, and agricultural pumps and industrial valves which generates 95 per cent of the companys sales by value. Also, the company should capitalize on the untapped need for high quality valves and reallocate its resources from the paper and paints unit to the domestic pump market and valves market by divesting this business. The objective of the restructuring exercise should be to increase its concentration on the urban market and emerge as a solution provider and not just a pump provider. This would mean that the company would have to increase its presence in the urban market in the form of number of dealerships and service centres. It must emerge as a company which would understand the clients fluid material handling need. Essentially, it would have to give prompt service and make efforts to reduce the downtime for its customers.

CORPORATE VALUES
The unorganized market for ADP is very large (55%). These players not only have a cost advantage in the form of lesser overheads but also indulge in other malpractices. The company has never indulged in such practices and has over the years built up a reputation of being trustworthy. It should not let go of this image and should continue to hold on to its high corporate values. This would have the following advantages: The honest image that it has built over the years can now help it establish in the urban market where the brand name has more value. The unorganized market would suffer significantly due to implementation of VAT and rising raw material cost. Hence, its cost advantage would slowly fade off making farmers go for more trusted and reputed brands which will not be too costly than the unorganized sector brands.

REPOSITIONING STRATEGY
ABC Limited needs to embark upon a repositioning exercise based on product or service differentiation. Considering that the current trend is to opt for complete solution providers, the company must focus on turnkey projects involving design, product selection, commissioning, and after sales service for their customers. Essentially, it should go beyond mere design and delivery of pumps and valves and provide systematized solutions. Its experience in project pump business will help it to grow in this direction.

OUTSOURCING
The rising cost of non-value adding services and a growing trend towards concentration on core competences have made many players in the pump manu-

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A book is the only place in which you can examine a fragile thought without breaking it.
Edward P Morgan

covers reviews of current books on management

BOOK REVIEWS

AN ENCOUNTER WITH HIGHER EDUCATION: MY YEARS WITH LSE


I G Patel New Delhi: Oxford University Press, 2004, pp 200, Rs 495

THEMES

Higher Education University Autonomy Data Envelopment Analysis Managerial Economics

G Patels An Encounter with Higher Education reminds me of two books that have remained a part of my memory ever since I read them quite sometime ago. One is The Making of the President, 1960, by Theodre White and the other is The Harvard Century: Making of a University to a Nation by Richard Norton Smith. The focus of the first book is John F Kennedys election to the presidency of the United States, but in the process of addressing his main purpose, White also provides a vivid understanding and deep insights into how the American political system works in practice. The other book, while discussing the evolution of Harvard University, describes in great detail, how the leadership style of each president impacted on the evolution of this great institution. Like White, Patel too judiciously weaves into his treatment of the principal theme of his book, i.e., his experience as the Director of the London School of Economics and Political Science (LSE) from 1984 to 1990, various aspects of the working of the School and of the relationship between the British government and university system. Of particular interest to the Indian institution builders is Patels description of how he was selected for the post. The process started much before the term of his predecessor expired and all formalities had been completed a full year ahead of Patels entering upon his new responsibility. This provided ample opportunity for him to get acquainted with the system and prepare himself for his new job. Contrast this with the situation prevailing in India, where, very often, even in the case of elite institutions, the appointment of the chief executive gets delayed until much beyond the expiry of the incumbents term! And let us not forget that LSEs Search Committee had to perform a much more arduous task, as it had the entire world to search from, unlike the leadership searches for Indian institutions that are limited at best to the country alone, though, in actual practice, not beyond the institutions concerned. If the quality of leadership in most of our institutions often begins to slide down as they grow in years, has it got something to do with the attention given to the

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process of selection? A noteworthy feature of the working of the LSE Search Committee was the flexibility demonstrated in dealing with Patels sensitivities, i.e., his refusal to formally apply for the job or appear for a formal interview. Contrary to the popular image of the British being sticklers for procedural formalities, they can be sufficiently flexible a quality good institution builders can hardly dispense with. Patels account of LSEs dealings with the government-controlled University Grants Committee (UGC) may be of special interest to the Indian readers at a time when the government grants to certain categories of specialized institutions have been slashed. British institutions of higher learning, such as LSE, were facing a similar ordeal when Patel took over as its Director because of what he calls the mounting meanness of Margaret Thatchers government (p 26) with regard to financial support. Even during those dark days, however, there was no threat to the autonomy of the British institutions of higher learning as Patels account of the LSE interaction with the UGC bears out. So entrenched is the notion of university autonomy in that country. Contrast this with what has happened to the autonomy of the Indian universities after the establishment of UGC soon after Independence. Modelled after the British agency and conceived purely as a funding body, as Prime Minister Nehru took pains to emphasize in his inaugural speech, our UGC has turned out to be some sort of a supra management whose fiat our universities can illafford to ignore. Somehow, it seems to me, we as a nation have failed to internalize the value of university autonomy or else the kind of insidious attempts under way these days to curb the independence of the IIMs, and other such institutions that do not come under the UGC purview, would have been unthinkable. After all, the relative autonomy these institutions have enjoyed so far in their internal management has been a major factor in their emergence as world class institutions. Apart from a deeply entrenched tradition of university autonomy, the quality of leadership has been a major factor in the British institutions of higher education being able to safeguard their freedom to manage their affairs without undue interference from any quarter including the government. They elect their leaders with great care, capable not only of standing up to pressures but also of meeting other contingencies. Selected out of hundreds of nominations (p 12) received from all over

the world, Patel had his own share of challenges during his six-year tenure. Financial stringency was one of these arising out of sharp decrease in the government grant. How it had already affected the School can be described in his own words: There had been a reduction in academic staff members and a worsening of the staff-student ratio. Academic support staff had suffered a steeper decline. Acquisitions to the library had to be reduced, computerization of Schools activities and the spread of information technology, in general, had to be postponed, repairs and maintenance were neglected and the deterioration had begun to show. The surroundings of the School were uninviting, student accommodation was way behind needs, and the financial crunch on students was making increasing demands on the generosity of our friends and alumni (p 26). Patel gives a comprehensive account of how he addressed these problems in which task he, with his nonconfrontational style, usually had the cooperation and support from all stakeholders of the School the governing board, the faculty, students, alumni, etc. Consensus, however, can be only a strategy and not the goal of good governance and a true leader cannot escape the responsibility of taking decisions that may displease some people or hurt their sensitivities. There were many occasions that tested Patels mettle in this regard. Perhaps the most noteworthy in this context was how he handled the issue of instituting a special chair in the name of Karl Popper who had retired from the School before Patel joined. The proposal to honour the famous social philosopher originated with the new director himself. Popper approved of the idea but Patel was quite clear in his mind that the distinguished scholar would have no say in the selection. Nobody would have thought that this would pose any problem but it so happened that Popper raised serious objection to the appointment of the person selected and went to the extent of threatening to dissociate his name from the proposed Chair. Patel decided to keep Karl Popper Chair in abeyance for the time being and appointed the selected candidate to a simple professorship! He faced a more or less similar problem in the case of filling up of the International Relations Chair where he went along with the recommendations of the experts in favour of a candidate whose writings had offended the sensitivities of a group of people including some prospective fund-givers. ExamBOOK REVIEWS

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ples of this kind can be multiplied, but a short review is hardly the place for detailing them. While looking at Patels record at LSE, one should not forget that before going to London, he did not have much experience of managing an institution of higher learning. Most of his working years had been spent in the Civil Service and his directorial tenure at the Indian Institute of Management, Ahmedabad (IIMA) was much too brief to be a real source of learning. Although he does refer to his IIMA involvement as a useful input, his administrative style, it seems to me, stemmed more from his personal values and beliefs than from any previous experience. Whatever the case, Patels record at LSE places him in the category of educators who leave behind their imprint on the institutions they serve. And he did so in a country whose imperial condescension to its erstwhile colonies has not yet quite vanished to one of which Patel belongs.

Apart from being an account of how he did so, An Encounter also gives an idea of Patels views on some important issues relating to higher education. It also has a chapter about his days as the IIMA Director. And some of the things it tells about him have so far been known only to a few people, e.g., his becoming the Principal of Baroda College when he had still not completed 25 years of age. The style of presentation, a straightforward narrative in lucid English prose, is an added bonus to the reader. The book, thus, easily joins the list of works that have made a lasting impression on me. Other readers, I am sure, will feel likewise. Dwijendra Tripathi Retired Professor Indian Institute of Management Ahmedabad e-mail: dwijtrip@yahoo.co.uk

AN INTRODUCTION TO DATA ENVELOPMENT ANALYSIS: A TOOL FOR PERFORMANCE MEASUREMENT


R Ramanathan New Delhi: Sage Publications, 2003, pp 201, Rs 250 ata Envelopment Analysis (DEA) is a mathematical technique, based on linear program ming (LP), which is used to evaluate the performance of organizations/departments through relative efficiency measurements. In An Introduction to Data Envelopment Analysis, R Ramanathan not only lays the foundation of the technique of DEA effectively, but also richly illustrates it through full-fledged applications implemented by the author himself. It covers the latest developments in this field and lists out the resources available in print and web media for implementing DEA. A not-too-rigorous mathematical treatment makes this book an easy, rapid-reading text and works as an entry point for those who want to step into this realm. It takes the reader from terminology and concepts to the evolution and application of the technique. A chapter dedicated to the dos and donts from the implementation point of view and solutions to selected problems at the end of the book make it very useful for those who want to try their hands at DEA. The emphasis of the book is on practice rather than abstract theory. Ramanathan begins with a very lucid exposition of the terms, basic concepts, and graphical illustrations without the aid of LP, setting the stage for readers unVIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

comfortable with it. The author elucidates the applicability of DEA to not-for-profit organizations and elaborates the underlying philosophy of DEA. The exercises chosen at the end of the initial chapters, however, are not in the right order of increasing complexity. These exercises may leave the reader confused. In Chapter 2, the author introduces generalized mathematical formulation from first principles leading to the formulation of fractional DEA program through a simple example. This elicits interest among readers despite careless typographical errors even in mathematical constructs. An exercise right after introducing the generalized formulation firms up the concepts of fractional DEA before the author introduces dual formulation. The matrix formulation and non-Archimedean constant introduced here without any further active use, however, do little more than break the flow of the text. The CCR model (named after its developers, Charnes, Cooper and Rhodes), laying the first stepping stone in the formal theory of DEA, is immediately followed by dual DEA formulation, its relation with primal, and interpretation. This sequence capitalizes on the interest aroused so far through the introductory chapters. The relationship between multiplier DEA and en-

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velopment DEA and their variants described in Chapter 2 could have been better illustrated through a solved example. The two-stage optimization procedure is yet another distraction which could have been avoided if it were taken to the Appendix; it is not used further in the text. In the section on interpretation of dual DEA formulation (Chapter 2, p 54), the example involving firms P, Q, R and T is inserted unnecessarily. It creates discontinuity and concludes in an ad hoc fashion. In line with the chronology of the theory of DEA, the concept of economies of scale is introduced in Chapter 3 which includes basic concepts of constant and variable returns to scale (CRS and VRS), technical and scale efficiencies, estimation of the most productive scale size (MPSS), and their detailed investigation. This helps the reader understand the evolution of DEA to real life adaptation and its increasing acceptance. This chapter ends with ample examples for the reader to have a good grasp of the theory. This chapter also introduces the BCC (Banker, Charnes, and Cooper) model quite succinctly backed by good references but is marred by a number of typographical errors. With this chapter, the basic theory and evolution of DEA during its foundation years is covered exhaustively and the text is fairly easy to understand. Beyond this chapter, the book shifts to application of theory. The variants of basic models and the recent developments have been covered in Chapter 4 of the book which discusses Multiplicative DEA models, Additive models, Window Analysis and Malmquist Productivity Index Approach. Similarly, variants in these models, such as the use of non-discretionary input/output, treatment of categorical variables, and incorporation of judgmental and subjective weights, are discussed. These models and variants are briefly introduced and a select few are illustrated. Examples for each type of variant would, however, have made the chapter more effective. The chapter ends with three exercise problems and a note for advanced readers on other DEA models. The note establishes DEAs linkage with multi criteria decision making (MCDM) models and evokes the readers appreciation for DEA and its scope for further extensions. The best part of the book lies in the chapter on computer support for DEA, wherein the computational features of DEA are taken into account along with the resources available in print and web media. DEA software, presented in Chapter 5, is aptly described with

finer implementation level details like compatibility with the operating system (OS), the embedded solver, limits on the size of the problem, and interfacing with other common software. The format of data input, specification of variables, syntax of command, and snapshots of the various intermediate and final outputs along with their interpretation make very interesting reading. This is very helpful for readers who want to try out DEA. The software of varying degrees of robustness and complexity is demonstrated: Data Envelopment Analysis Program (DEAP) by Tim Coelli of University of New England, Australia; Efficiency Measurement System (EMS) software from University of Dortmund, Germany; General Algebraic Modeling System (GAMS) formulation; and simple spread sheet computation in MS Excel. The chapter on DEA bibliography and application takes the reader to the world of DEA in practice, which helps one understand the issues involved in problem formulation, implementation, sensitivity analysis of the model, post-DEA analysis, validation and reaffirmation of the results through techniques such as regression, etc. The problems attempt to demonstrate full-fledged implementation which ranges from comparative performance of schools to productivity assessment of state transport undertakings in India; from comparative risk assessment of energy systems and energy efficiencies of transport modes in India to carbon dioxide emission of different countries. This wide range of problems adds to the richness of the text especially when the studies have been carried out by the author himself. The book concludes with a chapter on dos and donts for undertaking DEA studies. It gives thumbrules to those who want to use DEA as a black box. If the authors guidelines are followed, even an amateur can confidently choose appropriate DEA models, employ them, and also conduct post-DEA analysis. The chapter ends with a graphical frontier analysis wherein two schools with different efficiencies have the same relative efficiency scores. This clearly exposes the limitations of DEA and brings forth the importance of post-DEA analysis and the caution to be exercised while using DEA results. The book, though, disappoints and annoys readers with a keen eye for detail: typographical errors abound; several variables are used without defining them; and problems are sequenced inappropriately within exercises and across chapters. The insertion of unnecessary technical details at numerous places may also distract
BOOK REVIEWS

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or annoy readers. The matrix representation of the formulations in Chapter 2, for instance, need not have been given in the main body of the text. Similarly, the discussion on the non-Archimedean constant was unnecessary along with matrix formulation. Both could have been moved to an Appendix. Overall, the book is a good effort to introduce DEA especially to students who may not have a background in quantitative techniques, and would yet want to use DEA. A book covering so much is expectedly shallow, but it makes easy reading and opens the doors to the field of DEA. Researchers, scholars, and advanced readers have little to derive from it except using as a quick handbook for DEA usage checklist, definitions, and concepts.

The most notable feature of the book is its use of many small case studies, comprehensive bibliography, and illustration of software usage, making it very useful to practitioners. In fact, DEA Made Simple or DEA in 24 Hours could have been more appropriate titles for the book. The simple and comprehensive style of writing engages the readers. But, there are limitations mentioned throughout the review; one hopes that the next edition of the book will take care of them. Bharat Bhushan Verma Fellow Programme in Management, P&QM Indian Institute of Management Ahmedabad e-mail: bharat@iimahd.ernet.in

MANAGERIAL ECONOMICS: THEORY AND APPLICATIONS


M L Trivedi New Delhi: Tata McGraw-Hill Publishing Company, 2003, pp 746

he biggest challenge in communicating concepts of Economics is, perhaps, tying theory with practice and being able to effectively explain what one sees in the real world in the context of what is predicted by theory. This, in fact, would be the key to practitioners and managers obtaining a better understanding of the principles of Economics and applying them in their lives. Existing literature on the subject consists largely of text books like Peterson and Lewis (2001) and Koutsoyiannis (2000) that cater to specific audiences such as students and teachers of economics and management and expound theoretical principles without linking them to practice. Trivedis Managerial Economics differs from such works in its endeavour to establish this link in its exposition of Economics. This book is different in its treatment of the subject also because it focuses on the firm rather than the manager. In what could more aptly be titled Managerial Micro-Economics, the author has deftly strung together almost all the facets of Economics relevant to the manager in particular and to the firm and business in general. The book is in nine parts sub-divided into 38 chapters and explains the theory underlying the principles of Economics. To make this practically relevant, the author uses mathematical constructs and real life examples. Part 1 (Economic Theory and Managerial Decisions) explains the relevance of Economics as a subject to

professionals, managers, and managerial decisions in particular. It also outlines the scope of managerial Economics and its applications in the various functions of management. It goes on to explain that there are some techniques and principles to be used if one were to use the concepts of Economics in day-to-day business. The author then moves on to the theories of the firm. He begins by stating that there are several theories explaining the raison dtre and the activities of a firm. He shows rather sketchily that neo-classical theories employ an optimalist approach where mathematical optimization drives managerial decisions. The later theories challenge this neo-classical approach and provide more compact explanations. He then provides a detailed summary of the various theories that have been proposed. It is in Part 3 that the author finally begins explaining the cornerstone of Micro-Economic theory the market. He provides a beginners level analysis of the concepts of demand, supply, and elasticity and goes on to explain demand forecasting in fair detail. The author then leapfrogs in Part 4 from the theory of the market to explaining production and cost theories. Along with the traditional concepts of cost, the author innovates by demonstrating the estimation of an empirical cost curve and introduces relevant additions like the learning curve and its dynamics.

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The book also explains the concept of optimization in great detail. Probably aimed at practising managers, the fifth part draws up various scenarios and the different aspects and methods of optimization that one may use. In doing this, the book also touches upon the fundamentals of Game Theory and how it would affect managerial choices. Surprisingly, the book does not deal with this in detail, though it is one of the most researched areas in Applied Economics. In the next three parts, the book deals with some key decisions that the firm may have to take. In Part 6, the book focuses on productivity and its improvement through efficiency and technological innovation. It lucidly brings out important concepts such as that of economic efficiency. It also underlines the importance of smoothening of performance. In the next part, the crucial concept of pricing and its regulation is taken up. The book talks both about private as well as public firms and the differences in their approach to the pricing decision. It explains monopoly regulation and the approach of the Indian government in fair detail. Part 8 focuses on the growth and expansion decisions that a firm takes and presents a comprehensive analysis of the theories of location, capital budgeting, internal growth, and expansion through acquisitions. The ninth and final part provides an apt end to the detailed exposition of Economics in the book. It highlights the relevance of the environment to the firm and stresses that social responsibility and public accountability are, in the final analysis, as important as the economic well-being of the firm. In the preface, the author rues the state of Economics literature today and says that it suffers from moving within a narrow range caused by the prohibitive cost of research. At the same time, he also notes that the publish-or-perish problem which forces academicians to produce research to retain their jobs also reduces quality greatly. The author has very effectively helped address both these concerns through his book. The comprehensive exposition in the book makes it both a good primer and a reference book. It covers most of the concepts of Micro-Economic theory relevant to managers. The book also critiques the work of many authors. It helps readers understand basic concepts without difficulty and judge whether they should read further. Books on Economics are often accused of using literature and references that are too outdated. It is not

uncommon to see authors going back to the Great Depression to illustrate concepts. But, Trivedi draws extensively from recent research and weaves its insights and results into his analysis. For instance, while explaining the concept of the learning curve, he uses the experience of the Indian industry during the 1960s and 1970s identified by Rameshan (2001). The author painstakingly traces oft-quoted statements and tries to put a context to them. He provides a cogent analysis of the views of experts and often steps aside to take his own views. The book, for example, begins with a strong critique of the assumptions underlying the generally accepted theories of the firm, puts in perspective the views of the economists who propounded them, and shows how they have become unrealistic. The application focus of the book is innovative in the sense that it shows that the applicability of MicroEconomic theory is not restricted to the traditional firm. It also brings out the applications of Micro-Economics in public policy and legislation. It dwells in detail, for example, on the issue of monopoly regulatory legislation and the principles that govern it. It also critiques the technology policy of the Government of India and analyses its impact on firms behaviour. This is a welcome change from the restricted view of firm-focused Micro-Economics literature. There are, however, some areas where the book fails to deliver. Its presentation of the concepts of Economics is sketchy in many places. It sometimes introduces advanced concepts without first dealing with the basics. The first few chapters have, for instance, references to concepts like Isoquants which the reader would not be familiar with. Similarly, the book jumps to pricing and its dynamics without first acquainting the reader with the different market structures and the impact they could have on the pricing decision of the firm. Also, the book has not dealt with some of the most crucial concepts in Economics such as indifference curves and the theory of utility which underlie a wide range of economic principles. Some concepts, such as optimization, have been repeated unnecessarily. Given such deficiencies, it is hard for the author to deliver on his promise of making the book useful to beginners and experts alike. It has gaps which hinder absolute beginners. At the same time, it is too basic in many areas for practitioners and experts to derive value from. The organization of the book could also potentially
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lead to some confusion. The sections often appear disjointed. The theory of production, for example, suddenly appears after the theory of the market with no perceptible connection between the two. In its quest for being comprehensive, the book often moves out of Economics and launches into concepts in other fields. This creates two problems. First, it may distract the reader and obfuscate the concept being examined. Secondly, it makes the book too voluminous. It would have been better to restrict the treatment of managerial decision-making to the concepts of Economics. Another shortcoming of the book is that it is completely India-focused. Almost all the examples and cases cited are Indian which the international reader may not appreciate. In places where Indian cases have been used, the author could have provided a brief background to familiarize the reader with the situation. Similarly, the author often cites the current policies of the Indian government to explain concepts. These may lose relevance quickly and, without a brief background, may become difficult to comprehend. The book, despite its shortcomings, would surely

qualify as a good basic text book that has tried an innovative approach to Economics. It would be of value to teachers of Economics who could pick up many useful hints on the approach they should employ to effectively communicate principles of Economics. Students who have a basic understanding of the concepts of Economics also will find it useful because it reinforces them and lends them a new perspective.

REFERENCES
Koutsoyiannis, Anna (2000). Modern Microeconomics, London: Macmillan. Peterson, Craig and Lewis, Cris (2001). Managerial Economics, New Delhi: Prentice Hall. Rameshan, P (2001). Organizational Efficiency and Productivity Improvement, New Delhi: Vikas. Nikhil Kashyab Balaraman Mukundan Devarajan Post-Graduate Programme Indian Institute of Management Ahmedabad e-mail: 2nikhilb@iimahd.ernet.in e-mail: 2mukund@iimahd.ernet.in

To hope means to be ready at every moment for that which is not yet born, and yet not become desperate if there is no birth in our lifetime. Emily Dickinson

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Indian Management Research


Mitali Sarkar

features summary of articles published in Indian and international journals with special emphasis on India and other emerging markets

ABSTRACTS

Finance, Accounting, and Banking


1. IMF Conditionality and Country Ownership of Adjustment Programs 2. Structural Vulnerabilities and Currency Crises 3. Launching a World-Class Joint Venture 4. Understanding Venture Capital in East Asia 5. A Real-world Way to Manage Real Options 6. Business Groups: Financing Constraints and Investments

Human Resource Management


19. Its Time to Retire Retirement 20. Conflict Escalation: Dispute Exacerbating Elements of E-mail Communication 21. Mutual Expectations: A Study of the Three-way Relationship between Agencies, their Client Organizations and White-collar Agency Temps 22. International Compensation: Learning from How Managers Respond to Variations in Local Host Contexts 23. Fairness of Human Resources Management Practices, Leader-Member Exchange, and Organizational Commitment 24. Labour Turnover and Management Retention Strategies in New Manufacturing Plants

34. Implications of the Internet for Knowledge Creation and Dissemination in Clusters of Hi-tech Firms 35. Regulation and the Internet 36. Case for Re-examining IT Effectiveness

Strategic Management
37. Netchising: The Next Global Wave? 38. Measuring the Strategic Readiness of Intangible Asset 39. Misery Loves Companies 40. To Better Maps: A TOC Primer for Strategic Planning 41. Strategy as Ecology 42. Expatriate Managers and MNCs Ability to Control International Subsidiaries: The Case of Japanese MNCs

Marketing Management
7. What Do Customers Consider Important in B2B Websites? 8. Avoiding the Customer Satisfaction Rut 9. The Effects of Locational Convenience on Customer Repurchase Intentions Across Service Types 10. Influence of TV Advertisements on Childrens Buying Response 11. The Importance of Customer Input in the Development of Very New Products 12. The Management of Conflict in BuyerSeller Relationships

Operations Management
25. Knowledge Management Opportunities for Cycle Time Reduction 26. E-enabled Closed-Loop Supply Chain 27. How Do Suppliers Benefit from Information Technology Use in Supply Chain Relationships? 28. Modeling Customer Satisfaction in Telecommunications 29. How Co-operative is Co-operative Purchasing in Smaller Firms? 30. Exploring Decision Support and Strategic Project Management in the Oil and Gas Sector

Economics
43. Globalization, Technology, and Asian Development 44. Is Globalization Reducing Poverty and Inequality? 45. Big Bang versus Gradualism in Economic Reforms 46. Water Subsidy Policies

Organizational Behaviour
13. Worse than Enemies 14. Managerial Involvement and Perceptions of Strategy Process 15. A Dual-Motor, Constructive Process Model of Organizational Transition 16. The Influence on Personal Mastery, Organizational Learning and Performance of the Level of Innovation 17. Becoming an Effective Teaming Organization 18. A New Model for Work Stress Patterns

Agriculture, Natural Resources, and Rural Development


47. Buyer Collusion and Efficiency of Government Intervention in Wheat Markets in Northern India 48. Structure and Operations of Rural Credit Markets: Some Results based on Field Surveys in West Bengal 49. Child Farm Labour: The Wealth Paradox 50. Aggregate Private R&D Investment in Agriculture: The Role of Incentives, Public Policies, and Institutions

Information Systems Management


31. Getting IT Right 32. The Role of System Trust in Business-to-Consumer Transactions 33. Centralization as a Design Consideration for the Management of Call Centres

Abstracts is sponsored by the Indian Council of Social Science Research, New Delhi
and intended to facilitate Indian management research.

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Finance, Accounting, and Banking


1. Khan, Mohsin S and Sharma, Sunil (2004), IMF Conditionality and Country Ownership of Adjustment Programs, The World Bank Research Observer, 18(2), 227-248. Of late, questions have been raised on whether the conditions imposed on the borrowing countries are too intrusive and whether the design and implementation of IMF conditionality have undermined country ownership of adjustment programmes aimed at correcting macroeconomic imbalances. This paper draws upon finance and agency theory to establish two basic propositions about IMF conditionality and country ownership of adjustment programmes. First, it is argued that some form of conditionality exists in all borrower-lender relationships. Second, country ownership of programmes is essential as it aligns the incentives of the borrower and the lender. This paper examines the main features of IMF lending, assesses the implementation and effectiveness of IMF conditionality, and discusses some new initiatives for enhancing country ownership of IMF-supported programmes. The IMFs mandate is to provide short-term lending to support balance of payments adjustments, and it believes that conditional lending has generally improved the external accounts of borrowing countries. On average, IMF-supported programmes have been empirically shown to be reasonable effective in achieving their main macroeconomic objectives. A widespread perception, however, exists that programme ownership by borrowing countries is insufficient. The authors consider certain new initiatives for enhancing the country ownership of IMF-supported programmes. These include encouraging countries to design their own programmes, streamlining structural conditionality, introducing flexibility in the timing of structural policy measures, and applying conditionality of outcomes rather than policies. The authors find merit in shifting the emphasis toward outcomes-based conditionality and exploring the use of floating tranches, especially for structural reforms. Outcomes-based conditionality, properly balanced with policy-based conditionality, it is hoped, would help in aligning IMF conditionality more closely with country ownership. 2. Ghosh, Swati R and Ghosh, Atish R (2003), Structural Vulnerabilities and Currency Crises, IMF Staff Papers, 50(3), 481-506. This paper examines the role of corporate structural vulnerabilities in currency crises using a panel dataset covering around 40 industrialized and emerging market countries, over the period of 1987-1999. The focus is on deep currency crises that is, those in which there was an appreciable decline in real GDP growth. In addition to the usual macroeconomic factors, four broad categories of structural indicators are considered: (a) overall rule of law, including ratings on public sector corruption, risk of government expropriation or contract repudiation, and efficiency of the judicial system and legal and accounting standards, (b) corporate sector governance related to shareholders rights, (c) corporate governance related to creditors rights and (d) corporate debt-equity ratio and maturity structure of debt. This paper goes beyond the standard probit analysis to use a decision-theoretic classification technique known as a binary recursive tree (BRT) a technique that can separate the different types of crises

represented in the dataset and examine the interaction of the different variables in determining the currency crisis. The results confirm that macroeconomic imbalances, particularly a large current account deficit, are often the proximate trigger of a crisis. A weak rule of law has been found to make countries particularly vulnerable to the effects of macroeconomic imbalances. Further, a risky corporate finance structure high debt-equity ratio and short maturity of corporate debt is an important determinant of currency crises. When these debt-equity ratios and maturity composition of corporate debt are included, the indicators of shareholder and creditor rights figure less prominently, suggesting that the effect of the latter on the probability of a crisis is manifested mostly through the financing structure of corporations. Finally, the authors argue that the interaction between structural vulnerabilities and macroeconomic imbalances in determining crises is often highly complex, highlighting the difficulties of undertaking effective surveillance and monitoring of countries potential vulnerability to crises. 3. Bamford, James; Ernst, David and Fubini, David C (2004), Launching a World-Class Joint Venture, Harvard Business Review, February, 90-100. Launching a world-class joint venture is complex and demanding. The fact is that JVs and alliances bring their own set of challenges and the companies do not clearly understand how to overcome them. This paper examines these challenges and discusses the keys to successful launch. It is argued that although many companies are highly disciplined about integrating acquisitions, they do not normally commit sufficient resources to launching similarly sized JVs or alliances. The launch phase beginning with the signing of a memorandum of understanding and continuing through the first 100 days of operation is usually not managed closely enough. The challenges include building and maintaining strategic alignment across the separate corporate entities, creating an appropriate governance system, managing the economic interdependencies between the corporate parents and the JV, and building the organization. For resolving the strategic conflicts, companies are suggested to develop a venture capital (VC) business plan and draw up supporting performance contracts that make key JV managers accountable for the success of the venture. An appropriate governance system should be such as to allow the JV management team to make timely decisions while providing the parents with sufficient oversight to protect their assets. To find the right balance between autonomy and control, companies are suggested to apply rigorous risk management and performance tracking and streamline decision making. Most alliances are structured so that the parents continually provide financial capital, human skills, raw material, and customers. Economic interdependencies should be addressed as soon as an agreement looks likely in order to avoid launch delays. It is necessary that the launch team challenges and limits interdependencies wherever possible and dedicate resources to resolve them upfront. Finally, for building the organization, the companies are suggested to choose their organizational model carefully, create a compelling value proposition that would make good people want to join the team, and obtain commitments from parent company staff. Once a company gets the launch right, the rest almost takes care of itself, the paper concludes.
ABSTRACTS

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4. Bruton, Garry; Ahlstrom, David and Yeh, Kuang S (2004), Understanding Venture Capital in East Asia: The Impact of Institutions on the Industry Today and Tomorrow, Journal of World Business, 39(1), 72-88. Although there has been, in general, a wide recognition of the role of venture capital (VC) for the regional economic development, not much is known about the East Asian venture capital. This paper examines the practice of venture capital in East Asia, with a specific focus on the three key centres of VC Hong Kong, Singapore, and Taiwan. The objective is to see how the institutions, particularly those related to the regulatory environment and culture in East Asia shape the VC industry and create differences from that of the West. It has been observed that ethnic Chinese dominate most elements of the economic life of these three geographic areas and have strong cultural institutions that impact other business phenomenon. The institutional aspects that shape organizational activity include regulatory, normative, and cognitive components. In the context of this study, since business is dominated by Overseas Chinese in these three regions, the cognitive aspects, transmitted primarily through the local culture, are expected to hold the key to understanding the systems structure. The study suggests that a range of institutional elements present in East Asia influence the actions of venture capitalists located in the region. In spite of similar training and norms as venture capitalist in the West, these institutions create several differences from venture capital practice in the West. In East Asia, the distinguishing characteristic includes the fact that most East Asian economies have a deeply entrenched concentrated ownership structure, with significant family control of firms, and interlocking shareholding among firms, characteristic of Overseas Chinese business practice. These normative and cognitive institutions combine with the weak regulatory system and poor corporate governance to create different and unusual challenges for venture capitalists working in East Asia. The authors, however, indicate the possibility of East Asian venture capitalists increasingly behaving similarly as their counterparts in the West. 5. Copeland, Tom and Tufano, Peter (2004), A Real-world Way to Manage Real Options, Harvard Business Review, March, 90-99. Real options involve multistage investments, the company, at each step, having the option open either to push ahead or pull out. Thus real option decisions are much more complex and ambiguous than the financial options and therefore there has been, in general, a consensus on rejecting the option-based methodologies for valuing a companys growth. This paper presents a binomial valuation model that captures the contingencies of real options and addresses nearly all the commonly voiced criticisms of using options theory to manage those contingencies. These models can be more easily customized to reflect changing volatility, early decision points, and multiple decisions. Moreover, since they are transparent and can be spread-sheet based, managers find them easy to use. This paper describes how a binomial model works, discusses some of its problems, and offers suggestions for improving the management of real options. Valuing an investment project as a compound option by using binomial model is a two-step process: (a) modeling the value of the underlying asset that involves estimating the value of the asset if it existed today
VIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

and forecasting to see the full set of possible future values of the plant and (b) valuing the options working backward from the end of the last year of the decision tree and using replicating portfolio technique to estimate the value of the project. However, if the mangers do not exercise their options rights in a timely and rational manner, there is a possibility that the real options would be less valuable than predicted. To solve the suboptimal exercise problem, the authors suggest modification of the planning and budgeting systems to reflect the decision trees constructed by managers in using the binomial model to value their projects. In practice, this would mean identifying decision trigger points that will tell managers when they need to decide on exercise and also specify rules governing the exercise decisions. After all, good management is as much about making decisions at the right time as about making the right decisions, the authors add. 6. Lensink, Robert; Molen, Remco Van der and Gangopadhyay, Shubashis (2003), Business Groups: Financing Constraints and Investment: The Case of India, The Journal of Development Studies, 40(2), 93-119. Business groups form an integral part of the private sector with group affiliated firms accounting for more than 80 per cent of the private sectors assets, profits, and sales in 1993. With respect to corporate investment, business group affiliates are understood to have better access to external capital, either from within the group or from outside. This study compares the investment behaviour of business group affiliates with that of stand-alone companies and tests the hypothesis that group affiliated firms are less capital constrained than stand-alone companies. It tests for the presence of capital constraints by estimating the cash flow sensitivity of investment spending, taking the firms cash flow as a proxy for internal funds. The data set of the study contains 694 listed Indian companies for the 1989-97 period. In order to estimate the cash flow sensitivity for the sample firms, a standard accelerator cum cash flow investment equation is estimated. In the basic regressions, investment scaled by the beginning-of-period total assets is explained by the change in sales scaled by the beginning-ofperiod total assets and cash flow scaled by the beginning-ofperiod total assets. Cash flow is measured as the sum of net profits and depreciation. The importance of size, age, and export orientation are examined as determinants of the sensitivity of investment spending to changes in cash flow. As group firms are typically larger and older than stand-alone companies, and because being large or old tends to increase cash flow sensitivities, group affiliates were expected to have higher cash-flow sensitivities. However, the results suggest that all else equal, business group affiliation lowers the sensitivity of investment spending to cash flow. Overall, the results find a significantly positive group affiliation effect: stand-alone companies have higher cash flow sensitivities than group affiliates. Interpreting the cash flow sensitivity as a measure of financing constraints, this suggests that business group affiliates have better access to external funds than standalone firms.

Marketing Management
7. Chakraborty, Goutam; Lala, Vishal and Warren, David (2004), What Do Customers Consider Important in B2B Websites? Journal of Advertising Research, 43(1), 50-61.

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This study is meant to fill the gap in the research to demonstrate empirically what factors customers consider important in B2B websites. The authors develop a reliable and valid scale using a rigorous scale development procedure and a field study with 606 business customers, for measuring and understanding the factors. Based on earlier research, the study identifies seven factors that customers might consider important in a businessto-business website: organization, personalization, interactivity, informativeness, privacy and security, entertainment, and accessibility. Organization turned out to be the most important factor in a website followed by non-transactionrelated interactivity and privacy/security. Then came informativeness followed by transaction-related interactivity and personalization, entertainment being the least important. However, common managerial wisdom suggests that there should be meaningful differences in these importance ratings across groups of customers who have different web usage objectives. Hence, the authors compared those who use the web primarily for purchasing products with those who use websites primarily for non-purchase-related purposes such as identification, comparison, and specification of products, managing, and bidding for construction projects. While both groups consider organization to be the most important factor in a B2B website, their self-rated importance differs on some of the other factors. The authors suggest that for buyers, managers should focus on improving perceptions of purchase-related features such as privacy/security and transaction related interactivity. For non-buyers, the emphasis should be on improving the website experience through non-transaction-related interactivity, personalization, and enhancing product-related information. Thus a behavioural segmentation approach is believed to be useful for designing a website, conclude the authors. 8. Dahlsten, Fredrik (2004), Avoiding the Customer Satisfaction Rut, MIT Sloan Management Review, Summer, 73-77. While customer satisfaction (CS) is considered as the guiding principle in most companies, it is feared that they could sometimes get stuck in a customer satisfaction rut. There is a possibility that these companies may be measuring the wrong variables and using the information in mainly reactive ways. For managers who intend to climb out of this rut, it is proposed that they move beyond the mere measurement of quality and satisfaction and refocus their CS practices on the actual customer experience. They are suggested to formulate a comprehensive strategy for using that knowledge throughout the organization. Based on a recent qualitative research at Volvo Cars, this article seeks to provide greater understanding of CS practices and their managerial implications by illustrating how the practices at one company, though professional and efficient, can be improved and complemented. It reveals some of the problems at Volvo and discusses some ways by which it is trying to become more customer-orientedby honestly and thoroughly scrutinizing its current CS practices as well as pioneering new methods not used by competitors. Initiating and communicating customer satisfaction goals without offering a clear rationale for them can promote differing interpretations within an organization and be the first sign the company is in a customer satisfaction rut. The challenge for managers of such companies is to infuse a more extrinsic focus into their CS practices which would require an organic shift from a reactive and cost-conscious focus on todays problems to a focus on long-term opportunities.

Although abandoning intrinsic focus might jeopardize quality cost control, intrinsic focus alone is not sufficient to engender true customer orientation; it works best only with a strong extrinsic complement, the author adds. 9. Jones, Michael A; Mothersbaugh, David L and Beatty, Sharon E (2003), The Effects of Locational Convenience on Customer Repurchase Intentions Across Service Types, Journal of Service Marketing, 17(7), 701-712. It is widely believed that the choice of a location is the single most important decision facing retailers and service providers. However, since convenient locations could be costly, it becomes important for the service providers to consider the costbenefit trade-offs inherent in the location decision. This article addresses this issue in a service context in order to understand when investments in a convenient location will yield sufficient payback and when such investments will yield little or no value. The authors propose and demonstrate that the importance of locational convenience for customer repurchase intentions depends both on satisfaction levels and on service type. The research, carried out among customers of banks and hairdressers in a city in southern USA, finds that a convenient location does not have a main effect on customers repurchase intentions. However, having a convenient location is important in more standardized, less personalized services when satisfaction falters. Having a convenient location is not important for less standardized, more personalized services, regardless of satisfaction levels. For banks, therefore, having a convenient location can make customers less likely to defect to another provider when satisfaction with the core service provided by the bank drops. But contrary to conventional wisdom, having a convenient location is less important as a factor affecting the repurchase intentions of hairdressers clients. A hairdresser with conveniently located premises, therefore, cannot rely on this locational advantage, when the service level slips, as a barrier to prevent customers from switching to another hairdresser. It is important that the service firms realize that investments in strategic attributes other than location, such as employee training and technology, could be more beneficial to customer retention in such cases. 10. Verma, DPS and Kapoor, Neeru (2004), Influence of TV Advertisements on Childrens Buying Response: Role of Parent-Child Interaction, Global Business Review, 5(1), 51-71. Television advertising has been heavily used by marketers to influence the buying response of children. It is assumed that children develop effective and discerning skills to remember and recall product-related information provided through TV advertisements and help other members in the family in taking a buying decision. It is the parents who ultimately mediate the influence of advertisements by filtering childrens request for a particular product. This study assesses the possible effects of TV advertising on childrens consumer socialization from early childhood to early adolescence and examines the role of parent-child interaction in this process. Data for the study were collected through a survey of 500 children and a matching sample of their parents in the National Capital Territory of Delhi. The parent-child interaction was determined by four variables: (a) the amount of restrictions parent imposed on childrens TV viewing, (b) the choice of programme to be watched by children, (c) their co-viewing, and (d) the explaABSTRACTS

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nation of the intents and contents of TV advertisements, teaching children what is real and what is created by the media. These variables were found significantly related to each other. Childrens exposure to TV advertisements was determined, to a large extent, by parental control of their TV viewing. Parents who took interest in their children resorted more to co-viewing; this resulted in higher parent-child interaction that helped in a more mature, healthy, and positive consumer learning on the part of the child. Parents of young children were found to hold slightly more negative opinions, while those of the older children considered the impact of TV advertisements more positively and appreciated the informative role played by them. The sex of the child was also found to play a significant role in framing parents perception, as a majority of the parents of girls considered the impact to be positive, while the parents of the boys reported more of a negative influence. It is hoped that the findings of this study would be useful to the parents, marketers, and policy makers. 11. Callahan, John and Lasry, Eytan (2004), The Importance of Customer Input in the Development of Very New Products, R&D Management, 34(2), 107-120. All technology driven firms have organizational processes and infrastructures that facilitate the capture of customer requirement information and its integration into the new products design. This paper provides empirical evidence on how the importance of customer input in new product development changes with product newness. Data were collected on 55 product development projects from the computer telephony integration industrya new industry experiencing rapid technological change. Three testable hypotheses were developed concerning the relationships between product newness, the importance of customer input in the development process, and the use of customer intensive market research methods. Product newness was measured using five questions relating to technological and market issues, results of which were used to form an overall newness measure for the product. The results suggest that the importance of customer input increases with market newness of a product up to a point and then drops off for very new products, whereas the importance of customer input increases with technological newness of a product without dropping off. It was also observed that the importance of customer input significantly increases the use of customer intensive market research methods, whereas, neither market nor technological product newness in themselves had much direct effect on research methods. Five major activities of software product development were identified: idea generation and screening, requirements definition, technical development, trials and testing, and product launch. Both the importance of customer input and the use of customer intensive research methods vary over the major activities of product development, the authors add. 12. Freeman, Susan (2004), The Management of Conflict in Buyer-Seller Relationships: A Case Study of an Australian Exporter in Asian and US Markets, Asian Academy of Management Journal, 8(2), 109-132. Despite the increasing research on inter-organizational buyerseller relationship, the author observes a lack of focus on how these relationships are terminated. This study therefore takes up the examination of the complexity of conflict and dissoVIKALPA VOLUME 29 NO 2 APRIL - JUNE 2004

lution strategies of inter-organizational buyer-seller relationships, comparing Asian and Western markets and their contextual boundaries. A model is developed linking different dimensions of cross-cultural business relationships to different dissolution and communication strategies for managing conflict. Data were collected from a single firm to demonstrate exit strategies that a firm might use when dealing with important buyer-seller relationships in foreign markets, where cultural practices in the business environment vary considerably. The case study focused on an Australian exporter in the citrus fruit industry, and on the main buyer-seller relationships in two of their most important foreign markets, the US and Singapore. Five factors emerged out of the case study which have implications for conflict management and exit strategies in buyer relationships in foreign markets: history of relationship with the foreign buyer, business culture of the foreign buyers market, importance of the buyer relationship to the organization, dynamics of the market environment operating in the foreign buyers market, and the future options for the firm. It is argued that these factors constituting the contextual boundary becomes even more complex when the firm has to manage business relationships that are undergoing tension and conflict and possibly exit, in psychically distant cultures. Even after a formal termination of the business relationship between the focal firm and buyer, informal interactions can still continue. Hence, for maximizing positive interactions of the firm, it is considered important to exit or revoke business relationships beautifully so that the firms continued goodwill and reputation is ensured.

Organizational Behaviour
13. Sulkowicz, Kerry J (2004), Worse than Enemies: The CEOs Destructive Confidant, Harvard Business Review, February, 65-70. Most CEOs develop a close relationship with a trusted colleague-a confidant-with whom they can share their experiences. While most of the confidants complement the CEOs strengths and sharpen their effectiveness, there are some dangerous ones who cause enormous damage to the CEO and to the organization. They go to any extent to achieve their aims without any apparent constraints of conscience. This paper identifies three distinct types of destructive confidants: reflectors, insulators, and usurper. The reflectors include people who mirror the CEO, constantly reassuring him that he is the fairest of them all. They intuitively know how to make a narcissistic CEO feel good. However, in extreme forms, the CEO-confidant pair ends up creating its own distorted version of reality, or shared madness. The insulators try to serve as a mediator between an ill-suited CEO and his organization. They buffer the CEO from the organization preventing critical information from getting out or getting in. In the short run, insulators appear to be helpful but over time, they start undermining the very authority of the leader they are seemingly trying to protect. The usurpers are confidants who cunningly ingratiates himself with the CEO in a desperate bid for power. Unlike the reflectors and insulators, they are unethical and are dangerous not only to the CEO but also to the organization as a whole. However, resolving a toxic CEO-confidant relationship is difficult as CEOs have a personal stake in their confidants. Training confidants could help although it has only

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limited value. The only sure way to avoid destructive CEOconfidant relationships is for the CEO to step back and dispassionately analyse the relationship and his role in it, the author suggests. 14. Collier, Nardine; Fishwick, Francis and Floyd, Steven W (2004), Managerial Involvement and Perceptions of Strategy Process, Long Range Planning, 37(1), 67-83. Managerial involvement has been identified as a core element in the strategy making process. Both positive and negative effects of involvement have been predicted in theory. On the one hand, it has been argued that involvement strengthens shared vision, increases rationality and improves adaptiveness in strategy making. On the other hand, involvement is said to lead to intense political behaviour, increased cultural inertia and more constraints in the strategy process. This study tests the corresponding claims of the literature by examining the relationship between managers reported level of involvement and their perception of how strategy develops. It also investigates whether such relationship differ according to a managers hierarchical level and functional background and whether they are robust within a large sample of managers from many organizations in a wide range of environmental contexts. A survey of over 6,000 managers reveal that their reported levels of involvement are positively associated with perceptions of strategy development processes that are more rational, more focused by a shared vision, and more adaptive. The managers who report more involvement tend to see the process as less top-down and less influenced by political and cultural interests. Those who are more involved also tend to view strategy as less constrained by external factors. It is argued that these associations between involvement and desirable features of strategy process are important because perceptions are the basis of managerial behaviour. Involvement increases managers tendency to see desirable attributes in strategy process and decreases the tendency to see negative attributes. 15. Cule, Paul E and Robey, Daniel (2004), A Dual-Motor, Constructive Process Model of Organizational Transition, Organization Studies, 25(2), 229-260. A process theory is considered to provide the best framework for a theory of organizational transition. Drawing from an earlier research, this article proposes a process theory of transition that incorporates two generative mechanisms, or motors. At the individual level, a teleological motor is employed to capture the managerial actions undertaken to promote transformation. At the organizational level, a dialectic motor is employed to capture forces both promoting and opposing change. The theoretical model that emerges from the analysis is grounded in an empirical study of a large company undergoing a major transition in business model and organization structure during the decade of the 1990s. The model consists of three sequential phases of transitioncreation, destruction, and unification. The dialectic motor at the organizational level of analysis explains how the conflicting goals of individuals face opposing change to produce a radically new and successful organization. The analysis comprised a form of hermeneutic circle in which both macro-and micro-analysis was conducted. Personal stories of 15 people were collected and divided into three chapters. Confused Creation portrays the birth of a new organization with new responsibilities. The

inflexion point leads to the second chapter, Creative Destruction, in which the initial creation was destroyed in order to achieve profit goals. However, destruction produced a form of entrepreneurial anarchy, threatening profitability. The final chapter, Phoenix Arises begins with the recognition of the negative consequences of anarchy. The paper discusses the transition of CASCO illustrating the operation of both teleogolical and dialectic motors across the three phases of transition. 16. Lorens-Montes, Francisco Javier; Garcia-Morales, Victor J and Verdu-Jover, Antonio J (2004), The Influence on Personal Mastery, Organizational Learning and Performance of the Level of Innovation: Adaptive Organization versus Innovator Organization, International Journal of Innovation and Learning, 1(2), 101-113. This paper analyses the difference between innovator and adaptive organizations based on the capabilities of personal mastery, organizational learning, and capacity to innovate and on organizational performance and job satisfaction. From an organizational perspective, adaptive or performance organizations try to do better at what they already do, improving efficiency. On the other hand, the innovator or problemsolving organizations, besides working efficiently, also look to create new values and models that enable them to do away with the existing guidelines and confront new challenges. Data for the study were collected from 900 companies with greatest turnover in Spain and then by analyzing a series of items, 402 usable ones were divided into adaptive and innovator organizations. On testing the hypotheses on these organizations, the authors found that personal mastery, organizational learning, capacity to innovate and organizational performance are highly inter-linked in both innovator and adaptive organizations. It was also observed that innovator organizations encourage more personal mastery, organizational learning, capacity to innovate and organizational performance than adaptive organizations. Finally, personal mastery, organizational learning and capacity to innovate was found to better explain the organizational performance and job satisfaction in innovator organizations than in adaptive organizations. Such organizations encourage a greater perspective of openness and sincerity, a more creative style of response, a more participative leadership, a shared vision and a greater development of human resources, which all lead to increased job satisfaction. The authors, however, state that since this study was conducted in four sectors, including food-farming, manufacturing, construction and services, the results could be different if analysed in different contexts. 17. Trent, Robert J (2004), Becoming an Effective Teaming Organization, Business Horizons, 47(2), 33-40. A group approach to work has become an integral part of the formal organizational design in most companies. However, what generally happens is that the teams themselves get overemphasized rather than the concept of teaming which actually is a broader process involving effective structuring and supporting the use of formal work teams. This article presents a four-phase teaming process that considers the major hurdles, issues, and decisions that affect team effort and success. It draws upon an extensive research with hundreds of teams in dozens of companies, learning gained through
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training and development, and a thorough review and integration of team-based research. The first phase in the organizational teaming process is the planning phase involving the assessment of organizational readiness, selection of appropriate tasks, formation of teams, and evaluation of additional preparation issues. A recommended action during this phase is to create a formal charter that conveys the teams responsibilities, stipulates appropriate authority levels, and identifies core and as-needed members. The second, performing phase, involves the teams active participation, interaction, and work. The critical steps include establishing team-based performance goals, promoting member effort and commitment, and facilitating internal team interaction. The third phase of regular evaluation focuses primarily on performance assessment linked to feedback and rewards. There is usually a tendency for the teams to reach a stage of maturity and decline, if left unattended. Therefore, to sustain commitment and performance, the author includes maintenance in the fourth and the final phase. Performance maintenance demands that teams establish goals, continuously keep assessing performance, and rotate responsibilities, bringing in new members. By following a path that integrates much of what is known about team-based management, firms would begin to realize consistent advantages from this promising but often difficult way to perform, the author concludes. 18. Barhem, Belal; Md Sidin, Samsinar; Abdullah, Iskandar and Alsagoff, Syed Kadir (2004), A New Model for Work Stress Patterns, Asian Academy of Management Journal, 9(1), 53-77. Work stress is believed to be one of the most important factors affecting productivity. Stress, in fact, is an extraordinary state affecting the individual human functions as an outcome of internal and external factors. This study examines a new, hitherto untested model of occupational stress that is designed to evaluate the stress patterns in terms of personal differences, sources of work stress and coping strategies. The study is conducted in two countries: Jordan and Malaysia for a general understanding on how to cope with the stress, within the customs job environment. The customs workers of most developing countries are known to suffer various degrees of stress because of the difficult nature and high responsibility involved in their work. The model helps in measuring the relationships between a set of work stress sources that include role ambiguity, role conflict, career development, role overload, and responsibility for other people. The model also investigates a set of coping strategies flexibility, acceptance of others values, self-knowledge, wide interest and active and productive. The third part of the model examines personal differences sex, age, experience, educational level, and marital status. Both Malaysian and Jordanian employees identified role ambiguity as the main source of work stress and self-knowledge as the main coping strategy to overcome work stress. Moreover, the relationship between sources of work stress and coping strategies was found to be strong while the relationship with personal differences was weak. The authors suggest improvement in the communication channels and preparation of specific guidelines for the jobs in order to minimize role ambiguity. Additionally, skills training is recommended both for avoiding role conflict and increase coping ability against stress.

Human Resource Management


19. Dychtwald, Ken; Erickson, Tamara and Morison, Bob (2004), Its Time to Retire Retirement, Harvard Business Review, March, 48-57. Several countries, such as the United States and Western Europe, suddenly face a severe skilled labour shortage, the likely reasons being the changing demographics in these countries and the downsizing moves by most companies in the recent years. Data suggest that the population of the youngest workers is growing while that of the prime executive development years is declining. And, the fear is that, if this shift in age distribution continues, it would lead to a chronic labour shortage. In this backdrop, this paper looks at the implications for businesses of an aging workforce and discusses how companies can retain the skills of employees by moving away from the old rigid model of retirement to a flexible approach where employees can become lifelong contributors. On the basis of a year-long research, the authors developed a series of management actions and pragmatic techniques for anticipating, coping with, and capitalizing on the shifts in workforce demographics. Retirement, as is currently understood, in fact, is a recent phenomenon. Historically, people worked until they themselves dropped out. Flexible retirement is flexible work in the extreme a logical extension of the flexible work models where the work may continue indefinitely. Today, when most of the retirees are bored and restless sitting at home, and for whom workplace is the primary social affiliation, retirement in the traditional sense, does not make sense. The authors suggest the development of a programme aimed at older and mid-career workers with the skills, abilities, and experiences that the organizations need the most. Such a high-retention programme might include fresh assignments or career switches, mentoring or knowledge-sharing roles, training and development, and sabbaticals all of which have the potential to rejuvenate careers while engendering fresh accomplishments and renewed loyalty. 20. Friedman, Raymond A and Currall, Steven C (2003), Conflict Escalation: Dispute Exacerbating Elements of E-mail Communication, Human Relations, 56(11), 1325-1347. E-mail communication has become a fundamental communication tool for millions of people around the world. Communication through e-mail is typically asynchronous, textual, and electronic and is therefore very different from in-person communications. Motivated by the qualitative observations by many suggesting an escalation of conflict interaction through e-mail, this paper develops a theoretical framework of e-mail escalation the dispute-exacerbating model of e-mail (DEME). The basic thesis is that some structural features of e-mail make it more likely that disputes will escalate when people communicate electronically than when they communicate face-toface or via telephone. The paper first articulates the structural properties of e-mail communication and then examines the impact of these properties on the conflict process effects, finally looking at how the process effects in turn trigger conflict escalation. It also discusses how the extent of familiarity between individuals acts as a moderator of these relationships.

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The first question is whether escalation is inherent in e-mail conflict or is merely a product of how people use that technology. It is argued that the greater risk of escalation when using e-mail is a function of the technology. It reduces feedback and social cues, allows for excess attention on statements, encourages argument bundling, creates deindividuation, and enhances biased perceptions. Yet, such risks can be reduced by greater self-awareness among those who use e-mail and the use of different ways of communicating than would happen naturally. The participants need to recognize that certain actions or reactions are not intended and are an artifact of the technology. Recommendations for managing disputes through e-mail include avoiding misintrepretations, allowing the anger to settle before responding, generating maximum possible interactions back and forth, etc. In no case is abandonment of e-mail suggested. It is, in fact, an extremely useful tool that can help transform organizations into networked forms and therefore, what is required is to learn to manage the problems efficiently. 21. Druker, Janet and Stanworth, Celia (2004), Mutual Expectations: A Study of the Three-way Relationship between Agencies, their Client Organizations and White-collar Agency Temps, Industrial Relations Journal, 35(1), 58-75. The traditional employment relationship is a two-way relationship based on a notion of exchange. In the case of the agency temp, there are three parties employment agencies, the temporary workers who are placed with them, and the client or host companies with whom they are placed. This paper examines the mutual expectations of the parties to the three-way relationship between (1) agencies and the host organization, (2) agencies and their temps, and (3) host and agency workers. It considers the ambiguities and complexities inherent in the psychological contracts between employment agencies and client businesses in the UK and the implications for the worker who is not defined as an employee. The study is based in a mix of semi-structured interviews, non-participant observation, and focus group research. The temps were fond to be remarkably positive about relations with the agency that placed them and about other reputable agencies with which they had worked. They were, however, critical about the host organizations with which they were placed and had lower expectations from them. Secondly, there seemed to be a mismatch in expectations between the host organization and the worker. The host organizations were perceived to be illprepared for the arrival of agency temps and were often poorly organized to benefit from their presence. In the focus group discussions, there was a strong sense of transience. For most of the participants, temping was not a permanent option, largely because of the absence of continuity in pay and availability of work benefits. Only for a minority, agency temping was perceived as a long-term choice, especially for older workers who had little confidence about the prospects of permanent employment. 22. Bloom, Matt; Milkovich, George T and Mitra, Atul (2004), International Compensation: Learning from How Managers Respond to Variations in Local Host Contexts, International Journal of Human Resource Management, 14(8), 1350-1367. As organizations expand their operations across nations and become MNEs, they face two distinct and opposing set of

pressures: one, inducing MNEs to harmonize approaches across nations and locations and another, related to those conditions that compel MNEs to conform to conditions in the various local host contexts in which they operate. This paper develops a framework to explain how MNEs balance global alignment and local conformance pressures in the design of their international compensation systems (ICS). The assumption is that the overall compensation strategy that the MNEs use would influence how MNEs craft compensation packages for the various groups within the organization, such as headquarters and local managers, expatriates, and executives. For developing the model, a grounded theory-building process was used by integrating the information obtained from ICS of five MNEs. The insights obtained from this theory suggest that it is the degree of variation in contextual factors, both within and between local host contexts, rather than the type of contextual factors (e.g. cultural norms, regulatory controls, economic conditions) per se, that matters most for understanding how MNEs manage the balance. The managers in the focal organizations asserted that alignment with organizational context is critical for organizational success. They acted as pragmatic experimentalists conforming when necessary, resisting when feasible, and crafting strategic responses whenever possible as they tried to adjust their international compensation in such a way that they would support their organizations global strategy, management structures, and culture. 23. Hung, Daisy Kee Mui; Ansari, Mahfooz A and Aafaqi, Rehana (2004), Fairness of Human Resources Management Practices, Leader-Member Exchange and Organizational Commitment, Asian Academy of Management Journal, 9(1), 99120. To stay competitive in a global economy, it has become necessary for the organizations to design effective HRM practices that promote the level of commitment of high performing employees in the organization. It is important to explore how far the fairness perceptions of these practices relate to employees attitudes and behaviour. This paper integrates the two broad research areas HRM practices and leader-member exchange (LMX) in predicting organizational commitment. Contrary to the earlier research, the authors conceptualize them as multi-dimensional constructs and test the interaction of fairness perceptions and LMX on organizational commitment in the Malaysian context. A sample of 224 managers was drawn from nine diverse multinational, manufacturing companies located in Northern Malaysia. Data were collected through survey questionnaires consisting of a series of psychometrically sound scales to assess the employed variables in the study. Fairness of HRM practices was assessed in terms of employee relations, performance management and promotion, procedural fairness, and fairness in training. Similarly, LMX scale included contribution, loyalty, affect, and professional respect while organizational commitment was assessed in terms of three components affective, continuance, and normative. Hierarchical multiple regression results provided support for the direct impact of fairness perceptions and LMX on each component of commitment. But significant interactions were convincingly evident only in the case of affective commitment. These interactions suggest that the impact of fairness perceptions of HRM
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practices on affective commitment is not unconditional. The impact is modified by the quality of exchange between supervisors and subordinates, the authors conclude. 24. Smith, Chris; Daskalaki, Maria; Elger, Tony and Brown, Donna (2004), Labour Turnover and Management Retention Strategies in New Manufacturing Plants, International Journal of Human Resource Management, 15(2), 371-396. High labour turnover has become a regular element of employment relations in large multinational manufacturing companies. This paper examines policies towards high labour turnover at firm level, in particular human resource management policies, using two contrasting case examples from Japanese transnational corporations (TNCs). It contextualizes management decision making with regard to labour turnover through a political economy and firm-level analysis. The authors question how high turnover fits within new production and product market conditions and suggest that it could have positive outcomes for the firm, despite managements claims to see high turnover as unremittingly problematic. High mobility of labour is considered a rational response to the lack of alternative means of expressing grievances, that is voice, and was reflective of low wages, non-unionism, assembly and routine manufacturing typical in Britain. At the macro-level, a shift from using wages and strong internal labour markets towards an inter-firm collusion on wages, non-poaching, and union avoidance are highlighted as labour retention mechanisms. At the micro-level, these strategies are matched with firm-level HRM policies of careful labour selection, company paternalism, segmentation of labour force into temporary and permanent group, and accommodation to higher levels of labour turnover to balance product demand and labour supply. A focus on selection was the dominant strategy applied by both the sample companies suggesting that management at firm level believes they can control the labour markets by systematically controlling entrants to their firms. Creation of temporary employment agencies (TEAs) is another common accommodating strategies used by these companies to significantly diminish the volume of labour turnover. The findings of this study can be applicable to other areas in which TNC employment has been dominant in manufacturing.

acquiring explicit knowledge. The availability of knowledge dissemination facilities was measured by the explicit knowledge transfer system. The results of path analysis show that NPD cycle time relates significantly to the speed of knowledge acquisition and the availability of knowledge dissemination facilities. Innovation-technology fit strengthens the negative relationship between speed of knowledge acquisition and cycle time, but does not strengthen the negative relationship between availability of knowledge dissemination facilities and cycle time. The author gives theoretical explanations for these findings and suggest that managers must address not only the ongoing knowledge acquisition process for product development but also seriously consider current knowledge management in their companies if they intend to utilize the full value of organizational NPD potential. 26. Nunen, Jo AEE van and Zuidwijk, Rob A (2004), E-enabled Closed-Loop Supply Chains, California Management Review, 46(2), 40-52. This paper presents a framework for systematic assessment of information and communication technology (ICT) benefits in closed-loop supply chains. It is believed that ICT can play a significant role in helping companies realize new innovative business opportunities in the area of closed-loop supply chains. Processes, customers, and products and their interactions are vital sources of management information in closed-loop supply chains. The process perspective concerns the different types of recovery processes that occur in closed-loop supply chains. The recovery options include cleaning and repackaging, repair, remanufacturing, refurbishing, cannibalizing and recycling. However, recovery processes are difficult to manage due to a number of uncertainties in quantity, quality, and timing of materials and components that are released from the recovery process. The customer perspective relates to information that is collected for customer relationship management (CRM). From a product perspective, the information of the product and its parts is captured directly or indirectly from the product itself that can be used to improve certain processes within closed-loop supply chains. ICT systems supporting measurement and control within the chain offer new business opportunities to the organization involved. From a process perspective, it is important that the managers determine which are the most relevant activities in the reverse flows, where costs can be reduced considerably, and where substantial improvements can be achieved. From a customer perspective, the services that are relevant for the customer should be identified and improved. From a product perspective, managers are suggested to discover where their biggest opportunities are. Future improvement will in part be driven by further technical developments. 27. Subramani, Mani (2004), How Do Suppliers Benefit from Information Technology Use in Supply Chain Relationships? MIS Quarterly, 28(1), 45-73. This study focuses on the supplier perspective in IT-mediated supplier-retailer interactions and discusses the benefits to suppliers from IT use. The question, the authors feel, is not whether the suppliers should use supply chain management systems (SCMS) but how they can take advantage of these systems and benefit from their use. This paper draws from organizational theories of learning and action and transaction

Operations Management
25. Yang, Jie (2004), Knowledge Management Opportunities for Cycle Time Reduction, International Journal of Innovation and Learning, 1(2), 192-205. Knowledge innovation plays a significant role in new product development (NPD). It is argued that developing new product at a lower cost and at a faster speed than the competitors is the source of competitive advantage. This study examines the link between knowledge management (KM) and NPD cycle and between the cycle time of NPD and new product financial performance. It also investigates the moderating effect of innovation-technology fit on the link between KM and the cycle time of NPD. Two aspects of knowledge management are specifically considered knowledge acquisition and knowledge dissemination as they interactively create the environment for knowledge sharing and organizational learning. The speed of knowledge acquisition was estimated by measuring the frequency of capturing environmental changes, the frequency of acquiring tacit knowledge, and the frequency of
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cost theory to propose a model relating suppliers use of SCMS to benefits. It proposes that two patterns of SCMS use by suppliers exploitation and exploration create contexts for suppliers to make relation-specific investments in business processes and domain knowledge. These, in turn, enable suppliers to both create value and retain a portion of the value created by the use of these systems in interim relationships. The focus of this study is on supplier investments that create two types of intangible asset specificity: business-process specificity and domain-knowledge specificity. The businessprocess specificity arises from the development of relationships-specific routines or standard operating procedures for efficient task execution while domain-knowledge specificity arises from the development of a context-sensitive understanding of cause-effect relationships that facilitate effective action and resolution of ambiguities in task planning and execution. The data suggest that domain-knowledge specificity is more potent than business-process specificity as a basis for deriving strategic advantage. The results also provide empirical support for vendors-to-partners thesis whereby IT use in buyersupplier exchanges leads to closer cooperative relationships. The results further refine this insight, indicating that the nature of intangible, relation-specific investments is influenced by patterns of appropriations of SCMS by suppliers. 28. Athanassopoulos, Antreas D and Iliakopoulos, Anastasios (2004), Modeling Customer Satisfaction in Telecommunications: Assessing the Effects of Multiple Transaction Points on the Perceived Overall Performance of the Provider, Production and Operations Management, 12(2), 224-245. Over the last two decades, the focus on customer satisfaction has progressed from being a simple measurement issue to a strategic imperative that affects firm competitiveness. This study explores the antecedents of customer satisfaction in the telecommunications industry with reference to fixed line services provided to residential customers. It proposes a customized customer satisfaction framework in telecommunications to reflect the service delivery process as experienced by customers. The authors draw upon the concept of customer contact according to which customer contacts are distinguished based on three major dimensions including communication time, intimacy, and information richness. It is argued that the interaction between customers and the delivery system is affected via alternative contact points. Five distinct contact points between the customers and the telecommunications operator have been proposed for formulating the overall perceived performance of the telecommunications provider. The empirical results evidenced the dominance of the stable parts of customer transactions over the unexpected incidents, such as fault repairs and new service provision. The status enjoyed by the telecommunications operator with regard to image, product performance, directory enquiry, and branch network was found to affect overall customer satisfaction perceptions. However, the corporate image of an organization cannot be built and sustained without the assistance of the incidence-driven performance. It is therefore suggested that the telecommunications organization should utilize the strong association between the stable customer transaction points and the overall customer satisfaction such that they will gradually improve their performance in the incident-driven transactions and thus increase their role in the perceived overall customer satisfaction levels.

29. Mudambi, Ram; Schrunder, Claus Peter and Mongar, Andrew (2004), How Co-operative is Co-operative Purchasing in Smaller Firms? Long Range Planing, 37(1), 85-102. Evidence suggests that small firms either do not engage in cooperative purchasing arrangements or continue to practise adversarial engagement instead of co-operation. This study examines the mistakes of the SMEs and discusses the ways of putting them right. Through an in-depth multiple-interview study of the firms reporting high levels of cooperation, the authors identify three well-defined clusters: deliberate, emergent, and close-but-adversarial. In the firms with deliberate strategies, co-operative purchasing is a consciously designed and long-term part of management policy. The emergent firms are those that have very close co-operative relationships but have not implemented them consciously; partnerships just happen but are long-term. Then there are firms with close ties with their suppliers but which still operate fundamentally adversarial policies. Though they implement formal aspects of cooperative relationships, they would not have developed informal, trust-based aspects. Divisionalized firms, where purchasing departments are most concerned about vulnerability to suppliers, tend to fall into this category. It is argued that successful purchasing is possible in each of these categories; a firms optimal strategy is likely to depend crucially on its resources and capabilities. By and large, firms with deliberate purchasing strategies are found reaping the benefits of cooperative strategies. The close-but-adversarial firms are also leaner though they seem to have much more codified approach to minimize vulnerability. The emergent-type firms formed the largest group, the ability to thrive without a formal purchasing strategy seemingly appealing to the smaller firms. The firms are suggested to choose the approach that is best suited to their competencies and culture; fit is as important as the strategic approach, the authors conclude. 30. Asrilhant, Boris; Meadows, Maureen and Dyson, Robert Graham (2004), Exploring Decision Support and Strategic Project Management in the Oil and Gas Sector, European Management Journal, 22(1), 63-73. In the context of the changing and complex business environment, strategic projects are essential, long-term investments, often involving high level of uncertainty. Strategic project management consists of evaluation and control and are considered successful if these projects are completed successfully, both in financial and non-financial terms. This article is an attempt towards an increased understanding of best practice in decision making in strategic project management, as applied to the upstream oil and gas sector. It examines the concept of strategic project management, the elements involved in the process, and the role of techniques in facilitating strategic project management. The elements are classified into three categories: context and content elements that describe the strategic project management process, and outputs that describe the results of the process. The elements are placed within the four perspectives proposed by the Balanced Scorecard: financial, external environment, internal business, and learning and innovation. The authors then examine the extent to which the techniques for managing strategic projects address the proposed set of multi-dimensional elements. For simplification, the techniques were separated into evaluation and control techniques, and then mapped onto the set of
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elements involved in strategic project management. No oneto-one match between techniques and elements could be found. Thus the individual or a small number of techniques can only lend partial support to the strategic project management process, the authors tentatively conclude.

Information Systems Management


31. Feld, Charlie S and Stoddard, Donna B (2004), Getting IT Right, Harvard Business Review, February, 72-79. In the 40-year history of information technology (IT), it has more or less been an expensive mess. Despite the best intentions of the CIOs, IT has so far operated without the constructive involvement of the senior management team. In fact, technology in itself cannot make IT work; it needs inspired leadership, superb execution, motivated people, and the thoughtful attention and high expectations of senior managementjust like the other parts of the business do to be successful. This paper proposes three interdependent, interrelated, and universally applicable principles for executing IT effectively, adding that it is the responsibility of the top management to comprehend and apply them. Of foremost importance is a long-term IT renewal plan that would keep the focus of the IT group on the companys overarching goals, makes appropriate investments directed towards cost reduction, and generates a detailed blueprint for long-term systems rejuvenation and value creation. The second principle involves a simplified, unifying corporate technology platform that replaces a wide variety of vertically oriented data silos that serve individual corporate units with a clean, horizontally oriented architecture designed to serve the company as a whole. However, what is most important for avoiding a mess in the IT business is a high-performance IT culture, with a clear set of rules and a solid performance management and a feedback system. Like interlocking gears, these three principles work together and must be consistently applied. If they mesh well, each reinforces the others and IT organizations and systems tend to deliver results rapidly. However, in case one is disengaged or turns in the wrong direction, the whole machine starts working against itself or grinds to a halt. 32. Pennington, Robin; Wilcox, H Dixon and Grover, Varun (2004), The Role of System Trust in Business-to-Consumer Transactions, Journal of Management Information Systems, 20(3), 197-226. One of the top concerns of Web consumers has been found to relate to trust and privacy. It is argued that unknown vendors may enhance the concept of system trust by using trust mechanisms on their Web site. For instance, a vendor could use a seal of approval based on an independent thirdparty evaluation, a rating system to indicate how their site rates on given criteria based on customer feedback, or even a selfreported statement on their site as a way of guaranteeing compliance with established e-commerce standards. This study introduces the construct of system trust to a model of e-commerce purchase intentions. It proposes and tests a model that includes the construct of system trust through a survey of 200 consumers in an experimentally controlled setting. Trust is assessed as a perceptual construct and trust in vendor is hypothesized to be influenced by system trust and perceived vendor reputation. System trust, in turn, could be
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influenced by trust mechanisms. Brand name and price are used as the control variables. The overall model was tested using a two-step structural equation modeling approach. The structural model included three antecedents to system trust: seals, guarantees, and ratings. All hypothesized relationships including the relationship between system trust and perceived trust in vendor, were found to be highly significant. The results indicate that system trust is important to consumers and within e-commerce situations, can be influenced directly by the vendor through provision of guarantees. This low-cost method could pay off through its indirect influence on trust in vendor, attitude, and intentions to purchase. Further, the study found that, regardless of reputation, firms should enhance system trust. Overall, the results demonstrate the importance of interventions such as self-reported vendor guarantees that affect system trust in enabling successful e-commerce outcomes. 33. Adria, Marco and Chowdhury, Shamsud D (2004), Centralization as a Design Consideration for the Management of Call Centres, Information & Management, 41(4), 497-507. A call centre provides telephone access to information services that are delivered by a human operator (agent), who in turn has access to an information resource (database). It thus typically replaces a more informal approach to service activities in an organization. This article perceives call centres as a means of improving an organizations customer service and specifically examines the relationship between a call centre and the two organizational outcomes of efficiency and customer service, particularly in connection with the organizational design variable of centralization in terms of distribution of authority. Call centres represent one part of an increasingly bureaucratized IT environment, and there is a shift to move decision making upwards in the organizational hierarchy. It is argued that centralization moderates and influences the organizations efforts to improve customer service through the implementation of the call centre and its IT. If managers fail to capitalize on the particular way that centralization moderates between IT and competitive strategy, the organization may not enjoy an important benefit of the call centre, which is competitive advantage through increased efficiency and improved customer service. Based on survey responses from 68 call centre managers, the authors find that both centralization and decentralization are associated with call centre service operations. While the call centre provides managers with the ability to influence decision making (centralization), there are also opportunities for agents in the call centre to exercise authority in managing the organizations communications with customers (decentralization). Certain guidelines are suggested for managers who are responsible for establishing or managing call centres. 34. Eng, Teck-Yong (2004), Implications of the Internet for Knowledge Creation and Dissemination in Clusters of Hitech Firms, European Management Journal, 22(1), 87-98. Hi-tech industries, focusing on industrial concentration and local specialization of firms clustering in a particular location or region have generally been commercially successful. Localized specialization is believed to help in the creation and dissemination of knowledge. The objective of this study is to examine and determine the concepts pertaining to Internet-

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based drivers for facilitating the way clusters of firms create and disseminate knowledge. Specifically, the role of Internet is examined in relation to the dynamics that explain and contribute to the creation of regional competence in clusters of high-tech firms. The analysis is based on detailed face-toface interviews with 62 chief executive officers of high-tech firms from Cambridge. From the analysis emerge four Internet drivers of regional clusters based on Internet technology: open systems, virtual channels, multi-user engagement, and extended customizability. These drivers are shown to have high support for spatial localization in terms of leveraging competitiveness. It is argued that since the Internet facilitates communications, extends customization capabilities, and presents new virtual channels, firms in clusters gain efficiency through their close and intensive interaction in the use and production of resources between firms. Specifically, the open systems of the Internet promote stronger partnerships as well as firms in clusters benefit from multiple linkages through virtual channels and extended customizability. A localized context not only creates new opportunities for firms to explore linkages involving numerous firms, but also may serve to spread business risks and increase regional stability. While the Internet may attract national and foreign competition into the region, it also builds on existing regional competence based on local specialization. Thus, integrating the four Internet drivers with regional economics literature would provide a more complete explanation of regional competence in the emerging context of the Internet, the author concludes. 35. Jarvenpaa, Sirkka L; Tiller, Emerson H and Simons, Robert (2003), Regulation and the Internet: Public Choice Insights for Business Organizations, California Management Review, 46(1), 72-84. Internet-related regulation encapsulates a broad range of control activities, including legally binding rules from government institutions and technical standards for digital behaviour from non-governmental and international organizations, or from business firms themselves. These economic, social, and technical regulations can affect fundamentally how a firm operates on the Internet; how it stores, protects, shares, and commercializes its digital data internally and externally. Critical to the enforcement of the regulatory bargain is the ability of policymakers to design enduring regulatory structures specific institutional procedures and rules that benefit the policy makers preferred group of firms and special interests. Public choice provides a supply-and-demand-based exchange model of business and regulatory institutions where regulators are seen as suppliers of regulations for incumbent businesses who buy those regulations with electoral resources. Underpinning public choice is the notion of the collective action problem and, for solving it, the regulatory institutions are required to have regulatory sovereignty. In this backdrop, the paper examines (a) whether the Internet affects the ability of existing firms to act in a collective manner to hold up price or to resist non-price competition, (b) whether governments retain sufficient sovereignty over Internet-enabled industry participants to follow through on regulatory bargains with existing firms, and (c) whether enduring structures and processes of regulation can be designed to favour the incumbents in the decentralized and fast-changing Internet environment. It is argued that with some modifications, public choice could continue to be an effective tool for understanding

regulatory developments in the emerging digital economy. The modifications could be in the form of redefinition of the scope and broadening of the roles of the regulatory body and role reversal for the government and business in regulatory situations. 36. Kurien, Priya; Rahman, Was and Purushottam, VS (2004), The Case for Re-examining IT Effectiveness, Journal of Business Strategy, 25(2), 29-36. IT effectiveness is a measure of how well an IT organization develops the right technology components of business solutions for its customers, so that the business supported can operate and grow according to its own strategy and plans and work within its own constraints. Over two decades, Infosys has transformed itself into a global provider of world class technology services and solutions. In doing so, it had to learn how to address the different elements of IT effectiveness in a manageable way and has developed systematic capabilities to do so. This paper describes the most important of these elements, and discusses some of the lessons from both Infosys and that of its clients. Five key elements of IT effectiveness are identified: IT blueprint, IT measurement framework, core IT, active business case, and rigorous change management. The experience of Infosys for transforming IT is a consolidation of three things: its own journey to CMM5 and beyond; its joint learning with clients as the outsourcing age has moved from infancy towards early adulthood; and the individual prior experience of people within the organization. From an analysis of this combined experience emerge several themes, the most important ones being balancing demand and supply and business and IT, measuring value, practical lessons from process improvement benchmarks, and active business case management. Ultimately what is most important is the way the value delivered by IT is defined, measured, and improved.

Strategic Management
37. Morrison, Allen; Bouquet, Cyril and Beck, John (2004), Netchising: The Next Global Wave? Long Range Planning, 37(1), 11-27. For global success, businesses need to carefully consider the location where they should go and the process by which they should get there. In general, three trends have been found to impact the globalization choices: (1) the movement towards the e-enablement of key activities, (2) the rising costs associated with maintaining core competencies at world-class levels, and (3) the growing problem of managing attention in global organizations. Extensive field interviews with senior executives of 35 companies in different continents reveal that a few companies have been able to simultaneously address these three challenges by adopting a different global business modelNetchising. This newly emerging model provides companies with essentially all the benefits of globalization without requiring the ownership of overseas assets. Netchising is a structural approach to globalization that relies on the Internet for procurement, sales, and the management of customer and partner relationships. Netchisers use the Internet for transferring core activities through partnership arrangements; the netchisees in turn provide access to their geographic competencies. Other advantages of netchising include added strategic flexibility, greater mass-customization, and
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improved value chain efficiencies. It is, however, found that it worked best for companies with strong Internet capabilities and certain kinds of customer interfaces. The paper reviews the key factors governing whether a company is Internetready, and addresses the question of when netchising becomes a viable alternative to other traditional approaches to globalization, such as trade, franchising, and FDI. It is believed that as costs of developing and maintaining world-class core competencies increases, the appeal of netchising will only increase with time. 38. Kaplan, Robert S and Norton, David P (2004), Measuring the Strategic Readiness of Intangible Assets, Harvard Business Review, February, 52-63. Executives know that intangible assets are difficult to imitate and are thus a powerful source of sustainable competitive advantage. Therefore, by estimating the value of intangible assets, it could be possible to measure and manage the companys competitive position much more easily and accurately. This paper draws on the concepts and tools of the balanced scorecard to present a way to systematically measure the alignment of the companys intangible assets what the authors refer to as the strategic readiness. Three categories of intangible assets were identified: human capital, information capital, and organization capital. A tool called strategy map was developed to link these assets to shareholder value creation through four interrelated perspectives financial, customer, internal process, and learning and growth perspectives. This article focuses on the learning and growth perspective the foundation of the map to show how intangible assets actually determine the performance of the critical internal processes. It is argued that human capital becomes more valuable when it is concentrated in the relatively few strategic job families implementing the internal processes critical to the organizations strategy. Information capital creates the greatest value when it provides the requisite infrastructure and strategic applications that complement the human capital. On the other hand, organization capital introducing a new strategy must create a culture of corresponding values, a cadre of exceptional leaders who can lead the change agenda, and an informed workforce aligned to the strategy, working together, and sharing knowledge to help the strategy succeed. Since these intangible assets are more subjective than the conventional financial measures, some managers avoid measuring them. It is, however, argued that by using the systematic approaches set out in this paper, companies can now measure what they want, rather than wanting only what they can currently measure. 39. Margolis, Joshua D and Walsh, James P (2003), Misery Loves Companies: Rethinking Social Initiatives by Business, Administrative Science Quarterly, 48(2), 268-305. Human misery prevails in all possible forms across the globe while a small fraction of the global population move towards prosperity. In the face of deep-seated problems of human misery, business leaders face a vexing reality. On the one hand, they are themselves aware of their corporate social responsibility and are willing to respond to the calls for corporate involvement in ameliorating malnutrition, illiteracy, wealth inequality, and other social ills. On the other hand, they have to sustain their legitimacy, securing vital resources, and
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enhancing financial performance. To see how firms navigate these competing objectives in their responses to social ills, this paper first assesses the responses of organizational theory and empirical research to this tension over corporate involvement in wider social life and then proposes an alternative approach as a starting point for systematic organizational enquiry. A brief appraisal of a 30-year corporate social performance (CSP) and corporate financial performance (CFP) empirical research tradition and the standing of stakeholder theory is used for developing the alternative agenda. A compilation of findings from these studies suggests a positive association between CSP and CFP. Adapting a pragmatic stance, the authors introduce a series of research questions whose answers would reveal the descriptive and normative dimensions of organizational responses to misery. For corporate social initiatives, three sets of features are believed to interact with normative considerations to shape the framework for action. How a company should respond would be a function, in part, of features of the problem, features of the company in particular, the companys relationship to the problem and features of the impact of the companys response, the authors add. 40. Gupta, Mahesh; Boyd, Lynn and Sussma, Lyle (2004), To Better Maps: A TOC Primer for Strategic Planning, Business Horizons, 47(2), 15-26. Several practitioners and scholars have recently challenged the universal appeal of traditional strategic planning concepts, strongly advocating the need for a new model that would define strategy and its working in a new way. Strategic planning so far has been an imperfect process resulting in imperfect maps. This paper presents an approach, based on the theory of constraints (TOC) with the hope that it would help in improving the strategic maps. The TOC has two broad viewpoints: the business system perspective and the ongoing improvement perspective. The TOC thinking process tools address three questions: (a) What to change? (b) What to change to? (c) How to cause the change? Strategy development is fundamentally a creative process and there is no one right answer for these questions. However, the thinking processes provide a structured way for the management to tap into its collective intuition to determine a course of action. The authors use the case of People Express a defunct airline to introduce the use of TOC thinking process tools for strategic management and show how they reach beyond theory to apply to business decisions. The different steps in the strategic planning process involve situational analysis, strategy formulation, and strategic implementation. These steps are illustrated by using the concepts of the current reality tree (CRT), the evaporating cloud (EC), future reality tree (FRT), prerequisite tree (PrT), and transition tree (TrT). CRT and EC are considered idea tools for allowing a management group to develop the common mental models or collective intuition critical to success in strategy development and implementation. The CRT allows all decision makers to examine and challenge the cause-and-effect relationships while the group creation of the tree allows all relationships to be discusses and generate by-in for the process. EC exposes hidden assumptions and helps in injecting a breakthrough idea into the current situation. FRT ensures that proposed solutions will not cause more problems than they solve. The paper thus shows how the Toc tools provide a structured way to use intuition to develop creative solutions.

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41. Iansiti, Marco and Levien, Roy (2004), Strategy as Ecology, Harvard Business Review, March, 68-78. Most companies today inhabit ecosystems that extend beyond the boundaries of their own industries. It is believed that the moves that a company makes would, to varying degrees, affect the health of its business network which, in turn, would affect the companys performance. This paper offers a framework to assess the health of a companys ecosystem, determining the companys place in it, and developing a strategy to match its role. It is argued that for an ecosystem to function effectively, each of its domain that is critical to the delivery of a product or service should be healthy. Three critical measures of an ecosystems health are identified: productivity, robustness, and niche creation. Although it is argued that a company that is part of a robust ecosystem enjoys relative predictability, neither robustness nor predictability can completely capture the character of a healthy biological ecosystem. In a business context, the best measure of health is the ecosystems capacity to increase meaningful diversity through the creation of valuable new functions, or niches. For promoting the health and stability of the companys own ecosystem, it is important to determine the companys role within the network. The companys choice of ecosystem strategy keystone, physical dominator, or niche is governed primarily by the kind of company it is or aims to be. The choice, however, can get affected also by the business context in which it operates: the general level of turbulence, and the complexity of relationships with others in the ecosystem. For instance, a niche strategy could be most appropriate when the business faces rapid and constant change while a keystone strategy is more effective if the business is at the center of a complex network of assetsharing relationships and operates in a turbulent environment. On the other hand, if the business relies on a complex network of external assets but operates in a mature, stable industry, a physical dominator strategy would be more suitable. 42. Paik, Yongsun and Sohn, Junghoon Derick (2004), Expatriate Managers and MNCs Ability to Control International Subsidiaries: The Case of Japanese MNCs, Journal of World Business, 39(1), 61-71. With the intensifying global competition, it becomes increasingly important for multinationals corporations (MNCs) to maintain control over their international operations. An appropriate control would ensure that the MNCs strategic goals are met and deviations from standards are corrected so that subsidiaries act in accordance with headquarters policies. Building upon the literature on behavioural means of control, this paper addresses the issue of expatriates as an effective means of control over international subsidiaries. The primary proposition of this paper is that expatriate personnel with adequate cultural knowledge of the host country will contribute to the MNCs control, but those without cultural knowledge will not. It thus links the effectiveness of control to the level of cultural knowledge that the expatriates possess about the assigned country. Traditionally, MNCs have relied on conventional standardized bureaucratic means of control, e.g., rules and regulations, auditing, or formal performance evaluations. But, such output-based control mechanisms are often too rigid to cope effectively with the increasing number of its separate and yet interdependent international operations. An empirical investigation was conducted with a sample of Japanese MNCs

international operations in Korea, Taiwan, Singapore, and the United States. The findings indicate that while expatriate personnel with adequate cultural knowledge of the host country contribute to the MNCs control ability, those without cultural knowledge do not. It thus suggests that when managers with appropriate cultural knowledge are not available, the MNC would be better off refraining from relying on expatriates as a means of control, and resorting instead to alternative control mechanisms, such as equity positions.

Economics
43. Stiglitz, Joseph E (2004), Globalization, Technology, and Asian Development, Asian Development Review, 20(2), 1-18. One idea that has emerged in the last decade is that it is a gap in knowledge and technology that separates developed from less developed countries. The author sees globalization as a very powerful force for developing countries, enabling the technology gap and the knowledge gap. It is believed that welldesigned globalization can promote technology and development through trade links, FDI, joint ventures, etc. It is, in fact, because of globalization that opportunities and knowledge are easily available today. The question that arises in this context is whether the designs of international regime and international economic institutions and the policies pursued by them help developing countries seize these new opportunities to reduce the disparities in knowledge or make it all the more difficult to overcome the gap. This paper focuses on the economic dimensions of globalization relating them positively to development. Appropriate technology policies are discussed and it is believed that a role of government is necessary for making success more likely. The example of Korea is cited to show how a broad scale programme involving different activities of the government helped in closing the technology gap to not only promote economic growth but also reduce poverty. While emphasizing that globalization can promote development by promoting technology, it is also pointed out that poorly-designed globalization can, in fact, inhibit development. For instance, capital market liberalization can lead to instability in the real economy, making real investment in both fiscal and human capital less attractive. For globalization to work successfully in the direction of reducing the disparities in knowledge and technology, the author suggests the need for fundamental reforms in the institutions and in the policies governing globalization in the world today. 44. Wade, Robert Hunter (2004), Is Globalization Reducing Poverty and Inequality? World Development, 32(4), 567-589. The neoliberal argument suggests that there has been a fall both in the number of people living in extreme poverty worldwide and in the world income inequality. On the other hand, the antineoliberal argument asserts that world poverty and inequality have been rising, not falling due to rising integration of poorer countries into the world economy. This paper questions the empirical basis of the neoliberal argument. It also explains why there should be a concern about probably-rising world inequality. For obtaining world extreme poverty head account, international poverty line for a given base year is defined by the World Bank by using purchasing power parity conversion factors (PPPs). The author is convinced of a large margin of
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errors in the Banks poverty headcount and states that it could be significantly different from the one generated by PPP conversion factors based more closely on the real costs of living of the poor. The trend of world income distribution is stated to depend upon which combination of measures and countries are considered. Evidence supports the liberal argument when inequality is measured with population-wieghted countries per capita PPP-adjusted incomes, plus a measure of average inequality. On the other hand, studies measuring inequality over the whole distribution and using either cross-sectional household survey data or measures of combined inequality between countries and within countries show widening inequality since 1980. The author counters the neoliberal argument that inequality provides incentives for effort and risktaking and states that it actually goes with higher poverty, higher unemployment higher crime and slower economic growth, particularly in larger countries like China. The point is that if globalization within the current framework increases inequality within and between countries, increases in world inequality above moderate levels would cut world aggregate demand and thereby world economic growth, making a vicious circle of rising world inequality and slower world growth. The author also discusses the other impacts of rising inequality thus explaining why it should be a matter of concern. 45. Feltenstein, Andrew and Nsouli, Saleh M (2003), Big Bang versus Gradualism in Economic Reforms: An Intertemporal Analysis with an Application to China, IMF Staff Papers, 50(3), 458-479. Economic reforms can follow one of the alternative paths: gradualism in which the country can move gradually by selectively introducing reforms and spacing them over time or a big bang approach that introduces all the reform measures immediately and simultaneously. This paper analyses the implications of the alternative paths of economic reform in the context of China an economy with a large public sector that is being transformed to become more market oriented. A dynamic general equilibrium model is used to analyse the effects of speed of adjustment and sequencing of reforms in this transition economy. Specifically, three types of policy reforms are considered in the model: privatization of capital, devaluation, and tariff reduction. Two initial simulations carried out with privatization introduced at different speeds show that on balance, an immediate privatization has a more positive impact on consumers than a gradual one. Simulations are then carried out combining an adjustment in the exchange rate with privatization. With a gradual devaluation with immediate privatization, there is a relative increase in inflation but a fall in real GDP in the initial period followed by a higher real GDP and a dampened inflation once the private productivity catches up. Both rural and urban customers are better off than under gradual privatization. However, in the case of one-step devaluation with immediate privatization, there is no significant change in the real GDP and budget and price level is generally higher which is reflected in lower welfare for both customers. Similarly, the results suggest that tariff reform, taken alone, have little impact, whether done gradually or in one step. Looking at complete policy packages, the big-bang approach is better from a welfare point of view: both customers are better off under a package where adjustment and reform policies reinforce each other. A piecemeal approach to reform could not only fail to improve overall welfare significantly but may even reduce it, the authors conclude.
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46. Gomez-Lobo, Andres and Contreras, Dante (2003), Water Subsidy Policies: A Comparison of the Chilean and Colombian Schemes, The World Bank Economic Review, 17(3), 391407. Informal subsidies benefiting primarily the middle customers are common in utility industries across the developing countries. Although the convention is to tackle the social and distributive effects of subsidies through general tax and benefit systems, this may not always be a wise policy, particularly for the developing economies. This paper analyses the distributive effects of two subsidy programmes for water utility services applied in developing economies: a means-tested subsidy programme introduced in Chile in the early 1990s and a geographically-targeted scheme adopted in Colombia after 1994. The Chilean system gives eligible households the right to consume water at a lower price up to a certain limit, beyond which an additional consumption is charged at the full tariff. The subsidy is funded entirely from general tax revenues, and the water regulator responsible for setting tariffs is not involved in determining subsidy levels thus completely separating the welfare policies in the water sector and the economic regulation of the industry. On the contrary, Colombia has a scheme based on cross-subsidies between different clients and uses a geographic targeting system to determine whether a client pays a surcharge or receives a subsidy from the tariff structure. The Chilean system is better able to identify poor households than the Colombian scheme, but the overall impacts of the two schemes are quite similar, at least for the three income deciles. However, there is scope for improvement in both the programmes. In Chile, the targeting mechanism should be improved or the number of subsidies should be increased if the policy objective is to benefit a significant proportion of households in the lowest income deciles. On the other hand, in Colombia, almost all households receive some kind of benefit, implying an unnecessarily high fiscal cost. The authors suggest an improvement in the targeting mechanism to lower this cost without affecting benefits to lower-income households.

Agriculture, Natural Resources, and Rural Development


47. Banerji, A and Meenakshi, JV (2004), Buyer Collusion and Efficiency of Government Intervention in Wheat Markets in Northern India: An Asymmetric Structural Auctions Analysis, American Journal of Agricultural Economics, 86(1), 236-253. The use of auctions to effect sales of foodgrains in wholesale markets has a long history in India. The process of oral auctions which started as early as the 30s, was institutionalized through the setting up of regulated markets. There are, however, unanswered questions regarding the behaviour of agents and the form of collusion, etc. This paper uses the auction theory to analyse these issues for the wholesale markets for wheat in Northern India. Most grain markets in developing countries are characterized by buyer concentration, with relatively few buyers dominating the market. This could be a result of systematic differences in willingness to pay across buyers. The objective of this study is to analyse the asymmetries across buyers and detect whether collusion exists and, if yes, then in what form. It also examines the questions of efficiency of governments procurement to see if it is paying too much for

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the purchase of a given quality of grain. The study is based on a primary survey of two regulated wheat markets in North India: one in Narela and the other in Panipat. While in Narela, all the wheat was bought by private millers and traders, the prices being inevitably higher than the minimum support price (MSP), in Panipat, the procuring arms of the state government bought virtually all the grain that arrived at the MSP. By stimulating environments in the presence and absence of collusion, the impact on market prices were quantified. It is observed that the presence of buyer asymmetry exacerbates the downward impact of collusion on market prices. This is precisely because the two players with the highest valuations for the grain are part of a cartel which disallows their bidding simultaneously at any lot, the authors explain. Further, for the season during which the study was conducted, government operations were not inefficient. Certain suggestions are offered for extension of this study in several directions. 48. Bhaumik, SK and Rahim, Abdur (2004), Structure and Operations of Rural Credit Markets: Some Results based on Field Surveys in West Bengal, Journal of Rural Development, 23(1), 1-30. The rural credit markets are usually characterized by inadequate availability, unequal distribution of formal credit, exploitative nature of the informal credit, and high variability of rate of interest. This paper seeks to build a broad idea about the structure and the actual nature of operation of rural credit markets in West Bengal, a state that has recorded a tremendous growth in the agricultural production. It specifically examines the nature of participation of various categories of households in rural credit markets, distribution of formal and informal loans in rural areas, terms and conditions of the credit contracts in rural areas, determinants of rural households access to formal loans, actual cost of formal loans, and sees if there is any gap between the requirement for formal credit and its ultimate availability in rural West Bengal. Data were collected through an extensive survey of eight randomly selected villages in the state. Ninety per cent of the households in these villages participated in the credit markets, the share of informal sector being nearly two-third of the total amount. Because of the unavailability of formal credit which is exclusively meant for production, the farmers, particularly the marginal and small farmers, are forced to borrow from the informal lenders for both production and consumption purposes. While land formed the main collateral security for the formal credit agencies, nonland and non-marketable collateral predominated the informal loan contracts. All this led to segmentation of agrarian credit markets into formal and informal sectors. Moreover, between different categories of farmers, the credit gaps are found to be relatively higher for the marginal and small farmers as compared to the large farmers. Considering the marginal and small farming character of agriculture in West Bengal, the overall suggestion is to provide them with sufficient institutional credit with minimum disbursement delay. 49. Bhalotra, Sonia and Heady, Christopher (2004), Child Farm Labour: The Wealth Paradox, The World Bank Economic Review, 17(2), 197-227. Land is the most important store of wealth in agrarian societies and is typically distributed very unequally. It has been remarkably observed, particularly in the context of Ghana and

Pakistan that, on average, children in land-rich households are more likely to work and less likely to attend school than children in land-poor households. This phenomenon is referred to as the wealth paradox. It challenges the common presumption that child labour emerges from the poorest households. This article explains the apparent wealth paradox with the help of a theoretical model that clarifies the role of labour and land market failure as distinct from the role of credit market failure. The model of the peasant household is set in an economy with imperfect markets for labour, land, and credit. By allowing two periods, it captures the impact of child work in period 1 on productivity in period 2. This effect arises through both the gain in work experience and the possible lowering of educational attainment. The model specifies the effects of farm size on child labour which, in addition to a wealth effect, includes substitution effects arising from market imperfections. These effects are tested using survey data from rural Pakistan and Ghana. The results confirm the persistence of wealth paradox for girls in both Ghana and Pakistan explaining it in terms of imperfections in the land and labour markets. For boys, introduction of control variables mitigates the paradoxical patterns. This gender differential in work and school participation and gender differences in the determinants of child labour would be useful in designing interventions to close the gender gap. Other implications of the findings are also discussed. 50. Alfranca, Oscar and Huffman, Wallace E (2003), Aggregate Private R&D Investment in Agriculture: The Role of Incentives, Public Policies, and Institutions, Economic Development and Cultural Change, 52(1), 1-21. Research and development (R&D) is fundamental to any agricultural innovation. Private research has grown tremendously in recent years offering the prospects of advances in the quality of agricultural goods as well as reduction in their costs. This paper examines the forces that determine the amount of privately funded research in this vital sector using a sample of European countries. The objective is to present econometric evidence quantifying the effects of economic incentives, public policies, and institutions on national aggregate private agricultural R&D investments or expenditures. The primary hypothesis is that all the three are important and that interactions exist among them. An econometric model of national aggregate annual private R&D investment is formulated and fitted to annual data for nine European Union countries for the period 1994-95. Overall, public and private agricultural research in these countries has been found to be complementary, holding trend factors constant. Evidence suggests that public agricultural R&D crowds-out private agricultural R&D investments at low levels of private R&D, but are complementary at high levels of private R&D. The study also finds a small negative transnational externality associated with private agricultural R&D investment in other EU countries. Private sector R&D investment is shown to respond positively to the size of a countrys agriculture but are negatively related to the relative importance of crop output in total agricultural production. Moreover, stronger patent rights, better contract enforcement, efficient civil bureaucracy, and protectionism of local firms were found to increase aggregate private agricultural R&D investment unconditionally. The authors suggest restructuring of public agricultural research so that it is complementary with private agricultural R&D investment.
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Service Quality II
K Manjunatha

includes select references on a particular theme

BIBLIOGRAPHY

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K Manjunatha is a Librarian at TA Pai Management Institute, Manipal. A Ph.D. from Mangalore University, he has organized workshops for librarians and published many articles in Library Science journals. e-mail:manjunath@mail.tapmi.org

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